TRUSTEES of family discretionary trusts could be forgiven for feeling they are under attack. First Labor Left faction convener Doug Cameron branded them tax cheats. Next the Australian Taxation Office has announced it will increase its audit activity and scrutiny of discretionary trusts.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
It is ironic that this ATO crackdown comes after legislation passed in June 2011 confirmed the ability of discretionary trusts to stream or selectively distribute capital gains and franked dividend income. Before this legislation the ATO had tried to argue trusts could not stream income.
The confirmation of income streaming was dependent on a trust's deed allowing it. There was a downside to the certainty created by the legislation. This was the requirement for the records of the trusts to show that a beneficiary is entitled to this income no later than two months after the financial year end.
One of the major benefits of discretionary trusts is the ability of the trustee to distribute the income, whether it is business or investment income, among the family members/beneficiaries of the trust. The income distribution is evidenced by a trustee's resolution or minute.
Until the passing of this legislation and before the ATO decided to begin this increased scrutiny of discretionary trusts, it had been common practice for the resolutions or minutes to be prepared by the accountants for a trust after the end of each financial year when preparing the trust's accounts and tax return.
The ATO had been aware of this practice and approved it. It has now changed its mind and will no longer tolerate the practice.
This is because many trust deeds, the governing rules for a trust, state that the income of the trust must be distributed to beneficiaries before the end of the financial year. It is this requirement imposed on trusts by their own deeds that the ATO is using to enforce the tougher regulations.
To ensure that trustees are properly documenting the distribution of trust income the ATO will mount a two-pronged campaign. The first will be to raise the general awareness of trustees and accountants of the necessity to document distributions before June 30 each year.
In the second, letters will be sent to selected trustees in late May and early June 2012 advising them of the importance of documenting trust distributions before the end of each financial year. The letter will also request that a copy of the trustee's resolution for 2012, the trust deed and any amendments made to the deed, be forwarded to the ATO in the first week of July 2012.
Some trusts formed many years ago that have not had their trust deeds updated, may have been incorrectly distributing their income. Hence the reason the ATO wants copies of these deeds and amendments.
Trustees of trusts face two choices. Either contact their accountants and have their trust deed reviewed, prepare interim results before the end of each financial year and prepare a resolution before June 30 distributing the income of the trust.
Or they can bury their head in the sand and hope that they never get selected for an ATO audit.
Max Newnham's Funding your Retirement - A Survival Guide is available in bookstores and as an e-book.
