Trustee Resolutions: What You Need to Know for June 30
As a business owner or investor, you are undoubtedly familiar with the many legal and administrative responsibilities that come with running a company and different trust structures. Among these duties, one critical aspect that often requires attention is creating and implementing a trustee resolution.
In this article, we will explore a trustee resolution, its importance for business owners, and why it's critical to complete your trustee resolution by June 30.
What is a trustee resolution?
In Australia, a trustee resolution refers to a formal decision made by the trustees of a trust. Trustee resolutions are crucial for properly administrating a trust and ensuring that the trustees' actions are documented and legally recognised.
As the ATO succinctly defines them, trustee resolutions are "a checklist for trustees who wish to make beneficiaries presently entitled to trust income by way of making resolutions". The presently entitled beneficiary must then include their share of the net income in their assessable income.
Trustee resolutions typically cover important decisions and actions related to the trust, such as distributions of income or capital to beneficiaries, changes in the trust deed, appointment or removal of trustees, investments, and any other significant transactions. These resolutions provide a clear record of the trustees' intentions, decisions, and responsibilities, which can be important for legal and taxation purposes.
Examples of Trustee Resolutions for Different Trust Types
Trustee resolutions are critical to ensuring that trust income is distributed according to the trust deed and relevant tax laws. Different trust structures require different types of resolutions. Here are examples to help illustrate the process:
- Discretionary Trusts: In a discretionary trust, trustees have the power to decide which beneficiaries will receive income and how much they will receive. Trustee resolutions for discretionary trusts typically specify the allocation of income among beneficiaries, such as distributing income to family members or other individuals. These decisions must be made by June 30 to ensure proper tax planning for the beneficiaries.
- Unit Trusts: A unit trust involves beneficiaries (unit holders) who are entitled to a fixed percentage of the trust's income based on the number of units they hold. Trustee resolutions in a unit trust must outline how income or capital will be distributed according to each unit holder’s entitlement. These resolutions are more straightforward, as the distribution is based on the unit holder’s proportional interest in the trust.
Each type of trust has unique characteristics, and it’s essential for trustees to follow the specific guidelines of their trust deed when making resolutions to ensure they comply with tax obligations and the terms of the trust.
Why do I need to complete a trustee resolution by June 30?
By completing trustee resolutions before June 30th, trustees can adequately assess the trust's income, expenses, and capital gains or losses for the financial year. This information is crucial for tax planning, as it allows trustees to distribute income to one or more beneficiaries in a way that minimises tax liabilities and takes advantage of any applicable tax concessions or exemptions. Furthermore, timely completion of trustee resolutions enables trustees to prepare the necessary financial statements, reports, and tax returns required by the ATO.
Completing trustee resolutions by June 30th helps ensure the proper administration of trusts, facilitates accurate financial reporting and enables trustees to fulfil their legal and tax obligations.
What do trustees need to consider before June 30?
Trustees (or directors of a trustee company) must consider and determine the distributions they intend to make by the 30th of June each year, at the latest (though the trust deed may require an earlier deadline). The decisions made by the trustees should be documented in writing, preferably by June 30.
Failure to have valid resolutions in place by the 30th of June each year carries the risk of the trust's taxable income being assessed in the hands of a default beneficiary (if the trust deed allows for it) or the trustee (in which case, the highest marginal tax rate would typically apply).
Before the 30th of June, the following should be taken care of:
- Establishing trustee resolutions to distribute trust income to beneficiaries for the current financial year, at the latest.
- Reviewing the prior year's trust distribution resolution to ensure consistency and compliance.
- Confirming the estimated trust income of the trust for the year ended June 30.
- Reviewing the trust deed to ensure that the income definition and distribution clauses allow the proposed trust distribution resolution for June 30.
- Obtaining Tax File Numbers (TFNs) from beneficiaries (excluding minors, non-residents, and tax-exempt entities) before allocating income to them.
- Ensuring that distributions remain within the designated family group if a Family Trust Election (FTE) or Interposed Entity Election (IEE) has been made, to avoid the 47% Family Trust Distribution Tax (FTDT).
