With the close of the financial year rapidly approaching, it’s a good time for trustees to strategise and document their annual trustee resolutions for their trusts. This is a key requirement for trust distributions. This process must be completed before the 30th June deadline (or earlier as stated by your trust deed). This is to avoid tax penalties that can soar up to 47%.
The following guide highlights key considerations and steps that you should be considering. Let’s look at what you should prioritise during this time.
What’s Covered:
What Is a Resolution?
In the simplest terms, a Trustee Resolution is a formal decision made by the trustee or trustees of a trust. These resolutions can cover various actions, like distributing income, investing in assets, or changing the trust’s structure. They are key part of the process when doing trust distributions.
But why are these resolutions so important? They serve as legal proof of the trustee’s decisions. They show that the trustee is appropriately managing the trust and acting in the best interests of the beneficiaries.
One essential resolution that trustees must make each year involves how the trust’s income will be distributed among the beneficiaries. This needs to be decided before the end of the financial year and should be clearly documented.
Remember, trustees must not take these resolutions lightly. Trustees must consider the trust deed (which sets out the rules for the trust), the interests of the beneficiaries, and tax laws. They must also ensure that all resolutions are correctly recorded and kept as part of the trust’s records.
What if the Trustee Is a Company?
A company acting as a trust’s trustee is often termed a ‘corporate trustee’. The company, not the individuals, is legally responsible for the trust.
One key difference in this setup is the company constitution. This is a document that outlines how the company is governed. It’s similar to the trust deed but for the company. It sets out the rules for making decisions, including how directors’ meetings should be convened and held.
Why does this matter? All decisions, like a Trustee Distribution Resolution, must align with the company constitution if the company is the trustee. This includes procedures for convening and conducting meetings, voting on resolutions, and recording decisions.
For example, if a director is absent and the constitution requires all directors to be present for decision-making, it could delay crucial actions like a Trustee Distribution Resolution. Such delays have tax implications if the resolution isn’t made before the end of the financial year. Thus, understanding the company and trust rules is critical to effective trust management.
What Is the Trust’s Financial Position?
Before making a Trustee Distribution Resolution, it’s vital to have a rough picture of the trust’s financial position. Using software can significantly help track your trust’s financial status and give you immediate feedback when needed.
On one hand, your trust may only be invested in shares. You should consider tools like Sharesight for tracking share purchases, sales and dividends. For a more comprehensive picture, with the ability to also lodge tax returns, you might consider Simple Invest 360 software. These platforms offer real-time insights into your investments, which can inform your resolutions.
The next step involves updating and classifying your transactions. With your transactions sorted and categorised, you’ll have a clearer view of the trust’s finances. From there, you can run reports to give you an idea of the types and amounts of income, capital gains, or losses the trust might have.
With this information at hand, you’re well-prepared to make a trust distributions resolution. You don’t need to have prepared full trust accounts to make a resolution. When you make a resolution, you don’t need to specify an actual dollar amount unless it’s explicitly required in the trust deed.
Do You Have the Trust Deed Handy?
The trust deed is a legally binding document that sets out the rules and provisions of your trust. It’s like the blueprint for how your trust is managed. It outlines the powers and duties of the trustee, the beneficiaries rights, and the distributions’ terms.
So, why should you always have the trust deed at your fingertips?
Firstly, it provides clarity. Your trust deed is your go-to guide whenever you’re unsure how to handle a trust matter. It spells out the terms of the trust in black and white, leaving no room for ambiguity.
Secondly, it’s your legal safety net. The trust deed provides the legal foundation for all your decisions as a trustee. By aligning your actions with the trust deed, you’re ensuring you’re on the right side of the law.
Thirdly, the trust deed may specify particular requirements when making a Trustee Distribution Resolution. For instance, the distribution may require a dollar amount or to be made in a certain way.
Also, now is an excellent time to ensure the trust deed is valid and hasn’t vested!
Who Are Your Beneficiaries?
The trust deed should clearly outline who the beneficiaries are. This could be specific individuals, like family members, or a broader class of people, such as all descendants of a particular person. It’s also possible for charities or other entities to be beneficiaries.
Why does this matter? Because, as a trustee, you have a legal duty to act in the best interests of the beneficiaries. Knowing exactly who they are helps you make decisions that benefit them.
Moreover, when making trustee distributions, you need to consider the needs and circumstances of the beneficiaries. You should consider their age, financial situation, or relationship with other beneficiaries.
Understanding who your beneficiaries are is more than just good practice. It’s a crucial part of managing a trust. Keeping your beneficiaries in mind ensures that your trust achieves its purpose and serves the interests of those it was designed to benefit.
Has There Been a Family Trust Election (FTE)?
An FTE is a decision made by trustees to specify their trust as a family trust. This is an essential step as it can offer several tax advantages. However, it also means the trust is bound by specific distribution rules.
In essence, an FTE ties the trust to a particular family group. This group is defined by a specified individual and their family. The trust can only distribute income or capital to members of this family group unless it’s prepared to pay hefty penalty tax rates.
So, while an FTE can offer benefits, it also narrows the scope of who can be a beneficiary. As with all aspects of trust management, it’s essential to understand the implications before making an election. This is another instance where professional advice can prove valuable.
How Is the Trust’s Income Calculated?
