Under tax law, beneficiaries of a trust must be entitled to their share of the trust’s income as at 30 June.
It’s a bit of a strange rule – it means you have to decide who gets the income before you even know how much income there will be.
That’s why it’s so important to touch base with your accountant before the end of the financial year. Your accountant can help estimate how much income and capital gains your trust is likely to generate, so you can make informed decisions about how best to distribute it.
Keep in mind: once you resolve to distribute trust income to someone, that person becomes liable for the tax on it, even if they don’t physically receive the money.
On the surface, it may seem like a great idea to name low-income family members as beneficiaries to take advantage of their lower tax brackets.
However, recent ATO rulings have clarified that they’re watching that practice closely. If someone is named as a beneficiary, they must receive the real economic benefit of that income.
For example, if you distribute $100,000 to your 18-year-old son, you need to be able to show that he genuinely benefited from that money. Understandably, you may not want to hand over a $100,000 cheque, but you still want to utilise his lower tax rate.
That’s where your accountant can help. They will work with you to find a compliant and sensible balance and determine what level of distribution is appropriate without attracting unwanted ATO attention.
Another key consideration is that once someone receives a distribution, they may become a connected entity of the trust, with this status lasting for four years.
That may not matter immediately, but it could have tax implications, especially if you plan to sell a business in the next few years. Connected entities are included when applying small business tax concessions, so getting this wrong could cost you down the track.
In short, a little planning can make a big difference later.
Let’s chat before 30 June so we can help you get your trust distributions right, and avoid any tax-time headaches from coming your way.
Disclaimer
The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.