Family Trust – Annual Distribution Minute

Family Trust - Distribution Statements Book Cover
  • Family Trust - Distribution Statements

  • $178 includes GST

  • (ring us if you are building 10 or more) Section 100A compliant

Best practice for Family Trust Distribution Statements – 15 point checklist

As per the Minutes you are currently building, before making distributions, the Trustee works with the accountant to consider:

1. Family Trust deed requires the distribution statement earlier than 30 June

Does the family trust deed require the distribution decision for an income year to be made before 30 June?
Or, even more strangely, does the Family Trust deed require the distribution statement to be made only after 30 June?
To be effective in creating a ‘present entitlement’, the distribution minute is made and signed by 30 June. Or such earlier or later time as required by the trust deed.
You may comply with the ATO’s rules. But still, fall foul of the Family Trust’s rules.  Upgrade the Family Trust Deed if it requires a distribution minute either before or after 30 June.

2. Section 100A, Reimbursement Agreements and Debt Forgiveness

Section 100A Income Tax Assessment Act 1936 is an anti-avoidance rule. It applies to an agreement called a ‘reimbursement agreement’. This is where:

    • one person (on a high marginal tax rate, often mum and dad) receives the benefit from the Family Trust distribution; but
    • another beneficiary (on a low marginal tax rate, such as your children swanking around university or ‘finding themselves’ travelling around Europe) is made ‘presently entitled’ to income and is taxed on that income.

The person getting the benefit of the Family Trust distribution is on a higher marginal tax rate. This is compared to the beneficiary paying the tax. The ATO does not like the reimbursement agreement. As it ends up that the high-income earner is paying less income tax. When section 100A applies, the beneficiary’s ‘present entitlement’ is ignored. And the trustee of your Family Trust is, instead, assessed on that income. This is at a “human’s” highest marginal tax rate.

I have never recommended Reimbursements Agreements. And this has been the case since 1988. Both Legal Consolidated and the ATO have never liked Reimbursement Agreements. (I always thought they risked an attack under the general anti-avoidance provisions in Part IVA. But the ATO has taken the section 100A approach instead. Either way, I always argued to both my students and accountants that Reimbursements Agreements are dangerous, silly and smack of laziness.)

We have, instead, recommended Deeds of Debt Forgiveness. But since 2019 even Deeds of Debt Forgiveness have been attacked by the ATO.

Legal Consolidated’s Annual Distribution Statement complies with section 100A. The minutes do not stop your Family Trust from retaining the wealth as UPEs. Or paying out the distribution.

And our minutes do not stop you from washing out the UPEs by reimbursement agreements (never recommended), Deeds of Debt Forgiveness or Deeds of Gift. But relying on section 100A, the ATO wants the family trust to actually transfer wealth to your children. Or, at least, keep the Unpaid Present Entitlement in the Family Trust’s books. This is rather than getting rid of the UPEs with a reimbursement agreement, Deed of Debt Forgiveness or Deed of Gift.

But leaving the UPE on the books or paying them out to the child presents problems:

    • the child loses the UPEs and wealth to the bankruptcy and family courts
    • at the child’s death, the UPE is an asset in their Will
    • the ungrateful child may not give it back when you need financial help in your retirement
    • and the age-old traditional problem: the Family Trust has no cash or assets to give to satisfy the distribution statement

Legal Consolidated does not have an easy answer for these issues. Perhaps your accountant sets up a bank account in the child’s name and the family trust borrows to feed that bank account with the trust distribution. The parents have access to that account. And the parents use that bank account to fund their own lifestyle. (Which seems to be the opposite problem that the ATO is worried about.)

Or perhaps your accountant will merely have the human beneficiary forgive the debt for ‘natural love and affection‘. Which still works, except we do not know the tax consequences.

The accountant knows your circumstances and needs to craft a solution for a personal outcome for you based on your unique set of facts. And every client is unique.

But there is a bigger issue here. I believe that accountants do not charge enough. In my personal view, most accountants should be immediately doubling or tripling their hourly rate. And getting rid of half their clients. And especially getting rid of risky clients that refuse to take their accountant’s advice. And then blame the accountant when something goes wrong.

Legal Consolidated only takes instructions via the accountant, financial planner and other lawyers. The accounting profession is noble but undervalues itself. The big four accounting houses do not undervalue themselves. It is about time that all accountants do the same.

3. Exercise of discretion

Do the discretionary trust minutes clearly show the trustee of the Family Trust “exercised its discretion” to distribute?

