Tips for Trustees Drafting Distribution Minutes

The lead up to 30 June ought to be a reminder that the complexity of drafting effective trust resolutions continues to be underestimated given the range of issues that can potentially undermine the intentions of a trustee when attempting to make distributions.

Set out below are some key tips for drafting effective distribution minutes this end of financial year:

  1. The resolution must be made in writing and signed by 30 June (ideally by all trustees or directors of a corporate trustee).
  1. Be aware of how the trust deed requires the trustee to determine income as it can differ between ordinary concepts - Section 95 of the Income Tax Assessment Act 1936 (Tax Law Approach) or a hybrid approach. An example of the latter would be a Tax Law Approach but with an ability to ignore notional amounts (refer below).
  1. If you are looking to ensure that particular beneficiaries pay tax on particular amounts (i.e. precision) then a Tax Law Approach is imperative. If not, then an ordinary concepts approach is adequate. The difference is important as under an ordinary concepts deed, it may be inescapable for beneficiaries to be appointed income on a percentage basis despite the use of specific amounts and a balance distribution.
  1. It may be commonplace, but ensure that the intended beneficiaries are actual beneficiaries of the trust deed, and if you intend to differentiate between capital gains and franked distributions, ensure that there are adequate powers of classification in the trust deed and that the classifications carry through in both the financials of the trust and the resolution.
  1. 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.
  1. 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 to confer present entitlement. The consequences are assessments to either the trustee or default beneficiaries.
  1. Generally, distribution resolutions should always use a balance distribution approach to ensure that to the extent possible, unexpected or undetermined amounts are appropriately allocated. It is also imperative in these circumstances that the trustee adopt a Tax Law Approach in determining income.
  1. In relation to streaming:
  • for capital gains, ensure that the trustee also distributes the sheltered gain to the recipient of the taxable gain, meaning that the trustee will need to identify the power in the trust deed to advance or apply capital prior to vesting of the trust; and
  • 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. Also remember the importance of making valid family trust elections in a manner that provides maximum distribution flexibility for non-fixed trusts that wish to pass through franking credits to beneficiaries or 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.

As with all matters involving trusts, care must be taken in drafting the terms of all constituent documents and appropriate legal advice should be sought to ensure that suitable mechanisms are considered. 


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