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As we settle into the new financial year, it’s a great time for trustees to take stock.
The ATO has flagged increased scrutiny around how trusts are managed, especially when it comes to income distribution and profit allocation, so staying on the front foot matters more than ever.
Instead of finding yourself under pressure next tax season, take the opportunity now to check in on your obligations, review how the trust is operating, and make sure your documentation and decision-making can stand up to scrutiny.
Here are three things for trustees to consider this new financial year…
1. Review your trust deed
Your trust deed is the legal backbone of your trust. It lays out the rules for how the trust operates, what you can and can’t do as trustee, and who is entitled to benefit.
Over time, trust deeds can fall out of sync with how a trust is actually being managed. This is especially true if family structure, investments, or tax laws have changed.
This financial year, make time to review your trust deed to understand:
- Who the eligible beneficiaries are.
- Any limits, conditions or requirements.
- Potential outdated clauses that don’t reflect how the trust operates now.
If what’s written no longer works, have a chat with your accountant and lawyer about updating it.
2. Consider whether a family trust election is right for you
To access certain tax benefits, such as passing on franking credits to beneficiaries or making it easier to carry forward losses, you can make a formal choice to have your trust treated as a family trust under tax law.
Family trusts benefit from simplified rules and valuable concessions; however, they also have some limitations. For example, once you elect to have the trust recognised as a family trust, you cannot easily distribute income to people outside the defined family group without attracting significant tax penalties.
It is a decision that’s also not easily reversed, so it’s worth speaking to your accountant before making the call. They can help you weigh the long-term benefits against any constraints.
3. Assess the risk of profit allocation decisions
If you work in professional services (such as law, accounting, medicine, architecture, and so on) and your earnings are paid into a trust, you need to be careful about how that income is shared.
The ATO has issued updated guidance targeting situations where income from personal effort is received into a trust and then distributed to family members to reduce tax. While income splitting through a trust may be allowed in some cases, the ATO expects a fair portion of the income to go to the person who actually earned it.
A new risk assessment framework has been introduced to help classify scenarios based on their likelihood of attracting ATO audit attention. Arrangements assessed as ‘green’ are considered low risk, while those that fall into the ‘red’ category are more likely to be reviewed or audited by the ATO.
This financial year, be sure to review how your profit allocation decisions stack up against the ATO’s guidelines. If your income structure involves distributing profits from personal services, check in with your accountant to ensure nothing raises red flags, and consider keeping documentation to explain your reasoning behind income allocation decisions.
How RSM can help
We understand the complexities of tax planning for trusts and can guide you through reviewing your trust deed, weighing the pros and cons of a family trust election, assessing income allocation risks, and more.
Our goal is to make managing your trust’s obligations easier by providing clear, practical advice backed by experience.
Having worked with countless trustees from all walks of life, we know every trust is unique. Any recommendations we make are tailored to your specific situation and designed to help you confidently manage your trust and make informed decisions.
For a friendly and confidential discussion about strategy or compliance for your trust, contact your local RSM office.
