02 Sep 2017 Trustee Resolutions – Don’t Pay 49% Tax

How to avoid paying 49% in tax!

Most discretionary trust deeds will contain a clause requiring the trustee to prepare an annual Trustee Resolution to distribute the income. That resolution is usually required before the end of the Tax Year, even though the trustee may not know exactly how much income is available to be distributed.

Why is it Important?

If trustee’s don’t comply with the terms of the trust deed then the income of the trust can be taxed at the highest marginal tax rate, 49%. This can mean an unnecessary Income Tax cost even when the income of the trust is relatively low.

What is in the Trustee Resolution?

Discretionary trusts usually allow income to be tax effectively streamed to beneficiaries. The distribution is not dependent on what happened last year or ownership interest, but is entirely at the discretion of the trustee. This means significant tax savings are possible if the distribution is completed properly.

To give you an idea I have provided an example below showing how we can reduce your tax liability by properly distribution the trust income.

Tax Saving Example

Mum works as a Planning Consultant in the family business operated through the trust, dad works in a gym and earns $60,000. Aunty Mabel, doesn’t earn any income but has a $50,000 capital loss from the sale of an investment property before moving into her rest home. There are 3 children aged 18, 16, and 12. The oldest child is doing a TAFE course and doesn’t earn any income.

The trust earned $125,000 from mums business, had fully franked dividend income of $30,000, and a taxable capital gain of $50,000 from the sale of an investment property.

Without the properly prepared distribution the trustee will be liable to pay $110,450 in tax.

With the properly prepared distribution the tax cost will be spread across all beneficiaries saving nearly $90,000 in tax.

Trustees – What to do Next

If you are currently a client, we will be sending you a letter in plenty of time to ensure you achieve the best tax outcome. If you are not a client, then give me a call on (07) 5448 9600 so we can make sure you get the right advice.