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The last 12 months have seen significant changes to tax laws and laws affecting Family Trusts.

AFP Accounting, Tax and Business Advisory has changed how we process Trust distribution resolutions to maintain compliance with these changes.

Practical compliance changes for the distribution of Family Trusts.

All Trust Distribution Resolutions must be valid, unambiguous, and completed on or before 30 June to avoid the Net Income of the Trust being assessed at the top marginal tax rate of 47%.

With all the recent scrutiny, AFP Accounting, Tax and Business Advisory anticipate an increase in Trust audits within the next year or two.

Changes in 2023 to Tax Laws and Family Trust Laws

The Australian Taxation Office (ATO) has issued several publications targeting family discretionary trust operations and distributions.

In addition to a judgement made in a recent court proceeding, these publications have affected trust administration practices.

Industry and regulatory bodies further stated that template distribution resolutions may no longer be accepted.

The ATO advises that trustees must ensure their resolutions are effective, including where trustees may want to make beneficiaries specifically entitled to franked dividends and capital gains included in that income.

Trustees must ensure that the intended beneficiaries are entitled to be appointed and comply with any Trust Deed requirements concerning validly establishing or distributing trust income to beneficiaries.

Trustee resolutions must be made on or before 30 June each year (or such earlier date as required by the Trust Deed) to make a beneficiary entitled to the trust’s income.

Failure to resolve will result in no distribution and the Trust income being taxed at the highest marginal tax rate of 47%.

ATO – section 100A – PCG 2022/2

Generally, when a beneficiary receives their distribution entitlement (and applies the entitlement for their benefit), Practical Compliance Guideline Section 100A does not affect them.

However, the risk it will apply rises if the beneficiary does not receive their distribution entitlement and (or) a benefit is provided to another person or entity through that distribution entitlement.

PCG 2022/2 outlines several scenarios and explains the likelihood of the ATO compliance activity to determine whether to apply section 100A. It divides scenarios into green or red zones.

Green zone arrangements will only be examined to confirm that further ATO investigation is not warranted. In contrast, red zone arrangements will be analysed to determine whether they are at high risk of non-compliance.

Owies v JJE Nominees Pty Ltd Case

The dispute involved two beneficiaries challenging distributions made by the Trustee of the Owies Family Trust.

The Victorian Supreme Court of Appeal examined the circumstances where a Trustee of a discretionary Trust may have breached their fiduciary duty by not giving ‘real and genuine consideration’ to all beneficiaries.

The trust was established in 1970b and held over $23 million in assets.

Over several years, Mr Owies, in his capacity as director of the Trustee company, did not distribute any funds to kids because they were “on drugs” and allocated all “100%” of Trust income to senior family members.

Two of the children successfully argued that the resolutions of the Trustee did not give ‘real and genuine consideration’ as to whether a distribution should be made to each of them.

The Court of Appeal found that the distributions were voidable (but not void) because the distribution decisions were made with no genuine consideration of the children as beneficiaries of the trust.

The Court of Appeal ordered the removal of the Trustee and appointed an independent trustee to control the trust.

There was no record on file of whether or not any other beneficiaries were considered and why spouses were excluded.

The Trustee may need to document why no distribution(s) were made to direct family members and beneficiaries listed in the Trust Deed.

How To Keep Family Trusts Tax Compliant?

Trust distribution resolutions are subject to significant litigation and ATO compliance review.

For the Trustee to avoid an adverse Court judgment against them for future Trust distributions, the Trustee may need to do one or more of the following:

Review the Draft Trustee distribution resolution we prepared.

Make enquiries on the needs and circumstances of every primary/named/specified beneficiary as a minimum.

Internally document enquiries and considerations and how distributions were made.

Ensure that Trustee powers are exercised ‘reasonably’. There’s no definition or clear guidelines for ‘reasonable’. The Courts will consider all surrounding circumstances.

Consider removing particular primary beneficiaries from the trust – subject to review of the Trust Deed.

* Please ensure the removal will not eventuate in Trust resettlement, which could lead to severe tax consequences.

If distribution is made to kids, including minors, the Trustee must physically transfer the funds to beneficiaries.

Ensure you retain a signed copy of the Trust Distribution resolution for compliance.

Next Steps for Trust Distributions

Non-compliance has substantial consequences. With increased scrutiny expected, Trust audits will likely rise in the coming years.

The recent Owies v JJE Nominees Pty Ltd case underscores the importance of genuinely considering all beneficiaries when making distributions. Proper documentation and justification of distribution decisions are essential.

Trustees should carefully review and document their Trust distribution resolutions to maintain tax compliance.

By staying informed, adhering to Trust Deed requirements, and adopting robust documentation practices, Trustees can navigate the complexities of Family Trusts, mitigate risks, and ensure compliance with changing tax laws.

Talk to your professional accounting advisor to ensure compliance with ATO legislation.

If you would like to discuss the management of your trust fund or how to construct an effective resolution, contact us at enquiries@afpaccounting.com.au 

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