A Cautionary Tale in Drafting Trustee Resolutions

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As you may know, trustees of discretionary trusts who wish to make beneficiaries presently entitled to trust income for an income year are required to make resolutions by the end of each income year (e.g. 30 June). For a signed trustee resolution to be effective, it must be prepared in accordance with the terms of the trust deed and, if the trustee is a company, the requirements in the Constitution must also be observed. This is especially important where the discretionary trust is picked up for a review or audit by the Australian Taxation Office (ATO), as demonstrated in a recent case[1].

Background Facts

The taxpayers in this case were a discretionary trust, the Whitby Trust, and its individual beneficiaries. The trustee of the Whitby Trust is a corporate trustee and it was carrying on a business of property development at all relevant times. The ATO conducted an audit of the trust’s tax affairs for the 2011-2014 income years. The ATO eventually issued amended assessments in those income years at the conclusion of the audit.

The trustee provided signed resolutions distributing the trust income to various corporate beneficiaries in each of the income years. However, the ATO did not accept the signed resolutions and issued assessments to the four default individual beneficiaries of the trust instead. The individual beneficiaries then attempted to disclaim the present entitlement to the trust income.

The ATO accepted the disclaimer from three of the individual beneficiaries for the 2011-2013 income years but did not accept the disclaimer from the fourth beneficiary, who was a minor at the time. The ATO issued assessments under section 99A (e.g. the highest marginal tax rate) for the 2011, 2012 and 2013 years to the trustee on the basis that there were no beneficiaries presently entitled to the disclaimed trust income. The ATO upheld the assessments to all of the default beneficiaries for the 2014 income year on the basis that the separate Deeds of Disclaimer provided in relation to the 2014 trust income entitlements were ineffective.

After the taxpayers’ objections were disallowed, they appealed to the Tribunal.

Tribunal Decision

The ATO sought to discredit one of the directors of the trustee company by reference to other occasions when he had either been found to have acted or admitted he had acted dishonestly and pressed the Tribunal not to accept his evidence. However, the Tribunal noted that just because a person may have been less than honest on past occasions did not mean that they were always less than honest and decided it was not necessary to make a finding as to whether the director was to be believed or not in the present matter.

The Tribunal held that the trustee resolutions were not effective for two reasons. First, they were signed by only one of the three directors. The trustee company’s Constitution provided that, at a meeting of Directors, the quorum required is the number of directors determined by the Directors and, unless so determined, is two directors. Further, there was no evidence that a meeting took place to ratify the resolutions as required by the Constitution.

Second, there was no evidence that the Guardians’ written consent (as required under the Trust Deed) had been obtained in exercising the trustee’s discretion to distribute the trust income. The Tribunal rejected the taxpayers’ contention that one of the Guardians was not a Guardian as she was not even aware of her role and that it was enough the other Guardian, who signed the resolutions in his capacity as the director of the trustee company, consented to the trust income distribution.

The Tribunal also upheld the ATO’s objection decisions in relation to the disclaimer of the trust income entitlements by the default beneficiaries. However, a discussion on ‘how to effectively disclaim your trust income entitlements’ will have to wait till another day.

MKT Note

There was only one director that signed the trustee resolutions which were dated 30 June. The director then conceded that the meetings did not necessarily take place on 30 June each year. This then led to the ATO’s (and the Tribunal’s) queries surrounding the happenings of the meetings. Had all the directors signed the trustee resolutions on ‘actual dates’, the Tribunal may have arguably accepted the validity of the signed resolutions (subject to satisfying the other requirement of the trust deed, of course).

Finally, many older trust deeds contain a requirement for the Guardian’s written consent to distribute trust income. In this case, the trustee must ensure that the relevant individual in his/her capacity as the Guardian signs a written consent for the trust income distribution.

If you would like MKT to review your clients’ trust deeds for trust income distribution purposes or provide assistance in drafting trustee resolutions, please contact Peter Hong.  As always, in May/June, MKT will be providing PAN Member Firms our 2020 template trustee resolutions for you to adapt and use for your trustee clients.

[1] The Trustee for the Whitby Trust and Commissioner of Taxation [2019] AATA 5637

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