As we approach the end of the financial year there is plenty of advice on things that should be done to get a better tax result, ranging from buying a new car to getting health insurance. Note that I didn’t say all the advice was credible, nor should be followed.
There are some important things to do before 30 June however, including tax planning with your professional advisors, and if you use a trust for your business or investments, you must consider how the income of that trust is to be distributed.
Failing to do so correctly may result in the trust paying the top rate of tax, with no discount for capital gains that have been held more than 12 months.
So why does this situation arise?
In Australia, a trust is assessed and pays tax on the income that it does not distribute to beneficiaries. If a resolution to distribute the income of a trust is not valid, then the trust of taken to have not distributed it’s income. By failing to distribute income, the trust is assessed, and pays the top rate of tax.
A resolution to distribute the income of the trust must be made in accordance with the terms of the deed. If the deed has a clause that resolutions must be recorded in red pen, if the resolution is recorded any other way, it will not be valid.
Thankfully, most deeds do not require resolutions in red pen, however it is important to know what the deed says to ensure your resolution complies with the terms of the deed.
How do you avoid the high tax scenario?
The first step in getting your distribution resolution correct is to determine who the correct person or persons to make the resolution are. If the trust has a corporate trustee, this will be the director(s) of the corporate trustee. If it is individuals, this will be either one, a majority, or all of the individuals.
If the trustee is a company, identify the director or directors of the company and review the constitute to determine how decisions of the company should be made, and the documentation requirements. The company will have to ensure the record keeping requirements of the Corporations Act 2001 are met, as well as any requirements of the company’s constitution. These can be different, for example, while Part 2G.4 of the Corporations Act 2001 allows a company 1 month to have resolutions recorded in the appropriate minute book, some company constitutions provide that a resolution is made when it is signed by the sole director. If the sole director considers something, on 26 June, but signs the resolution a week later, the resolution will be taken to be made on the day it is signed.
If the trustee is an individual, the deed will detail the timing and record keeping requirements of these resolutions.
Having determined who should make the resolution, it is important to read the terms of the trust deed. A resolution to distribute income must be made in accordance with the terms of the deed. Old deed may have particular provisions, including that a distribution must be made before the last day of the year (i.e. a resolution made on 30 June would not be valid), or that the resolution must list all potential beneficiaries and allocate income to them, even if the allocation is to be nil. New trust deeds tend to be less prescriptive, but it is always worth ensuring you know what the deed requires before making your resolution.
Regardless of the terms in the trust deed, the Australian Taxation Office (“ATO”) view is that resolutions must be made before 30 June.
Record Keeping in respect of resolutions
Even if the deed is silent on the issue, a resolution must be documented to satisfy the ATO’s requirements. While a decision made prior to 30 June may be recorded after year end (see above), it is far better to have the resolution documented before 30 June to evidence the trustee’s intention to make a distribution.
At Cake Accounting, we discuss trust resolutions in our tax planning sessions with clients, and email draft minutes prior to 30 June, which is sufficient evidence to show that the matter has been considered prior to the end of the year.
What if you don’t yet know the income of the trust?
For an investment trust, you may have a good idea of the income of the trust, but if the trust is carrying on a large business, it may be far more difficult to estimate the income of the trust before the accounts have been finalised.
Regardless of your knowledge of the income of the trust, you must still make a resolution to distribute the income before 30 June of the year for it to be valid.
Clients taking advantage of Sweeter by Cake Accounting, our managed accounting solution, have already had their tax planning session and other clients of Cake Accounting will have resolutions drafted this week.
If you use a trust for business or investments and the above is news to you, contact us today to ensure your distribution is correctly made and documented so you can enjoy using your trust as you should.