ACIS TRUST DISTRIBUTION GUIDE

Transcription

1 ACIS TRUST DISTRIBUTION GUIDE We ve developed the Acis trust distribution resolutions templates to enable you to: Effectively distribute income of a trust for the purposes of June 30 tax planning. Stream income where doing so will provide advantages for the trust/beneficiaries. These templates contain samples of several possible resolutions for the distribution of trust income. The samples take no account of specific circumstances that apply to any trust and are prepared and provided for information purposes only. Advice should be obtained if the trustee becomes aware of, or is required to deal with: franked dividends and/or capital gains that will be streamed to particular beneficiaries; current year or carry forward capital losses; deemed capital gains (e.g. market value substitution rule); capital gains in the context of the small business CGT concessions; trust receipts that comprise franked dividends and capital gains only; or any other receipts or expenses which may require consideration in the context of trust streaming. These templates are intended as a general guide only and not as a substitute for professional advice. Neither its contents nor any conversation or correspondence based on, or related to it, should be construed as advice of any kind. Please call us toll-free on if you have any questions or identify anything that needs action while completing trust resolutions.

2 General These templates may be used as a general guide for the preparation of a trust s income distribution procedure. Resolutions must be passed on or before June 30 in each financial year to be effective. The templates have been prepared specifically as a guide for use only with the current standard redchip/acis Discretionary Trust Deed. These resolutions may not be appropriate for any other trust deed, and great care should be taken when referring to them in such circumstances. The current standard redchip/acis Discretionary Trust Deed permits resolutions to be passed by the trustee verbally or in writing. s should not, however, rely on the passing of a verbal resolution for the distribution of trust income, as in doing so will make it virtually impossible to satisfy the Commissioner of Taxation that the resolution has been passed before June 30. Decisions of the trustee can be recorded: By the use of a resolution signed by all trustees or directors of a corporate trustee. Such a resolution must be signed by all trustees or directors before June 30; By the use of a minute of a meeting of the trustees or directors of a corporate trustee. A minute of a meeting may be prepared after the meeting is held and may therefore be prepared and signed after June 30 provided the meeting is held before June 30. It is inappropriate to use a minute if the relevant trust has a sole trustee or is a sole director company. In all circumstances it is recommended that the document recording the resolution be prepared and signed prior to June 30, regardless of whether the trustee uses a resolution or a minute of a meeting to record trust distributions. The Importance of the Trust Deed A trust s deed is paramount in determining how the trustee is empowered and/or obligated to act in relation to the beneficiaries and the trust assets. It is, therefore, vital to understand the trustee s discretions and powers in relation to trust income, and whether a particular action proposed by the trustee is authorised. If this is not the case, any resolution purporting to put into effect a distribution, will be invalid. Great care needs to be taken to examine the trust deed prior to the passing of trust resolutions to ensure that: the income of the trust is properly identified and determined; the persons who are to receive proposed distributions are in fact beneficiaries; losses and outgoings can be applied in the way that the trustee proposes; the trustee has the ability to treat particular items as income for the purposes of income distributions; and distributions are recorded in the accounts of the trust in a way which is consistent with the trust deed and the proposed resolution.

3 s also need to ensure they understand the tax and accounting treatment of particular items. For example: Item Treatment Franked distributions Capital gains Deemed capital gains Unrealised gains/losses Div. 7A deemed dividends Disallowed expenses Expenses that are not outgoings Depreciation These form part of taxable income and may be streamed if permitted by the trust deed. Franking credits are not, however, income for the purposes of trust law. The ATOs regard franking credits as notional amounts which do not represent an accretion to the trust. Note that franking credits are attributable to the beneficiary who receives a proportion of the franked distributions. These do represent an accretion to the trust, but may not be regarded as income for trust law purposes. The relevant trust deed will need to be consulted to determine the correct treatment. Capital gains may also be streamed by the trustee if permitted under the trust deed. If a capital gain arises due to the operation of the market value substitution rule, it is a notional amount and does not represent an accretion to the trust and is, therefore not income for accounting or trust law purposes. These may be considered to be an accretion/depletion to the trust, but are not income for accounting or trust law purposes. Loans that are deemed dividends are notional and do not represent an accretion to the trust. They are not income for accounting or trust law purposes. If an outgoing is appropriately charged against trust income for accounting purposes, it may be recognised for accounting purposes but may not be tax deductible e.g. entertainment expenses. If an outgoing involves no depletion of the trust fund (i.e. no actual payment of the outgoing occurs), the item may be tax deductible but is not charged against income for accounting or trust law purposes. Usually depreciation constitutes a trust depletion and is not, therefore, a notional amount. It may be charged against the income for accounting and trust law purposes.

