Trust Tax Planning 2023

Annual Distribution Resolutions or Minutes of Meeting

Trustee resolutions and minutes of meeting regarding the annual distribution of trust income must be documented prior to 30 June each financial year or, if the trust deed specifies an earlier date.

If valid resolutions are not in place by 30 June, the risk is that the taxable income of the trust will not be presently entitled to beneficiaries and subsequently be assessed:

in the hands of a default beneficiary (if the trust deed provides for this), or
the trustee (in which case the highest marginal rate of tax of 47% would normally apply)

For further information visit the ATO website.

Unpaid Trust Entitlements (UPE) to Companies

From 16 December 2009, there were changes to the rules for trust distributions to companies, where the amount remains unpaid.

Division 7A may apply to an unpaid present entitlement (UPE) of a private company beneficiary to trust income in situations where the trust and private company are related entities ultimately sharing the same owners/controllers.

A UPE is an amount of trust income which the trustee of a trust appoints, but does not pay, to a private company beneficiary.

The ATO view is that even if not converted to an ordinary loan, a UPE is capable of amounting to ‘the provision of financial accommodation’ by the private company beneficiary in favour of the trust, and therefore may be considered a loan for Division 7A purposes.

You can check to see if this applies to a Trust by checking the prior year financial statements, specifically the Assets on the Balance Sheet and corresponding Notes, to determine if there are any words describing a dollar balance as a UPE, Unpaid Present Entitlement, Beneficiary Loan or Loan to Company.

The simplest way that a trustee can avoid Division 7A treating the UPE as a deemed dividend paid by the private company to the trust, is by paying out the UPE, but we have a range of strategies that can manage this issue if identified early.

Trust Losses

In the absence of a Family Trust Election (FTE), current or prior year revenue losses or bad debts are not deductible unless certain tests for changes in ownership and control are satisfied. The application of the tests depends on whether the trust is a fixed or non-fixed trust and is modified where a valid FTE is in place.

The consequence of making a FTE is, however, that the trust would be liable to Family Trust Distributions Tax if a distribution (a very broad definition capturing loans and advances) is made to a beneficiary that is not a member of the family group.

Consider further details on our Family Trust Elections article.