The Trustee may be assessed by the Tax Office on the Trust income at the highest marginal tax rate (i.e. 47% including Medicare levy)!
Trustees who distribute the income of a Discretionary Trust (or often referred to as a Family Trust) through a resolution to beneficiaries must do so by the end of the financial year (30 June) for the resolution to be effective in determining who is to be assessed on the Trust’s income.
For example, say the Trust has net income of $160,000 to distribute. If the trust makes a resolution prior to 30 June to distribute the income to the family members as follows: 2 kids $416 each, with mum and dad each receiving 50% of the balance (being $79,584 each). The total tax the family would pay for the 2016/17 year, assuming no other taxable income or expenses would be $38,007. Compare this to a tax bill of $50,032 if you failed to make a resolution and the Trustee was assessed!
Handy checklist
- Check the Trust Deed – your resolution must be consistent with your trust deed. Some deeds may specifically exclude a person or entity from receiving any distribution. Some deeds may not allow you stream certain types of income such as a capital gain to particular beneficiaries (some older deeds don’t allow this).
- Make it clear – as to who is to receive an income distribution from the trust and how much.
- Accurate taxable income estimates – to ensure any profits from the trust is distributed in the most tax effective way it is important to accurately estimate the income of the Trust and the potential beneficiaries in your family group.
- Be careful if ‘streaming’ capital gains or franked dividends – in trust speak, ‘streaming’ means giving certain beneficiaries different types of income. Since 2010/11 the law was amended to specify that the only types of income you can stream are capital gains and franked dividends. Also, don’t forget the balance of the remaining income must be distributed to someone, otherwise the trustee will be assessed on any residual income at the highest rate of tax.
- Distribute to Children – It is possible to distribute up to $416 to Children under 18 and this may be tax free
- Distribute to Family Members on lower marginal tax rates – it may be possible to distribute income from the Trust to other Family Members on lower marginal tax rates. But before we distribute to other family members we must carefully review their current taxable income and any government benefits they receive.
What Next?
If you have a family trust then you need to make a resolution prior to 30 June. We encourage all our clients to do tax planning with us. We will review all options for you and recommend the most tax effective manner to distribute you family trust profits. Give us a call on 07 5451 1118 or drop us an email at reception@mjjacountants.com.au
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