With the end of the financial year almost here, practitioners are being warned about their approach to trust distribution minutes.

Speaking with Accountants Daily, Tax & Super Australia’s tax counsel John Jeffreys says that faced with a mounting workload and the stress that can come with it, accountants should be wary of the concept of “specific entitlement” and be aware of the specific requirements that need to be followed in trust distribution minutes.

“Many accountants employ the use of template minutes across their practice,” he says. “Great caution must be exercised when using such ‘one size fits all’ approaches, as [it] can often be the case that the template minutes do not properly fit the terms of a trust deed.

“This can result in beneficiaries being taxed in unexpected ways or, possibly, the distribution being ineffective. If the distribution minute is ineffective, the income of the trust will be taxed to the trustee at the top marginal rate.”

Trust distribution minutes need to comply with the terms of the particular trust deed that is related to the trust, Jeffreys says, and practitioners will ideally (informed by how income is defined in the trust deed) consider on a case-by-case basis whether distributions are being made to valid beneficiaries.

He also says practitioners may want to consider whether any type of income or gain should be streamed to selected beneficiaries (if the trust deed empowers the trustee to do so), and whether any other person, such as an appointer, will need to approve the trustee’s distribution decisions.

Whether amounts are being distributed to foreign residents may also have to be considered, Jeffreys says. If so, practitioners should consider whether there are any withholding tax or trustee tax implications.

The concept of specific entitlement in relation to streaming trust capital gains and franked distributions can, in his experience, often be misunderstood, and practitioners should approach it with extra caution in the coming weeks.

“Some years ago, the law was changed to make the streaming of capital gains and franked distributions possible following the decision in the Bamford High Court Case,” Jeffreys says. “The concept of ‘specific entitlement’ was introduced to facilitate streaming to beneficiaries and the law has a number of specific requirements that must be followed in trust distribution minutes and accounting records to enable this streaming.

“Accountants are strongly encouraged to ensure they understand these concepts when drafting trust distribution minutes.”

As well, he says in some cases the knock-on effects of COVID-19 could push some practitioners to consider whether the trust is a resident of Australia. “This could occur where the trustees are individuals and they have been overseas for a prolonged period,” he says. “Is the central management and control of the trust now in Australia? Also, are the beneficiaries now residents of Australia?

“Accountants should also be aware of the very recent decisions handed down by the Full Federal Court in the Greensill and N & M Martin Holdings cases,” Jeffreys says. “These decisions confirmed the ATO position that a capital gain made by a trust from the disposal of non-taxable Australian property to a foreign resident is subject to tax in Australia.”