Our most common saying in relation to trusts is ‘read the deed’.
Over the years, we’ve seen far too many situations where bad outcomes have arisen because nobody stopped to read the deed and ensure they understood how it operated in a particular situation.
This can occur in a whole range of scenarios, including:
- Determining what happens to control of the trust on the death of an appointor or trustee
- Confirming whether an amendment to the trust deed, such as an extension to the vesting date, is able to be made
- Ensuring that a person receiving distributions from the trust is in fact an eligible beneficiary
While many advisers are diligent in ensuring they have read the deed, it is important to understand that ‘the deed’ is not just the original instrument creating the trust but also any variations or amendments which have changed the terms of the trust over time.
When a trust is established, a trust register should ideally be created to act as a central repository for all trustee resolutions, deeds of variation, changes of trustee and other key documents.
Without a centralised trust register, it can be incredibly difficult (if not impossible) to ensure that trustee decisions are being made with reference to the correct set of rules.
The risks of not having a trust register were highlighted in an AAT decision handed down recently, involving a dispute between a trustee and the ATO.
The dispute related to distributions the trustee had made over a numbers of years, which the trustee subsequently conceded were invalid. In particular, the issue arose (in part) because related entities of the trust which had received distributions were not named as beneficiaries under the trust deed and were ineligible to receive the payments.
As a result, the trustee entered into a deed of settlement with the ATO where it acknowledged the related entities were not beneficiaries of the trust and agreed to be assessed on the income at the top marginal tax rate.
While this was an undesirable outcome for the trustee, the pain of the situation was exacerbated when some months later, a copy of a trustee resolution was located which did in fact nominate the related entities as beneficiaries of the trust.
While this meant the distributions were valid and the trustee should not have been assessed on the income, the AAT held that the trustee had missed its opportunity to produce the evidence to the ATO and the deed of settlement was binding on the parties.
The two key lessons we can take from the case are:
- Before distributing income from a trust, it is critical to review the trust deed (and any associated amendments or resolutions) to ensure the recipient is eligible to receive the distribution
- Trustees should always maintain a trust register with copies of all key documents in relation not the trust, to minimize the risk of those documents being overlooked or lost
For those who are interested, the case is EE&C Pty Ltd as Trustee for the Tarcisio Cremasco Family Trust and FCT [2018] AATA 409.
If you need assistance creating a trust register for any of your clients, please contact us.
Comments are closed.