In June each year, a trustee’s thoughts naturally turn to resolutions and distributing income. This means that trustees have to take action and state how they will distribute income to the beneficiaries before 30 June.
Preparing distribution resolutions is not a new skill, but that doesn’t mean that time-honoured mistakes can’t still occur.
Read the Deed
As with any trustee power, a resolution to distribute trust income must be in strict adherence with any rules set out in the trust deed. Failure to follow the rules can render resolutions invalid, leading to a number of undesirable outcomes including:
- the intended recipients of the distribution being unable to receive it;
- the default beneficiaries under the trust becoming liable to tax on amounts that they never receive; and/or
- the trustee itself being assessed at the highest marginal rate.
FCT v Carter
Best practice is to prepare trustee resolutions in close consultation with the relevant trust deed (and, in the case of corporate trustees, the constitution). Any procedural peculiarities set out in the deed must be observed. For example, some older deeds require that distribution resolutions must be made several days before the end of the financial year.
In the case of Carter v FCT  FCAFC 150, the trustee’s distribution resolutions were held to be invalid for a number of formality-based reasons. These included:
- failure to obtain the consent of the trust’s guardian (a requirement peculiar to the deed in question);
- failure to record who was in attendance at the directors’ meeting or that a quorum was present; and
- failure to indicate whether the meeting in question was a meeting of directors or shareholders.
In this case, the invalid resolutions meant that the deed’s ‘distributions-in-default’ mechanisms deemed the income to be distributed to the default beneficiaries who then became liable to tax on those amounts. The default beneficiaries subsequently tried to disclaim their interests in the trust. Their disclaimers were held to be effective in removing their entitlement to the income but NOT their liability to the tax on those amounts.
In short, the invalid resolutions led to an extremely negative tax outcome with beneficiaries paying tax on amounts that they never received.
30 June Deadline
As always, trustee resolutions to distribute income should be prepared before 30 June with the help of the trust’s accountants.
Further, the recent Owies decision is a timely reminder that trustees must give ‘real and genuine consideration’ to the needs of beneficiaries before making any trustee distribution. Practically, the relevant inquiries into the needs of beneficiaries should probably be commenced well before 30 June.
The ATO’s ‘Resolution Checklist (QC 25912)’ is also a useful resource when preparing resolutions.
For assistance with your distribution resolutions, contact the team at Aintree Group Chartered Accountants.