Trust Resolution Important Information
May 24, 2023
| in Taxation
Prepare the Resolution to Distribute Income
The Details:
Trustees for discretionary trusts must resolve to distribute the income of the trust to eligible beneficiaries no later than the 30 June.
The resolution formally documents in writing the decision of the trustee, determining which beneficiaries will receive the income of the trust and therefore pay tax on it. If the resolution is not completed effectively, then you will have no choice on who or what entity pays tax on the income and this can result in tax at 47%.
Practically, what does this involve?
- Draft an effective trustee resolution (this can also be known as a minute);
- Communicate the income of the trust and the distribution strategy – including if some income (dividends and capital gains) will be streamed to different beneficiaries to be effective for income tax purposes.
- Keep evidence you documented this on or before 30th June (noting some trust deeds have a different date requirement)
Before you can prepare a trust resolution you need to:
- Understand the terms of your trust deed (as all trusts deeds are different and can have different clauses that can affect the way the distribution is recorded);
- Know who an eligible beneficiary is;
- Understand the ATO requirements to make a valid resolution to distribute income of the trust in accordance with the trust deed;
- Understand the tax implications of the decision
What are the consequences of not having a valid resolution in place by 30 June?
The following are examples of what may occur:
- More tax to pay to the ATO (this can be substantial);
- No opportunity to effectively plan distributions to minimise tax;
- The trusts default beneficiary is taxed on the income at their marginal rate even if they are not the recipient of the cash;
- Or if there is no default beneficiary the trustee will be taxed at the top marginal rate (currently 47% including Medicare Levy)