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:
Percentage Distribution: Allocating fixed percentages of trust income to beneficiaries, ensuring the total equals 100%.
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.
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.
Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.