Often, trustees allocate income to beneficiaries on a tax rate lower than the rate the trustees must pay if they retain the income in the trust. Under current tax law, trustees have until the earlier of when they file their tax return or are obliged to do so, to allocate the income among beneficiaries, or keep it within the trust. 

Many times, we review trust deeds that reflect the tax law that applied when they were written. Typically, these deeds require the trustees to allocate the year’s income within six months of the trust’s balance date, or else it is deemed to be trustee income.  Problems arise if the trust’s financial statements aren’t finalised within six months of the balance date, which is common.  The trustees lose their ability to allocate income to lower taxed beneficiaries and must pay the higher trustee tax rate.  We have seen examples where this has proved very costly.

When we review a trust deed, we always check this issue.  Where possible, we help the trustees to vary the trust deed to allow them to allocate the income at any time until they file their tax return or are obliged to do so. This usually gives them more time and solves the problem.