Thanks to the ATO and the Highest Court In The Land, If Your Family Trust Deed Is Not Set Up Properly By 30 June, and if your Trust Resolutions are Not Put in Place, it Could Cost You Thousands of Dollars, If Not Hundreds Of Thousands of Dollars In Extra Tax.

As a result of the High Court case of Bamford v Commissioner of Taxation, there are TWO things that are now clear:

1. As the ATO now tells us, if you have NOT completed a trust resolution before 30 June, you will have to pay up to 46.5% tax, and you’ll have ABSOLUTELY NO SAY in the people who get distributed money from your family trust!

2. As Bamford told us, if you do not have your family trust deed correctly worded, it could cost you thousands of dollars, if not $100’s thousands of dollars.

What does this mean?

It means ill news and bad tidings if you ignore it.

Without a trust resolution, you are deemed to distribute to the default beneficiaries. These could be high-tax individuals. And if you don’t have default beneficiaries, you will be liable to pay 46.5% tax.

Without correct wording of the family trust deed, Bamford shows that some of the clever tax distributions that you and your accountant have done could be undone by the ATO. Therefore, there is a possibility that you will pay a small fortune in extra tax.

The main reason that people make a trust distribution is to pay less tax. They distribute trust income to a group of possible beneficiaries.

However, if you don’t distribute any part of the trust income because you forget to, or you don’t do your distribution docs properly, then the trustee has to pay tax on the income that hasn’t been properly distributed.

Why is this such a disaster?

Because the trustee is taxed at 46.5% tax!!!!!!!

How can this happen?

What Bamford said, ignoring the legal jargon, was that the Tax Act says that the income tax for a family trust is worked out on the “net income” of the trust. “Net income” is different from the “trust law income”, and this is where problems can arise.

Thus, it is critical that you:

Define trust income appropriately in your trust deed; and
Make valid distributions in your trust deed.

If this isn’t done, the beneficiary will not be presently entitled to a share of the “trust income”. This means that the trustee is assessed on the “net income” that has not been properly distributed. And they pay tax at 46.5%.

Example:

Let’s assume your trust has $100,000 net income from a capital gain. You distribute the money between husband, wife, kids and family company to ensure that nobody pays more than 30% tax.

However, let’s assume that because the trust deed is not worded properly, the trust income is $140,000. So trust income is $140,000, net income is $100,000. Guess what happens to the extra $40,000? It gets taxed at 46.5%! Yet if the deed was properly drafted, it would have been taxed at only 30% as you could have distributed it to a company!

This is an extra $6,600 tax!

How do we fix this?

Get your trust deed updated BEFORE 30 June to ensure that so you are NOT caught out this year!

Make sure you fix the following in your trust deed:

Update your trust deed to ensure that capital gains are taxed in the hands of the beneficiary. The Trustee is no longer taxed at penalty rates where there is no other income. The update ensures that your beneficiaries won’t be taxed on income that is higher than what they actually get.
Not only that, but if you haven’t updated your trust deed in 10 years, it’s not only Bamford you can take advantage of. There are streaming provisions, franking credits, and a whole lot more sexy things you can do to improve your trust deed.
Modernize the trust deed to improve the powers of the appointor and guardian, the situation with legal disability, etc.