Family Trust – Annual Distribution Minute

What is a Famly Trust Distribution Minute?

A “Family Trust – Annual Distribution Minute” refers to a formal document that outlines the decisions made for distributing income and assets from a family trust for a specific financial year ending 30 June. The Distribution Statement records the details of how the trust’s income is distributed among its beneficiaries, which are the individuals or entities entitled to receive the trust’s income or assets.

What are Distribution Minutes?

Before the end of each financial year, the trustee signs a minute setting out who gets the income from the Family Trust, Testamentary Trust or 3-Generation Testamentary Trust.

Best practice for Family Trust Distribution Statements: 16-point checklist

Each year the Trustee of the Family Trust works with the accountant to consider:

Consider your ‘usual’ and ‘default’ beneficiaries in your Trust Minutes

Up until 2022, the Appointor would tell the Trustee who to distribute to. The case of Owies v JJE Nominees Pty Ltd [2022] VSCA 142 changed that. Since then Legal Consolidated Trust Minutes record the genuine thoughts of the beneficiaries. Watch out for your ‘usual’ or ‘default’ beneficiaries. While you do not have to ‘talk’ with these people you have to consider their financial position and circumstances. Legal Consolidated Family Trust Minutes confirm that you made enquiries in the accounting period on the needs and circumstances of each ‘usual’ and default beneficiary (also called primary/named/specified beneficiary).

Exercise of discretion

Do the discretionary trust minutes clearly show the trustee of the Family Trust “exercised its discretion” to distribute? This is in addition to the requirements in Owies case.

Family Trust deed requires the distribution statement earlier than 30 June

Does the family trust deed require the distribution decision for an income year to be made before 30 June? Or, even more strangely, does the Family Trust deed require the distribution statement to be made only after 30 June? To be effective in creating a ‘present entitlement’, the distribution minute is made and signed by 30 June. Or such earlier or later time as required by the trust deed. You may comply with the ATO’s rules. But still, fall foul of the Family Trust’s rules.  Upgrade the Family Trust Deed if it requires a distribution minute either before or after 30 June.

Has Mum and Dad already pulled out money from the family trust, this year?

Has Mum and Dad been pulling money out of the family trust throughout the financial year? This is common. Has any distribution of income for the current income year already been made earlier in the income year? If so, the distribution should be considered when drafting the final distribution minute.

Has the Family Trust suffered a “Family Trust Election”?

Has a ‘family trust election’ been made? In this case, your class of beneficiaries to whom you can distribute is extremely limited.

Family Trust benefits from the CGT Small Business concessions

Are there any special income tax or CGT considerations that would mean that a distribution should or should not be made? Consider:

• • • • the CGT small business concession provisions
      • the trust loss provisions and, in particular, the pattern of distribution test
      • vulnerable children, children with unstable marriages and de facto relationships

Family Trust retains income – Trust Distribution Minute

Does the trust deed permit the accumulation of income? (In a company, the company pays its own tax. This is at a fixed constant tax rate. Which is often 30%.) But with a Family Trust, instead, the beneficiary pays the tax. This is at its own tax rate. It is therefore common to want to remove the wealth you have personally paid tax on from the Family Trust. But there may be tax and asset protection advantages in not distributing certain types of income.

Does the Family Trust deed allow full discretion to separate revenue and capital?

Does the trust deed permit the characterisation of the otherwise revenue or capital nature of an amount? If not update the Family Trust Deed to allow for the new rulings on Bamford’s case.

Family Trust distributing to its bucket company with the Trust Minute?

Is there a distribution to a bucket company? But no cash or assets are actually transferred? Build a Division 7A Loan Deed first.)

Ordinary vs statutory income in a Family Trust

What are the sources of the ordinary income and statutory income derived by the trust during the income year? Is it better for different kinds of income or amounts (e.g. franked dividends or a capital gain) to be ‘streamed’?

Family trust distributing to a charity with a Trust Distribution Minute

If a distribution is made to an exempt entity that is a beneficiary (charity), the anti-avoidance rule must be taken into account. This is also the fact that an exempt entity beneficiary is taken not to be presently entitled to the extent that, within two months after the end of the income year, it has neither been notified of its present entitlement nor has been paid its present entitlement.

Satisfying the Family Trust distribution with a CGT asset

If an asset is to be distributed in specie, does the distribution result in a CGT event? Determine what the CGT consequences are. Consider trading stock or a depreciating asset. Is the beneficiary registered for GST?

Farm assets in the family trust

Does the trust carry on a business of primary production? Is it necessary to distribute income to ensure that a beneficiary is taken to carry on the business of primary production?

Withholding rules vs Family Trust deed

What are the Tax File Number (TFN) withholding rules for each beneficiary?

