- This year, 30 June means 30 June: all bets are off in relation to any ATO administrative accommodation.
- Trustees and those advising them need to take a thorough and professional approach to trust administration: this starts with having a proper understanding of the terms of the trust deed.
- Subject to the deed requiring otherwise, ‘resolving’ to deal with the trust income in a particular way can occur even if the minute recording that decision follows later – however, you need to have objective and contemporary evidence of the resolution having been made.
- The minute of the trustee’s resolution should narrate a clear story about the process that the trustees went through in determining who the beneficiaries are, what the trust’s income is and how they want it to be distributed.
- Practically, the trustees may not always know precisely what income they have to distribute by 30 June – this is an issue but with some common sense should not be a problem.
- The Commissioner’s latest thinking on what is the ‘income of the trust estates’ will exclude notional amounts from trust income, so watch out for the trapped franking credits.
30 June 2012 Trustee Resolutions
What do you normally do on a Saturday? Take the children to sport? Catch up on work? Get ready to watch the football? Or do you sit around the breakfast table deciding on trust income distributions? Yes- you read that last sentence right: on Saturday, 30 June 2012 your clients may be doing exactly that.
What’s going on?
The administrative accommodation that the ATO traditionally allowed for the making of trust distribution resolutions has been consigned to the dustbin of history. So, from the current financial year onwards, 30 June means 30 June.
This is because the Commissioner has withdrawn Income Tax Rulings IT 328 and 329, as foreshadowed in the Decision Impact Statement on the case of Colonial First State Investments v Commissioner of Taxation  FCA 16 (Colonial First State). In these rulings, the Commissioner stated that from an administrative point of view, he would accept that a payment or application of income made within 2 months of the end of an income year could give rise to a present entitlement as at the end of that income year.
Additionally, the point about trust resolutions needing to be made by 30 June was emphasised by the point in Draft Taxation Determination TD 2012/D2, and the Commissioner has indicated that he will be undertaking compliance activity on trust resolutions: the ATO will be writing to 1,200 trustees in May 2012 requesting copies of resolutions prepared for the 2012 Income Year and some will be reviewed to ensure they are effective.
If the trustees are found to not have made a valid resolution dealing with a trust’s income by 30 June, any later resolution will be ineffective and will result in no beneficiary being presently entitled to the income of the trust as at 30 June. Consequently, either the trustee will be assessed on the income under section 99A at the top marginal tax rate or, depending on what the trust deed provides, the trust’s default beneficiaries will be ‘presently entitled’ to the income of the trust.
Is this fair?
The Commissioner’s administrative practice was always somewhat hollow. In many cases, the two month administrative extension allowed by IT 328 and 329 was of no real help, because most trust deeds require the trustee to determine the income of the trust and resolve to distribute it by 30 June (or, in some cases, even earlier), otherwise the income is accumulated or distributed to a default beneficiary.
In calm seas, relying on the Commissioner’s administrative practice and taking a flexible approach to the trust deed could generally be seen as a low risk proposition. However, when a tempest struck – a tax examination, family law dispute or testator family maintenance claim – the folly in not adhering to the strict terms of the trust deed, in particular by not resolving to make a distribution of income by 30 June or any other appointed date, would become painfully apparent. Have you heard the one about the accountant cross examined in the witness box as to how it was that he held close to 100 trustee meetings in his office in 24 hours on 30 June?
Another point, less widely appreciated, is that if a trust has a corporate trustee, the directors of the corporate trustee have an obligation under section 251A of the Corporations Act 2001(Cth) to record the resolutions of the board of directors in a minute, and to place that minute in the company’s minute book (a required record of the company), within 30 days of the resolution being passed. Not doing so is a strict liability offence under the Corporations Act.
In our view, the upside of the Commissioner’s approach is that it will force a more serious approach to tax administration and better compliance practices among trustees and their advisors, which can only be a good thing. However, given that the Commissioner bears some of the responsibility for lulling people into a false sense of security through his administrative practices, a better transition could have been worked out.
So, what should I do?
Our practical advice to practitioners seeking to help their clients meet their obligations to make trust resolutions for the 2012 year by 30 June 2012 includes:
Read and understand the trust deed: A trust deed is a private legal instrument and there is no standard form or set of ‘replaceable rules’ like those which exist for companies. Each deed will be different and will have changed over time, even if your practice has used a single trust deed provider for many years. The key to avoiding problems is to ensure that you and your clients have a proper understanding of the trust deed, especially what is says about:
- who the beneficiaries of the trust are: Primary, general and default;
- what the income of the trust is;
- what the requirements are for the trustee to make a distribution of income – particularly the timing; and
- what happens if a proper distribution of the trust’s income is not made in accordance with the trust deed.
