Navigating the complexities of tax obligations for family trusts can be daunting, yet it is essential for trustees and beneficiaries alike. Properly managing distributions and ensuring compliance with tax regulations not only protects your financial interests but also optimises the benefits for your trust.
With a few days to go before the end of the financial year, some important tasks need to be checked off for family trusts. Discretionary trusts, commonly known as family trusts, are widely used in Australia and are generally created to hold and protect family or business assets. Trustees of these trusts have the ability to distribute trust income or capital to any beneficiaries they choose.
One key task before the EOFY is making the necessary trustee resolutions for the current income year. Beneficiaries have no entitlement to receive payments in any given year, so it’s crucial to ensure they are presently entitled to trust income by making effective resolutions by 30 June, or the date specified in the trust deed. This is particularly important if you wish to allocate franked dividends and capital gains to certain beneficiaries this year.
Here are some more key aspects to safeguard your family’s financial future:
Putting it in writing
Keeping written records of annual resolutions is crucial for properly distributing capital gains or franked distributions to beneficiaries for tax purposes[i]. Trustees must specify in writing which beneficiaries are entitled to franked distributions, in order for the franking credits to flow through to them.
Does the trust deed allow for income streaming? Before you decide to allocate franked dividends or capital gains to certain beneficiaries, you need to ensure that the trust deed has provisions for income streaming. Also, what is the definition of income in the trust deed? In some cases, capital gains will need to be treated separately to other income. If you are unsure, please check with us or your trust’s accountant.
Check family trust elections
It is crucial to review the elections your family trust has in place to avoid incurring family trust distribution tax (FTDT)[ii]. FTDT is payable at the top marginal tax rate plus the Medicare levy, if a trustee distributes income or capital to someone not specified in the family trust election.
The ATO advises trustees to regularly assess their trust’s elections. This includes verifying if current elections should be revoked, ensuring specified individuals remain suitable, and being aware of deadlines for making changes. If new beneficiaries are added during the year, ensure their tax file numbers are on record.
FTDT applies when:
- A trustee has made a family trust election (FTE).
- A partnership, company, or another trust within the family group has made an interposed entity election (IEE).
- Income or capital is distributed to entities other than the specified individual or their family members.
Reasonable wages or benefits for work are exceptions unless they exceed commercial rates.
To avoid FTDT liabilities, the ATO encourages trustees to review elections annually. Consider whether elections are necessary, if specified individuals are still appropriate, and be mindful of the timeframes for changes. This proactive approach helps ensure compliance and prevents unintended tax consequences.
Prepare for new reporting requirements
Trustees also need to ensure they are prepared for the administration changes from 1 July 2024. These changes are part of the Modernisation of Trust Administration Systems (MTAS) project and affect return lodgements for the 2023-24 and later income years[iii]. The project, announced in March 2022, aims to streamline the tax lodgement process, improve data accuracy in annual tax returns, and enhance compliance activities.
Key changes include:
- Modifying labels: The statement of distribution section in trust tax returns will now include four new capital gains tax (CGT) labels, improving beneficiary income reporting.
- New trust income schedule: All trust beneficiaries must lodge this schedule with their tax return, ensuring accurate and consistent income reporting.
- Data validations: New checks in the practitioner lodgement service will strengthen data integrity.
Impact on trustees and beneficiaries
From 1 July 2024, trustees will see new labels in the statement of distribution section to enhance CGT reporting. Trustees must provide beneficiaries with copies of the trust statement of distribution to help them correctly complete the trust income schedule.
For the 2023–24 income year, beneficiaries’ tax returns will include a new trust income schedule. This form requires details from the statement of distribution, which should be obtained from the trustee. If you receive trust income from a managed fund, include that information as well. Whether you file via myTax or through a tax agent, follow the prompts and instructions for accurate reporting.
If you would like more information about EOFY requirements for your family trust, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[ii] ATO (2024) Family trusts – concessions
