The end of the financial year is fast approaching. Have you made a start on your trust distribution minute and/or intend to pay your beneficiaries a dividend? If you have a discretionary trust, then 30 June 2023 is an important date for you.
The purpose of a trust is to separate the legal and beneficial ownership of assets. The legal ownership of the asset rests with the trustee. The beneficiaries benefit from the income that flows from the assets.
A trust is not a legal entity. It is best described as a legal “relationship” that is controlled by the trustee of the trust under the terms of the trust deed.
The ATO have tightened the requirements around the distribution of income. Decisions around the nature and distribution of the income and resolutions about that are documented by trust minutes detailing how the trust’s income is to be distributed need to be signed prior to 30 June each year. If they aren’t completed, you could end up paying a lot more tax than you intended.
What is my Trust Distribution Minute?
Your trust’s net income for tax purposes (distributable income) is distributed annually to beneficiaries who will be entitled to receive it, in accordance with the trust deed (rules of the trust).
ATO legislation requires that your trust’s distributable income be calculated and the allocation of the income to beneficiaries for the current financial year needs to be determined before 30 June.
Trust minutes are used to inform the Australian Tax Office (ATO) of the allocation. The trust distribution minutes also avoid default beneficiaries unexpectedly becoming presently entitled to the income and being taxed on it.
What do I need to do?
Calculate the net income for tax purposes (distributable income) and who will be entitled to receive it in accordance with the trust deed (rules of the trust). This needs to be documented in a resolution that is to be signed prior to 30 June.
There is no specific format mandated by the ATO however valid trust distribution minutes must provide clear methodology of the determination of each beneficiary’s entitlement. It is important that the minutes are prepared accurately and reference your trust’s deed.
When do I have to make Trust Distribution Resolutions?
If you make beneficiaries entitled to trust income for an income year by way of a resolution, it will only be effective for determining who is assessed on the trust’s net (taxable) income if it is made by 30 June.
What happens if I don’t prepare a Trust Distribution minute?
If a trustee fails to exercise its discretion before 30 June, then usually the trustee itself will end up being taxed on the trust’s taxable income for that year, and at the top marginal rate!
The ATO used to allow trusts up to two months to prepare and execute their distribution minutes. However, with the withdrawal of the ATO’s IT 328 and IT 329 guidance, 30 June is now a hard deadline.
Do I need to prepare a Trust Distribution every year?
Yes, this must be prepared every year based on the income for that year.
Can I prepare a Trust Distribution myself?
You are able to prepare this yourself ensuring you make appropriate allocations to the beneficiaries and provide a final signed version to Arabon. This will allow us to follow the guidelines when we complete your tax return preparation.
Dividend Statements
If your company pays a dividend or a non-share dividend, you are required to send your shareholders a dividend statement, showing the amount of franking credit attached to the distribution and the extent to which it’s franked.
Entities that are not private companies must issue a distribution statement on or before the day on which the distribution is made.
The ATO mandates that private companies must issue a dividend statement within four months of the end of the income year in which the distribution is made. This extension for private companies means they can decide what franking credit to allocate after the distribution is paid. However, the extension doesn’t apply if the franking credits allocated to the distribution would create or increase a company’s liability to franking deficit tax.
If your business is required to prepare a trust distribution minute or a dividend statement by 30 June 2023 and you need assistance with pulling this together, please contact your Arabon accountant on 1300 ARABON. Doing this ahead of time gives us enough time to implement any relevant tax saving strategies!
