Tax & Trusts: The Top 3 Problem Areas
by Knowledge Shop Editor, on 26/09/17 12:54
An analysis of Knowledge Shop’s help desk has revealed that just over 56% of accountants asking trust related questions are unclear about how trust law applies in practice.
Knowledge Shop answered 7,904 trust related questions on the help desk over a 12 month period.
Dealing with trusts is tricky and very different to general accounting principles. There is no question that advisers have an understanding of how to work with trusts but there is a gap when it comes to trust concepts. Applying trust law is often one of those “unknown unknowns” in accounting teams - everyone believes they are right because they are oblivious to the peculiarities of trust law fundamentals.
Here are the top 3 reoccurring issues where advisers are still uncertain of the details:
Treatment of different types of income – trust, taxable and accounting income
A lot of people are confused between the different concepts of income used when dealing with trusts. For example, people refer to distributing accounting income or dealing with taxable income in the resolutions etc., but this isn't really how it works. The income that ends up being available to distribute to beneficiaries is based on trust law concepts and the wording of the specific trust deed. Some trust deeds align distributable income with taxable income but this is not always the case - each trust deed is different.
Franked dividends passing to discretionary trusts
We still see a lot of people who are not aware of the problems that can arise when franked dividends pass through a discretionary trust. The normal 45-day holding period rules are very difficult to pass in this case unless the beneficiary is an individual and their total franking credits from all sources during the year does not exceed $5,000. The main way of dealing with this in practice is for the trust to make a family trust election, but it is important to carefully select the test individual for the election and check that making the election won't cause other problems (e.g., trigger penalty tax if the trustee ends up providing benefits to people outside the family group).
Trusts distributing to non-resident beneficiaries
Another common issue is confusion when trusts are distributing to non-resident beneficiaries. In this case the treatment generally depends on the type of income that is flowing through the trust. Some forms of income are not subject to any further Australian tax (e.g., fully franked dividends, foreign income), some are subject to non-resident withholding tax obligations which are dealt with through the activity statement process (e.g., other dividends, interest) while other income is taxed in the hands of the trustee on behalf of the beneficiary through the income tax return process.
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