The ATO is closely monitoring how trusts distribute income and to whom. Trust distribution arrangements have been under intense scrutiny in recent years, so trustees must carefully consider their steps before appointing or distributing income to beneficiaries.

What Does Your Trust Deed Say?

One key area of concern is trustees not consulting the trust deed before appointing income. The trust deed typically outlines what the trust can do, to whom it can allocate income, and how. It should be your first point of reference.

Review Your Deed

  • Conduct a Thorough Review: Examine the trust deed and any amendments to ensure trustees’ decisions align with the deed’s terms.
  • Check the Trust Vesting Date: The deed will detail what happens when the trust vests. If it vests, trustees might need to distribute the income and property to specific beneficiaries, losing the discretion to decide who gets the income or capital.
  • Identify Intended Beneficiaries: Understand who the intended beneficiaries are and remember that some might have different entitlements to income and capital under the deed.
  • Timing and Requirements for Resolutions: Verify any conditions and timing requirements for trustee resolutions in the deed, such as acting before 30 June.
  • Streaming Capital Gains or Franked Distributions: If you want to stream to certain beneficiaries, ensure the deed allows for this and that streaming requirements are met.

Family Trust and Interposed Entity Elections

  • Family Trust Elections: These elections can protect trust losses, company losses, and franking credits but can cause significant tax issues if misused. They tie the trust’s workings to a specific individual’s family group.
  • Interposed Entity Elections: These make an entity part of an individual’s family group. Trustees need to understand the implications, as distributions outside the family group can trigger family trust distribution tax at penalty rates.

Who Gets the Benefit?

The ATO is also vigilant about arrangements where beneficiaries still need to receive the actual financial benefit of their distributions. If such arrangements reduce the overall tax paid on the trust’s income, they increase risk and draw the ATO’s attention.

Increased Reporting on Tax Returns

Changes have been made to capture more information on tax returns about trust income distributions, including:

  • Trust Tax Return: Four new capital gains tax labels have been added. Beneficiaries should receive this information to match what they report on their returns.
  • Beneficiaries’ Schedule: All beneficiaries must lodge a new trust income schedule, aligning with the trust’s statement of distribution.

Trusts offer great flexibility in income distribution, but this comes with the need for strong controls and compliance. The ATO is increasingly strict about trust income distributions and their tax impacts. Trustees must get it right, as invalid distributions can lead to significant tax consequences.