Making an effective trust resolution
The decision in Dalby’s case highlights the importance of trustees making an effective income distribution resolution (referred to simply as a ‘trust resolution’ in the discussion below). The following discussion is intended to assist trustees and advisers to deal with some complex issues that can arise when distributing trust income from a discretionary trust.
It is important to note that there is no ‘one-size-fits-all’ approach to distributing trust income from a discretionary trust, as this process differs from one trust to the next. This is because each trust presents a unique set of circumstances, in terms of the type of income derived and the profile of the beneficiaries, along with its own, unique, trust deed. As such, the following discussion is only intended to provide a general overview of issues that may arise in distributing trust income.
Timing requirements
To create an effective present entitlement for tax purposes, a trustee must distribute trust income no later than 30 June in the relevant income year (or such earlier time as provided in the trust deed) to avoid a trustee assessment under S.99A (or triggering a default beneficiary clause – refer below). Importantly, the 30 June deadline applies to all amounts included in trust income, including franked dividends and capital gains, even if these are being streamed to beneficiaries.
For completeness, note that, if a trustee of a trust wishes to stream a capital gain to one or more particular beneficiaries and the capital gain (or part of it) is included in trust capital, the trustee has until 31 August following year-end to record that entitlement to trust capital (e.g., via a written capital distribution resolution). Refer to S.115-228 of the ITAA 1997.
The importance of documenting trust resolutions
The requirements regarding the creation of written records that document the distribution of trust income is a source of confusion for many trustees.
One question that often arises is whether an income distribution can be made verbally (no later than 30 June). The starting point in this regard is to determine whether the trust deed requires the resolution to take a particular form. If the deed requires it to be in writing, a verbal resolution will not be effective. Furthermore, if capital gains or franked dividends are being streamed for tax purposes, this must be done in writing. Refer to Subdivisions 207-B and 115-C of the ITAA 1997.
The ATO has acknowledged that, whilst a trustee is required to distribute trust income no later than 30 June for tax purposes, the trustees (or directors of a corporate trustee) are able to effect that distribution by way of a verbal resolution, in certain circumstances. Specifically, a verbal resolution is acceptable provided that there is nothing in the trust deed, the tax law (e.g., streaming requirements) or the Corporations Act 2001 (‘CA’) that prohibits a verbal distribution.
If permissible, the trustees (or directors of a corporate trustee) can make a verbal resolution by engaging in some form of communication that results in the distributions being settled on (e.g., a meeting or phone hook-up in which all trustees/directors are involved).
However, whilst the ATO acknowledges that trustees (or directors of a corporate trustee) are able to verbally resolve to distribute trust income (in some circumstances), it has also stated that, even if a verbal resolution is acceptable, it should be supported by contemporaneous documentation and then later formally documented in a minute (or written resolution) to create a formal record of the verbal resolution. Further to this, also note that, if directors of a corporate trustee make a verbal resolution (i.e., where permitted), the CA specifically requires that a minute be prepared within one month of the meeting, which will be taken to be evidence of the verbal resolution made at the meeting. If the minute is prepared after the one-month period, the evidentiary value of the minute may be diminished in any litigation (among other consequences). Refer S.251A of the CA.
TAX TIP – Prepare, sign and date resolutions no later than 30 June
Due to the uncertainty associated with the making of a verbal trust resolution, it is generally considered best practice that trust resolutions be prepared, signed and dated no later than 30 June in the relevant income year (or earlier if required under the relevant trust deed) so as to avoid any later dispute with the ATO regarding the distribution of trust income.
Further to the above, the decision in Dalby’s case highlights that, in addition to preparing and documenting the trust resolutions by year-end, if the trust resolution is relevant to an assessment that is the subject of legal proceedings, it is crucial the trustee promptly produces the resolution to the ATO and the Tribunal. In this case, the trustee (and their tax agent) failed to produce the trust resolution (which the trustee believed to be effective in distributing trust income for the relevant income year), or even to raise the existence of the trust resolution, in its initial objections to the trustee assessment under S.99A. When the trustee did finally produce the resolution, the Tribunal concluded it was too late in the proceedings to extend the grounds of objection to include it.