Tuesday, May 12, 2015

Trust distributions – three reminders

Previous posts have focused on the various key aspects in relation to trust distributions (see for example -

As another 30 June looms, it is useful to note that one of the key aspects in this regard relates to the manner in which section 99 of the Tax Act causes the trustee of a discretionary trust to be taxed at the top marginal rate whenever an income year passes where no beneficiary is made presently entitled to the trust income for that year.

In this type of situation, it is critical to consider the way in which the relevant trust deed is crafted, and in particular:
  1. understanding if there is a default distribution provision in relation to income;
  2. if there is a default provision, ensuring that the potential default beneficiaries reflect the intentions of those ultimately in control of the trust;
  3. ensuring that the default provisions do in fact work.
Arguably, the leading case in this area is BRK (Bris) Pty Ltd v FCT [2001] FCA 164.

As usual, a full copy of the case is available at the following link http://www.austlii.edu.au/au/cases/cth/FCA/2001/164.html.

While there was a purported default distribution, it was crafted to only apply if the trustee had not otherwise made a decision 'within a reasonable time after the end of a financial year'.

While the provision was likely valid for trust law purposes, it was ineffective for tax law purposes because section 99 imposes the top marginal tax rate for any undistributed income as at midnight on 30 June each financial year.

Image credit: Ken Teegardin cc