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20th April 2012
People who operate businesses using a Family Trust structure should ensure they are prepared for the ATO’s tightening of rules around the way Trusts distribute funds.
At the end of each financial year, the trustees of a family trust use their discretion to distribute the income of the trust to selected beneficiaries.
According to BMO’s Senior Taxation Consultant Neil Cameron, this discretion should be given under the terms of the trust deed.
“What percentage of income is distributed to each beneficiary is often part of broader tax planning and will often depend on the beneficiary’s individual income and tax rate.
He said the ATO is now requiring written proof of the distribution being made prior to the end of the financial year.
“The trustee/s of the trust must document in writing a ‘resolution’ of the trustee/s of the trust that correctly records the distribution. In the past the ATO has allowed these resolutions to be made some time after the end of June each year. This policy has now effectively ended.”
Mr Cameron said that most modern deeds are given a wide range of different classes of income that can be identified and specifically distributed. However, the latest legislation and ATO policy has restricted this flexibility.
“In the 2010 High Court case of FCT v Bamford, the meaning of ‘distributable income’ was clarified and we now have new legislation affecting the types of income that a trustee may classify and distribute to a particular beneficiary.”
He said that these changes have added to the complexity of dealing with trust income, including the distribution of capital gains and franked dividends to specific beneficiaries.
“We highly recommend that trustees seek advice from their accountant and a qualified solicitor to ensure that their Trust Deeds are up-to-date with the changes, and that they are observing the new laws and ATO policy when it comes to distributing the income and capital of their trusts."
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