4 Default Beneficiaries The trust income may be distributed to the default beneficiaries regardless of any action taken by the trustee subsequently where trust income is not properly or effectively distributed by the trustee prior to June 30, and the trust deed contains a default beneficiary mechanism. Where such a mechanism exists, the trustee is deemed to have resolved to distribute any undistributed income to the default beneficiaries as at June 30. The Commissioner of Taxation has withdrawn IT 328 and IT 329 on the basis they do not represent the law on the timing of trust resolutions. The rulings permit trustees a period of up to 2 months following June 30, to pass trust resolutions. The position now, is that all trust resolutions must be passed on or before June 30. Failure to do so may activate any default mechanism provided for, in the relevant trust deed. The current standard redchip/acis Discretionary Trust Deed does contain a default beneficiary mechanism and will operate in the following circumstances: where the trustee fails to pass any resolution prior to June 30; where the trustee fails to determine the income of the trust prior to June 30; where the trustee fails to take items of income into account when passing a resolution and those items are, therefore, not effectively distributed; where the trustee does not effectively stream franked distributions or capital gains and those items are, therefore, not effectively distributed; where the trustee resolves to distribute to persons who are not beneficiaries at the date of the resolution; where the trust deed does not authorise a particular distribution; and where claimed deductions are disallowed and the trust income increases accordingly any increase in trust income not properly distributed will flow to the default beneficiaries. In these examples, default beneficiaries may therefore be entitled to taxable income of the trust in excess of that which they were anticipating. Additional tax would accordingly be payable by those beneficiaries.

5 SAMPLE RESOLUTION 1 NO INCOME STREAMING This template demonstrates the situation where the trustee is not seeking to stream either capital gains or franked distributions to beneficiaries. In this particular example, the trustee determines the income of the trust for the year will be net income as defined in section 95 of the Income Tax Assessment Act 1936 less any amounts not actually receivable by the trustee (i.e. items of income which are not accretions to the trust fund notional amounts). Examples of where this type of resolution might be appropriate include: where the trust has not derived capital gains and/or franked distributions during the year; where the trust has derived capital gains and/or franked distributions during the year, but determines not to stream those items beneficiaries receiving trust income will share the capital gains and/or franked distributions proportionately to their entitlements to trust income; where the trust derives a capital gain which results in no net gain due to the application of current year or prior year capital losses; and where the trust derives a franked distribution, which is reduced to nil by directly related expenses.

6 The persons signing below being all of the s or all directors of the corporate of the Trust resolve as follows: CONSIDERED: RESOLVED: DEFINED TERMS: The considered: 1. the trust deed for the Trust (as amended) (the "Trust Deed"); 2. the financial transactions of the Trust for the financial year ended [YEAR]. The resolves that all actions of the s during the year relating to the investment or expenditure of Trust moneys and application of income be ratified and confirmed. The resolves that if a word or phrase is given a defined meaning in the Trust Deed, that word or phrase will have the same meaning in these resolutions. INCOME DETERMINATION: The determines, in accordance with the s discretion in the definition of Income in clause 1.1 in the Trust Deed, that the Income of the Trust, for the financial year ending 30 June [YEAR], will be the net income as defined in section 95 of the Income Tax Assessment Act 1936 less any amounts or credits (including franking credits) which are included as income for the purposes of the Income Tax Assessment Acts but not actually paid or payable to the. ACCUMULATION: The determines, in accordance with the s powers in clause 5.4(a)(ii) in the Trust Deed, to accumulate an amount of the Income as determined by the as follows: Amount or % of Income to be accumulated 1/3

7 INCOME DISTRIBUTION: The determines, in accordance with the s discretion in clause 5.4(a)(i) in the Trust Deed, that the Income of the Trust for the year (less any amount to be accumulated as specified above) be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of Income paid, applied or Set Aside for the Beneficiary PRIORITY: SUB-TRUST: RESOLVED: For the avoidance of doubt, where specific amounts are listed above and where the Income of the Trust is insufficient to discharge the s liability to pay, apply or Set Aside these amounts, the determines to pay, apply or Set Aside these amounts to fully discharge the entitlement of each Beneficiary before any payment, application or Setting Aside to any Beneficiary following them in the list. The resolves that all amounts paid, applied or Set Aside by the as specified above are held by the pending payment to the relevant Beneficiaries on sub-trust in accordance with clause 7.4 of the Trust Deed. The resolves that regardless of any addition or adjustment to the Income after the date of these resolutions, the Income will be paid, applied or Set Aside in accordance with the preceding resolutions. 2/3

