With the financial year end rapidly approaching, clients with discretionary trusts should ensure they do the following prior to 30 June 2014.
- Ensure that the trustee of the trust resolves to distribute trust income prior to 30 June 2014. Further, as some deeds provide that trustees should resolve to distribute income on a day prior to 30 June 2014, trustees should ensure that a valid trust resolution to distribute income is made prior to the date required under the deed.
- If different types of income are being distributed to trust beneficiaries, ensure that the trust deed allows for the trustee to stream different classes of income, for example such as - ordinary income, capital gains and franked dividends.
The Australian Taxation Office has been taking a more aggressive approach to audits of discretionary trusts in recent times and if an appropriate trust resolution is not made prior to 30 June 2014, (or an earlier date as may be required under the deed), they may instead tax the trustee on the income for the year at higher rates, or tax the default beneficiaries under the deed. In addition, if a trust deed does not allow for streaming of different classes of income, the ATO have been challenging the validity of the resolution itself and the potential for a greater taxation liability is again raised - including penalties and interest - as typically such matters are picked up years later on an audit by the ATO.
Therefore, we suggest that clients review their trust deeds carefully now and ensure that the trustee makes a valid trust resolution prior to the 30 June 2014 year and distributes income in accordance with the powers contained in the trust deed itself.