Multiple discretionary trust distributions throughout the year

Discussion in 'Accounting & Tax' started by AlexIM, 30th Nov, 2021.

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  1. AlexIM

    AlexIM Active Member

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    A silly question - with a discretionary trust can distribution happen at any time the trustee decides on by simply transferring trust income to beneficiary's bank account? Or does it have to be the end-of-year distribution?

    So what I am asking if a discretionary trust is set up, can it for example pay beneficiaries monthly, from IP income for example, recording / noting down these distributions, and then finalising the distribution at the end-of-year trust distribution minute?
     
  2. JasonC

    JasonC Well-Known Member

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    Yes it can.

    Regards,

    Jason
     
  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The trust deed and tax law generally prescribe that the net trust income is determined annually based on a financial year. Tax law doesnt mention other than annual. During the year the trustee could advance money to beneficicaries in anticipation of the final distribution. ie a loan to them. Then at year end a net borrowing or amount still payable may be the final balance aftre the annual distribution is credited. Care has to be taken not to lend to Fred and then credit Mary at year end.

    The trust deed for many managed funds will prescribe that the trustee determine a interim distribution each quarter with a final distribution determined at year end. THis may comply with tax law and may guide that a interim distribution is also possible BUT I dont recommend it unless the trust has fixed elements. You cant fix it if its wrong and the trustee could be liable for errors

    Its part of the accounting process.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This is a bit vague. The trustee needs to make a beneficiary presently entitled to income (or capital) for them to be entitled to the income/capital. Merely transferring money to a bank account is not enough, it would just be a loan really until the trustee resolves to make them presently entitled.

    The person receiving the transfers throughout the year might also end up being different to the one presently entitled. If this happens they should repay the trust the money and the trustee should transfer it to the presently entitled beneficiary. otherwise the original person will have a debt to the trust and the trust will have an unpaid present entitlement to the one they resolved to make presently entitled.
     
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  5. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I saw a case of a trustee (from a former accountant) that would describe payments as distributions in their package of diligent distributions etc. They were repeating what their former adviser had suggested. At year end the final tax distribution differed and almost duplicated hat occurred iwthin the year but was specific to sums. The ATO argued resolutions etc were all in conflict and none were "absolutely entitled to the net income" as the sum distributed was markedly different to all the resolutions and didnt match all of the income etc and then assessed the trustee at the top marginal rate and not either beneficiary. They had also streamed and this didnt match paymnets and the ATO didnt consider the streaming effective (which I raised as a potential issue) It went to a Barrister who agreed the ATO view was likely difficult to challenge. He argued wit the ATO decision that the trustee was mistaken and that they meant advances when they described distributions so that the final annual distribution could stand but the ATO didnt agree. The streaming issues couldnt be set aside from that view.
     
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  6. AlexIM

    AlexIM Active Member

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    So just for me to understand this in more simple terms, the problem here was that the trustee specifically described the payments as "distributions" rather than "loans"?

    Secondary, where did the trustee _describe_ this as distributions specifically? In emails, bank transfer details? The only minute that should manage the distributions is the end of year trust minute I think.
     
  7. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes...as well as inconsistency in what was distributed v the tax view of "net trust income". It made the resolutions defective.
    In resolutions. That is the ATO view to making a beneficiary entitled. The ATO will always ask for these.

    yes, Stick to year end BUT is it correct and was it made by the required date ? eg A simple resolution that allocated 100% of income to mary is far more effective than one which says $1,234 to Mary if a month later the tax amount is $1678due to franking credits or other accrued income.

    Also consider why I said resolutions and DO NOT RECOMMEND a minute other than where a formally constituted board physically meets and also maintains a continuous record of all minutes.

    A : To save some time. A resolution is a record of a decision and that reord may merely be attributed to one of the Directors making that resolution on behalf of the directors. A minute is a record of a meeting and will generally ascribe a time and place and who was or wasnt present. Was a quorum met ? Did they even meet. Hand on the bible stuff.... If its didnt factually take place is it a sham ? Where a resolution could merely describe what was decided in a meeting of the minds by email, phone or even a consious choice at another time (sort of). Harder for the ATO to allege its not correct. Tip : Without legal advice NEVER use digital signing for minutes or resolutiosn unless on the same date as that meeting or decision. It leaves a record that can be refuted.
     
    Last edited: 30th Nov, 2021
  8. AlexIM

    AlexIM Active Member

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    One more silly question. The initial trust settlement is done with $10 given to the trustee. Does it form part of the assets of the trust that need to be accounted for in the accounting statements, and if the trust is wound up next day - distributed to beneficiaries?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yep
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    That is vesting...Giving of the trust property to beneficiaries. When there are NIL assets held on trust, the trust comes to a end. It cant be ressurrected. A new trust must be settled.
     

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