Ideas Tax Knowledge Blog

Topics on preparing timely trust resolutions (6)

Written by Ideas Group | Sep 18, 2020 1:41:03 AM

 

Drafting a Trust Resolution: Key Considerations

When drafting a trust resolution, it's crucial to ensure that all trust income is distributed to beneficiaries by 30 June (or earlier as per the deed) to avoid a trustee assessment under S.99A.

Ways to distribute trust income include:

  1. Percentage Distribution: Allocating fixed percentages of trust income to beneficiaries, ensuring the total equals 100%.

  2. Fixed Dollar Distribution: Assigning specific dollar amounts to beneficiaries, but this can be tricky if the exact income isn't known or if it changes later.

  3. Combination Approach: Using a mix of fixed amounts and percentages.

Trustees should draft the resolution to meet their objectives, including dealing with all trust income, including dividends and capital gains.

Benefits of a Default Beneficiary Clause

To prevent trustee assessments, many trust deeds include a default beneficiary clause. This clause automatically distributes any undistributed income to nominated beneficiaries (usually primary adult beneficiaries) by 30 June if the trustee hasn't made a distribution.

The rationale is to avoid taxing income at the top tax rate under S.99A and instead distribute it to beneficiaries on potentially lower tax rates.

Tax Tip - ATO Challenges:

The ATO may challenge trustee resolutions if they're not effectively made by 30 June. Having a default beneficiary clause in the deed can prevent this challenge, as the income is automatically distributed.

Disadvantages of Default Beneficiary Clause:

However, automatic distributions can lead to income going to beneficiaries unintended by the principal, like bankrupt individuals or separated spouses.

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