Distribution of Trust Income
Let’s get the nasty warning out of the way first! If the Trustee does not validly make a resolution for the distribution of trust income by 30 June (or earlier if the Trust Deed requires!), the taxable income of the trust will be assessable in the hands of the default beneficiary (provided the Trust Deed specifies this) or the Trustee. Where the Trustee is assessed, the top marginal tax rate applies to the taxable income of the trust.
The first point of call when administering a trust is the Trust Deed. The Trust Deed is “king” and should be referred to whenever the Trustee or director(s) of the Trustee Company make a decision about the trust. It is even more crucial when making a distribution of the trust income before the end of the financial year.
In guiding a Trustee regarding how they approach the distribution of trust income, the Trust Deed will generally contain the following:
- The definition of trust income; is the trust income to be determined in accordance with:
– Section 95 of the Income Tax Assessment Act; or
– Accounting Principles and Trust Law; or
– Ordinary Concepts.
- Who the beneficiaries of the trust include
- Does the Trust Deed allow for “streaming” of trust income; i.e. does the deed allow the Trustee to separate the income of the trust into different categories and flow the different types of income to particular beneficiaries?
- The requirements of the Trust Deed to make good past losses of the trust;
- The ability of the Trustee to distribute the capital of the trust;
- How the Trustee can validly make their resolution for the distribution of trust income (even if not specified, we recommend that the Trustee’s resolution is documented and signed before 30 June!)
The above list is not exhaustive but should give you an indication of the importance of regularly reviewing the Trust Deed to ensure that the Trustee is not in breach of its requirements.
In addition to the Trust Deed, when considering the distribution of trust income, the Trustee must also consider the various taxation requirements of the distribution. This may include (but is not limited to):
1. Whether the trust is a “Family Trust” for tax purposes;
2. Consideration of the taxation requirements of streaming income;
3. Determining the beneficiary’s share of taxable income based on their proportionate share of the trust income (or class of trust income, if streamed).
Given the potential tax downside, if distributions of trust income are not correctly dealt with by the Trustee, I would encourage that you give due thought to this as we approach the end of the financial year.
So where to from here:
- Review the Trust Deed! What are your obligations as Trustee?
- Bring your management accounts for your Trust up to date and review the performance of your trust for the current financial year (consider the definition of “trust income”.
- Liaise with the beneficiaries of the trust and determine their estimated levels of taxable income for the current financial year;
- With this information in hand, approach your tax advisor to consider the most tax effective way to distribute the income of the trust;
- Document and have the Trustee sign the resolution of the Trustee before 30 June!
Let me know in the comments if you would like a particular topic discussed in a future installment of TT and I will do my best to accommodate! Remember, I am unable to give advice, but am always happy to share my thoughts on an area of tax. For specific advice, talk to your advisors or contact me.
And please remember, Tolerable Tax does not contain tax specific advice. Each taxpayer’s circumstances differ and you should always seek advice (specific to you) before taking any action.