Trust resolutions: where advisers are still getting caught

As we move into annual tax planning season, trust resolutions continue to be one of the most common sources of downstream tax risk we see across private groups. While the fundamentals still matter, including how net income is defined under the deed, who is in fact a beneficiary, and whether resolutions stray into conditional or contingent territory, the real exposure increasingly arises from technical issues that are often assumed to be settled.

Three areas in particular continue to surface during audits, transactions and adviser onboarding reviews:

• historic family trust and interposed entity elections;
• trust‑to‑trust distributions in older structures; and
• the interaction between discretionary trusts, corporate beneficiaries and the 45‑day holding rule.

What follows is not a recap of the law, but a reminder of where the rules still produce unexpected outcomes.

Family trust elections: old elections, current consequences

Family Trust Elections (FTEs) and Interposed Entity Elections (IEEs) have remained largely unchanged since 1998. The risk, however, is not novelty, it is longevity. Historic elections that were incomplete, invalid or poorly documented continue to produce serious consequences decades later.

The most acute exposure is Family Trust Distribution Tax (FTDT). A single breach activates FTDT automatically 21 days after it occurs, with no discretion to waive or remit available to the Commissioner. If the liability remains unpaid after 60 days, interest compounds. Critically, where a breach today relates to a distribution made many years ago, FTDT can be assessed retrospectively back to 1998, often producing catastrophic liabilities.  The ATO has highlighted targeted relief for GIC remission on FTDT liabilities up to 31 December 2026 (aligned with their current approach to voluntary disclosures), demonstrating their expectation that groups should be well on their way to proactively reviewing and disclosing historical distribution issues.

What we continue to see in practice is not deliberate non‑compliance, but:

• inconsistent test individuals across entities;
• missing or invalid IEEs; and
• structures that have evolved without elections being mapped alongside them.

From a governance perspective, advisers should assume the ATO portal records are not infallible, particularly for older groups. A defensible approach therefore requires active reconstruction of the election history.

At a minimum, this means maintaining visibility over:

• a consolidated register of all FTEs and IEEs;
• identification of the relevant test individual for each election; and
• confirmation that elections were validly made (including timing and eligibility).

Client onboarding or transaction due diligence typically requires parallel evidence gathering, including portal records, correspondence with former advisers, and internal file reviews, together with clear documentation of the steps taken. This is critical both for identifying client risk and managing professional indemnity exposure.

A recurring and often underestimated trap is the assumed breadth of the family group. Distributions to in-laws, or structures that interpose trusts controlled outside the (narrowly defined) family group, routinely fall foul of the regime. IEEs cannot always cure this, and sideways extensions of the family group do not exist.

Trust‑to‑trust distributions: modern comfort, historical risk

For most modern trusts, trust‑to‑trust distributions are not inherently problematic. Except in South Australia, all Australian jurisdictions now operate under a statutory ‘wait and see’ rule, which softens the traditional rule against perpetuities and protects dispositions that might otherwise vest too remotely.

In Queensland, this position is reflected in s 203 of the Property Law Act 2023 (Qld), with comparable positions in other jurisdictions. Courts readily apply these provisions, and trustees can generally rely on them with confidence.

The difficulty arises with older trusts—particularly those established before the relevant statutory reforms took effect. For these trusts, the common law rule against perpetuities may still apply. Unlike the statutory regime, the common law rule is unforgiving: if there is any possibility that an interest might vest outside the perpetuity period, the disposition is void when made.

Because the statutory positions are prospective, advisers cannot assume that the modern safety net applies retrospectively. The risk is often only identified years later, as illustrated in Domazet v Jure Investments Pty Ltd [2016] ACTSC 33, where the timing of the trust’s establishment proved determinative.

The practical takeaway is simple but critical: where trust‑to‑trust distributions are involved, the establishment date of the distributing trust should never be treated as irrelevant background.

The 45‑day holding rule: corporate beneficiaries under scrutiny

While an FTE facilitates the flow‑through of franking credits, it does not displace the holding period rules at the beneficiary level. A corporate beneficiary must itself be a qualified person, meaning it must hold its relevant interest at risk for the required period which must straddle the ex-dividend date for that dividend.

The ATO has taken a close interest in scenarios where:

• a discretionary (non‑widely held) trust receives franked dividends; and
• those dividends are distributed to a company incorporated after the shares go ex‑dividend.

In these cases, the Commissioner’s position is that the company cannot satisfy the holding period requirement. The consequence is that the franking offset is denied at the company level, effectively treating the distribution as unfranked and potentially exposing the group to economic double taxation.

This issue is most acute where companies are introduced late in the income year as part of tax planning, without regard to the timing of dividend receipts earlier in the year.

What can you do as part of your tax planning?

Across each of these issues, the common theme is not complexity but assumption—elections assumed to be valid, distributions assumed to be safe, and franking credits assumed to flow. In practice, it is these assumptions that continue to expose private groups and their advisers to significant downstream risk.

A disciplined year‑end process, grounded in structure mapping, historical verification and timing awareness remains the most effective safeguard.

If you would like to discuss how these three areas impacting trust resolutions may impact your clients, please reach out to our Tax team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.