Appointor or Guardians consent to the Trust Minute

Does the family trust deed require the consent or approval of some person? This is to distribute income and capital. It is often the Guardian who consents. (Another name for a “Guardian” may be “Appointor”, “Principal” or even, in old Family Trust deeds the Trustee itself.)

Update your Family Trust deed to make sure it defines income as ‘net income’

Unlike companies that are heavily controlled by the Corporations Act, Family Trusts have their own rules. Family Trusts are free to define words in any way.

For example, your Family Trust Deeds defines what income is. Your Trust Minute does not change that. Rather your trust minutes just distribute the ‘income’.

Legal Consolidated and your accountant will recommend that your Family Trust Deed be amended so that income is defined as “net income” of a trust and it is determined by standard accounting practices, not by tax legislation.

“Accounting net income” often differs from “net income for tax purposes” due to various factors. These can include the impact of capital gains tax indexation, loss carryforwards, accelerated depreciation rates for tax purposes, the segregation of foreign losses, non-deductible provisions, and prepaid expenses.

If your Family Trust does not yet use the definition of ‘net income’ then update it.

Section 100A, Reimbursement Agreements and Debt Forgiveness with Trust Minutes

Section 100A Income Tax Assessment Act 1936 is an anti-avoidance rule. It applies to ‘agreements’ called a ‘reimbursement agreement’. This is where:

• one person (on a high marginal tax rate, often mum and dad) receives the benefit from the Family Trust distribution; but
• another beneficiary (on a low marginal tax rate, such as your children swanking around a university or ‘finding themselves’ travelling around Europe) is made ‘presently entitled’ to income and is taxed on that income.

The person getting the benefit of the Family Trust distribution is on a higher marginal tax rate. This is compared to the beneficiary paying the tax. The ATO does not like the reimbursement agreement. As it ends up that the high-income earner is paying less income tax. When section 100A applies, the beneficiary’s ‘present entitlement’ is ignored. And the trustee of your Family Trust is, instead, assessed on that income. This is at a “human’s” highest marginal tax rate.

Legal Consolidated has never recommended Reimbursements Agreements. And this has been the case since 1988. Both Legal Consolidated and the ATO have never liked Reimbursement Agreements. (I always thought they risked an attack under the general anti-avoidance provisions in Part IVA. But the ATO has taken the section 100A approach instead. Either way, I always argued to both my students and accountants that Reimbursements Agreements are dangerous, silly and smack of laziness.)

How does section 100A work with Family Trust Minutes?

Section 100A’s powers are board. However, it is intended as a specific anti-avoidance measure. For the ATO to win under section 100A it must satisfy:

• a beneficiary of a trust estate (who is not under a legal disability e.g. over 18 and of sound mind) must be presently entitled to income of the trust estate (trust income): Section 100A(1)(a)
• a connection is needed between the beneficiary’s present entitlement to the trust income and an agreement under which another person benefits (Reimbursement Agreement)
• the Reimbursement Agreement has the ‘purpose’ of reducing income tax that is otherwise payable
• the Reimbursement Agreement is not entered into in the course of ‘ordinary family or commercial dealing’.

Q: Does a Reimbursement Agreement have to be in writing?

No. The ATO does not need to prove that.

Q: Does a Reimbursement Agreement have to be ‘legally enforceable’?

No. The ATO does not need to prove that.

Q: Does a Reimbursement Agreement have to result in any “reimbursement” (according to the ordinary meaning of that term)?

No. The ATO does not need to prove that.

Q: What happens if the ATO proves a  Reimbursement Agreement under section 100A?

Sadly, if section 100A applies, the legislation deems the beneficiary not presently entitled to the share of trust income. However, this is only for income tax purposes. (The family court and bankruptcy courts are not concerned with tax.)

Q: What are the tax consequences of a  Reimbursement Agreement under section 100A?

Sadly, no beneficiary is ‘presently entitled’ to that share of income. Therefore, a section 99A assessment arises. This is to the trustee. This is at the top human marginal tax rate! (Section 95(1)). Worse still:

• franking credits to the beneficiary are also lost

However, under sections 207-45 and 207-50(3)(b) ITAA1997 the trustee may get the franking credit offsets on tax payable under the section 99A assessment: section 207-45(c). 

• any taxable capital gain affected by section 99A fails the 50% CGT discount and other Small Business CGT relief is lost
• such failed trust income distributions to loss entities (e.g. companies, trustees of trusts or individuals) are ineffective. The result? The losses remain unused.

BBlood Enterprises Pty Ltd v FC of T

For help understanding s100A read BBlood Enterprises Pty Ltd v FC of T 2022 ATC ¶20-840; [2022] FCA 1112 and Newton v FCT (1958) 98 CLR 1. In our view, the BBlood case does not support the ATO’s approach. But we still continue to not recommend Reimbursements Agreements.

