Key points

  • The ATO’s practice of allowing trustee resolutions to be made in July or August was abolished two years ago; so 30 June means 30 June - expect no leniency from the ATO.

  • The trust compliance process with your clients should be starting now.

  • Many clients are still uncovering gremlins in their trust deeds and making mistakes - read the deed and deal with problems before it is too late.

  • Making trustee resolutions and recording them carefully is important - they can make or break your client in an audit.

  • The streaming rules are complex; it's easy to make a mistake.

It is 42 days to 30 June, which falls on a Monday this year. That means now is the time to start working with your clients who have trusts on the trustee’s year end compliance obligations. In this update, we highlight some problem areas and key action items.

We have now had two years of experience getting trustee resolutions completed properly by 30 June. The feedback from many of our accountant clients is that what seemed like a nightmare in 2012 has not turned out so bad. Indeed, there have been many positives. For example:

  • Many younger (and older) members of the profession have developed a good discipline around trust compliance.

  • Clients have started to better understand the complexity in administering a trust-based business structure - but have not always been happy to pay the higher fees associated with this complexity.

  • Clients are taking a step back and thinking about whether a trust-based business structure is the best structure to have for the future.

  • People have opened up their clients’ trust deeds and discovered stuff they never knew was there, sometimes with frightening consequences.

Frankly, this doesn’t surprise us. Firstly, we have always known accountants to be an intelligent, resilient and adaptable bunch! Secondly, it was always our view that some good would come of these changes. If you want our editorial view, please see our Taxation Update from 2012.

To assist with your clients’ preparation of this year’s trust resolution, there are some key principles to keep in mind. We never tire of repeating them. They are:

Read and understand the trust deed: This is happening more than it did in the past, but there are still horror stories. These are some recent examples:

  • Excluded beneficiaries: Trustees must be careful not to make trust distributions to trusts or companies in the family group that are ‘excluded beneficiaries’ under the trust deed. For example, as well as usually excluding the settlor as a beneficiary, many trust deeds exclude the ‘guardian’ or sometimes the appointor. Some deeds go one step further and also exclude as a beneficiary another trust that can benefit the guardian (for instance, as a ‘general beneficiary’) or a company in which the guardian owns shares.

  • Vesting dates: Time does fly, especially when it comes to the vesting date of a trust. We have seen far too many examples where trustees (and their advisors) have continued to administer the trust well past the vesting date. Done carefully, it is possible to extend the vesting date of the trust, but only before the vesting date has expired.

  • Distribution and streaming clauses: We still see many trust deeds that do not have robust income definition and distribution clauses, or provisions which allow the trustee to more easily make beneficiaries’ ‘specifically entitled’ to streamed capital gains and franked dividends. In most cases, trust deeds can be amended to fix these things without triggering a resettlement.

Pay extra attention to ‘streaming’ capital gains and franked dividends: The streaming rules for franked dividends and capital gains were introduced as ‘interim’ measures while the trust taxation rules in Division 6 were reformed in the wake of Bamford and other cases. The planned reform never came (and will not be coming any time soon), so the ‘interim’ rules are for the time being permanent.

The streaming rules are complicated and difficult to apply in practice. Also, as mentioned above, the rules require the trust deed to do some work to make a beneficiary ‘specific entitled’ to a streamed franked dividend or capital gain. If you have not already done so, you should review the trust deed and ensure that it is up to the task.

Also, when streaming discounted capital gains, in many cases it will be necessary for the provisions of the trust deed that allow for a capital distribution to be used to stream out the part of the capital gain that has been sheltered by the CGT discount. For example:

Capital gain made by trust:​ $100 [full ‘financial benefit’ of this amount to be provided to beneficiary]​​​.

Discount capital gain:​ ​$50 [Included in trust distributable income - income equalisation clause and ‘streamed’ to beneficiary in its character as a capital gain].

‘Sheltered’ component:​ $50 [not included in trust distributable income - get out to beneficiary as a distribution of trust capital].

It is important that accountants identify when this is required and check that it is allowed under the capital distribution clauses.

This takes us back to another trust deed issue: many trust deeds require a guardian or settlor to provide their consent to the trustee making a capital distribution. If the person whose consent is required is dead or out of contact, getting consent will not be possible.

Keep a document trail around the trustees’ resolution: Most trust deeds require the trustee to resolve to distribute the income of the trust by 30 June (or another date - another trust deed trap!).

You should be aware that, when conducting a review or audit, the ATO's practice is to check trust resolutions early in the process. Don't think that it won't be interested in such detail. It has the forensic capability to determine when a document was created and signed.

The trustee resolves to do something by making a decision to do it: the minute is the written record of the resolution. The minute does not need to be dated on or before 30 June. However, it is very important to be able to prove that the trustee made its resolution on or before the date the trust deed requires it to be made. This means that in addition to the minute, other records of the trustee’s decision (preferably ones that are easy to date) should be prepared and kept, such as correspondence between the trustee and its advisors.

In a recent audit, the ATO did not accept that a trust resolution was made on the date the minute said it was made (which was 30 June). In this case, the taxpayer could provide some additional evidence (diary notes and accountant’s invoices) that showed the trustee was planning and, with advisors, thinking about trust resolutions before 30 June. However, by itself this was not enough to convince the ATO. More or better extraneous documentation, actually showing a decision about the distribution of income was made before 30 June, probably would have got the taxpayer over the line.

Trustee resolution minute best practice: Some may find it laborious, but we think the ‘best practice’ when it comes to structuring a trustee’s resolution minute is for it to confirm these things:

  • That the trust deed was tabled and considered by the trustee/s.

  • That the trustee/s considered and determined that the beneficiaries to whom income distributions will be made actually are beneficiaries of the trust.

  • That the trustee/s considered the trust deed’s income definition and applied it to the amounts sought to be distributed (including, if necessary, making a determination about what the trust income will be).

  • The distributions to be made (many trustee resolution minutes go straight to this).

  • How the distributions will be paid, applied or set aside for the beneficiaries.

Distribution methods: It is fine to express a distribution, if not in exact dollar terms, in one of these ways:

  • As a proportion of the trust income (a percentage) and a balance.

  • By setting out a methodology in the trustee’s distribution minute that can be easily applied to work out each beneficiary’s entitlement - for example, as a percentage of income of a particular type (100% of the trust income that represents ‘rent’).

Distribution approaches that don’t work include:

  • Distributions that are ‘reverse engineered’ based on tax rates or another variable;

  • Distributions where the trustee tries to deal in advance with how a post-assessment adjustment to the taxable income of the trust will be treated or attributed.

Applying these principles should help you navigate the complexity of trustee resolutions and good trust administration.