Tax Office using discretion to stretch the Trust

Following an eventful 18 months in the Courts fighting taxpayers over disputes regarding the effectiveness & legitimacy of distributions by trustees (Bamford’s case), the Tax Office has announced new compliance measures for trustees of discretionary trusts in relation to 2012 trust distributions.

The Tax Office is planning on using the trust deeds of discretionary trusts against trustees, by clamping down on the timing of documenting the trustee’s annual income distribution. In previous years the Tax Office has accepted that it was not practical for trustees to make accurate income distributions by June 30 each year, notwithstanding the fact that many trust deeds impose such a requirement on the trustees.

Under a new hardline approach, covering the 2012 and subsequent financial years, the Tax Office has announced a compliance program which will target a selection of discretionary trusts, requiring the trustees to provide a copy the 2012 income distribution resolutions as well a copy of the trust deed (including any amendments).

The penalties for failing to make a valid trust distribution by the required date could be severe, with the Tax Office having the ability to assess the trustee on the income of the trust at the top marginal rate (46.5%).

Trustees need to act now to ensure that they are ready to make valid trust distribution resolutions by 30 June. Many older trust deeds may be in need of a review to ensure that the powers to distribute income reflect the principles arising from Bamford’s case. Over the last 12 months, Prosperity has been in contact with clients regarding updating their deeds. Secondly, with the Tax Office raising the stakes regarding pre June 30 resolutions, trustees of discretionary trusts will need to be diligent in preparing and assessing interim results to allow appropriate resolutions to be prepared before year end. More than ever before, trustees need to be seeking advice to ensure they are prepared in case the taxman comes knocking in July.

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