4. Has mum and dad already pulled out money from the family trust, this year?

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.

5. Family Trust destroyed by a “Family Trust Election”?

Has a ‘family trust election’ been made? In which case your class of beneficiaries to who you can distribute is extremely limited.

6. Family Trust benefits from the CGT Small Business concessions

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
    • vulnerable children, children with unstable marriages and de facto relationships
7. Family Trust retains income

Does the trust deed permit the accumulation of income? (In a company, the company pays its own tax. This is at a fixed constant tax rate. Which is often 30%.) But with a Family Trust, instead, the beneficiary pays the tax. This is at its own tax rate. It is therefore common to want to remove the wealth you have personally paid tax on from the Family Trust. But there may be tax and asset protection advantages in not distributing certain types of income.

8. Does the Family Trust deed allow full discretion to separate revenue and capital?

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.

9. Family Trust distributing to its bucket company?

Is there a distribution to a bucket company? But no cash or assets are actually transferred? Build a Division 7A Loan Deed first.)

10. Ordinary vs statutory income in a Family Trust

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’?

11. Family trust distributing to a charity

If a distribution is made to an exempt entity that is a beneficiary (charity), the anti-avoidance rule must be taken into account. This is 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.

12. Satisfying the Family Trust distribution with a CGT asset

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?

13. Farm assets in the family trust

Does the trust carry 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?

14. Withholding rules vs Family Trust deed

What are the Tax File Number (TFN) withholding rules for each beneficiary?

15. Appointor or Guardians consent

Does the family trust deed require the consent or approval of some person? This is distribute income and capital? It is often the Guardian who consents.

Can a beneficiary disclaim or renounce their entitlement to Family Trust income?

Build an Annual Family Trust Distribution Minute

Each year the Trustee signs the Annual Family Trust Distribution Minute.

This is before the end of the financial year. The trust minute states how the Family Trust income is distributed. This is for the income in that current financial year.

“Income” comes in many categories. For example, income tax, net capital gains and franked distributions. The trust minute allows distributions to the income categories. Such income is ‘streamed’ to specific beneficiaries.

For example, one beneficiary gets capital gains. Another gets the franked dividends. And another gets income.

Our trust minutes include comprehensive notes. There is also our law firm letter signing off on the trust minutes.

I won’t know my Family Trust’s income until well after 30 June

That is ok. Our Family Trust Distribution Minutes allow for this. The distribution minute is:

  1. to each person in the Minutes. This is automatically increased to their individual taxable incomes. This is considering their personal income, from all other sources.
  2. up to their next applicable tax rate (including Medicare)
  3. and so forth for each marginal tax rate of the beneficiary, up to the highest tax bracket
  4. and then the remainder after all the named beneficiaries reach their highest tax brackets (including Medicare) goes to the next list of people that you write in the Minutes.

Therefore, to build these trust distribution minutes you do not need to know:

  • the Family Trust’s income; or
  • the beneficiaries’ final income for the financial year.

Once you have built the Family Trust Distribution Minutes, there is a section for you to handwrite the beneficiaries in.

The ATO states in its publications Trustees Resolutions QC 25912:

“Do you have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income?

No. Your resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled, unless the trust deed specifically requires it. 

The family trust 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 …’

Example of how a Family Trust Distribution Statement works

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 paternity 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 rarely get any money. You are just using up their low marginal tax rates.

The money owed to beneficiaries is called Loan Accounts or more precisely Unpaid Present Entitlements (UPEs). Regularly the children or beneficiaries sign a Debt Forgiveness Agreement to reduce the money the Family Trust owes them to zero.

Do I have to do Family Trust Distribution Minutes every year?

Every financial year, the trustee of a discretionary trust exercises its discretion. This is to distribute its “trust law income” among the trust’s beneficiaries. “Trust law income” is defined in your Family Trust Deed.

Sign Annual Family Trust Minute before the end of the financial year?

Build and sign the Statement before the end of each financial year. Otherwise, you pay extra tax.

The 2 months’ grace period to sign Trust Distribution Minutes was always illegal

Before September 2011 the ATO foolishly and against the law told us that clients could sign the trustee resolutions up to two months after the end of the financial year. However, that is not the law. It was never the law.

The case of Colonial First State Investments Ltd v FC of T [2011] FCA 16 forced the ATO to withdraw the practice concession.

This is another example of how the regulator, the ATO, incorrectly interprets the law. In this instance, the ATO is giving a concession. My doctoral thesis highlights the issues of the ATO’s incorrect application of the law.

