PAYMENT DEFERRALS
If you are having trouble paying your tax liability, please let us know as soon as possible so we can negotiate a deferral or payment plan with the ATO on your behalf.
TRUST SPLIT ARRANGEMENTS
A trust split usually involves a family trust. A common reason given for ‘splitting’ the trust is to allow different parts of the family group to have autonomous control of their own part of the trust fund.
The Tax Commissioner’s view is that the split will create a new trust (as the trustee has new personal obligations and new rights have been annexed to property) and trigger a capital gains tax event, which could potentially give rise to a taxable capital gain.
TFN REPORTING
Has your trust lodged TFN reports for all beneficiaries?
Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax return each year. The Australian Taxation Office (ATO) is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.
WHERE TFN PROVIDED
Where beneficiaries have quoted their TFN to the trustee, trustees are required to lodge a TFN report for each beneficiary. The TFN report must be lodged by the end of the month following the end of the quarter in which a
beneficiary quoted their TFN. For example, if the trustee receives a beneficiary’s TFN in April, they must lodge a TFN report by the end of July.
WHERE TFN NOT PROVIDED
Where a TFN has not been provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% on distributions made to the beneficiary and pay this to the ATO. The trustee must also lodge an annual report of all
amounts withheld.
Failure to comply with the TFN reporting and withholding requirements may trigger penalties.
TRUST DISTRIBUTIONS
TIMING OF RESOLUTIONS
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2022 at the latest (the trust deed may actually require this to be done earlier). Decisions made by the trustees should be documented in writing, preferably by 30 June 2022.
If valid resolutions are not in place by 30 June 2022, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).
ANTI-AVOIDANCE AND ‘ROUND ROBIN’ TRUST DISTRIBUTIONS
Anti-avoidance measures prevent family trusts engaging in ‘round robin’ circular trust distributions with other closely held trusts.
The rules impose penalty rates of tax in situations where trust income is distributed to one or more other trusts and ends up being distributed back to the first trust. Before 1 July 2019, trusts that had made a family trust election were excluded from these rules but that is no longer the case.
DISTRIBUTIONS TO NON-RESIDENT BENEFICIARIES
In some circumstances, non-resident beneficiaries can be taxed in Australia on gains relating to foreign assets, which would not have been taxed in Australia had they been made by the beneficiary directly.
If a resident discretionary trust makes a capital gain, the ATO expects that this will normally be taxed in Australia, even if the gain is distributed to a non-resident beneficiary, even if the gain does not relate to Taxable Australian Property (TAP) and even if the gain has a foreign source. Given that non-resident beneficiaries will be taxed at nonresident tax rates and may not have access to the full CGT discount, it will be important for trustees to consider this carefully when deciding on distributions for trusts that have a mixture of resident and non-resident beneficiaries.
The ATO’s determinations do not take into account the possible application of any double tax agreements. This is another issue that would need to be considered to reach a conclusion on how distributions are likely to be taxed in the hands of non-resident beneficiaries.
LOW INCOME TAX OFFSET AND MINORS REMINDER
The low-income offset has not been available to minors who only receive ‘unearned’ income (e.g. distributions from a discretionary trust) since the 2013 income year. Minors who only receive ‘unearned’ income will normally be subject to penalty rates of tax on income that exceeds $416.
Normal marginal tax rates can potentially still apply to minors who receive distributions from a deceased estate or testamentary trust. However, recent amendments to the rules in this area are aimed at ensuring that minors are only taxed at adult marginal tax rates in respect of the income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).
STREAMING OF FRANKED DIVIDENDS AND CAPITAL GAINS
Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the beneficiary’s entitlement to the franked dividends is recorded in writing by 30 June 2022. For streaming of capital gains to be effective for tax purposes, the beneficiary’s entitlement must be recorded in writing by 30 June if the capital gains form part of trust income for the year or 31 August if the capital gains do not form part of trust income.
We can assist you with this process if you do wish to stream franked dividends or capital gains to specific beneficiaries.
TAX EXEMPT ENTITIES
If a trustee resolves to distribute income to a tax-exempt entity, the trustee will be assessed on that income at the top marginal tax rate unless:
- The trustee actually pays the entire distribution within 2 months of the end of the income year; or
- The trustee notifies the entity in writing of its entitlement within 2 months of the end of the income year.
Also, anti-avoidance rules tax the trustee on a portion of the income distributed to a tax-exempt entity where there is a mismatch between the net financial benefit to be received by the entity and the tax treatment of the distribution.
The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.