8 PRESENT ENTITLEMENT: PRIOR PAYMENTS: The confirms and acknowledges that each Beneficiary listed above has an immediate and indefeasible vested interest in the Income distributed for their benefit above and is presently entitled to the relevant share of the Income in accordance with clause 5.8 of the Trust Deed. The resolves that, if any Income of the Trust has been paid to any Beneficiary or Beneficiaries during the year and prior to 30 June, those amounts form part of the distributions made in accordance with the above resolutions and are not in addition to them. 3/3

9 SAMPLE RESOLUTION 2 INCOME STREAMING This template provides an example of where the trustee is seeking to stream either capital gains and/or franked distributions. In this resolution the trustee determines the income of the trust for the year will be net income as defined in section 95 of the Income Tax Assessment Act 1936 less any amounts not actually receivable by the trustee (i.e. items of income which are not accretions to the trust fund notional amounts). The trust income will therefore be: amounts that are income for tax purposes (other than capital gains); less expenses attributable to the income for the purposes of the trust s accounting records; plus the gross amount of any capital gains (which are separated and identified for the purposes of streaming) after the application of unrecouped capital losses. This resolution does not provide for the application of capital losses against particular capital gains in any order of priority. If the relevant trust deed permits the trustee to apply trust capital losses to capital gains in this manner, there may be opportunities to increase the tax effectiveness of the distributions (e.g. applying capital losses against non-discountable capital gains first). You should not rely on this resolution and seek advice if your circumstances require such considerations. s who have not concluded that streaming of franked distributions and/or capital gains will be effective for tax purposes should consider using Sample Resolution 1. If a beneficiary is to be specifically entitled to the net financial benefit of a franked distribution, the entitlement must be recorded no later than June 30. This must be in writing. If a beneficiary is to be specifically entitled to the net financial benefit of a capital gain, the entitlement must be recorded in the trust s accounts on or before 31 August. However, where a capital gain is included in trust income, the trustee must deal with it by June 30. Failure to do so may mean: no beneficiary is presently entitled to the capital gain; or the default beneficiaries may become entitled to the gain. Sample resolution 2 records the beneficiary s specific entitlement to any capital gain. If the resolution is not signed and dated by June 30, only the net capital gain will be included in trust income. s must take great care when streaming income. In some instances an attempt to stream income may not achieve its intended objective or have other consequences. For example: where a trust is able to reduce its net capital gain to nil using small business CGT concessions. An attempt to stream a capital gain may result in beneficiaries being taxable in relation to other trust income not applied for their benefit;

10 where a capital gain has been calculated under the market value substitution rule and cannot be streamed, beneficiaries may be taxed on the notional gain based on their proportionate entitlement to the other trust income; and where a trust derives capital gains and/or franked distributions only, and the shares are negatively geared (meaning no net franked distributions). An attempt to stream a capital gain may result in no income remaining to which beneficiaries can be presently entitled no beneficiary can therefore benefit from the franking credits. Comment on Capital Gains The streaming rules require that beneficiaries be made specifically entitled to the net financial benefit of the gross capital gain. If a beneficiary is to be assessed on 50% of the taxable portion of a capital gain, the trustee will need to stream 50% of the gross capital gain to that beneficiary. For the purposes of streaming, this sample resolution deals with gross capital gains after applying capital losses of the trust and prior to any reduction by way of CGT concessions or discounts. The net financial benefit of the gross capital gain is only reduced by capital losses applied by the trustee for accounting purposes. This occurs only to the extent where the capital losses are offset in the same way for tax purposes. If there is a mismatch between the accounting and tax treatment of capital losses, the gross capital gain will not be reduced by the capital losses. Where more than one capital gain is derived, the trustee is required to determine if it will distribute the entire capital gain or if it will distribute specific capital gains to certain beneficiaries.

