Trust Tax Tips 2016
Here are some useful tax tips and reminders concerning trusts:
Beneficiaries
Trustees should check their trust deed and make sure that they only make distributions to eligible beneficiaries. Only an eligible beneficiary can be presently entitled to income of a trust estate. If distributions are not made to eligible beneficiaries then the net (taxable) income of the trust may be assessed to the trustee or default beneficiaries.
Trustee resolutions
To ensure beneficiaries are presently entitled to trust income, all trustees must make a resolution by 30 June of that income year. This resolution establishes which beneficiaries are presently entitled to the trust’s income and helps determine who is to be assessed on the trust’s taxable income. If the trust deed requires an earlier resolution to be made, the requirements of the deed should be followed.
Lodging trust income tax returns
It is important to lodge the income tax return by the lodgment due date. Generally all trusts that derive income during the year must lodge an income tax return. It is also important that labels 53A and 54W on the trust tax return concerning distributable income are completed correctly.
Exempt entities as beneficiaries
The Government introduced two rules for the 2010–2011 and later income years that may apply where a trustee makes a tax-exempt beneficiary entitled to income of a trust estate.
The first is a “pay or notify” rule. Where a tax-exempt entity has been made presently entitled to income of the trust estate, the trustee must either pay the entire entitlement to that entity or notify them of their entitlement within two months of the end of the income year. Otherwise, the trustee will be assessed in relation to the amount.
The second rule, called a “benchmark percentage” rule, applies where a tax exempt entity is presently entitled to an amount (excluding capital gains or franked distributions) that results in a disproportionate share of the net income being attributed to it. In this case the trustee will be assessed on this amount. This would occur, for example, if the tax-exempt entity is made presently entitled to all of the trust’s income and that amount is significantly less than the trust’s taxable income. In those circumstances, the trustee would be assessed on the disproportionate or excessive amount originally attributed to the tax-exempt entity.
For both rules, the taxpayer may apply to the ATO to not assess the trustee.
Property developments trusts
The ATO has advised that it has noticed some trusts in the property development industry are characterising their business income as capital, rather than revenue, to take advantage of the 50% CGT discount. According to the ATO, the trust should not be characterising the profits from the sale of the developed property as being a capital gain because the trust is either carrying on a business or is involved in a profit-making undertaking involving the development.
Discretionary distributions to SMSFs
The ATO has highlighted concerns relating to self-managed superannuation fund (SMSF) annual returns where discretionary trusts distributions were reported. The ATO said trustees were asked to check the trust deed of the distributing trust (and any resolutions) to determine whether the amount reported at Label 11M (gross trust distributions) was non-arm’s length income. The ATO has reminded trustees to ensure distributions from discretionary trusts are correctly reported in the SMSF annual return.
Want to know more?
Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.