Remember that ‘resolving’ doesn’t necessarily mean ‘minuting’: While some trust deeds may provide otherwise, it is generally the case that what a trustee is required to do by 30 June is ‘resolve’ that the income of the trust will be distributed in a particular way. A ‘resolution’ is a decision of the trustee – a meeting of the minds that a particular course of action will be taken. The ‘minute’ is what follows to create a record of that resolution and can – indeed more often does – follow the resolution some time later (remembering the Corporations Act requirements outlined above). The key practical pointers here are:
- you must ensure that your clients have evidence that objectively shows that the matter of the trust’s distribution of its income was under consideration at a meeting of the trustees that occurred before 30 June and that resolutions were made at that meeting;
- such objective evidence could include a trustees meeting with an external observer (ie what you may do if the clients attend your office for the meeting), an exchange of correspondence, diary note or – and this is our favourite approach – evidence that a ‘draft’ distribution minute was provided and run through at the meeting;
- if, as is often the case, you have trustees in different parts of the country or the world needing to get together before 30 June, check if the constitution of the corporate trustee makes any specific provision for the use of technology to hold board meetings; and
- when you record the resolutions of the meeting, don’t date the minutes as having been signed on 30 June if they haven’t - it doesn’t matter! The minute should be signed on the date it is signed recording the fact that the meeting was held on or before 30 June.
The form of trustee resolutions: in our view, best practice for conducting trustee meetings and therefore presenting trust distribution minutes is as a narrative that covers these bases:
- first, the trustees tabled the trust deed (and any deeds which have varied it over time;
- second, the trustees considered who the beneficiaries of the trust are and have determined that the entities to whom distributions of income are sought to be made are beneficiaries of the trust;
- third, the trustees considered how the trust deed defines income and have determined that what is sought to be distributed is ‘income of the trust’ as defined;
- fourth, the trustees have resolved to distribute the income of the trust to the specified beneficiaries in the manner and amounts/proportions desired; and
- fifth, the trustees have determined how the distributions of income will be paid, applied or set aside to or for the beneficiary.
In addition, it is important to bear in mind that the trust resolution, as a ‘record’ of the trust, will have additional work to do if the trustees wish to ‘stream’ capital gains or franked dividends under last year’s streaming rules. On this, please click here to see our update from last year.
The most frequently asked question
At this stage, you are probably wondering how you are meant to go through the process outlined above in relation to amounts of trust income that the trustees will not have full information about as at 30 June. For example, the trustees might be waiting on information from third parties (eg information about holdings in managed investments) and management accounts may not be required to have been prepared.
This is a valid issue and the key challenge with the new requirements for trustee resolutions. Indeed, it could be said that this is the very reason that the Commissioner put his administrative concessions in place to begin with and given the difference in timing points and information requirements for trust, tax and accounting purposes, it will never be perfect.
The solution, in our view, is for the trustees to isolate the ‘known unknowns’ – that is, the amounts that you know are coming but don’t know exactly how much – and come to a resolution as to how these will be distributed to the trustees in terms of proportions. A resolution should also be made that when the final numbers have been determined, the beneficiaries relevant proportion of the final amount will be the amount that will be ‘paid, applied or set aside’ on their behalf. Both of these resolutions should be recorded in the minutes, which can be annotated at a later time when the final figures are known.
There is no guarantee that this is foolproof but at some point, there has to be some recognition by tax administrators that we are living in an inherently imperfect world with practical constraints, and an effort to prudently deal with these constraints should be viewed favourably.
The second most frequently asked question
We have had several clients asking us for our view on provisions in trustee resolutions which are intended to either ‘cap’ the amount of a beneficiary’s distribution to a particular dollar amount or set out how a post-assessment adjustment resulting in higher assessable income (and therefore trust income) will flow to the beneficiaries.
In our view, such clauses are not effective in light of the decision in FCT v Bamford & Ors  HCA 10 (Bamford). Bamford confirmed the High Court’s interpretation of Division 6 as working on a ‘proportionate’ basis and not a quantum basis. As such, any distribution of income to a beneficiary – whether of a specific amount or otherwise – simply sets the proportion of the trust’s income that will be applied to tax that beneficiary in respect of the trust’s tax income. This is the law and it cannot be overridden by a determination or decision of the trustee.
Last month, the Commissioner set out his views on the meaning of the term ‘income of a trust estate’ for the purposes of Division 6 in draft Taxation Ruling TR 2012/D1. In this ruling, the Commissioner reconciles his views on the meaning of the term with those that came out from Bamford, Colonial First State and other cases. The key point is that the Commissioner is aligning his view of what is ‘income of a trust estate’ with the Colonial First State view, looking to what is the ‘distributable’ income of the trust. This means the Commissioner's view is that:
- income of the trust estate is a net concept after application of expenses and is determined yearly;
- present entitlement means the right to call for the physical payment of income; and
- the statutory context that links income of the trust estate to present entitlement means that there is in the Commissioner's view an effective cap on the amount of the income of the trust. The income of the trust cannot exceed that amount that is available for distribution or the accretion to the trust in the relevant year.
Significantly, the Commissioner has stated that amounts included in the net income of the trust that represent notional amounts cannot form part of the income of a trust estate because they are not available for distribution or otherwise capable of funding a distribution to a beneficiary. Such notional tax amounts will include imputation credits, foreign tax credits, Division 7A deemed dividends, amounts included in assessable income from distributions received from other trusts that exceed the cash distribution and amounts arising from recognition differences for tax and accounting such as the building allowance. This may present an issue where such notional amounts being factored into the income of the trust is important if the trustee is to have sufficient income to pay a distribution in order to flow out franking credits.
Clearly the ATO is looking to ensure that the 30 June deadline is met for income resolutions so the message is clear: trustees need to be organised and have resolved in a way required by the deed to deal with the distribution of 2012 income.