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Changing a trust position with tax consequences

What to know as a trustee changing the administration of the trust to alter tax consequences.

Last updated 2 May 2016

This information is for trustees who are considering changing a previously advised position in the administration of the trust so that tax consequences are altered.

The ATO should be notified of such a change in position and the matter collaboratively resolved.

What are attempts to change trust positions?

There have been instances where a trustee has taken a position (for example, of the effect of a decision regarding beneficiaries’ entitlements reflected in trust resolutions), and then subsequently changed that position (for example, by arguing those entitlements or resolutions are invalid, defective or made at different time).

Where such a change in position has tax consequences, we should be notified as an affected party and the matter collaboratively resolved.

Examples of high-risk behaviour

Start of example

Changing trust resolutions

In a particular case, tax returns were lodged on the basis that resolutions appointing trust income were made on 30 June. During an audit of the trust, resolutions signed and dated 30 June were provided to the auditors. As a result of the audit, amended assessments issued to the beneficiaries named in the resolution.

At objection, the taxpayer (a beneficiary) argued that the resolutions were not in fact made until after 30 June and that they should therefore not be assessed on any of the trust net income (including the amount they originally returned). It was further argued by the default beneficiaries (those entitled under the deed to the trust income if the trustee fails to make a valid resolution) that no adjustment could be made to their assessments because their period of review had expired.

In this case, it was noted that although we were told that the default beneficiaries were presently entitled under the deed, no attempt was made to contact the default beneficiaries or make payments consistent with the new version of events that had been conveyed to us.

Attempts to rectify errors without informing us

Errors in trust deeds or resolutions might be able to be corrected by application to the court. In such cases, where the ATO is an affected party, we need to be informed and may want to be involved in any rectification proceedings.

Early vesting of a trust where there are tax consequences

If a decision is made to vest a trust early, there may be tax consequences such as a tax debt owing that might prove difficult to recover once the trust has vested. We should be notified if it is intended to vest a trust and there are tax consequences.

Failure to advise the ATO of mistakes in the trust deed or errors in the administration of the trust

As soon as you become aware of errors in a trust deed or in the administration of a trust you should advise us. Some trustees and their advisers are aware of serious problems with trust deeds or the administration of the trust yet fail to inform us until we discover the error, or it becomes convenient to disclose to us.

End of example

Failing to involve us may result in us taking action, including amending tax assessments for fraud or evasion (which are not subject to the usual four-year time limit) and imposing possibly significant penalties.