Hi, I've got a very basic question to clarify my thinking. I'm a trustee of a discretionary trust. With the end of the financial year coming up I have to distribute the income to the beneficiaries. 1) Does the minutes of the distribution have to be complete by 30th June? With some income coming on 30th June (e.g. bank interest), this is impossible. 2) Does distributions have to be distributed, by 30th June as well? 3) Or do I just have to include record this in the books as distributed by 30th June? I've read somewhere, where it is specified that trusts have until August 31 to perform distributions - but cannot find the section in the ATO website. Any help would be great - great forum! Confused
You can just make book entries for the distributions once you have all the data available. If you have something like managed funds which calculate final distribution as of June 30 but don't actually pay the money until some time in July - you have to take this into account anyway. You probably won't know the amount of the final distribution until well into July anyway - so you can't calculate the distributions to beneficiaries until after that time. It's all just book entries listing money owed but yet to be received, and for beneficiary distributions, funds that are owed (to the beneficiaries) but haven't been paid yet. This is all stuff you'd do when your accountant finalises the books sometime after June 30 ... so don't sweat it, it's practically impossible to get everything looking neat by tyhe end of the financial year ... this is all just normal stuff for your accountant.
The ATO can pick holes in the legal effectiveness of a distribution from all sorts of angles. Don't rely on the ATO practice statement, but get advice on how to word the distribution minute to cope with income that has been "derived" by June 30th without the Trustee knowing how much and even what type of income. This should be made on or before June 30. If you have purchased a pro forma deed with example distribution minutes then still get this checked before using them since even as we speak there is a big case before the courts that could fundamentally impact distribution of capital gains. Very messy ... Cheers, Rob
Yeah - a little messy this. Ensure your accountant has all the minutes prepared and dated at June 30. Good trust distribution minutes should have the allocation of the income and also what happens to any additional income to be distributed (i.e. as a result of ATO amendments to the trust tax return). That way if the ATO ever amends the return you don't end up paying tax at the maximum rate. Also be aware that rules for family trust distributions have narrowed for the 2009 year, meaning you can only distribute to lineal descendants (i.e. your direct kids, parent and grandchildren etc) rather than nieces and nephews. On the bright side, as the Low Income Tax Offset is increasing to $1200 per year for 2009 (up from $750), the amount you can distribute to minors has increased from $1667 to $2668 (going from memory here as the ATO website was not working at the time to confirm these amounts).
Thanks for the detailed replies. Certainly 1 area where it pays to have a good accountant! I'm still going to have to do a bit of book keeping work to know what and how much I plan to distribute come June 30. confused
Hi Superman, this isn't very good news . What's the reason for the change and where did hear about it? I couldn't find anything on the ATO website, do you have a link so I can read up on it? Regards, Oli.
Oops! The good old Senate amended this to remove this change which was mooted in the May 2008 budget. See ATO link here. This is good and means if you have a family trust you can still distribute to nieces and nephews! Sorry if I freaked anyone out.
Hi, not an expert, but I remember from the Somersoft forum that a discretionary trust is not necessarily a family trust - the two terms are not interchangeable. I think that the trustee has to make a specific "family trust election", and different tax rules apply. Check with an accountant.
You are correct - a family trust election does make a difference however it is not applicable to the original question asked regarding the paper work and effectiveness of the recording of the distribution. If anyone is interested I can post a summary of the impact / benefits / disadvantages of making a family trust election.
I am interested in understanding the implications of a family trust election. I thought Family and Discretionary trusts were the same thing?? Is the family trust election an annual thing or is it a function of whats in the deed?
Found a basic overview of the impact of a family trust election here: http://www.superiortax.com.au/Special%20Topics/News/FTE.pdf <-- Opens as a PDF. So the basic reasons you would do it are that you have imputation / franking credits of more than $5k and/or tax losses to utilise in the family trust. Please note the election must be made (either separate / stand-alone form or the schedule attached to the trust tax return) - just becuase your trust has "family trust" in its name doesn't make it a family trust. Any specific application to your personal situation should be discussed with your qualified accountant.
Just got off the phone from the ATO who confirm $2,668 can be distributed to a minor from a discretionary trust, without the minor paying tax or lodging a tax return. HOWEVER, I WAS TOLD UNDER SECTION 98(1), THE TRUSTEE IS LIABLE FOR TAX AND CANT BE OFFSET AGAINST THE BENEFICIARY AS THE BENEFICIARY IS NOT LIABLE ANY TAX. Is this correct?
Whats the problem ? The Trustee pays the tax liability - which is nil because of the low income tax offset. Assuming the child has no other income, they would only need to file a return if there were refundable franking credits distributed to them. Cheers, Rob
I was told by the ATO, that the trustee does not receive the low income rebate (especially as the trustee is an individual and has other income). Therefore, the trustee pays the tax. Therefore, the beneficiary must file for a TFN, lodge the tax return, with the income from trust and apply the credit tax paid by the trustee. That is what I was told, if that is correct? This seems rather cumbersome, when the overall net effect is zero. Furthermore, if the beneficiary receives income from two trusts (even though overall it is below $2667), it is also required to lodge a tax return?
Ok thanks. Its funny that I got the wrong advice. I rang up the ATO again and got a different response this time - they said to use assessment code "027" on the Statement of Distribution and that way the ATO wont assess the trustee. But it still seems if the minor receives income from two trust then section 100(1A) wont help, and the minor will be required to lodge a tax return. So would you agree the best way to overcome two trusts in the future distributing to a minor is to distribute the income of Trust A to Trust B and then allow Trust B to distibute the income to the minor subject to the threshold limits? Rather than distributing to the minor from Trust A and Trust B individually?
Actually this only says that the beneficiary is assessed on that income. Section 100(2) still says the beneficiary is entitled as a credit to the tax paid by the trustee. So section 98(1) still applies. I've confirmed this with the ATO as well unfortunately.
s.100 slaps an assessment on the beneficiary when the Trustee is assessed under s.98 for the beneficiary's share of net income ... i.e. TWO assessments for the same amount of income. s.100(1A) is the exception, where the beneficiary has no other income and does not require a refund of franking credits. Cheers, Rob
