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Trust planning must be considered as EOFY approaches

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MEDIA PLANNING: Investors should review their trust structures before the end of financial year (EOFY) as recent rulings on trust distributions could complicate how they operate, according to HLB Mann Judd Sydney tax director, Peter Bardos.

Trusts are a commonly recommended structure for business owners and their families, with income distributions an increasing concern for the Australian Taxation Office (ATO) on matters of compliance.

“In order to prepare your trust for EOFY, there are multiple obligations that should be fulfilled by the trustee. It’s important that trustees actively review their trust structure, including the distribution of income.

“Make sure there is a complete original copy of the trust deed, including any amendments. You will also need to ensure any resolution made to distribute the income from the trust or the capital is consistent with the terms of the deed,” he said.

According to Mr Bardos, the simplest way to look at trust distributions is to understand the process is about working out who is getting what, and when, from the trust.

“Generally, discretionary trusts are required to prepare and execute distribution minutes prior to 30 June for each financial year. This is to explain in detail how the income of the trust will be distributed to beneficiaries for the relevant financial year and must detail any use of income streaming.

“These minutes must be prepared in accordance with the trust deeds. Failure to do these resolutions by 30 June will usually not result in the best outcome.

“Trustees should also be considering the ATO’s draft guidance when preparing the year-end minutes. It’s now recommended the trustee document the intention of the funds and how this interacts with the draft guidance,” he said.

The ATO’s draft guidance on trust reimbursement arrangements outlines their views on when Section 100A may apply. Broadly, it will apply where someone other than the beneficiary enjoys the benefit of trust funds appointed to a lower-taxed beneficiary. If applied, the income is taxed at the top tax rate.

Mr Bardos said it has previously been common practice to appoint income to a family member with a lower tax rate and leave those funds in the trust, for the benefit of all beneficiaries.

“This may still be in-line with the draft guidance however the minutes should be supplemented by a document with the intention for distribution.

“Trust vehicles are effective tax structures, but importantly, trustees shouldn’t leave it too late to review the guidance and make decisions, otherwise they risk greater scrutiny from the ATO,” he said.

HLB Mann Judd Sydney wealth management partner, Michael Hutton, echoed Mr Bardos’ sentiment that investors shouldn’t leave EOFY planning too late, and said ongoing market uncertainty only heightens the need for a clear, long term investment strategy.

“The right tax structures, such as trusts, are important, but so too is an investment portfolio that’s diversified and has the appropriate exposure to a broad range of asset classes.

“There are a number of external macro factors rattling investment markets; Russia/ Ukraine, rising inflation and rate pressures, and the change in Federal Government, however knee-jerk reactions to these will only hurt portfolios in the longer-term.

“Quality investments and appropriate asset allocation will win through for long-term portfolios and ultimately, ensure a comfortable retirement. Having a well thought through investment strategy can only help mute the noise,” he said.

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