Trust Distributions – how do you navigate the minefield?

The government has released  draft amendments  that will specifically allow the streaming of capital gains and franked dividends derived by trusts.

The intention is that these amendments will apply for the 2011 year, but it is likely that there will be changes to the draft proposals as there are some significant issues that have been raised in submissions on the draft.

This places advisers in the difficult position of having to guess which law will apply to the taxation of trusts as they attend to their end of year tax planning.

At this stage our view is that the proposed amendments will not require specific amendments to trust deeds but advisers may have to fundamentally rethink how they implement and document trust distributions.

Year-end tax planning and the preparation of trust distribution resolutions have been made more difficult by the administrative position recently adopted by the ATO. In  Improving the Taxation of Trusts  (released by the ATO on 28 April 2011) the following statement was made:

Trustees should be aware that regardless of whether the proposed changes are enacted as currently set out, they will not allow for trustee resolutions to be made on or before 30 June 2011 to be amended. Therefore in framing a resolution, a trustee may need to also consider its tax effect should the law not be enacted as proposed.

Suggested approach

1. Until the legislative position is clear, advisers should proceed with caution when preparing distribution minutes and will have to try to ensure their minutes will have the desired effect under both the current and proposed law.
2. It may also be prudent to implement general amendments to trust deeds to:

(a) remove any requirements to distribute income by 30 June; and

(b) ensure the trustee has the power to attribute capital gains and dividends to specific beneficiaries and to distribute gross capital gains, not just the assessable component of any gains.

 If you have any questions in relation to trust deed updates or trust distributions, please contact a member of our team.