Further to our previous Client Alerts in relation to important tax issues for Trusts, it appears the Australian Taxation Office (ATO) are continuing to increase their strict compliance approach towards trusts.
The ATO has just released a fact sheet in relation to Trustee resolutions (refer to link: http://www.ato.gov.au/General/Trusts/In-detail/Changes/Trustee-resolutions-must-be-made-no-later-than-30-June/.
The fact sheet highlights that Trustees need to ensure that any resolution made to distribute a trust’s income for the 2011/12 year is made in accordance with the terms of the Trust Deed and by 30 June 2012.
Why has the timing for recording resolutions changed this year?
Whilst many Trustees have previously taken advantage of the Commissioner’s administrative extension to prepare Trustee resolutions after year end (per Income Tax Ruling 328 and Income Tax Ruling 329), some may be surprised to know this concession was removed effective 1 September 2011 (as a result of the Federal Court decision in the Colonial First State Investments case), meaning 2012 Trustee resolutions must be prepared in accordance with the Trust Deed, generally requiring the Trustee to appoint income by 30 June of each year.
Does the resolution have to be in writing?
The ATO’s fact sheet provides some comments in relation to whether the resolution has to be in writing by 30 June 2012.
According to the ATO, whether the resolution has to be in writing will depend on the terms of the Trust Deed. If the Trust Deed does not require a resolution to be in writing, the ATO are of the view that an unwritten decision would create a valid entitlement at that time and be effective for tax purposes. However, a written record will provide better evidence of the resolution and avoid a later dispute (for example, with the ATO or with relevant beneficiaries) as to whether any resolution was made by 30 June.
If a resolution is made before 30 June and formalised after, will the formal resolution be accepted as evidence?
Pursuant to the ATO’s fact sheet, the ATO will accept official minutes being drawn up later as evidence of actions undertaken by 30 June to create present entitlement in the beneficiaries by that date.
What resolution is required to be made if the Trustee wants to effectively stream capital gains or franked distributions for tax purposes?
According to the ATO, a written record will be essential if a Trustee wants to effectively stream capital gains or franked distributions for tax purposes. This is because a beneficiary can only be specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing in the records of the trust either:
- by 30 June for franked dividends, and/or
- by 31 August for capital gains (where gain is not part of income).
What happens if you make a resolution after 30 June?
If no beneficiary (including a default beneficiary) was presently entitled to trust income as at 30 June, the Trustee will be assessed on the trust’s taxable income at the highest marginal tax rate plus the Medicare levy. In addition, any capital gains that may have been eligible for the 50% CGT discount would be assessed to the trustee as non-discount capital gains.
ATO’s Compliance Program
In line with the ATO increasing their strict approach towards trusts, the ATO’s compliance program for 2011/12 proposes to heavily target “Trustee resolutions”.
The compliance program will be carried out in two phases.
Phase one – a general awareness communication campaign – which aims to remind trustees as to the times by which they must establish:
- the present entitlements to income of the trust; and / or
- a beneficiary’s specific entitlement to capital gains and franked distributions under the new trust streaming rules.
We understand that the ATO is sending out letters to many Trustees across Australia “reminding” them of these obligations and deadlines.
Phase two – Trustee resolutions – The ATO proposes that another letter is to be sent in late May/early June to selected Trustees, which will remind them of the 30 June 2012 deadline and to request a copy of the resolution and a copy of the trust deed, which will then have to be forwarded to the ATO.
This is a big change to the ATO’s compliance action around Trustee resolutions as compared to prior years. It is clear that the ATO will be applying a much stricter approach to trusts going forward. Therefore, Trustees will need to ensure that a great deal of care is taken when deciding which beneficiaries to distribute to and the timing of recording the resolutions made.
What Trustees need to do
As there is still a level of uncertainty in relation to Trustee resolutions with some of the comments made in the ATO’s fact sheet being very broad, all Trustees will need to ensure that any resolution made to distribute a trust’s income for the 2011/12 year is made in accordance with the terms of the Trust Deed and sufficiently evidenced (as suggested by the ATO) by 30 June 2012.
Trustees need to review their 2012 likely taxable income, and decide which beneficiaries will be receiving a distribution from the trust and what portion of the trust’s income each beneficiary will be entitled to by 30 June 2012.
If you have any queries in respect to this matter please do not hesitate to contact your Blaze Acumen adviser.