Introduction

Do you operate your business or hold investments in a discretionary trust? If you answered yes, then read on…

As the 2024 financial year comes to an end, it’s important to ensure no detail is left unattended to. When it comes to the administration of a trust, the biggest hint I can give you is the following:

1. Make sure a trust distribution resolution is made and validly executed by 30 June or earlier if required under the terms of the trust deed (rulebook of the trust).
   
2. If you don’t, the resolution will be ineffective for income tax purposes.

An ineffective resolution means the trustee will be assessed on the taxable income at the highest marginal tax rate plus the Medicare levy. Ouch!

An invalid resolution can also:

1. Reduce the trust’s overall value; and

   2. Cause disputes amongst beneficiaries of the trust.

Requirements

Australian tax law requires a trustee to:

• Have made a valid income distribution resolution before 1 July each year; and
• Ensure the resolution is made in accordance with the terms of the trust deed.

Both the tax laws and the courts have made it very clear that purported distributions of trust income made after 30 June will be ineffective for tax purposes.

A valid trustee resolution will address how trust income will be distributed for the year. This is often done by way of a meeting of the trustee. Where the trustee is a company, it’s the directors of the trustee company who make decisions as to how the income of the trust will be distributed.



Accounting Records

The trust distribution resolution outlining how income and capital will be distributed doesn’t mean the money has to be physically paid to the particular beneficiary(ies) straight away. Once the trustee decides how to distribute the trust income to the beneficiary(ies), each beneficiary is said to become presently entitled to the income. That is, the income now belongs to the beneficiary and the beneficiary may call for payment of their entitlement at any time.

Unless required under the trust deed, the resolution doesn’t have to specify a fixed dollar value to make a beneficiary presently entitled to a share of the trust income. A beneficiary’s entitlement may be expressed as a specific percentage of the trust income for the year.