11 The persons signing below being all of the s or all directors of the corporate of the Trust resolve as follows: CONSIDERED: RESOLVED: DEFINED TERMS: The considered: 1. The trust deed for the Trust (as amended) (the "Trust Deed"); 2. The financial transactions and records of the Trust for the financial year ended [YEAR]. The resolves that all actions of the s during the year relating to the investment or expenditure of Trust moneys and application of income be ratified and confirmed. The resolves that if a word or phrase is given a defined meaning in the Trust Deed, that word or phrase will have the same meaning in these resolutions. INCOME DETERMINATION: The determines, in accordance with the s discretion in the definition of Income in clause 1.1 in the Trust Deed, that the Income of the Trust, for the financial year ending 30 June [YEAR], will be: ATTRIBUTION: (a) (b) the net income as defined in section 95 of the Income Tax Assessment Act 1936 (other than capital gains included in (b) below) less any amounts or credits (including franking credits) which are included as income for the purposes of the Income Tax Assessment Acts but not actually paid or payable to the ; and all capital gains (to the extent a capital gain remains after the application of steps 1 and 2 in subsection 102-5(1) of the Income Tax Assessment Act 1997 (Cth)). The acknowledges that the Trust s records enable the to identify and characterise different classes of income and capital in accordance with the s powers in clauses 5.2 and 5.3 in the Trust Deed. 1/5

12 ACCUMULATION: The determines, in accordance with the s powers in clause 5.4(a)(ii) in the Trust Deed, to accumulate an amount of the Income as determined by the as follows: Amount or % of Income to be accumulated. SPECIFICALLY FRANKED DISTRIBUTIONS: The determines, in accordance with the s discretion in clause 5.4 in the Trust Deed, that the Income of the Trust comprising the following specific franked distributions (less any expenses directly relevant to those distributions) be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of dividend Income paid, applied or Set Aside for the Beneficiary Particulars of franked distribution (e.g. company, date, source of payment) /5

13 FRANKED DISTRIBUTIONS: The determines, in accordance with the s discretion in clause 5.4 in the Trust Deed, that the Income of the Trust comprising those franked distributions not otherwise identified and dealt with as Specific Franked Distributions by this resolution above (less any expenses directly relevant to those distributions) be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of dividend Income paid, applied or Set Aside for the Beneficiary SPECIFIC CAPITAL GAINS: The determines, in accordance with the s discretion in clause 5.4 in the Trust Deed, that the Income of the Trust comprising the following specific capital gains (to the extent a capital gain remains after the application of steps 1 and 2 in subsection 102-5(1) of the Income Tax Assessment Act 1997 (Cth)) be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of capital gain paid, applied or Set Aside for the Beneficiary Particulars of capital gain (e.g. discount gain, other gain, asset type, event, date) /5

14 CAPITAL GAINS: The determines, in accordance with the s discretion in clause 5.4 in the Trust Deed, that the Income of the Trust comprising a capital gain (to the extent a capital gain remains after the application of steps 1 and 2 in subsection 102-5(1) of the Income Tax Assessment Act 1997 (Cth)) not otherwise identified and dealt with as Specific Capital Gains by this resolution above be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of capital gain paid, applied or Set Aside for Beneficiary Particulars of capital gain (e.g. discount gain, other gain, asset type, event, date) OTHER INCOME DISTRIBUTION: The determines, in accordance with the s discretion in clause 5.4 in the Trust Deed, that the Income of the Trust for the year (less any franked distributions and/or capital gains and/or any amount to be accumulated as specified above) be paid, applied or Set Aside to, or for the benefit of, the following Beneficiaries in the amounts or proportions as follows and in the following order of priority: Beneficiary Name & Class Amount or % of Income paid, applied or Set Aside for the Beneficiary /5

15 PRIORITY: RESOLVED: PRESENT ENTILTEMENT: PRIOR PAYMENTS: For the avoidance of doubt, where specific amounts are listed above and where the Income of the Trust is insufficient to discharge the s liability to pay, apply or Set Aside these amounts, the determines to pay, apply or Set Aside these amounts to fully discharge the entitlement of each Beneficiary before any payment, application or Setting Aside to any Beneficiary following them in the list. The resolves that regardless of any addition or adjustment to the Income after the date of these resolutions, the Income will be paid, applied or Set Aside in accordance with the preceding resolutions. The confirms and acknowledges that each Beneficiary listed above has an immediate and indefeasible vested interest in the Income distributed for their benefit above and is presently entitled to the relevant share of the Income in accordance with clause 5.8 of the Trust Deed. The resolves that, if any Income of the Trust has been paid to any Beneficiary or Beneficiaries during the year and prior to 30 June, those amounts form part of the distributions made in accordance with the above resolutions and are not in addition to them. 5/5