The end of the financial year is fast approaching, highlighting some important tax compliance and administration matters that may have a significant impact on family law and tax matters.
Parties to family law proceedings with an interest in a discretionary trust must ensure the trustee makes a resolution to distribution the 2022 trust income before 30 June 2022. Similarly, the minimum yearly repayment (MYR) on Division 7A loans made by private companies must also be made before 30 June 2022.
We set out below key action required before 30 June 2022.
The requirement for a trustee to make a resolution in relation to the distribution of income of the Trust is commonly defined within the Trust Deed.
If the Trust Deed requires the trustee to make a resolution in relation to the distribution of income in writing before 30 June of the relevant year, there will be an obligation on the trustee to comply.
The Commissioner of Taxation ('Commissioner') takes the view a trustee resolution to distribute the net income of the trust for a financial year must not only be made before 30 June but also documented before 30 June.
If the trustee does not make a resolution in accordance with the Trust Deed, the Commissioner of Taxation may take the view a valid resolution has not been made resulting in either the default beneficiaries or the Trustee may be assessed on the income of the trust for that year. Therefore, it is extremely important from a tax perspective that the trustee complies with its obligations under the Trust Deed.
Keeping in mind, that if the trustee is assessed, the highest marginal tax rate will apply.
This could have a substantial impact on the net asset pool.
A number of recent developments from the Tax Practitioners Board (TPB) and Australian Taxation Office (ATO) have focused attention on a) fundamental obligations of tax agents under the Tax Agent Services Act 2009 (TASA) and b) tax implications arising from trust distributions.
The release of TPB Practice Note TPB (PN) 5/2022 has provided a timely and important reminder to tax agents of the requirement to not only verify the identity of their client, but also the requirement to hold the legal authority to take instructions on behalf of another taxpayer.
The practice note highlights the importance of tax agents’ obligations under the TASA including the obligation to act in the best interests of their client (raising the question of ‘who is the client’), the obligation to not act in conflict, and the obligation to ensure client confidentiality is maintained.
These obligations have been further highlighted by the recent guidance issued by the ATO on Income Tax Assessment Act 1936 (ITAA1936) Section 100A .
The ITAA1936 Section 100A guidance has highlighted the risks for tax agents where beneficiaries have not been made aware of entitlements to trust income, or the existence of unpaid present entitlements (UPE’s) and where beneficiary UPE’s have been artificially reduced or eliminated through ‘gifting’ or some other journal offset.
Given the topical natures of these developments, family lawyers may wish to reach out to the ‘family accountant’ (where they continue to advise on the tax implications in family law settlements) to obtain a copy of any conflict waivers, legal authority to take instructions (where applicable), and to ascertain any historical adjustments made to the parties UPE’s.
In addition to the above, the recent High Court judgment in Commissioner of Taxation v Carter & Ors  HCA 20 (Carter) highlights the importance of parties having knowledge of any potential trust distribution (and inherent tax liability) prior to the end of the financial year.
Carter is now authority for the principle that the liability to taxation arising from the distribution of trust income arises at the end of the financial year, and that liability to taxation cannot be disclaimed after the end of the financial year.
The judgment could have a significant impact where parties disclaim or assign their right to UPE’s under Family Court orders.
Division 7A Minimum Repayments
Where parties have existing obligations under Division 7A loans, the current year MYR is due by 30 June 2022.
Shareholders or associates may be able to make the minimum repayment by using a dividend offset strategy (i.e. by journal entry) however certain conditions must be satisfied for the ‘payment’ to be effective, including:
- The dividend must be declared and ‘paid’ in accordance with section 245T Corporations Act 2001.
- The dividend must be declared prior to 30 June 2022 and in accordance with the private company’s constitution or replaceable rules.
- The resolution to pay the dividend must be recorded and filed in the corporate records in accordance with section 251A Corporations Act 2001.
- The company must provide the shareholder with a distribution statement within four months of the end of the financial year (i.e. by 31 October).
If the above conditions are not satisfied, there is a risk the Commissioner will take the view the MYR has not been paid and as a result, a deemed (unfranked dividend) may arise.
If the company is not able to declare and pay a dividend, the only option available to the shareholder or associate may be to pay the MYR in cash.
If the MYR is not paid before 30 June 2022 a deemed (unfranked) dividend may arise.
Deemed dividends are a notional repayment only. In the event of insolvency, a liquidator may still demand repayment of the loan. This could result in a shareholder or associate being exposed not only to a significant tax bill, but also an obligation to repay the loan.
Parties to family law proceedings who may be impacted are urged to seek professional advice in relation to managing their obligations and understanding the risk of non-compliance.
For more information
If you require further information on family law and tax advice, contact your local RSM adviser today.