Trust Minutes must be signed before 30 June each year

Make sure these Trust Minutes are signed before 30 June. Out of an abundance of caution email a signed copy of the Minutes to your Accountant.

Minutes signed after 30 June are ineffective – and always have been. That means the default beneficiaries become ‘presently entitled’ to the income and get taxed on it. Alternatively, if there is no ‘default beneficiary’ then the Trustee is taxed on the trust’s income. This is at the highest marginal rate. See section 99A Income Tax Assessment Act 1936.

Can I backdate my Trust Minutes?

It is illegal to backdate a legal document in all states of Australia.

In extreme circumstances, in NSW for example, it lands you in jail for up to 10 years. Backdating is fraudulent and illegal.

Why are there Distribution Statements updated for each financial year?

Since 1994, as a tax lawyer, I have provided an Annual Family Trust Minute 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 Family Discretionary Trust Minute of Distribution to reflect those particular rules for each unique financial year.

Latest ATO issues for Family Trust Distribution Statements

    • 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

What do I get in the Family Trust Distribution Minute Pack?

Build your Discretionary Trust Distribution pack online by answering the questions. Put in your credit card details. Within seconds, your Trust Distribution Statement appears on your computer and is emailed to you. It includes:

  • Our law firm’s letter of advice – for your Accountant’s due diligence file.
  • Distribution Minutes, compliant with the ATO’s latest rulings and their unpublished internal procedures.

Why is it better to prepare my Family Trust Distribution minutes with a law firm?

You are dealing directly with an Australian law firm’s website. Therefore:

  • We are responsible for the Family Trust Distribution Statement
  • Free legal advice as you build the Distribution Statement
  • Hints and videos for every question
  • Full sample of the Trust Minute before you start building
  • Law firm letter confirming we authored the Family Trust minute
  • Legal professional privilege

How do I build the Family Trust Distribution Statement?

  • Answer the questions on our website.
  • Read the Summary page.
  • Lock and Build your document.
  • Type in your Credit Card details.
  • We email the Minutes, our covering letter and Tax Invoice to you within seconds.
  • Print and sign the Distribution Minutes.

Do I give a copy of the Annual Family Trust Minute to the ATO?

The Australian Taxation Office (ATO) does not require and does not want to see your Distribution Statement. The ATO assumes you have complied with the law.

The law requires that you sign your Family Trust Distribution Statement before the end of the financial year. The ATO can demand the original signed Family Trust Distribution Statement. Make sure you have it. Email a copy of the signed Minute to your accountant, as well. Do the email before 30 June.

‘Trust law income’ vs ‘Tax law income’ in a Family Trust

  • Trust income” is determined by what is in the Family Trust deed
  • But “Net income” is determined under tax laws (contained in the Income Tax Assessment Acts)

Therefore, “Trust income” may not be the same as “Net income”.

The trust’s “net income” is usually its taxable income. This is because it is assessable income for the financial year.

Who pays the tax on the Family Trust’s income? Trustee or Beneficiary

Does the Trustee of the Family Trust pay the tax on the trust’s income? Usually not. Instead, the trust’s net income is taxed in the hands of the beneficiaries. This is why you are building the Family Trust Distribution Minutes.

The tax they pay is based on the Beneficiary’s share of the Family Trust’s income. The income is not actually physically paid to the beneficiary. (In fact, rarely does the Family Trust beneficiary ever see any money.) It is enough that the beneficiary is ‘presently entitled’ to the income. This is regardless of when or whether the income is actually paid to the beneficiary.

A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement depends on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.

Are old people using their Bucket Companys again?

Running out of beneficiaries on low marginal tax rates? Consider distributing the remaining family trust income to a company. A company pays a constant rate of tax. The rate is 30% or less. So while a human’s marginal tax rate climbs to almost 50%, the company never pays more than 30%. 

When you run out of human beneficiaries tip the rest of the trust income into a ‘bucket’ company. Any company can be a bucket company. It is not a special type of company. The company just needs to be a beneficiary under the Family Trust deed.

The term ‘bucket’ is used because the company sits below your trust. It is one of the trust’s many beneficiaries. You ‘pour’ the leftover family trust income into the bucket company. This is to reduce tax. It caps your tax payable at a corporate tax rate. This is 30% or less.

If it is a Legal Consolidated Family Trust then, when the Trustee or Appointor form a company it is automatically an eligible beneficiary under the Family Trust. This is also the case for most non-Legal Consolidated Family Trust deeds. The class of beneficiaries in a family trust should remain ‘open’.

