If you are a trustee of a trust, its time to pay attention. The laws have changed again and its time for action.
The 30th June is a critical date every year and this year a little more critical.A previous concession by the ATO in Income Tax rulings IT 328 and 329, which allowed you to make a trust resolution as to the distributions of income from your trust has been withdrawn. This has serious implications on the amount of tax your trusts beneficiaries will have to pay if not handled correctly.The dangers of this are best highlighted in the transcript of a discussion between CPA Australia and the ATO.
Trust resolution transcript
2012 trust changes - A CPA Australia interview with ATO senior tax counsel Fiona Dillon
Many accountants don't get around to working out a trust's income until well after the end of an income year. Does the change in practice mean that they will have to have the trust accounts prepared by 30 June?
No certainly not. Trustee resolutions do not have to specify an actual dollar amount in order for the resolution to be effective in making a beneficiary presently entitled to trust income. Instead, a resolution is effective if it simply prescribes a clear methodology for calculating the entitlement, the result of which will not be known until the accounts are drawn.
For example, the entitlement can be expressed as a specified percentage of the income - whatever that turns out to be. Alternatively, if the trustee knows that the income of the trust will be at least a certain amount, but how much beyond that amount is unknown, it may choose to make one or more beneficiaries presently entitled to the certain amount, and other beneficiaries entitled to the balance - whatever that turns out to be.
I understand that the Tax Office intends to undertake some compliance activities to make sure that resolutions were made by 30 June.
Yes, but those activities will be relatively small scale. The project in respect of 30 June distributions is primarily educational, and will involve the publication of relevant articles and alerting bulletins, some which have already taken place.
In addition, we intend write to a group of about 1200 trustees advising them of the need to make resolutions to distribute trust income by 30 June. It is then proposed that a limited number of those trustees will be selected for follow up activity after 30 June. I understand they will be asked to provide details of their resolutions in July.
Do resolutions have to be in writing by 30 June?
All that needs to happen by 30 June is a relevant present entitlement has to be created. In discretionary trusts, this is typically done by a trustee resolving to distribute income to the relevant beneficiary. Not all deeds require a trustee to make resolutions in writing - so a decision to distribute income by 30 June that is not committed to writing at that time may very well be effective to create the relevant entitlement.
But there may very well be a question (or an evidentiary issue) in these cases as to whether or not a decision was in fact made. Accordingly, I would suggest that it would be prudent to note any decisions in writing by 30 June (for example, in minutes of a relevant meeting - even if the formal resolutions are drafted after this time) so as to avoid a later dispute (for example with the Commissioner or between relevant beneficiaries and the trustee).
Is there any chance that the ATO will extend its prior practice just for this year?
No. We have been discussing the scope and sustainability of the prior administrative practice with the National Taxation Liaison Group and the Trust Consultation Sub-group for the last few years. For example, in September 2008 the ATO flagged with the NTLG and the Sub-group that the scope of the practice was necessarily limited in that it could not apply to trustees who were prevented by the terms of their deed from appointing income after the end of the income year.
The Federal Court's decision in Colonial in January 2011 confirmed that the law required a present entitlement to arise by 30 June. In April 2011 the Commissioner explained to the Trust Consultation Sub-group that this made our practice unsustainable, and this was confirmed publicly both in our published Minutes and in our Decision Impact Statement in respect of Colonial which issued in June 2011. Because this discussion came so late into the 2010-11, we agreed to continue our practice for that income year, and only withdraw it on 31 August 2011 after the two month period for that year had expired.
It has therefore been known for quite some time that the prior practice will no longer apply for this and later years.
Just to recap then - when trustees make beneficiaries entitled to income for the 2011-12 year one of the things they will need to consider is whether they have lodged a TFN report in respect of those beneficiaries?
Yes and if they haven't they will need to withhold or fill out a TFN report. If the entitlement arises by way of a resolution made in June, the report must be lodged by 31 July.
We don't plan to extend the transitional arrangements which allowed later lodgment when these rules were first introduced to the 2011/12 TFN reports.
If the trustee is liable to withhold, is there anything else they need to do?
The trustee must also:
- register for withholding with the tax office (this will generate an annual activity statement for this withholding only)
- lodge an Annual TFN withholding report by 30 September
- pay the amounts withheld by 28 October (we will send activity statement for this), and
- provide a payment summary to relevant beneficiaries.
The trustee must also lodge an annual trustee payment report in respect of all beneficiaries who have received a payment or been made entitled to income during the year. But this is simply included in the trust tax return's statement of distribution.