Discretionary trusts – ensure trust distribution resolutions are signed before 30th June
Discretionary trusts (often referred to as family trusts) must ensure that by 30th June of each financial year, the trust income is appropriately distributed to beneficiaries for taxation purposes.
Here’s why it’s important:
- Taxation: Trusts typically don’t pay tax on their income. Instead, the trust’s beneficiaries are taxed on the income they are entitled to from the trust. To ensure this happens in the relevant financial year, the trust must decide how its income will be distributed before the end of the financial year.
- Streaming of Capital Gains and Franked Dividends: Tax legislation allows for the specific streaming of capital gains and franked dividends to beneficiaries. This means that rather than blending all the trust’s income and distributing it as a singular amount, the trust can direct specific types of income (like capital gains or franked dividends) to specific beneficiaries. The trust’s decision (or “resolution”) must be made by 30th June to ensure the correct beneficiaries are taxed on these amounts.
- Default Clause: Many trust deeds have a default beneficiary or default distribution clause. If no effective distribution resolution is made by 30th June, the trust’s income may be automatically distributed according to this default clause, which may not be the desired outcome.
- Tax Liability: If no effective distribution resolution is made by 30th June, the trust may become liable to pay tax on its undistributed income at the highest marginal rate.
- Documentation and Proof: Trust distribution minutes or resolutions signed and dated before 30th June provide clear evidence that the trustee decided in the relevant financial year. This is important if the Australian Taxation Office (ATO) ever reviews or audits the trust’s distributions.