If you’re a trustee for a discretionary trust, you may not be aware of the importance of making distribution resolutions before 30 June to determine which beneficiaries will be entitled to trust income and possibly capital, for that year ended 30 June.
The date wasn’t always set in stone, as a previous concession allowed a two-month window after the EOFY when it was still possible to form a ‘present entitlement’. However, that 31 August window still applies to trust capital gains distributions with the exception of gains that have already been dealt with by 30 June.
So, what needs to be done by 30 June?
You must ensure that resolutions meet all the requirements. Failure to do so may mean that you, as trustee, or other beneficiaries may instead be assessed on the applicable share of the net (taxable) income of the trust. When this happens, it’s often the highest rate of tax.
First of all, make sure you have to hand a complete copy of the trust deed (including any amendments). It’s important to ensure that any resolutions made to distribute the trust’s capital or income are indeed consistent with the terms of the deed.
Is there a standard format for the resolution?
There is no standard format for a resolution since there are a wide variety of trust deeds all with differing requirements for resolutions. What is most important is that the resolution makes one or more of your beneficiaries presently entitled to the trust income by 30 June.
Just to confuse matters, the ATO states that a distribution resolution need not be in writing unless of course, this is specified as a requirement of the trust deed. So, in theory, it could be possible to make a mental resolution or a verbal resolution (if the deed allows) provided the trustee has ‘resolved’ to distribute income in a particular way.
That said, the ATO will need to see evidence that a distribution resolution was made before 30 June and it will be necessary to substantiate this fact. So, while a dated resolution document is not strictly required, it must meet the requirements of the trust deed or be made before 30 June and there must be objective evidence proving this was the case.
What sort of objective evidence?
This could be something as simple as a diary entry, meeting minutes, an exchange of correspondence, or a draft minute or memo waiting to be approved. While a document can be dated later than 30 June, it must show that decisions regarding the trust’s distributions for the relevant year were made on or before that date.
For peace of mind, the best way to ensure compliance is to have a dedicated document. A written record provides better evidence of the resolution while avoiding a dispute at a later date with a relevant beneficiary or the ATO as to whether the resolution was made.
A written record is also paramount if the trustee wishes to stream franked distributions or capital gains, for tax purposes. Why is this?
It’s because a beneficiary is only entitled to capital gains or franked dividends if this particular entitlement is recorded in writing in the trust’s records.
What if the trustee is a company?
For trusts with a corporate trustee that has several directors, a meeting should be held before the date specified in the trust deed or before 30 June. In the case of a single director company, we recommend discussing the resolution or meeting with another party such as the external accountant of the trust, which can subsequently be recorded as a formal resolution.
The recording of a resolution is more assured in the case of corporate trustees since they must act in accordance with the provisions detailed in the Corporation Act 2001.
Before documenting a resolution
Prior to documenting a resolution, there are a couple of rudimentary things from the trust deed that all trustees need to be aware of:
- Who makes up the beneficiaries of the trust
- How the income is defined and how the trust should determine the income to be distributed
- Who the current trustee is; and
- Whether there is a power to stream capital gains or franked dividends
If you’ve having difficulty with any aspect of trust resolutions or want to ensure that they meet the ATO requirements correctly so that you don’t incus any adverse tax consequences, we’ll be happy to assist. Please call JSM accounting on 07 3814 6512 or schedule an appointment online.