A checklist for trustees who wish to make beneficiaries presently entitled to trust income by way of making resolutions.
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This information is for trustees who wish to make beneficiaries of a trust presently entitled to trust income for an income year by way of making resolutions. This includes where doing so, they also want to make beneficiaries specifically entitled to franked dividends and capital gains included in that income. It is also for trustees who wish to make beneficiaries specifically entitled to capital gains forming part of the trust capital.
You need to ensure resolutions meet the requirements explained below. If a resolution is not effective, other beneficiaries or you (as trustee) may instead be assessed on the relevant share of the trust's net (taxable) income. Where a trustee is assessed, that may be at the top rate of tax.
Do you have a complete copy of the trust deed?
Make sure you have a complete copy of the trust deed, including any amendments. You need to be sure that any resolution you make to distribute the trust's income or capital is consistent with the terms of the deed.
Who can you appoint income or capital to?
Check the trust deed to ensure that the intended beneficiaries are within the class of persons who can benefit from an appointment of trust income (or of trust capital, if you intend to stream a capital gain that is not income of your trust) and not listed as excluded beneficiaries. For example, some trust deeds specifically exclude the trustee of the trust from being a beneficiary.
If you make an appointment in error to someone who is not a beneficiary, the default beneficiaries (if any) or you as trustee may be assessed on a corresponding part of the trust's net (taxable) income.
Has the trust vested?
Check the trust deed to ensure that the trust has not yet vested. If it has, then entitlements to income will already have vested in those beneficiaries entitled to the trust fund on the vesting date and attempted appointments of income or capital that are inconsistent with those entitlements will be ineffective.
Is there a family trust election in force for the trust?
Eligible trusts can make a family trust election to access certain tax concessions. If the election has been made, check whether the beneficiaries to whom you intend to distribute trust income or capital are within the family group of the individual specified in the election.
Appointing trust income or capital to a person outside the family group will result in a family trust distribution tax liability to you (as trustee). The beneficiaries who would otherwise be assessable because of the resolution will not be assessable.
When do you have to make resolutions?
If you make beneficiaries entitled to trust income for an income year by way of a resolution, it will only be effective for determining who is assessed on the trust's net (taxable) income if it is made by the end of the income year (30 June).
Sometimes a trust deed will require a resolution to be made before the end of the income year. In this case you should comply with the deed. For example, if the trust deed requires your resolution to be made by 28 June, then you should make the resolution by that date.
If your trust deed requires an earlier resolution, all references below to 30 June should be read as the earlier date required by your deed.
If you are making beneficiaries specifically entitled to trust capital gains by way of appointing trust capital to them, that must be done within 2 months of the end of the income year (31 August).
Is there a standard format for a resolution?
No. As there are a wide variety of trust deeds with different requirements for trustee resolutions, we cannot provide a standard format.
The important thing is that your resolution makes one or more beneficiaries presently entitled to the trust income by 30 June.
Does a resolution have to be in writing?
Whether the resolution must be recorded in writing will depend on the terms of your trust deed. However, a written record will provide better evidence of the resolution and avoid a later dispute, for example with us or with relevant beneficiaries, as to whether any resolution was made.
A written record will be essential if you want to effectively stream capital gains or franked distributions for tax purposes. This is because a beneficiary can only be specifically entitled to franked dividends or capital gains if this entitlement is recorded in writing in the records of the trust either:
- by 30 June for franked dividends
- by 31 August for capital gains.
A beneficiary cannot be made specifically entitled to a capital gain included in the income of the trust estate after 30 June if, as a result of the operation of the trust deed, another beneficiary (including a default beneficiary) was presently entitled to it before that date.
Is the wording of your resolution clear and unambiguous?
Check that your resolution is unambiguous and robust enough to deal with all eventualities.
Example: allocation of income
A trustee resolves to distribute the trust income as follows:
A – the first $100
B – the next $100
C – the balance of the income
D – the balance of the income.
The trustee may have been intending to appoint to C and D 50% of the income remaining after the specific appointments to A and B. But on one reading, all of that income was appointed to C, so that there is nothing that can be distributed to D.
End of example
Example: description of income
A trustee simply resolves to distribute all of the trading income to a beneficiary. But the trustee, in carrying on a business, has derived some interest income – this interest income would not be dealt with by the resolution. Depending on the wording of the particular trust deed, the result would be that some of the net (taxable) income of the trust would be assessed to the trustee or default beneficiaries.
