Clients with family trusts will be aware that we have sent out draft resolutions to distribute income each year before 30 June. We have taken this action on the basis that the ATO could argue that the income was not effectively distributed unless the trustees had acted by 30 June.
The ATO has had an administrative practice allowing extra time to make these resolutions, but many trust deeds required a resolution by 30 June, regardless of the ATO position.
The ATO has now put all trustees "on notice", that they will not accept resolutions made after 30 June. Although there are some legal views that the ATO cannot take this action, it is a brave trustee who takes up the challenge. There is a significant risk that any resolution made after this date will be ineffective. If this were to occur it could mean that the trustee will be assessed at the top marginal tax rate (46.5%) on all of the income of the trust, with a loss of the 50% discount for capital gains.
The ATO has announced that over the period leading up to 30 June 2012 and in the week after it passes, selected trustees will be subjected to compliance audits by the ATO. As a part of this audit the ATO will request copies of trust deeds together with copies of documented trustee resolutions for the 2012 financial year. The ATO will then make a determination on the effectiveness of the resolution and flag those that fail its review for the application of the top tax rate when returns are lodged.
This is the most significant change to the administrative arrangements for trusts in over twenty years.
This action makes it all the more important to have effective planning in place before 30 June, so that tax effective distributions are made and documented by that date. We will shortly be in contact with all impacted clients to determine the appropriate actions. In the meantime, please call with any queries.
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This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.