In the recent Administrative Appeals Tribunal (‘Tribunal’) case, The Trustee for the Dalby Family Trust v FCT [2019] AATA 5241 (‘Dalby’s case’), the trustee of the Dalby Family Trust unsuccessfully sought to avoid paying tax on the trust’s net (taxable) income for the 2013 income year, at the top marginal tax rate plus Medicare levy (the ‘top tax rate’), under S.99A of the ITAA 1936. As will become evident, this case highlights a number of key issues that must be considered by trustees when distributing trust income to trust beneficiaries, including the importance of:
- preparing timely and effective trust resolutions;
- having a default beneficiary clause in the trust deed; and
- considering who will pay tax on the net (taxable) income of the trust in the event a post year- end audit amendment alters trust income and/or increases net (taxable) income.
All legislative references in this section of the notes are to the ITAA 1936, unless otherwise stated.
The facts in Dalby’s case
The facts in Dalby’s case can be broadly summarised as follows:
- The trustee of the Dalby Trust lodged a trust tax return for the 2013 income year reporting trust income of $849,984 and a net (taxable) loss of $4,523.
- On 15 February 2018, the ATO audited the return and denied the trust a $900,000 tax deduction that represented monies lost on the trust’s gold trading activities (due to fraud). As a result of the deduction being denied, the trust’s net (taxable) income increased to $895,477.
- On 10 April 2018, as part of the audit process, a position paper was provided to the taxpayer stating the ATO had formed the view that no beneficiary was presently entitled to trust income for the 2013 income year and, as such, the trustee would be liable for tax on the trust’s net (taxable) income, at the top tax rate, under S.99A. No comments relating to the distribution of trust income were made by the taxpayer or their tax agent in response to the position paper.
- On 12 June 2018, the ATO issued a trustee assessment under S.99A which imposed a tax liability on the trustee in the amount of $416,396 (i.e., $895,477 x 46.5%).
- On 28 June 2018, the trustee’s tax agent lodged an objection to the assessment. The objection focused solely on the denied $900,000 deduction. The objection contained no reference to a trust resolution or any other trustee resolution or declaration. A further ‘objection’ form was lodged on 14 August 2018, but it too focused only on the denied deduction.