Tax Office reviews discretionary trust distributions

The Tax Office recently completed a review of SMSF annual returns where distributions from a discretionary trust had been reported. It says a similar review is planned for next financial year.

A discretionary trust is one in which the trustee has a discretion to determine the amount of trust income to distribute to each beneficiary.

In the review, trustees were asked to check the trust deed of the distributing trust – and any resolutions – to determine whether the amount reported at label 11M (gross trust distributions) was non-arm’s length income.

The Tax Office reminded SMSF trustees that distributions from discretionary trusts are considered to be non-arm’s length income, which is taxed at the highest marginal rate. It says these amounts should be reported at Section B: Income, label U2 on the SMSF annual return.

Trustees were also reminded to ensure distributions from discretionary trusts are correctly reported in the SMSF annual return.

For more information, refer to the Tax Office’s web pages “Non-arm’s length income” and “SMSF annual return instructions” for guidance.