End of example
Is the entitlement vested?
A beneficiary's entitlement must be vested by 30 June. An entitlement that will only arise on the happening of an event in the future, is not vested
For example, a resolution may not be effective to create a vested entitlement to income if it stated that an entitlement of a beneficiary would arise in the event of a future adjustment to the trust’s net (taxable) income by the ATO. Such variation of income resolutions are discussed in more detail below.
Can the entitlement be taken away?
For a beneficiary to be presently entitled to trust income, their right to the income must be indefeasible. That is, the entitlement must not be capable of being taken away. If an entitlement to trust income can be taken away from a beneficiary, then the trustee may be assessed on the corresponding part of the trust's net (taxable) income.
Variation of income resolutions
Variation of income resolutions are resolutions made by a trustee that attempt to deal with situations where there is a change to the net income of the trust after the end of the income year.
These resolutions are discussed in Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) is a beneficiary's share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled?.
Trustees have previously sought to use these resolutions as an attempt to control who bears the tax if a subsequent review or audit by us, or an amendment by the trustee, results in an adjustment to the net income of the trust.
A variation of income resolution may be in a similar format to the following example, which is based on one of the resolutions considered in the Full Federal Court case of Lewski v FCT  FCAFC 145. The trustee first resolves to distribute 100% of the trust income to a named individual beneficiary, and then resolves that, should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, 100% of such amount or amounts are to be deemed to be distributed on 30 June 20XX to Corporate Beneficiary Pty Ltd.
Resolutions like these give rise to considerable uncertainty and often don't achieve the outcomes sought by the trustee. They may result in a range of possible interpretations that cause genuine doubt as to who is presently entitled.
The tax outcome in each case will depend on the legal effect of the particular resolutions. This is a matter of trust law, not tax law, and the Commissioner is not able to conclusively determine this.
Where there are a range of possible interpretations, we will consider raising alternative assessments where the correctness of each assessment depends upon the proper legal effect of the resolutions. This may include assessments to beneficiaries (including default beneficiaries) as well as an assessment to the trustee under section 99A of the Income Tax Assessment Act 1936 on the highest amount that they could be assessed on under any of the alternative views.
Example: variation of income resolution
On 30 June 2023, the trustee of the Cashew Family Trust resolved to distribute 100% of the trust income to Andy.
The trustee further resolved (variation of income resolution) that should the Commissioner later include any amount in the assessable income of the trust, or disallow a deduction in calculating the net income of the trust, that amount shall be distributed to Bouquet Pty Ltd.
The trust deed of the Cashew Family Trust equates the income of the trust estate with its section 95 net income unless the trustee determines it to be a different amount. The trustee resolutions did not make explicit reference to the trustee making a determination of trust income.
The trust deed of the Cashew Family Trust provides that Edna Pty Ltd is the default beneficiary who will be entitled to any trust income that the trustee has not dealt with effectively by 30 June each year.
The trust tax return lodged by the trustee for the year ended 30 June 2023 shows the net income as $100,000 consisting of business income.
We later determined that the income from the business carried on by the trustee was understated by $20,000. That is, the net income of the trust was not $100,000 as calculated by the trustee but rather $120,000 and likewise the trust income as defined by the deed was $120,000.
No variation of income resolution
If there was no ‘variation of income’ resolution, Andy would be presently entitled to 100% of the income of the trust estate and therefore assessed on $120,000 because of the Commissioner’s adjustment of net income.
Effect of a variation of income resolution
The inclusion of a variation of income resolution gives rise to a range of different possible outcomes, depending on the legal question of whether it is authorised by the trust deed and the subsequent effects on the validity of the resolutions made by the trustee.
There are 3 possible ways in which the validity of the variation of income resolution may be interpreted under trust law. These are that the resolution is:
- not authorised by the trust deed and cannot be severed from the other parts of the resolutions, therefore the income distribution resolutions are wholly invalid
- not authorised by the trust deed, but may be severed without invalidating the remaining income distribution resolutions, therefore the resolutions are partially valid
- authorised by the trust deed and the income distribution resolutions are fully valid.
These 3 possibilities then give rise to further different outcomes, depending on the precise terms of the trust deed and the resolutions.
