As the end of the financial year approaches it is important that you take care of essential housekeeping for your family trust (otherwise known as a discretionary trust). Not completing these steps in time, or incorrectly, may result in unnecessary tax, and the loss of opportunities to optimise your family trust’s 2020 tax position.
Here is a quick summary of the general housekeeping items necessary for most family trusts in 2020.
Family trusts with 2020 trust distribution resolutions.
The following two things should be taken care of before 30 June 2020:
- Trustee resolutions need to be in place in order to distribute trust income for the 2019-2020 financial year to beneficiaries.
- Ensure all Tax File numbers have been received from beneficiaries before appointing income to them.
Trustees must consider and decide on the distributions they plan to make by 30 June 2020 at the latest. This decision should be documented in writing, also by 30 June 2020. There is a risk that the taxable income of the trust will be assessed in the hands of a default beneficiary if a valid resolution is not in place by 30 June 2020 – this is effectively a penalty and should be avoided at all costs.
Low-income tax offset and minors reminder.
The low-income tax offset is not available to minors who only receive ‘unearned’ income. This has been in place since the 2013 financial year. Minors who receive unearned income from a trust are limited to receiving a maximum of $416 per year in order to avoid penalty rates of tax.
Normal marginal tax rates could still apply to minors who receive distributions from a deceased estate or testamentary trust.
Streaming of franked dividends and capital gains.
If you want to stream franked dividends to a particular beneficiary for tax purposes, the beneficiary’s entitlement to the franked dividends must be recorded in writing by 30 June 2020. For streaming of capital gains, the beneficiary’s entitlement must also be recorded in writing by 30 June 2020 if the capital gains form part of trust income for the year. Otherwise these must be reported in writing by the 31 August 2020 if they do not form part of trust income.
Trustees of closely held trusts will also have some additional reporting obligations outside the lodgement of the trust tax return each year. Currently, the Australian Taxation Office is reviewing trustees to ensure they are remaining compliant with these obligations. In particular, they are looking at the requirement to lodge TFN reports for beneficiaries.
Where TFN provided
Trustees are required to lodge a TFN report for each beneficiary where they have quoted their TFN to the trustee. The TFN report must be lodged by the end of the month following the end of the quarter in which the beneficiary quoted their TFN.
Where TFN not provided
If the TFN was not provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% and then pay this to the ATO. The trustee must then lodge an annual report of all amounts withheld. Failure to comply with this may incur penalties. Withholding 47% is obviously not idea, so it is essential to ensure that the TFN for each beneficiary is reported to the ATO before a distribution is made.
Family trust anti-avoidance measure.
New anti-avoidance measures have been in place since 1 July 2019. These prevent family trusts from engaging in ‘round robin’ circular trust distributions with other closely held trusts. The new rules impose penalty rates of tax in situations where trust income is distributed to one or more other trusts and ends up being distributed back to the first trust. Previously, trusts that had made a family trust election were excluded from these rules but that is no longer the case.
At Link Advisors, we manage these housekeeping requirements as part of our annual tax planning service for our clients. If you need assistance with your family trust and are keen to ensure that its being used in the most efficient , yet low risk way, then reach out to one of our advisors for a chat about your particular situation.