A recent alert to trustees from the Australian Taxation Office (ATO) states that trustees who make beneficiaries entitled to trust income by way of resolution must do so by the end of an income year (June 30) for that to be effective for determining who is to be assessed on the trust's income.
The ATO position is that if a trustee makes a resolution after the end of an income year, there is a risk that the resolution will be ineffective and the trustee will be assessed on that income at the top marginal tax rate under section 99A.
The ATO position ignores recent case law in relation to this issue. Provided your client's trust deed does not require the trustee to distribute income by 30 June, it is still arguable that distributions of income that clients do not want to stream to specific beneficiaries can still be made within a reasonable time after 30 June (BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164 at paragraph 34).
A recent Treasury consultation paper, 'Modernising the taxation of trust income – options for reform', also acknowledges that there is no trust law requirement for distributions to be made by 30 June each year.
Therefore, even if the 30 June deadline is missed, clients whose deeds do not require that income distributions must be made by 30 June should at least have an arguable position in asserting that a post-30 June distribution of income is effective.
However, if seeking to stream dividends or capital gains to specific beneficiaries, trustees will need to comply with the special provisions introduced with the 'streaming measures' towards the end of last year. These provisions stipulate that distributions:
- seeking to stream franked dividends to specific beneficiaries must be made by 30 June; and
- that stream capital gains to specific beneficiaries must be recorded in the accounts or records of the trust no later than two months after the end of the income year (i.e.by 31 August).
Resolutions made after these dates will be ineffective for streaming purposes – resulting in capital gains and franked dividends being allocated proportionately among beneficiaries who receive other income (or the trustee, if there is no other distributable income).
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.