The first thing you need to do is understand how your trust’s income is worked out. This is usually explained in the trust’s deed. For example, the deed might say that the trust’s income is the same as its ‘net income’ – the money it has left after paying all its costs. If that’s what the deed says, then you shouldn’t try to use a different method for working out the income.
Are You ‘Streaming’ Capital Gains or Franked Distributions?
You need to be careful when ‘streaming’. That’s when you want to retain the type of income when given to beneficiaries. For example, suppose you distribute all the profit from selling something (a ‘capital gain’) to one person. In that case, you must ensure this is allowed by the trust’s rules.
You also need to ensure the person gets all the benefits from that gain. This might include parts of the gain that aren’t taxed.
It’s also important to remember that you have to decide who gets these gains by a specific date. You can’t change your mind about who gets a gain after it’s already been allocated.
Can You ‘Stream’ Other Types of Income?
You can’t ‘stream’ all types of income. For example, if the trust earns money from overseas, you can’t choose to give all this income to one person. Each person usually gets a share of each type of income the trust makes.
Does the Resolution Have To Be Written?
Proving that a resolution has been made is a vital aspect of trust management. Objective evidence, such as meeting notes, correspondence, or ‘draft’ minutes approved at the meeting, can help demonstrate that a resolution was made according to the trust deed’s terms.
Does a resolution have to be in writing? This depends on your trust deed. However, a written record often provides more robust evidence. It can prevent future disputes, either with the tax office or beneficiaries, about whether a resolution was made.
A written record becomes especially important when you want to effectively distribute capital gains or franked distributions for tax purposes. Beneficiaries can only be specifically entitled to these if the entitlement is recorded in writing by specific dates – 30 June for franked dividends and 31 August for capital gains.
It’s important to note that, due to the trust deed’s operation, if another beneficiary was entitled to the capital gain included in the trust’s income before 30 June, a beneficiary cannot be specifically entitled to it after that date.
In short, having a written record of resolutions is beneficial and often essential for efficient trust management and tax purposes.
Is the Resolution Unambiguous?
You need to make resolutions clear and easy to understand. They should not leave anyone guessing or cause any confusion. Let’s think about an example.
Suppose the trustee is sharing out money from a trust. They decide:
- John gets the first $100
- Sarah gets the next $100
- Mel gets all the money that is left
- Ben also gets all the money that is left
The trustee might have wanted to split the leftover money evenly between Mel and Ben. But, as written, the rule might imply that Mel gets all the leftover money, leaving nothing for Ben! That’s why it’s so important for rules to be very clear.
Here’s another example. The trustee decides to give all the trust’s ‘trading income’ (money made from selling things) to one person. But what if the trust also made money in other ways, like earning interest? The rule doesn’t say what happens to this money. Depending on the details of the trust, this could mean the leftover money gets taxed by the trustee or people not expected as they were listed as default beneficiaries.
So, trustees must be very clear when making rules about distributing trust money. They should use simple words and make sure the rules cover everything that could happen. If things are complicated, they might want to get help from a legal expert. It’s very important that there’s no confusion or misunderstanding about what the rules mean.
Do I Have To Pay the Trust Distributions?
The critical point is that a beneficiary is taxed on their entitlement to the trust’s income, regardless of whether they actually receive the money or assets. This is known as the ‘present entitlement’ rule. Even if a beneficiary hasn’t physically received the distribution, they’ll need to declare their entitlement to the trust’s income on their tax return and pay the tax accordingly.
It’s important to note that the trust deed can affect how and when trust distributions are made. Some deeds allow for income to be distributed at a later date or even held on trust for a beneficiary. Despite this, the beneficiary still needs to pay the tax when they become entitled to the income.
But what happens if a distribution isn’t paid? Well, the trust might need to cover the tax. Suppose a beneficiary is under 18 or a non-resident and they don’t receive the distribution. In that case, the trust may be liable for the tax on this income.
While there might not be a strict requirement to pay a distribution, doing so ensures that the tax liability falls where it should – on the beneficiary. As always, it’s crucial to understand the rules outlined in your trust deed and to seek advice as necessary. Trust management is complex, and understanding the tax implications of distributions is key to doing it effectively.
What About Trust Distributions to Minors?
Minors do not get the full adult tax-free threshold. The tax-free threshold for minors receiving income from a trust distribution is just $416. Above this amount, penalty tax rates apply.
So, what should one do? It is generally a headache to account for distributions to minors. You could allocate $416 to stay under the tax-free threshold. But if you allocate franked dividends with franking credits, then you need to do a tax return to get the refund.
If you are doing this yourself, it means you need to do paper based tax returns for the minors.
Wrapping Up
A Trustee Resolution is a crucial decision made by the trustees of a trust, concerning actions like distributing income or investing assets. These resolutions, which should align with the trust deed, the company constitution (if a company is a trustee), and tax laws, are legally binding and serve as proof of the trustee’s decisions. For trustee distributions, the trustees need to understand the trust’s financial situation, the trust deed’s stipulations, and the beneficiaries interests.
Making a Family Trust Election could bring tax benefits, but it limits distributions to a specific family group. While income calculation should comply with the trust deed, the ‘streaming’ of income to particular beneficiaries should follow both trust rules and tax regulations. Beneficiaries may be taxed on their entitlement, even if they don’t physically receive the distribution, but ensuring payment of the distribution is crucial to correctly assign the tax liability.
