21 Feb
Time to get familiar with new legislation on asset acquisitions and disposals.
By Siddharth Soin - Principal
With the ATO increasing scrutiny of Discretionary Trusts, it’s critical to have your trust deed reviewed, interim results prepared, and make a resolution to distribute the income of the trust all before the end of each financial year.
Discretionary trust structures are popular family investment vehicles. They provide both a level of risk management by separating the business from your personal assets and they are also tax efficient.
A discretionary trust allows the trustee to appoint the income of the trust (typically the profit of the business) and selectively distribute capital gains and franked dividend income to any of its beneficiaries in the proportions that it determines from year to year. As the trustee or director of the trustee company, this has allowed you to distribute income in the most tax efficient way.
Increased audit scrutiny
However the Australian Tax Office has announced it is cracking down on such activity and increasing its audit scrutiny of discretionary trusts.
You see, income streaming in a discretionary trust requires for the records of the trusts to show that a beneficiary is entitled to this income no later than two months after the financial year end.
For many trust deeds, the governing rules for a trust state that the income of the trust must be distributed to beneficiaries before the end of the financial year. It is this requirement imposed on trusts by their own deeds that the ATO is using to enforce the tougher regulations.
Urgent review
Trusts formed many years ago that have not had their trust deeds updated may be in breach by incorrectly distributing their income. Hence the reason the ATO wants copies of these deeds and amendments.
As a matter of urgency, you must contact your accountant and have your trust deed reviewed. It’s crucial that interim results are prepared before the end of each financial year and a resolution is drawn up before June 30 to distribute the income of the trust.
If you have a Discretionary Trust, make sure you schedule an appointment with us in the next couple of weeks to review your trust deed and ensure your trust’s ongoing compliance.