But, most people do not distribute to a bucket company

However, most people do not distribute any Family Trust income to a corporate beneficiary. This is for two reasons: Division 7A and wealth is ‘trapped’ in a company:

1. Division 7A

You do a Family Trust Distribution Statement distributing to your son. This is up to your son’s personal marginal tax rate. Later, after your son does his tax returns, your accountant tells you that the amount is $50,000. As per the Trust Distribution Minute, your son is deemed to have a ‘present entitlement to $50,000 from the Family Trust. However, your Family Trust never pays that $50,000 to your son.

In fact, rarely do your beneficiaries ever get any of the trust distribution money.

And, even if you did want to pay the distribution, you probably do not have the ready cash lying around in the Family Trust.

The ATO introduced Division 7A. Now you have to actually pay the money to the ‘bucket’ company. This is as per your Trust Distribution Statement. If you fail to physically pay the trust distribution into the company’s bank account then you suffer the complexities of a Division 7A Loan Agreement.

However, old people are near retirement. They are more likely to have actual cash in their Family Trust. They can actually pay the cash to the company. If you do pay the cash to the company then there are no Division 7A issues.

But that means you now have cash trapped in a company. And this leads us to your second problem.

2. Wealth is trapped in a company

Your accountant will often not want you to ‘gift’ money and wealth to a company. Rather, most people lend money to their company.

This is because it is hard to get money out of a company. Wealth in a company is ‘trapped’ in the company. One way to get money out of a company is to pay a dividend to the shareholder. But the dividend gets added to the shareholder’s taxable income.

But, an old person may be thinking of retiring in the next few years. Once retired and on a lower marginal tax rate, they can absorb the dividend at a low marginal tax rate. In fact, if the retired person’s income is so low they get a tax refund from the ATO for the company’s franking credit.

(A franking credit is a tax credit. It is paid by the company to the shareholder. This is along with the dividend payment. The franking credits reduce double taxation on both the company and the shareholder.)

Most Family Trusts do not have the cash to physically pay a trust distribution to the bucket company. And secondly, it is then hard to get the money back out of the bucket company for free.

These two problems disappear if the person is only a few years from retiring. This is because they will then move to a lower income. If you are:

  • not far from retirement (with a then expected lower-income); and
  • have cash in the Family Trust

then distributing to a bucket company, this financial year, may be advantageous. It works even better if you offset that dividend against the contribution into superannuation. You get an even bigger refund then.

As an added bonus, with the work test for super contributions, removed you can retire and take fully franked dividends from your bucket company and manage your tax payable by contributions to super.

Talk with your accountant and adviser.

Let the family trust beneficiaries know of their entitlement?

The Family Trust trustee provides each beneficiary with details of their share of the net income. The beneficiaries include the family trust entitlements in their tax returns. For example:

Dad allocates income to his son. This is via the Family Trust Distribution Minute. This is up to his next marginal tax rate. This is, say, $40,000.

However, no actual money changes hands. (It rarely does.)

The son’s tax liability on this amount is $8,000. Dad pays the $8,000 to the ATO from the Family Trust.

The Family Trust now owes the son, $32,000. Again the son never sees that $32,000. Rather there is an “Unpaid Present Entitlement” (UPE) owing to the son by the Family Trust. The son could ‘call in’ that UPE at any time. (That is why every so often Dad gets the son to sign a Forgiveness of Debt Agreement). 

Do Family Trust Distribution Statements need to be in writing?

Whether the resolution must be recorded in writing depends on the terms of your family trust deed. However, a written record provides better evidence of the resolution.

It avoids a dispute with the ATO and beneficiaries. This is as to whether any resolution was made.

A written record is essential to stream capital gains or franked distributions for tax purposes. This is because a beneficiary is only entitled to franked dividends and capital gains if this entitlement is recorded in writing.

How do I distribute to yet another family trust?

Our Trust Distribution Statement allows you to handwrite onto the minute:

     “An amount equal to the net loss in the Smith Family Trust ABN 383838383383 to the Smith Family Trust.”

See also

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30/09/2016

Family Trust – Annual Distribution Minute

Best practice for Family Trust Distribution Statements – 15 point checklist As per the Minutes you are currently building, before making distributions, the Trustee works with the accountant to consider: 1. Family Trust deed requires the distribution statement earlier than 30 June Does the family trust deed require the distribution […]