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What should we do about section 100A this year? What about the renewed focus on considering beneficiaries? The enlivening of s100A and cases such as Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (Owies) should put all practitioners on notice that rolling out the same resolutions every year without too much thought will not cut it anymore. Enough has been said on s100A but a few general comments ought to be made insofar as resolutions for this year are concerned.

Leading into EOFY – s.100A considerations

It is now clear that for s.100A to apply, the arrangements giving rise to a reduction in tax need to be agreed / consented / acquiesced to, no later than when the present entitlement arises (Timing). Fair to say that assuming you’re doing your normal planning in May/early June, distributions late June and then in the following year, genuinely dealing with whether distributions will be paid or retained or benefits sent elsewhere, this should not on its own cause s100A to apply, as the timing requirement would generally not be met.

That, however, will not necessarily be the end of the matter if the same arrangements (including carbon copy distribution minutes) are then just rolled out every year. In that case, you may need to consider:

  • if there is a beneficial tax outcome under those arrangements;
  • if it is an ordinary family or commercial dealing; or
  • when the Timing defence is available, whether Part IVA can apply.

Leaving tax law aside, Owies highlights that a trustee does have an obligation to consider all potential beneficiaries and to do so on the basis of making determinations with real and genuine consideration. Long gone are the days of resolutions being a ‘tick and flick’ exercise.

All well and good, but ultimately for those advisors continuing to deal with trusts, resolutions are still required to be produced by 30 June (or earlier if required by the trust deed – remember, READ THE DEED).

Given the success of our recent webinar, where we deep-dived into s100A, we thought it timely to take the opportunity to provide a reminder of our key tips for drafting effective distribution minutes for this (and every!) end of financial year.

Tips and traps

  1. The resolution must be made in writing and signed on 30 June or as otherwise required under the deed (ideally by all trustees or directors of a corporate trustee).
  2. Be aware of how the trust deed requires the trustee to determine trust income.
  3. If you are looking to ensure that particular beneficiaries pay tax on fixed amounts of income (i.e. precision) then determining trust income in accordance with s95 ITAA36 is imperative.
  4. Ensure that the intended beneficiaries are actual beneficiaries of the trust deed (which not only means read the deed, but also means you need to consider the impact of any modifications to that class by ancillary documents such as family trust or interposed entity elections, variations and foreign beneficiary exclusions). A distribution to a non-beneficiary risks being void.
  5. Although you should consider all beneficiaries in deciding who to distribute to, you do not need to give reasons for your decision. However, you do need to be mindful that evidence of the consideration that has been given, will be very important if there is an allegation by a beneficiary that the trustee failed to consider them or that the result of the trustee’s decision was ‘grotesquely unreasonable’. Either of these allegations if proven, can lead to the distribution being voidable.
  6. In determining income of a trust generally, ensure an awareness of notional amounts which cannot be taken into account (i.e. franking credits, deemed capital proceeds or deemed dividends) as well as choices required to be made, such as the methodology for trading stock.
  7. Conditional or contingent distribution resolutions are dangerous and should not be used. The primary issues with them are usually:
  • the trustee purporting to take into account factors that will not be known until after 30 June; or,
  • in endeavouring to take too much into account, not ultimately making a decision that is capable of conferring a present entitlement.

The consequences can be assessments to either the trustee (highest marginal rate) or default beneficiaries (often individuals).

  1. Generally, distribution resolutions should use a balance distribution approach to ensure that to the fullest extent possible, unexpected or undetermined amounts are appropriately allocated. It is also imperative in these circumstances that the trustee adopt a s95 ITAA36 definition in determining income with necessary modifications.
  2. In relation to streaming, there are a couple of things to take into account in addition to ensuring there are adequate powers in the trust deed.
  • For capital gains: ensure that the trustee also distributes the sheltered gain to the recipient of the taxable gain, meaning that the trustee will most likely need to identify the power in the trust deed to distribute capital to that beneficiary prior to vesting of the trust, as well as income.
  • For franked distributions: ensuring there is positive net income to distribute to the intended beneficiaries ensuring that that position is arrived at without reliance on franking credits and only directly relevant expenses relating to the franked distribution are taken into account.
  1. Remember the importance of making valid family trust elections. This should be done in a manner that provides maximum distribution flexibility:
  • for non-fixed trusts that wish to pass through franking credits to beneficiaries; or
  • to apply carried forward losses and have an awareness of who is within the family group and whether interposed entity elections are required to be made.

If any of the above raised questions for you, contact our Taxation team for advice.

