EOFY Tax Implications for Family/Discretionary Trusts: What You Need To Know

As the end of financial year (EOFY) approaches, you should make sure that you’re aware of EOFY tax implications for your family trust/ discretionary trust and that you complete all important tasks relating to your trust.

You must complete these tasks on time and correctly to avoid paying additional tax, scrutiny from monitoring bodies and avoid losing the option to optimise the tax position of your family trust in 2023.

Completing these tasks will also help with asset protection and tax planning.

In this article, we explain EOFY tax implications for family/discretionary trusts and what tasks you must complete. Read along!

What is a Family/ Discretionary Trust

Family trusts are one of the most commonly used types of trust structures in Australia. In family trusts, trustees are obligated to hold property or assets for the benefit of their beneficiaries, who are typically their family members.

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Tax Laws That Affect Your Family/Discretionary Trust

Trust income distribution

By law, the Australian Taxation Office (ATO) requires trustees who distribute income to beneficiaries to do so before the end of the financial year, which is June 30. 

This requirement is in place to ensure beneficiaries are examined as part of the trust’s income and that they’re entitled to the trust income.

If this requirement fails to be complied with, there are two primary consequences.

1. The Trustee may be examined by the ATO about the Trust 
2. Income will be taxed at the highest tax rate (which is generally 45%) instead of at the beneficiary’s tax rate, which is significantly lower.

Section 100A of Income Tax Assessment Act 1936

In February 2022, the ATO published the Taxpayer Alert TA 2022/1. This provided guidance on section 100A of the Income Tax Assessment Act 1936, affecting family trusts and trust income distributed from them.

Due to this alert, beneficiaries of family trusts will likely pay higher taxes due to having fewer opportunities to distribute income among family groups.

The ATO plans to target tax avoidance and reimbursement arrangements through the alert. 

If you’re a trustee who plans to distribute income during the financial year, you should carefully analyse the implications of the alert. 

You should also ensure your trust distribution arrangements follow the ATO’s alert.

Tax File Number(TFN) Requirements

Before appointing income to beneficiaries, trustees need to get their tax file numbers.

TFN reporting

The ATO regularly reviews trustees to ensure they’re complying with their duties. Their primary duty being reviewed is whether they’re lodging TFN reports for their beneficiaries.

In addition to filing the trust tax return, trustees have some additional reporting duties. 

Trustees must report each beneficiary’s TFN in the trustee’s report after the beneficiary provides it. Trustees must submit the TFN report within one month of the end of the quarter in which the beneficiary provided their TFN.

Trustees whose beneficiaries failed to provide a TFN are required to withhold and pay tax to ATO at a rate of 47%. After that, the trustee must file an annual report to the ATO about the amounts they have withheld. 

Penalties may result from failure to comply. 

Trust income tax returns

Tax returns are generally required by trusts receiving income throughout the year. Therefore, you should make sure you file your tax return on time. 

However, there are some exceptions that apply to some deceased estates.

Trustee Resolutions 

Trustee resolutions ensure that trust income is distributed to beneficiaries.  Resolutions are decisions trustees make in accordance with the power granted to them by trust deeds. For beneficiaries who are currently eligible for trust income, family trust trustees need to take action by the 30th of June of each income year.

For beneficiaries who are specifically entitled to receive franked distributions, their trustees must make a written resolution that deals specifically with franked distributions by June 30.

For beneficiaries who have specific entitlements to capital gains, their discretionary trustees need to pass a resolution regarding the capital gain by the 31st of August following the income year relating to the capital gain.

Capital gains that are part of or all of the trust estate’s income usually need to be specifically dealt with by June 30. 

The reason for this is that any capital gains that form part of the trust estate’s income can’t be dealt with separately after beneficiaries have already become presently entitled to them.

Trustee resolutions are used to determine which beneficiaries will be assessed on the net income of the trust.

Trust Income 

Trust income is the trust’s taxable income that is assessed for the year, excluding deductions based upon the trustee being a resident.

Franked Distributions

The ATO states that franked distributions and their franking credits are considered part of the family trust’s net income and, therefore, can be distributed to beneficiaries for tax purposes.

Contrary to ordinary business income, these amounts must be allocated by the trust deed. Beneficiaries can also be prevented from receiving franked distributions by a trust deed.

If no beneficiary has been named, the franked distribution is taxed proportionately to each beneficiary in accordance with their normal entitlements to trust income.

Capital Gains Tax(CGT)  

Absolute entitlement

When a beneficiary has an absolute entitlement to a trust asset, the asset is treated as if the beneficiary owns it rather than the trustee for CGT purposes.

In relation to the asset, the trustee’s actions are considered actions taken by the beneficiary.

Specific entitlement

Making a beneficiary specifically entitled to a capital gain allows the capital gain to be streamed directly to them.

Their capital gain is considered when their income year’s net capital gain is being calculated for any discounts or concessions they’re entitled to.

A 50% CGT discount is available for investments that have been kept in the trust for 12 months or more.

When do Family trustees have to pay tax?

Undistributed trust income

Trustees would be taxed at the highest marginal tax rate of 45% on the trust income they retain not being entirely distributed to the beneficiaries.

Non-resident beneficiary

Trustees are required to pay tax on behalf of non-resident beneficiaries when they receive a share of the trust income.

Minor Trust Beneficiary  

By the end of the financial year, trustees must pay taxes for beneficiaries that are under the age of 18.

The tax rate that will apply depends on the eligible income. For e.g. the current rates are 0% if the income is below $416, whereas if the eligible income is $1,308 or more, the tax rate that will apply is 45%.

Imposing this high tax rate is intended to discourage families from distributing trust funds to minors.

Things to consider as a trustee of a Family Trust

• Trustees are required to act according to the terms of the trust deed
• Before distributing trust income to beneficiaries, trustees need to inspect the trust deed to identify who is eligible 
• Distributions made to ineligible beneficiaries may result in unwanted legal and tax consequences
• In family trusts, superannuation isn’t regarded as a distribution
• Discretionary trusts in NSW aren’t subject to the land tax threshold, as they’re taxed at a flat rate of the property’s taxable value, which is currently 1.6%

What do you need to do as a member under a Family Trust?

As a trust member, you’re required to provide your income statement for the current financial year and an estimated income statement for the upcoming financial year. 

Your financial advisor can then review the best options for the Family Trust. 

If any income is to be distributed, this will be done in a tax-efficient manner. You must sign and complete a distribution form before the end of the current financial year.

Conclusion

It’s important to understand your tax obligations as a trustee under a family trust as soon as possible before the end of  financial year.

Knowing the tax implications for the EOFY will assist you in minimising the tax you have to pay, prevent monitoring bodies from scrutinising your trust, as well as save you time.

If you’re still unsure about the tax implications for your family/ discretionary trust you should seek professional advice.

Using our Legal and accounting advice plan you’ll receive the assistance that’ll ensure you meet your EOFY tax obligations, optimise your trust’s tax position, ensure you know the tax implications of EOFY on your trust and stay up to date with changes that are made to tax law.

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