A trustee resolution is not a formality

Most family groups sign one document in June that decides how a year of profit is taxed. It is usually a page long, often drafted from a template, and frequently executed a few days after the date written on it. When it is right, nobody notices. When it is wrong, the trustee is assessed on the income at the top marginal rate — which is a more expensive outcome than any saving the distribution was designed to achieve.

What the resolution actually has to do

A trustee resolution works by making beneficiaries presently entitled to the trust’s income. Present entitlement is the legal idea the whole system rests on: until a beneficiary is entitled to a share of the income, nobody is taxed on it, and the trustee is — usually at the top rate.

So the resolution needs to do three things, in this order:

1. Identify the income it is dealing with — the income of the trust estate for that income year, as distinct from its capital.
2. Appoint that income to named beneficiaries, in stated shares or amounts.
3. Do it validly under the deed: by the right people, in the right way, by the right date.

Everything that goes wrong tends to be a failure of the third point.

By when

30 June of the income year, unless the deed requires an earlier date. The ATO is explicit that a resolution made after year end is not effective for determining who is assessed on the trust’s net income — and that where a deed requires an earlier resolution (28 June, say), the earlier date is the one that matters.

Two exceptions worth knowing, because they are commonly confused with the general rule:

• Franked dividends can only be streamed to a beneficiary who is specifically entitled to them by 30 June.
• Capital gains can be appointed to a beneficiary as trust capital within two months of year end — 31 August — but only if the deed has not already made someone else presently entitled to that gain before 30 June.

That last condition is where the 31 August window stops being useful. If the deed’s default beneficiaries pick up the gain on 30 June, a later appointment cannot displace them.

The traps that actually cost money

The beneficiary is not in the class. Every deed defines who may benefit and, often, who is expressly excluded — including, in some deeds, the trustee. An appointment to someone outside the class is ineffective, and the default beneficiaries or the trustee are assessed instead.

The trust has vested. If the vesting date has passed, entitlements have already vested in whoever the deed says takes the fund. Attempting to appoint income afterwards does not work.

A family trust election is in force and the distribution leaves the family group. The result is family trust distribution tax payable by the trustee, and the beneficiary who would otherwise have been assessed is not assessed. It is a blunt instrument and it is not optional.

The wording is ambiguous. Consider a resolution that appoints “A — the first $100, B — the next $100, C — the balance, D — the balance of the income”. The intent was probably a 50/50 split of the remainder between C and D. On one reading, C takes all of it. The ATO publishes that example precisely because it happens.

The entitlement is never paid. An unpaid present entitlement owed to a corporate beneficiary is treated as financial accommodation provided by the company to the trust — which brings Division 7A into play. The distribution was valid; the loan it created was not documented. See the loan you didn’t know your company had made.

What to do about it, in order

1. Get the complete deed, including every variation. Not the summary, not the one from 2011. If the deed has been amended or replaced, the operative document is the amended one.
2. Read the resolution clause and diarise whatever date it imposes. It is frequently not 30 June.
3. Confirm the beneficiary class against the people you intend to appoint to, and check for exclusions and any family trust election.
4. Minute the decision before the deadline, in writing, in a form that identifies the income, the beneficiaries and the amounts. The ATO does not prescribe a format; a written record is what makes the position provable, and it is essential for streaming.
5. Reconcile afterwards. A resolution that apportions “the balance of the income” is only meaningful once the accounts are final. This is where an intention and an outcome diverge, and it is cheaper to correct in August than in an audit.

Why we ask for the deed before we ask for the numbers

Because the numbers are the easy part. A distribution can be arithmetically perfect and legally ineffective, and the difference is entirely in a document most clients have not read since settlement. That is the second look: not whether the accounts add up, but whether the decision they record was ever capable of being made.

Sources: Australian Taxation Office, Trustee resolutions; ATO, Trust payments and other benefits. General information only — not advice for your circumstances.