Why you need a pre 30 June Trust distribution minute

As accountants and advisors, we often promote the use of discretionary trusts (commonly known as family trusts) for business and investment purposes. Such trusts can provide protection of assets as well as highly beneficial tax outcomes.

It’s not all smooth sailing though. Discretionary trusts come with some technically complexities that require annual attention. Fortunately, this forms part of our service to you.

The purpose of this particular article is to explain the importance of preparing annual distribution minutes – easily one of the most important tasks for a discretionary trust.

What are annual distribution minutes?

Before 30 June each year a discretionary trust must decide how that year’s income is going to be allocated among the beneficiaries. The beneficiaries may be yourself, your spouse, children or possibly other parties such as a related company.

This decision is generally documented in a signed distribution minute (or resolution). A properly worded minute is used to address a few technical requirements (relating to trust law) and to provide proof that the decision was actually reached before 30 June.

One of the challenges is that you generally won’t yet know how much income the trust will have earned during the year. For example, if you sign these minutes on 20 June, there’s still 10 more days that the trust could earn income or incur expenses.

Therefore, to be effective, we achieve clarity of the beneficiaries’ entitlement through two alternate options:

A) Split the income (whatever amount it may be) proportionally between the eligible beneficiaries, for example:

1. Person A to receive 30%
2. Person B to receive 55%
3. Person C to receive 15%

B) Allocate specific amounts in order, with a balancing amount to a beneficiary, for example:

1. Person A to receive the first $20,000, then
2. Person B to receive the next $15,000, then
3. Person C to receive the balance

What happens if I don’t sign these minutes by 30 June?

Should a distribution minute not be prepared or you are unable able to prove to the ATO a distribution decision was reached prior to 30 June, the trust will generally pay tax on the income at the highest tax rate, including Medicare levy (which is 47% in 2021).

It is certainly feasible that a distribution decision will have been made prior to 30 June, but the minutes were not yet signed. Technically this would be fine.

However, it’s always going to be far easier to avoid unnecessary arguments with the ATO if you have a clear decision signed prior to 30 June.

We will draft the minutes for you

You can rest easy knowing that we will draft these minutes for you, according to your wishes. We’ll have reviewed your trust deed and income situation in order to present the document in a compliant manner.

As the trustee, however, you are obliged to review these minutes, ensure you are happy with the distribution of income and then sign and return to us.

FAQs

Yes, 30 June is a hard deadline

It depends on your trust deed, though generally the trust will be assessed on the income at the highest tax rate. However, some trust deeds will have a default beneficiary, who would be allocated the income should a resolution not be made in time. This is rarely an optimal outcome given that one single person will report all of the income.

Yes, it is a requirement to make a decision every year. Even if you think there is no income to distribute for a particular year, this may change in the future (for various reasons) . So important to cover it off with a documented minute.

Absolutely, the ATO will uphold the rules and apply additional tax and penalties accordingly.

We will need a copy of your trust deed, along with a reasonable understanding of the income earned by the trust and all related parties.

The deed will specify who can be a beneficiary and sometimes who explicitly cannot be a beneficiary. Children under the age of 18 have restrictions on the amount of income they can receive before incurring the top tax rate.

Splitting different types of income is known as streaming and your ability to do so will depend on your deed. Should your deed permit it, you can specifically stream capital gains and dividends separately from the other income. No other types of income can be broken out and dealt with independently, it will fall within the ‘other income’ bucket.

No, given deeds can vary so far with their own unique requirements, there is no standard resolution. The resolution needs to be in alignment with the requirements detailed with in the specific deed.