The following scenarios give a high-level summary of the range of trust law interpretations that could be reached by a court if the matter were litigated, and step through the consequent tax outcomes.
Neither the trustee nor the Commissioner can have certainty as to the interpretative outcome.
In these circumstances, we will consider raising alternative assessments to Andy, Bouquet Pty Ltd, the trustee, and Edna Pty Ltd.
Scenario 1 – variation of income resolution results in income distribution resolutions being wholly invalid
Where the income distribution resolutions are wholly invalid, they will not operate to make any beneficiaries entitled to any income.
Andy will therefore not be required to include any amount in his assessable income under section 97 of the ITAA 1936.
As the default beneficiary, Edna Pty Ltd would be liable to tax on $120,000 under section 97.
If there was no default beneficiary, the trustee would be taxed on $120,000 under section 99A at the top marginal rate.
Scenario 2 – variation of income resolution is invalid, but the remaining income resolution remains valid
Where the variation of income resolution is not authorised, but is able to be severed, Bouquet Pty Ltd would not be presently entitled to any income. The following 3 outcomes are possible.
- The resolutions may operate to make Andy presently entitled to 100% of the income of the trust estate, being the adjusted net income of $120,000. Andy would then be assessable on $120,000.
- The resolutions may be construed as an implicit determination by the trustee that trust income is equal to $100,000.
Andy would then be presently entitled to 100% of trust income, and therefore be taxed on 100% of taxable income (i.e. $120,000) under section 97.
As all income has been distributed for trust law purposes, Edna Pty Ltd will not be taxable, as the default beneficiary clause will have no work to do.
- The resolution to distribute 100% of the trust income to Andy may apply to make him presently entitled to a specific amount of $100,000 (being 100% of the trust income amount known by the trustee at the date of the resolution).
Andy must therefore include $100,000 of net income in his assessable income under section 97.
The remaining $20,000 of trust income would represent an amount to which no beneficiary was presently entitled at 30 June 2023. It would therefore be assessed to the trustee under section 99A, or potentially the default beneficiary (Edna Pty Ltd) under section 97. This would depend on the construction of the default beneficiary clause in the context of the resolutions which were made.
Scenario 3 – the variation of income resolution is valid
Where the ‘variation of income’ resolution is authorised by the trust deed and is valid, the following 3 outcomes are possible.
End of example
- The resolutions make Andy presently entitled to $120,000, being 100% of the trust income, and the variation of income resolution has no work to do.
- The resolutions make Andy entitled to 100% of the trust income (whatever that turns out to be) but he is not presently entitled to that income for tax purposes, because his interest is contingent on whether certain future events occur.
Because Andy’s entitlement is valid for trust law purposes but does not confer present entitlement, it is unlikely that the default beneficiary clause would be triggered. The full amount of $120,000 would likely be assessed to the trustee under section 99A.
- The resolution to distribute 100% of the trust income to Andy may apply to make him presently entitled to a specific amount of $100,000 (being 100% of the trust income amount known by the trustee at the date of the resolution). Andy would therefore be assessable on $100,000 under section 97.
The variation of income resolution could then be interpreted as dealing with the remaining $20,000 of trust net income in any of the 3 following ways.
- The variation of income resolution has no work to do, because the trustee has made an implicit determination that the trust income is equal to the amount of $100,000 known at 30 June.
Under this interpretation, all the trust income has been distributed by the trustee, and any additional income is not dealt with by the resolution.
As all income has been distributed for trust law purposes, Edna Pty Ltd will not be taxable as the default beneficiary clause will have no work to do.
Consequently, Andy would be required to include $120,000 in his assessable income.
- The variation of income resolution might make Bouquet Pty Ltd entitled to the additional trust income coming to the trustee’s notice because of the Commissioner’s amendment.
Bouquet Pty Ltd would therefore be entitled to trust income of $20,000, and the default beneficiary clause would have no effect.
However, as the entitlement is contingent on an event occurring after 30 June (i.e. the Commissioner’s adjustment) it's possible that Bouquet Pty Ltd has not been made presently entitled to this income.
Consequently, the trustee would be assessed and liable to pay tax on the $20,000 under section 99A.
