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Trust Distribution Resolutions: Top tax rate - Trustee removal and S100A

Updated: Jun 20

Trust distribution resolutions is the critical document that dictates how the income and capital of a discretionary trust is allocated amongst beneficiaries. The resolutions must adhere strictly to the stipulations of the trust deed, a foundational document that outlines the trust’s terms and conditions. The importance of a trust deed cannot be overstated; it serves as the governing framework within which trustees operate, ensuring legal compliance and the equitable distribution of assets.

The Importance of the Trust Deed

The trust deed is the rulebook for any trust. It specifies the powers of the trustee, the rights of the beneficiaries, and the procedures for making distributions. Trustees must meticulously follow these instructions to avoid legal pitfalls and ensure the trust operates as intended. A well-drafted trust deed provides clarity and guidance, reducing the risk of disputes and ensuring that the trustee’s actions are defensible in court. If the trust deed is not followed and the purported trust distribution resolutions are held invalid the trustee will pay tax on taxable income at 45%.

Requirements for Trust Distribution Resolutions

A valid trust distribution resolution typically needs to be in writing, dated, and signed by the trustee(s). The resolution should clearly specify the amounts or proportions of income and capital being distributed to each beneficiary. This practice not only provides a clear record but also ensures that the trustee’s intentions are unambiguous, which is crucial for legal and tax purposes. It is possible to make verbal resolutions prior to year-end and ratify them later but as they say the proof is in the pudding and you get it wrong, and the taxation consequences are severe.

Consequences of Failing to Make Proper Resolutions

Failure to make proper distribution resolutions can lead to significant taxation consequences. If trustees do not make a resolution by the end of the financial year, the trust income may be taxed at the highest marginal tax rate, rather than at the beneficiaries’ individual tax rates. This oversight can result in a substantial tax liability, diminishing the trust’s overall value and potentially leading to disputes among beneficiaries.

Streaming of Different Types of Income

Trustees have the ability to stream different types of income, such as dividends, interest, rent. foreign income and capital gains, to specific beneficiaries provided the trust deed allows. This practice can be highly beneficial for tax planning, as it allows for the optimal allocation of tax liabilities according to each beneficiary’s tax profile. However, the trust deed must expressly allow for such streaming; otherwise, all income is distributed proportionately among the beneficiaries.

The Potential Impact of Section 100A

Section 100A of the Income Tax Assessment Act 1936 can have significant implications for trust distributions. This section targets arrangements where trust income is distributed to a beneficiary who is not intended to benefit from the income, often as part of a tax avoidance scheme. Trustees must ensure that distributions are made genuinely and in accordance with the trust deed to avoid falling foul of these provisions.

Case Studies

Getting It Right:

In a well-managed trust, the trustee carefully reviews the trust deed and makes timely, written resolutions that allocate income to beneficiaries with lower tax rates. For example, a family trust streams capital gains to an adult beneficiary who has capital losses to offset, thereby minimising the overall tax impact. The trustee also ensures that these resolutions are documented and compliant with all legal requirements.

Getting It Wrong:

Conversely, consider a scenario where a trustee fails to make a distribution resolution by the end of the financial year. The trust income is then taxed at the highest marginal rate. Furthermore, the trustee attempts to distribute income to a beneficiary in a way that is not permitted by the trust deed, leading to a dispute among the beneficiaries and attracting scrutiny under Section 100A. The resulting legal and financial complications underscore the importance of adherence to the trust deed and proper resolution practices.

Danger - Owies Case and Trustee Responsibilities

The Owies case (Owies v JJE Nominees Pty Ltd [2021] VSC 31) highlights the critical importance of trustees adhering strictly to the terms of the trust deed and their fiduciary duties when making distribution resolutions. In this case, the Supreme Court of Victoria scrutinised the conduct of the trustees who were accused of failing to consider the interests of all beneficiaries equitably. The trustees had distributed the income of the trust in a manner that was perceived to be biased towards certain beneficiaries, neglecting the broader fiduciary duty to all beneficiaries.

The court found that the trustees did not properly inform themselves of all relevant considerations before making the distribution resolutions. This oversight resulted in a breach of their fiduciary duty, as the trustees failed to act impartially and in the best interests of all beneficiaries. The case underscored the necessity for trustees to act with due diligence, ensuring they fully understand and consider the trust deed's provisions and the circumstances of all beneficiaries before making any distribution decisions.

In conclusion, trust distribution resolutions are a vital aspect of trust administration. Adhering to the trust deed, ensuring resolutions are properly documented, taking into account Owies case and being mindful of tax laws such as Section 100A are essential steps in safeguarding the interests of both trustees and beneficiaries.

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