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The ATO’s additional guidance on trust distributions shows this is an area it is likely to check closely, says a specialist solicitor.
Shaun Backhaus, senior associate with DBA Lawyers, said the taxation of trusts continues to be an area of scrutiny for the ATO, with the Tax Office recently released a webpage, ‘Trust distributions done right’, guiding practitioners on how to prepare for year-end trust distributions.
“Clearly, the ATO is concerned with trustees and practitioners properly managing their annual distributions,” Backhaus said.
On its webpage, the ATO recommends that practitioners should consider several things, including reviewing clients' trust deeds and any amendments to ensure trustees are making decisions consistent with the terms of their deeds.
“It’s a good idea to check that the trust hasn’t vested, as this may impact distribution decisions,” Backhaus said.
“Additionally, the ATO recommends advisers should also check who the intended beneficiaries are and their entitlement to income and capital under the trust deed. If the trustee has made a family trust election or interposed entity election, this may have a tax impact on distribution decisions.”
The guidance also recommends supporting clients to notify beneficiaries of their entitlements to allow them to correctly report distributions in their tax returns, preventing trust income from being omitted.
Checking requirements under the deed governing the making of trustee resolutions is also advised, including the need to have the resolution in writing and the timing of when it's required to be made. Resolutions need to be made by the end of the income year.
Finally, the webpage suggested investigating whether the trustee has capital gains or franked distributions they'd like to stream to beneficiaries.
“This should include confirming the trust deed doesn’t prevent this and that trustees have complied with the legislative requirements relating to streaming these amounts,” Backhaus said.
“The webpage also states that ‘Our compliance activities often identify mistakes made by trustees that are the result of not following trust deeds or not checking family trust elections’.”
He continued that in May 2023, the ATO also released a checklist for trustees who wished to make beneficiaries entitled to trust income by way of making resolutions, which included a series of questions.
The questions revolved around the availability of a complete copy of the trust deed, the entities eligible to receive income or capital appointments, the status of trust vesting, the presence of an active family trust election, and timing requirements for resolutions.
“The issues raised in the checklist show that correctly managing tax aspects of trusts relies on a good understanding of various trust law principles that can apply,” Backhaus said.
He said the checklist also contains the following comments and warnings:
“The tax outcome in each case will depend on the legal effect of the particular resolutions. This is a matter of trust law, not tax law, and the Commissioner is not able to conclusively determine this.
Where there are a range of possible interpretations, we will consider raising alternative assessments where the correctness of each assessment depends upon the proper legal effect of the resolutions. This may include assessments to beneficiaries (including default beneficiaries) as well as an assessment to the trustee under section 99A of the Income Tax Assessment Act 1936 [ITAA 1936] on the highest amount that they could be assessed on under any of the alternative views.”
Backhaus added that alternative assessments are typically used by the commissioner in situations where they consider there is genuine doubt about which assessment is appropriate to ensure that assessments are made within the relevant legislative time frames required.
“Once the taxpayer’s 'final' liability has been determined, the relevant assessments will be amended by the Commissioner. Ultimately, however, the Commissioner would not collect more tax than the final ‘correct’ liability,” he said.
Furthermore, the ATO guidance also confirms that if a resolution is validly made by 30 June, the ATO will accept records created after 30 June as evidence of the making of a resolution by that date.
“While examples are provided of the types of records that would be accepted by the ATO, it seems clear that some written evidence would be required, such as a handwritten note, or family group ‘map’ showing relevant distributions as resolved,” Backhaus said.
“The ATO therefore accepts trustee resolutions that confirm a prior resolution that is not reflected in formal trustee resolutions. Such resolutions should be drafted as confirmatory and dated when completed. Backdating documents is subject to serious penalties.”
In conclusion, Backhaus said trustees should ensure they are considering the points raised by the ATO as without careful administration and record keeping, they may become liable for additional taxes and penalties.
“Trustees and their advisers should ensure they are familiar with and have the relevant provisions in their trust deeds and ensure their distribution resolutions are valid and effective,” he said.
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