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The Tax Office has said it often sees trustees failing to follow deeds or not checking family trust elections.
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Scrutinise trust deeds to avoid ‘unexpected outcomes’, ATO urges
06 May 2024
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9 minute read
The Tax Office has urged tax agents to “get the basics right” when it comes to trusts and has recommended a review of clients’ trust deeds to avoid any “unexpected outcomes” ahead of year-end distributions.
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The ATO said its compliance activities often identified trustees making mistakes due to failing to follow trust deeds or not checking family trust elections.
“Getting these basics right for your clients will help them avoid any unexpected outcomes,” it said.
To carry out compliant trust distributions for tax time, the ATO said tax agents should be reviewing clients’ trust deeds and any amendments to ensure trustees made decisions consistent with the terms of their deeds.
“Check that the trust hasn’t vested, as this may impact distribution decisions,” it said.
Tax agents should also check the trust’s beneficiaries and their entitlement to income and capital under the deed. If a trustee made a family trust election or interposed entity election, this may have a tax impact on distribution decisions.
Clients should also be supported in notifying beneficiaries of these entitlements so that beneficiaries can accurately report distributions in tax returns and prevent tax income from being omitted.
Additionally, tax agents should check the deed allowed for any of the trustee’s capital gains or franked distributions to stream to beneficiaries.
“This should include confirming the trust deed doesn’t prevent this and that trustees have complied with the legislative requirements relating to streaming these amounts,” the ATO said.
Finally, requirements under the deed around trustee resolutions, including the resolution’s timing and the need to have it in writing, should be reviewed and made by the end of the income year.
The ATO’s reminder comes after it announced trust administration changes starting on 1 July and applying to trustees, beneficiaries and tax agents as part of the Modernisation of Trust Administration Systems (MTAS) project.
The changes include strengthened data validations added to the trust tax returns in the practitioner lodgment service, modified labels in the statement of distribution to improve the reporting of beneficiary details and the introduction of a new trust income tax schedule for all beneficiary types.
“As the trust income schedule has been designed to align to the information on the trust statement of distribution, you should encourage your trustee clients to provide beneficiaries the information required to complete the trust income schedule as early as possible, to assist them to complete their tax return,” the ATO said.
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