- Bouquet Pty Ltd is entitled to a non-contingent amount which is merely to be ascertained with reference to events after 30 June. In that case, Bouquet Pty Ltd would be presently entitled to $20,000 and required to include that amount in its assessable income.
How should you calculate and report the income of the trust?
Make sure you understand how the income of your trust is calculated and that your resolution reflects this. For example, if the deed defines the income of the trust to be an amount equal to the trust's net (taxable) income, your resolution should not then seek to appoint accounting income.
If your trust deed equates the trust's income with its net (taxable) income, you should note our view (set out in Draft Taxation Ruling TR 2012/D1) that income cannot generally include notional amounts such as franking credits.
The income of the trust needs to be reported on the trust tax return, along with each beneficiary’s share of that income. This requirement is in addition to reporting the net (taxable) income of the trust and each beneficiary's share of that net (taxable) income. We use this additional information to check each beneficiary’s share of the trust’s net (taxable) income and to consider whether anti-avoidance provisions may apply.
Are you ‘streaming’ capital gains or franked distributions?
If you are ‘streaming’ capital gains or franked distributions (seeking for their character to be retained as capital gains or franked distributions in the hands of beneficiaries), check that:
- you are not prevented from doing so under the terms of the deed
- you have complied with the relevant legislative requirements relating to the creation and recording of these entitlements.
For example, if a trustee wants to stream a capital gain to a particular beneficiary so that the gain is assessed only to that beneficiary, the beneficiary must be entitled to all of the financial benefits referable to the capital gain. In a trust where income is equated with the trust's net (taxable) income, a resolution distributing that part of the income attributable to a discount gain will only create an entitlement to 50% of the financial benefits that arise from the capital gain – that is, the discount component of the capital gain being non-assessable will not form part of the income of the trust.
To create an entitlement to all of the financial benefits referable to the capital gain, the trustee would also need to distribute that part of the trust capital attributable to the discount component of the gain.
While tax law allows until 31 August to record the specific entitlements relating to capital gains, such entitlements cannot be created over any amount that has already been dealt with – for example, any capital gains forming part of trust income that was already dealt with by 30 June.
Are you seeking to ‘stream’ other types of income?
The tax attributes of other types of income cannot be separately streamed to different beneficiaries in the way that capital gains and franked distributions may be streamed. Under the general trust-assessing provisions in tax law, each beneficiary is taxed on a proportionate share of each component of the trust's net (taxable) income and cannot be treated as having a share of net income that consists of one category of income (for example, foreign income).
Will records created after 30 June be accepted as evidence of the making of the resolution by that date?
Yes. If a resolution is validly made by 30 June, we will accept records created after 30 June as evidence of the making of a resolution by that date. The following examples show the types of records and circumstances in which we will accept them.
Example: Individual trustee
On 29 June, an individual trustee writes a note, dated 29 June, stating that they have resolved to distribute the trust income in a certain way. On 15 July, the trustee types the note reflecting the resolution of 29 June and provides a copy to the beneficiaries. We will accept the handwritten or typed notes as evidence of the making of the resolution on 29 June.
End of example
Example: Corporate trustee
The corporate trustees of a larger trust group map out where distributions are to be made, with appropriate percentages. This 'map' is signed by the relevant trustees on 26 June to evidence the resolutions that have been made. On 25 July, the resolutions are recorded in the minutes book maintained by the trustees. We will accept the signed 'map' or minutes book as evidence of the making of the resolutions on 26 June.
End of example
Do you have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income?
No. Your resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled, unless the trust deed specifically requires it.
A resolution is effective if it prescribes a clear methodology for calculating the entitlement – for example, the entitlement can be expressed as a specified percentage of the income, whatever that turns out to be.
Alternatively, if you know that the income of the trust will be at least a certain amount, you may choose to make one or more beneficiaries presently entitled to the certain amount, and other beneficiaries entitled to the balance, whatever that turns out to be.
What happens if you make a resolution after 30 June?
If no beneficiary (including a default beneficiary) was presently entitled to trust income as at 30 June, and no beneficiary was made specifically entitled to trust capital gains (if any), then you (the trustee) will be assessed on the trust's net (taxable) income.
Have all entitled beneficiaries quoted their tax file number (TFN) to you?
If not, TFN withholding rules apply to closely held trusts, including family trusts.
A checklist for trustees who wish to make beneficiaries presently entitled to trust income by way of making resolutions.