Resolutions of directors of trustee company distributing income of discretionary trust

Resolutions of directors of trustee company distributing income of discretionary trust

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This document is a template resolution of directors of trustee company distributing income of discretionary trust.

This document is by way of example only. It will be necessary to adapt the resolutions to give effect to the trust deed and desired distribution in any particular case. The resolutions may deal specifically with income of a particular category eg franked dividends after dealing with deductible expenses.

A resolution distributing income should be made on or prior to the end of the relevant financial year otherwise the default distribution provisions of the trust deed may come into effect: eg see clause 4(3) of Precedent “Deed establishing discretionary trust”. Determinations of the trustee distributing income are usually irrevocable: eg see clause 4.6(c) of Precedent “Deed establishing discretionary trust”.

One of the key attractions of the usual form of discretionary trust is the ability in each financial year to determine the manner of distribution amongst beneficiaries (or the accumulation) of all or part the income for that year. A significant timing and drafting limitation on the flexibility arises from the imposition under Division 6 of the Income Tax Assessment Act 1936 (Cth) of tax on the share of net income of the trust estate to which no person is presently entitled, or in respect of which the beneficiary is under a legal disability.

As the tax so imposed is often at a higher rate, it is now the usual practice (reflected in Precedent “Deed establishing discretionary trust”) to draft discretionary trust deeds so that income is defined to mean income in accordance with section 95 of the 1936 Act, and to provide for an automatic distribution to default income beneficiaries in the event that a resolution to distribute has not been passed by financial year end.

It may be that the default beneficiaries are not the ideal destination, and in any event the default distribution clause may miss the option to try to selectively distribute different classes of income by appropriate resolutions passed before financial year end, where the trust deed so provides (as in Precedent “Deed establishing discretionary trust).

It is important in determining the resolutions to be passed, that the trustee be aware of potential solvency, equity and tax issues. A distribution of taxable income may result in a debt to the relevant beneficiary or beneficiaries of moneys which would be capital, according to ordinary accounting concepts, and which may not be covered by net assets available for distribution. An example is an expense by ordinary accounting concepts which is not deductible against taxable income (eg entertainment expenditure on trust business, or an extra provision for unpaid leave entitlements). If that expense is not deductible it will not reduce the amount of income distributable to beneficiaries or potentially taxable if retained, so a distribution (including a default distribution) of the taxable income will produce an effective reduction in the capital of the trust (according to general accounting concepts).

If there is not sufficient net or liquid assets (after allowing for all appropriate provisions and liabilities) to meet the distribution, then the trustee's directors may breach section 197 of the Corporations Act 2001, and the ability of the trust to continue may be prejudiced. In determining distributions, trustees or their officers will often allocate specific amounts to specific beneficiaries. It is important to be aware that when accounts are taken after year-end, the taxable income may turn out to be different from that expected.

In addition, disallowance of an expected taxable deduction may produce a different result for the taxable income. In the case of Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation (2010) 264 ALR 436; (2010) 84 ALJR 266; [2010] HCA 10; BC201001703, the High Court confirmed that any such additional taxable income would prima facie be assessed for tax purposes among the beneficiaries to whom net income of the trust is distributed, in proportion to their shares of the net income (whether those shares were determined by a resolution affixing particular dollar values, or affixing percentage shares, or otherwise). The potential for such results should be considered in determining whether a distribution will be of fixed amounts, or percentages, or of any residual income, in each case of different classes of income.

See also the effect of the Tax Laws Amendment (2011) Measures No 5 Act 2011 including as to the limits on streaming specific types of income and as to the timing of resolutions.

Note also, that the following draft resolutions assume a discretionary trust deed in the form of the Precedent “Deed establishing discretionary trust”. Some deeds will differ or have added conditions (e.g. appointor written consent) which will require different terms or consents and which may preclude distribution or streaming in the manner contemplated by this precedent.

Related precedents

For a template discretionary trust deed, see precedent “Deed establishing discretionary trust”.

For a template recording format for resolutions passed by directors of a company, see precedent “Recording format for resolutions passed by directors of a company”.

This document has been authored for Lexis Nexis by Selwyn L Black Peter D Carroll, Carroll & O’Dea and updated by Jane Garber-Rosenzweig, Gable Lawyers.

This document is prepared with the assistance of Specialist Editor Stephen Newman, Executive Counsel, Ponte Earle.