Trusts play a vital role in the Australian tax landscape, offering flexibility, asset protection, and tax planning opportunities for business and investment trusts alike. However, to maximize the benefits and ensure compliance with trust and tax laws, trustees must pay careful attention to the governance of their trust, particularly in relation to the preparation of trust distribution resolutions.

In this article, we highlight the significance of this task and factors trustees should consider when deciding on their distribution plans this financial year.

Complying with Trust Deed Requirements

Trustees have a legal obligation to follow the terms outlined in the trust deed. These terms will generally stipulate the process to be followed and the timeframe to be adhered to when preparing and executing distribution resolutions.

A crucial step for all Trustees when it comes to distribution matters is ensuring the correct and appropriate documentation is in place by 30 June of each financial year. Failure to do so can cause an invalid or nul distribution being transacted which may result in the default distributions of the relevant deed being applied.  In many instances this will result in unfavourable financial and taxation positions for all parties involved as income and capital of the Trust may not end up where it was intended.

To avoid this being the case, ensure your distribution resolution is in place and has been executed by 30 June.

Beneficiary Considerations

Trustees have a fiduciary duty to act in the best interests of all beneficiaries of the Trust. This includes considering the needs, circumstances, and tax implications for each potential beneficiary. In some instances, particularly regarding compliance with section 100A provisions mentioned below, documenting these considerations may be useful in providing evidence to support how decisions have been made by the Trustee.

Another important factor when it comes to beneficiary considerations is ensuring the persons or entities you intend to distribute to are beneficiaries of the Trust and are not excluded due to trust deed clauses or for taxation reasons, such as family grouping through family trust elections.

Determining Income and Capital

The Trust Deed will generally provide guidance around how the Trustee must and/or can determine what is income and what is capital for distribution purposes. Where the trustee intends to distribute ordinary income, franked dividends, and capital gains to different beneficiaries, putting the right steps in place to distinguish and distribute these categories of income will be vital in ensuring distributions end up where they are intended.

Section 100A Considerations

The ATO placed a large emphasis on reminding trustees to comply with section 100A taxation provisions last financial year with the issue of their draft ruling, practice guidelines, and taxpayer alert documents outlining their thoughts on its application.

These documents have been finalised during the 2023 financial year and provide further certainty around how the ATO will look to apply these provisions to trustees.  What is clear from the final position taken by the ATO is that section 100A has a wider net than what we originally thought would be the case and as such, should be considered by trustees as a preventative measure when distribution decisions are being made.

The section 100A provisions serve to prevent trustees from manipulating the trust’s distribution resolutions solely for tax purposes.  Generally, section 100A will not be applicable where it can be shown that the distributions made by the trustee ’on paper’ to beneficiaries align with the economic benefits received by those same beneficiaries. Where this is not the case and it can be shown that the distributions ‘on paper’ have resulted in beneficial tax outcomes, there is risk of section 100A applying.

To learn more about Section 100A, please refer to our article ‘ATO puts Trusts on notice re: their distribution strategies‘.

Invalid Distributions

Failing to effectively distribute the income of a trust can have significant tax implications. To avoid this, working through each of the factors above will help. At each key step, you must ensure you refer back to the trust deed to confirm you are following all of the rules required to make an effective distribution resolution.

Best Practice

Distribution resolutions are required to be made by the end of each financial year. Importantly, whilst this practice itself is an annual task, each year is likely to be different so trustees should not see this as a tick and flick exercise.

Income or capital of the trust may vary, beneficiaries may have differing needs, the economic benefits from the trust may go elsewhere – what is clear is that things will generally not stay the same.

Reach Out for Support

In summarising all of the above, it is clear to see that the area of distribution resolutions in most instances is quite complex.  Seeking guidance from your trusted advisor will give you peace of mind that you are maximising the most of your trust structure and the opportunities it can provide. Please contact the team at Davidsons on 03 52216399 or at info@davidsons.com.au if you would like assistance with your trust structure.

This article was written by Kylie McEwan, a Tax and Business Services director at Davidsons. Kylie specialises in complex tax matters including effective taxation strategies and trust administration matters.

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Disclaimer: This information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.