Build a Family Trust Distribution Statement on a law firm’s website
Each financial year your Family Trust gets an income. It may be from passively renting out property. It may be from operating your business. Someone has to pay tax on that income. Every year you get the choice of which beneficiary pays tax on the income.
Perhaps your son is on maternity leave. His marginal tax rate is low, so you may wish to distribute a big income to your son that year. In the following year, he may be back at work and earning a good salary. In that case, you don’t distribute any income to him from the Family *Trust. Perhaps your 18-year-old grandchild is now at a high school and not earning any money. In that case, you distribute to that grandchild using up their low marginal tax rate.
The beneficiaries that you distribute to never actually get any money. You are just using up their low marginal tax rates. (The money owed to beneficiaries are called Loan Accounts or Unpaid Present Entitlements. Each year the children or beneficiaries sign a Debt Forgiveness Agreement to reduce the money the Family Trust owes them to zero.)
* the decision of the Full Federal Court in the Thomas case, which concerned the effect of a Supreme Court order relating to the purported distribution of franking credits separately from the dividends;
* issues that arise out of a power of amendment conferred by a discretionary trust deed, including the extension of the vesting date
* the ATO’s view of how an amount included in a beneficiary’s assessable income under section 99B ITAA97 is treated where the amount had its origin in a capital gain from non-taxable Australian property of a foreign trust
* the ATO’s taxpayer alert for arrangements designed to exploit the proportionate approach to the taxation of trust income
13 point checklist
As per the Minutes you are currently building, the Trustee gives consideration to the following before making a distribution:
1. Does the trust deed require the distribution decision for an income year to be effected by a particular time and, if so, what is that time? (To be effective in creating a present entitlement, the distribution minute is made by 30 June (or such earlier time as required by the trust deed). Amend the Family Trust Deed if it requires a distribution minute after 30 June.)
2. Does the trust deed require the consent or approval of some person to a distribution of income, either generally or in particular circumstances? (Usually, it is the Guardian who consents.)
3. Has any distribution of income for the current income year already been made earlier in the income year? (If so, the distribution should be considered when drafting the final distribution minute.
4. Has a ‘family trust election’ been made? (In which case your class of beneficiaries who you can distribute to is extremely limited)
5. Are there any special income tax or CGT considerations that would mean that a distribution should or should not be made? (Consider:
• the CGT small business concession provisions
• the trust loss provisions and, in particular, the pattern of distributions test
• children with unstable marriages and defacto relationships
6. Does the trust deed permit the accumulation of income? (There can be tax advantages in not distributing certain income.)
7. Does the trust deed permit the characterisation of the otherwise revenue or capital nature of an amount? (If not update the Family Trust Deed to allow for the new rulings on Bamford’s case.
8. Is there a distribution to a company? (Build Division 7A Loan Deeds at www.legalconsolidated.com.au.)
9. What are the sources of the ordinary income and statutory income derived by the trust during the income year? (Is it better for different kinds of income or amounts (e.g. franked dividends or a capital gain) to be ‘streamed’?)
10. If a distribution is to be made to an exempt entity that is a beneficiary (charity), the anti-avoidance rule must be taken into account, as well as the fact that an exempt entity beneficiary is taken not to be presently entitled to the extent that, within two months after the end of the income year, it has neither been notified of its present entitlement nor has been paid its present entitlement.
11. If an asset is to be distributed in specie, does the distribution results in a CGT event? (Determine what the CGT consequences are. Consider trading stock or a depreciating asset. Is the beneficiary registered for GST for GSTD 2009/1.)
12. If the trust carried on a business of primary production, is it necessary to distribute income to ensure that a beneficiary is taken to carry on the business of primary production?
13. What are the TFN withholding rules for each beneficiary?
Sign Family Trust Distribution Statement by the end of financial year?
Build and sign your Family Trust Distribution Statements before the end of each financial year. It is not effective if it is signed after 30 June for that financial year.
Telephone my lawyers to get a discount voucher on 1800 141 612.
Dr Brett Davies, Taxation Partner, Legal Consolidated Barristers & Solicitors
But I won’t know the income of my family trust until after 30 June
The ATO has stated that:
‘your resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled…’ (Trustees Resolutions QC 25912).
The Resolution you are building states that a beneficiary gets the income up to their marginal tax rate, and then to someone else up to their marginal tax rate. As the ATO states:
‘A resolution is effective if it prescribes a clear methodology for calculating the entitlement …’
Why build Distributions Statements for each financial year?
Since 1994, as a tax lawyer, I have provided a Family Trust Distribution Statement for each financial year. I attend a lot of ATO audits. My doctorate was in tax. The tax laws change. The ATO changes its mind. We prepare the Distribution Statements that reflect those particular rules for each unique financial year.
Does a resolution have to be in writing?
Read your Trust Deed to find out. Do you have a Brett Davies Lawyers or Legal Consolidated Family Trusts Deed? All our Deeds allows for the Distribution Minute to be in writing or oral. Whether the resolution must be recorded in writing depends on your trust deed. However, a written record provides better evidence of the resolution and avoids a later dispute. You don’t want fights with the beneficiaries and the ATO.
A written record is essential to stream capital gains and franked distributions. A beneficiary is specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing.
Update the Family Trust for Bamford streaming only:
Or, update Bamford streaming PLUS update the rest of the Deed:
Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:
Or just update the Trustee:
Or just update the Appointor:
To deal with Division 7A (loan or UPE from your company to the Family Trust):
Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):
Change the name of your Family Trust:
To wind up and vest the Family Trust, when you no longer want it:
Telephone us for legal advice on building this document.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959