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.