Trust distributions can feel like a routine year-end step. But where a family trust election or interposed entity election applies, the trustee needs to check who is receiving income, capital, or another trust benefit before resolutions are signed.
Before the resolution is signed, find the election
The first issue is not always this year’s distribution. It is whether a family trust election was made years ago, who was nominated as the specified individual, and which income year the election applies from.
That sounds simple, but it is often where the problem starts. A trust may have changed accountants, introduced a bucket company, added a new entity or kept using the same distribution pattern without checking the original election. Family changes can also matter. Death, separation, new spouses, succession planning or changes in control can affect whether a person or entity is still inside the relevant family group.
Before the next resolution is made, trustees should usually check:
- Whether a valid family trust election exists
- Who the specified individual is
- Which people and entities are inside the family group
- Whether an interposed entity election was made and from which year
- Whether trust distribution resolutions match the election position
- Whether beneficiary accounts and tax returns are consistent with the resolutions
- Whether any historic distribution went to someone outside the family group.
A family trust election should not be treated as a “set and forget” document. Once it applies, the family group boundary needs to be checked before distributions are recorded.
Do not assume a related entity is inside the family group
An FTDT issue is not always obvious from the trustee resolution. A distribution may pass through another trust, a company, a partnership or a bucket company before the economic benefit reaches the intended person or entity.
The distribution pathway needs to be traced, not assumed. A company may feel like part of the family structure, but that does not answer whether the right election was made, whether it applies from the correct year, or whether the entity is within the family group for the relevant distribution.
A practical review usually compares the trust deed, election forms, resolutions, ledger accounts, unpaid present entitlement records, tax returns and beneficiary statements. If those documents point in different directions, the issue should be dealt with before the next resolution is made or before responding to an ATO review.
Historic distribution issues need documents, not memory
Family trust distribution tax issues often come to light during year-end tax planning, a private group restructure, estate planning, a change of accountant or a broader trust tax review.
The issue is not always a deliberate breach. A trustee may have distributed to an entity that everyone assumed was “in the group”. Years later, the election history, the specified individual or the interposed entity records may not support that assumption.
If a past issue is identified, the response should be document-led. Trustees may need to explain the election history, the family group position, the distribution pathway and why a beneficiary was treated as eligible at the time.
FTDT and section 100A should be kept separate
Section 100A and reimbursement agreement risk are separate from FTDT, but they can arise from the same distribution history. FTDT is concerned with whether a distribution went outside the relevant family group after an election. Section 100A focuses on whether a beneficiary’s entitlement arose from a reimbursement agreement.
Those issues should not be merged. Still, where there are unpaid entitlements, circular payments, benefits flowing to someone other than the named beneficiary, or a long-standing pattern of distributions, both issues may need to be reviewed before trustee records, tax returns or ATO correspondence is finalised.
How Velocity Legal can help
Velocity Legal’s tax lawyers assist trustees, beneficiaries, family groups and advisers with family trust distributions tax, including family trust elections, interposed entity elections, trust distribution resolutions, beneficiary entitlements, ATO correspondence, section 100A risk and options for addressing historic distribution issues.
If you need family trust tax advice or trust distribution tax advice, contact Velocity Legal before the next resolution is made or the ATO position becomes harder to manage. Read Less
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