The Australian Taxation Office (ATO) has highlighted that their compliance activities frequently uncover errors made by trustees i.e. trust distribution pitfalls. These mistakes often stem from failing to adhere to trust deeds or neglecting to verify family trust elections. Consequently, as agents prepare for year-end distributions for their trust clients, the ATO recommends considering the following key points:
– Review Trust Deeds and Amendments: Ensure that trustees’ decisions align with the terms of the trust deed and check if the trust has vested, as this can affect distribution decisions.
– Identify Intended Beneficiaries: Determine who the beneficiaries are and their entitlements to income and capital under the trust deed. If the trustee has made a family trust or interposed entity election, note that this may influence tax outcomes related to distribution decisions.
– Notify Beneficiaries: Assist clients in informing beneficiaries of their entitlements. This ensures beneficiaries can accurately report distributions in their tax returns, thereby preventing any income from being omitted.
Additionally, the ATO stresses the importance of identifying if the trustee has capital gains or franked distributions they wish to allocate to beneficiaries. This process should include verifying that the trust deed allows for such distributions and that trustees have adhered to the legislative requirements for streaming these amounts