ATO Warning on Trust Distributions
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What to Consider When Making Trust Distributions?
Many trustees and practitioners might be thinking of resolutions in relation to trust distributions. The ATO has issued a warning on trust distributions. The ATO is warning that their compliance activities often spot mistakes because trust deeds are not being considered appropriately. As a result, the ATO has published an article advising on the key considerations to bear in mind when distributing trusts:
- Conduct a review of the trust deed and any changes to ensure trustees are making consistent decisions with the terms of their deed
- Ensure that the trust has not vested, as this could affect distribution decisions
- Consider who the intended beneficiaries are, but don’t forget that some beneficiaries could have different entitlements to income and capital under the trust deed
- Check the deed for any requirements and conditions around the making of trustee resolutions, including the requirement to have the resolution in writing and the timing of when it is important to be made
- If the trustee is considering stream capital gains or franked distributions to certain beneficiaries, ensure that the trust deed doesn’t prevent this and the needs around streaming have been met.
Ensure to check if the trust has made an interposed entity election or family trust election. It consists of implications around distribution decisions because trust income distributions outside the individual’s family group will trigger family trust distribution tax at penalty rates. For clients with trusts in their group structure, it is important to check the trust deed to ensure any proposed distributions of trust income are valid. If trust distributions are invalid, the ramifications from a tax perspective can be significant, and the ATO is checking these errors being made in this area.
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Modifications to the Tax Returns for Trusts and Beneficiaries
The ATO is reminding trustees and beneficiaries of the changes their returns are prepared:
- For trustees, 4 CGT labels are being added in the statement of distribution section of the trust tax return
- For beneficiaries, the ATO is presenting a new trust income schedule that all beneficiaries obtaining trust distributions will need to file.
Yearly Repayments on Division 7A Loans
The ATO notices several common mistakes that are being made by taxpayers in concern with Division 7A which has prompted several webinars and articles to help practitioners and taxpayers on these rules. This latest article emphasises making minimum yearly repayments. When a private company extends a loan to a shareholder or associate, a typical method to prevent the loan from being treated as a deemed unfranked dividend under Division 7A rules is by ensuring the loan adheres to complying loan terms within the specified deadline. While this measure can avert Division 7A issues in the year of the loan’s origination, it’s vital to note that borrowers must fulfil the minimum annual repayments in the following years. Failure to do so may result in a deemed dividend triggered by any shortfall in repayments for that year.
When making yearly repayments, the ATO notices common mistakes being made and reminds borrowers of the following:
- Repayments begin in the year after the loan was made
- To use the right benchmark interest rate to calculate the minimum repayments for the year
- To pay annual repayments on the loan by the end of the income year
Be careful to ensure that repayments are not being paid by borrowing additional amounts from the same company. Certain provisions in the Division 7A rules can prevent these repayments from being considered.
Not-for-Profits Preparing for their First Self-Review Return
For many not-for-profits that are liable to access an income tax exemption, the latest changes have meant they need to lodge an NFP self-review return each year. With the first self-review return for the 2024 year due by October 2024, the ATO allows taxpayers to know that it will be important to ensure NFPs have updated their details for any new associates and appointed authorised contacts.
Three ATO Focus Areas for Tax Time
With the end of the income year approaching so fast, the ATO has announced 3 key focus areas for tax time. Last year, over 8 million taxpayers claimed a work-related deduction and around half of these claimed deductions when working from home. Work-related expenses are in the ATO’s sights. For clients who work from home, there are two options for claiming deductions on home running expenses. They can either claim deductions depending on their actual expenses or choose ATO’s revised fixed rate method that uses a rate of 67 cents per hour worked from home.
For individuals using the revised fixed rate method, they need to have a record of all the hours they have worked at home during the year and don’t forget that estimates are not sufficient. For clients making rental income, rental properties remain a key focus area of the ATO. The ATO keeps checking mistakes being made when claiming deductions for repairs and maintenance. While genuine maintenance and repairs on a rental property can be claimed as a deduction, the ATO’s warning is that a distinction must be made for improvements.
The other warning is that initial repairs to fix issues that existed when buying the property are not deductible immediately.
Lastly, the ATO recommends taxpayers avoid rushing to file their tax return in early July prior to pre-fill data available. It is adequate for individuals with multiple sources of income.
End-of-Year Employer Obligations
For employers, the ATO has sent some reminders of certain changes and crucial due dates as the end of the income year approaches.
First, the changes to individual tax rates will come into effect from 1 July 2024. It will affect the PAYG withholding rates of employers for the 2025 income year.
Second, the ATO reminds employers that the SG rate will maximise to 11.5% from 1 July 2024, so it is crucial to consider it to ensure SG amounts are calculated accurately. SG for the June 2024 quarter is also due to be paid by 28 July.
Additionally, the ATO reminds employers that they must ensure that their single-touch payroll finalisation declaration is completed by 14 July.
Breach Reporting Obligations
Draft guidance on the breach reporting obligations have been released by the Tax Practitioners Board which apply to registered tax practitioners from 1 July 2024. It explains:
- The additional breach reporting obligations that are supported by practical case studies
- When the obligations apply
- What forms a significant breach
- The time for reporting a breach
- What if a breach is not reported