- Complying with trust reporting requirements introduced on July 1, 2024, as part of the Modernisation of Trust Administration Systems (MTAS) project. These changes include updates to distribution labels, the introduction of a new schedule for all trust beneficiary types, and new data validation requirements.
Tax-exempt entities and trust income
When a trustee resolves to distribute income to a tax-exempt entity, the trustee will be assessed on that income at the highest marginal tax rate unless one of the following conditions is met:
- The trustee actually pays the entire distribution within two months of the end of the income year.
- The trustee notifies the entity in writing of its entitlement within two months of the end of the income year.
Additionally, anti-avoidance rules impose taxation on a portion of the income distributed to a tax-exempt entity if there is a discrepancy between the entity's net financial benefit and the tax treatment of the distribution.
TFN withholding
Trustees of closely held trusts, such as discretionary trusts, must withhold tax from distributions to beneficiaries who are yet to provide their Tax File Number (TFN) to the trustee. This rule applies to most types of beneficiaries, except those under a legal disability (e.g., minors), non-residents for tax purposes, or exempt entities (e.g., deductible gift recipients, etc.).
When a beneficiary provides their TFN and other relevant details to a trust, the trustee must lodge a TFN report for that quarter with the Australian Taxation Office (ATO). TFN reports are due by the last day of the month following the end of the quarter. A beneficiary's TFN only needs to be reported to the ATO once, and if there are no new TFNs to report for a quarter, it is not necessary to lodge a TFN report.
If a beneficiary has not provided their TFN to the trustee at the time of distribution, the trustee is obligated to withhold tax from the distribution at the highest marginal rate plus the Medicare levy.
Streaming of Franked Dividends and Capital Gains
For tax purposes, trustees can only allocate franked dividends (and their associated franking credits) to a specific beneficiary if the beneficiary's entitlement to these dividends is documented in writing by the 30th of June. Similarly, in order to effectively stream capital gains for tax purposes, the beneficiary's entitlement must be recorded in writing by the 30th of June if the capital gains form part of the trust's income for the year, or by the 31st of August if the capital gains do not form part of the trust's income.
Streaming capital gains and franked dividends is important because it impacts the tax treatment of these distributions. Franked dividends come with franking credits, which can reduce a beneficiary's tax liability. By properly documenting which beneficiary is entitled to these dividends by June 30, trustees ensure the beneficiary can claim these credits. If not allocated correctly, the franking credits may be lost, or the trustee may end up paying tax at a higher rate.
Verification of trust vesting on the trust deed
Refer to the trust deed to confirm whether the trust has already vested. If it has, the income entitlements will have vested in the beneficiaries entitled to the trust fund on the vesting date. Attempted appointments of income or capital that contradict these entitlements will be ineffective.
The ATO’s Increased Compliance Focus
The Australian Taxation Office (ATO) has heightened its focus on trust compliance in recent years, particularly concerning trustee resolutions. Trustees must ensure that all distributions are accurately documented and that they comply with tax laws to avoid scrutiny. The ATO's increased oversight aims to prevent tax avoidance strategies, and any discrepancies or failure to meet deadlines could lead to audits or financial penalties. By completing resolutions on time, trustees demonstrate their commitment to legal compliance and reduce the risk of ATO investigations or having to pay tax penalties.
Who can help prepare trustee resolutions?
A business accountant can assist in preparing trustee resolutions by providing expertise in financial matters and ensuring compliance with legal and regulatory requirements. They can review the financial records and transactions of the trust, analyse the financial implications of proposed resolutions, and offer guidance on tax implications and asset management strategies.
As experienced business accountants, Bonerath & Co. can also help draft resolutions, ensuring they are accurate, comprehensive, and align with the objectives of the trust. By leveraging our financial acumen and knowledge of trust laws, we aid trustees and business owners to make informed decisions, maintain transparency, and ensure that your EOFY obligations are tax efficient and met with confidence.
Contact the team today to gain assistance and insight to your trustee resolution and all end-of-financial-year matters.
