The Commonwealth Government has announced significant additional funding for the ATO to investigate and pursue trusts. It has never been more critical that distribution resolutions comply with the legislation, the terms of the trust deed and the ATO’s requirements.
Six key things you need to consider when preparing trust distribution resolutions.
1. Check the trust deed
How is trust income defined? The ATO has outlined its opinions on this issue in draft ruling TR 2012/D1.
Can the trustee choose another concept of trust income and if so, should it?
How does the trustee make decisions and what date are they to be made by?
2. Make sure that the proposed beneficiaries are included under the deed
Check whether the beneficiaries are actually eligible beneficiaries under the deed, particularly related companies, trusts and de facto spouses as these are often not included in older deeds.
3. If streaming capital gains, you must distribute the gross capital gain
If streaming capital gains, both the assessable and non-assessable components of the capital gain (after applying capital losses) must be distributed.
How you achieve this will depend on the terms of the deed and it may require that the trustee makes an interim capital distribution in addition to the income distribution.
4. If streaming franked dividends, the beneficiary must be specifically entitled to the ‘net financial benefit’ of the franked dividend
This means any expenses referable to the dividend (such as interest on a loan to acquire shares) must be deducted from the dividend to determine whether it can be streamed.
Also, it is not possible to separately distribute the franking credits as the franking credits do not form part of the trust income.
5. Be cautious about having trustee meetings and consider recording trust resolutions instead
Trustee resolutions are commonly prepared as minutes of a meeting. However, it is preferable to prepare a resolution that is signed by all trustees/directors rather than minutes, as this avoids any potential arguments with the ATO as to whether the meeting actually took place.
A resolution can usually be signed in counterparts and exchanged by email or fax.
The ATO’s position is that trustee resolutions must be completed by 30 June.
While the ATO position may be questionable, the prudent approach is to ensure that resolutions are recorded before 30 June or earlier if your deed says so, to avoid any potential disputes.
Cooper Grace Ward’s experienced tax and revenue team can help you navigate the distribution resolution minefield and assist with drafting distribution resolutions. Contact one of our team members to find out more.