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Tips and traps for trustees drafting distribution minutes

25 May 2023
John Ioannou Dominic Moon

What should we do about section 100A this year? What about the renewed focus on considering beneficiaries? The enlivening of s100A and cases such as Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (Owies) should put all practitioners on notice that rolling out the same resolutions every year without too much thought will not cut it anymore. Enough has been said on s100A but a few general comments ought to be made insofar as resolutions for this year are concerned.

Leading into EOFY – s.100A considerations

It is now clear that for s.100A to apply, the arrangements giving rise to a reduction in tax need to be agreed / consented / acquiesced to, no later than when the present entitlement arises (Timing). Fair to say that assuming you’re doing your normal planning in May/early June, distributions late June and then in the following year, genuinely dealing with whether distributions will be paid or retained or benefits sent elsewhere, this should not on its own cause s100A to apply, as the timing requirement would generally not be met.

That, however, will not necessarily be the end of the matter if the same arrangements (including carbon copy distribution minutes) are then just rolled out every year. In that case, you may need to consider:

  • if there is a beneficial tax outcome under those arrangements;
  • if it is an ordinary family or commercial dealing; or
  • when the Timing defence is available, whether Part IVA can apply.

Leaving tax law aside, Owies highlights that a trustee does have an obligation to consider all potential beneficiaries and to do so on the basis of making determinations with real and genuine consideration. Long gone are the days of resolutions being a ‘tick and flick’ exercise.

All well and good, but ultimately for those advisors continuing to deal with trusts, resolutions are still required to be produced by 30 June (or earlier if required by the trust deed – remember, READ THE DEED).

Given the success of our recent webinar, where we deep-dived into s100A, we thought it timely to take the opportunity to provide a reminder of our key tips for drafting effective distribution minutes for this (and every!) end of financial year.

Tips and traps

  1. The resolution must be made in writing and signed on 30 June or as otherwise required under the deed (ideally by all trustees or directors of a corporate trustee).
  2. Be aware of how the trust deed requires the trustee to determine trust income.
  3. If you are looking to ensure that particular beneficiaries pay tax on fixed amounts of income (i.e. precision) then determining trust income in accordance with s95 ITAA36 is imperative.
  4. Ensure that the intended beneficiaries are actual beneficiaries of the trust deed (which not only means read the deed, but also means you need to consider the impact of any modifications to that class by ancillary documents such as family trust or interposed entity elections, variations and foreign beneficiary exclusions). A distribution to a non-beneficiary risks being void.
  5. Although you should consider all beneficiaries in deciding who to distribute to, you do not need to give reasons for your decision. However, you do need to be mindful that evidence of the consideration that has been given, will be very important if there is an allegation by a beneficiary that the trustee failed to consider them or that the result of the trustee’s decision was ‘grotesquely unreasonable’. Either of these allegations if proven, can lead to the distribution being voidable.
  6. In determining income of a trust generally, ensure an awareness of notional amounts which cannot be taken into account (i.e. franking credits, deemed capital proceeds or deemed dividends) as well as choices required to be made, such as the methodology for trading stock.
  7. Conditional or contingent distribution resolutions are dangerous and should not be used. The primary issues with them are usually:
  • the trustee purporting to take into account factors that will not be known until after 30 June; or,
  • in endeavouring to take too much into account, not ultimately making a decision that is capable of conferring a present entitlement.

The consequences can be assessments to either the trustee (highest marginal rate) or default beneficiaries (often individuals).

  1. Generally, distribution resolutions should use a balance distribution approach to ensure that to the fullest extent possible, unexpected or undetermined amounts are appropriately allocated. It is also imperative in these circumstances that the trustee adopt a s95 ITAA36 definition in determining income with necessary modifications.
  2. In relation to streaming, there are a couple of things to take into account in addition to ensuring there are adequate powers in the trust deed.
  • For capital gains: ensure that the trustee also distributes the sheltered gain to the recipient of the taxable gain, meaning that the trustee will most likely need to identify the power in the trust deed to distribute capital to that beneficiary prior to vesting of the trust, as well as income.
  • For franked distributions: ensuring there is positive net income to distribute to the intended beneficiaries ensuring that that position is arrived at without reliance on franking credits and only directly relevant expenses relating to the franked distribution are taken into account.
  1. Remember the importance of making valid family trust elections. This should be done in a manner that provides maximum distribution flexibility:
  • for non-fixed trusts that wish to pass through franking credits to beneficiaries; or
  • to apply carried forward losses and have an awareness of who is within the family group and whether interposed entity elections are required to be made.

If any of the above raised questions for you, contact our Taxation team for advice.