Guide on Trust Funds – Part 22
Can trustees make a ‘verbal’ distribution of trust income?
If a trustee wants to ensure that the beneficiaries are assessed on the net (taxable) income of the trust for a financial year, the beneficiaries must be made ‘presently entitled’ to the trust income no later than the financial year end. The question then for trustee is what action must be taken by year end in order to create the relevant present entitlements. As a minimum this will involve the trustee exercising their discretion to distribute particular amounts of trust income to named beneficiaries.
Where a trustee exercises their discretion to pay or apply amounts of trust income to (or on behalf of) beneficiaries, those beneficiaries will be deemed to be presently entitled to those amounts under S.101 of the ITAA 1936. However, to the extent the trust income is not paid or applied in this way during the year, the trustee can exercise their discretion to distribute trust income by ‘setting it aside’ for one or more beneficiaries. Typically, this will give the beneficiary a vested interest in the income and legal right to demand payment of it 9or would if they were not a minor)
and this will amount to a ‘present entitlement’. Setting aside trust income for the year, the first thing the trustee must consider is if the trust deed specifies ‘how’ the trustee can exercise a discretion, including the discretion to distribute trust income. In other words;
- Can the trustee rely on making a ‘verbal’ distribution (which would be recorded in a minute of meeting after year end); or
- Must the trustee make a written resolution.
Making a verbal resolution
If the trust deed does not require a written resolution, then a ‘verbal’ resolution can create a valid ‘present entitlement’ at the time it is made. If there is a corporate trustee company’s constitution must also allow for meetings to be held in the relevant way.
Methods of making a verbal distribution
In order to make a verbal distribution, it is necessary for the trustees (including directors of a corporate trustee to have engaged in some form of communication. Examples of this can include:
- A meeting at which all trustees are present;
- A telephone hook-up in which all trustees are involved
- A video conference at which all trustees are in attendance.
Where there is only one individual trustee or a single director of a corporate trustee, obviously a meeting etc., is not possible. Despite this, it is still possible for a verbal distribution to be made.
Methods of making formal written resolution
Where the trustees decide to make a formal written resolutions of the distributions, there are two ways this can be achieved, being:
- Making, signing and dating the resolution at a meeting held no later than the financial year end; or
- Using a ‘circulating resolution’.
The first option is self-explanatory. It involves all trustees attending a meeting at which they each sign the resolution.
The second option can be used where it is not possible for the trustees (directors) to meet prior to year-end. A written resolution is prepared and is, in turn, delivered to each trustee (director) who signs the resolution whilst ensuring that the last signature is obtained no later than 30 June 2013. The concept of a ‘circulating resolution’ emanates from the CA which recognises that a resolution made in this way is effective despite the fact there was no meeting held. It is considered that a resolution made in this way by individual trustees would be equally effective.