We have, instead, recommended Deeds of Debt Forgiveness. But since 2019 even Deeds of Debt Forgiveness are attacked by the ATO.

Legal Consolidated’s Annual Distribution Statement complies with section 100A.

Legal Consolidated’s Annual Distribution Statement complies with section 100A. The minutes do not stop your Family Trust from retaining the wealth as UPEs. Or paying out the distribution.

While we do not give advice in this matter, our minutes do not stop you from washing out the UPEs by:

• reimbursement agreements; (never recommended)
• Deeds of Debt Forgiveness (now uncertain);
• or Deeds of Gift.

But relying on section 100A, the ATO wants the family trust to actually transfer wealth to your children. Or, at least, keep the Unpaid Present Entitlement in the Family Trust’s books. This is rather than getting rid of the UPEs with a reimbursement agreement, Deed of Debt Forgiveness or Deed of Gift.

Legal Consolidated’s Distribution Minutes comply with both of these actions.

What happens to the UPE if the child goes bankrupt, gets divorced or dies?

But leaving the UPE on the books or paying them out to the child presents problems:

• the child loses the UPEs and wealth to the bankruptcy and family courts
• at the child’s death, the UPE is an asset in their Will
• the ungrateful child may not give it back when you need financial help in your retirement
• the age-old traditional problem: the Family Trust has no cash or assets to give to satisfy the distribution statement (very common)

Legal Consolidated does not provide advice in this area. And your accountant will have not easy answers.

Some accountants recommend that you set up a bank account solely in the child’s name. The family trust borrows money. And physically pays that money into the child’s bank account. This is to satisfy the trust distribution minute. Therefore, the trust distribution is paid out. There is no Unpaid Present Entitlement. 

The parents have access to that account. And the parents use that bank account to fund their own lifestyle. (This seems to be the opposite problem that the ATO is worried about.)

Or, perhaps, your accountant will merely have the human beneficiary forgive the debt for ‘natural love and affection‘. Which still works, except we do not know the tax consequences as per the ATO.

The accountant knows your circumstances. Your accountant will craft a solution for you based on your unique set of facts. And every client is unique.

But there is a bigger issue here. I believe that accountants do not charge enough. In my personal view, most accountants should be immediately doubling or tripling their hourly rate. And getting rid of half their clients. And especially getting rid of risky clients who refuse to take their accountant’s advice. And then blame the accountant when something goes wrong.

Legal Consolidated only takes instructions from the accountant, financial planner and other law firms. The accounting profession is noble but undervalues itself. The big four accounting houses do not undervalue themselves. It is about time that all accountants do the same.

/beneficiary-disclaim-their-entitlement/

Build an Annual Family Trust Distribution Minute

Each year the Trustee signs the Annual Family Trust Distribution Minute.

This is before the end of the financial year. The trust minute states how the Family Trust income is distributed. This is for the income in that current financial year.

“Income” comes in many categories. For example, income tax, net capital gains and franked distributions. The trust minute allows distributions to the income categories. Such income is ‘streamed’ to specific beneficiaries.

For example, one beneficiary gets capital gains. Another gets the franked dividends. And another gets income.

Our trust minutes include comprehensive notes. There is also our law firm letter signing off on the trust minutes.

I don’t know my Family Trust’s income until well after 30 June

That is ok. Our Family Trust Distribution Minutes allow for this. The distribution minute is:

1. to each person in the Minutes. This is automatically increased to their individual taxable incomes. This is considering their personal income, from all other sources.
2. up to their next applicable tax rate (including Medicare)
3. and so forth for each marginal tax rate of the beneficiary, up to the highest tax bracket
4. and then the remainder after all the named beneficiaries reach their highest tax brackets (including Medicare) goes to the next list of people that you write in the Minutes.

Therefore, to build these trust distribution minutes you do not need to know:

• the Family Trust’s income; or
• the beneficiaries’ final income for the financial year.

Once you have built the Family Trust Distribution Minutes, there is a section for you to handwrite the beneficiaries in.

The ATO states in its publications Trustees Resolutions QC 25912:

“Do you have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income?

No. Your resolution does not need to specify an actual dollar amount for the resolution to be effective in making a beneficiary presently entitled unless the trust deed specifically requires it. 

The family trust resolution you are building states that a beneficiary gets the income up to their marginal tax rate. And then to someone else up to their marginal tax rate. As the ATO states:

‘A resolution is effective if it prescribes a clear methodology for calculating the entitlement …’

Are Trust Distribution minutes a tax minimisation scheme?

Part IVA of the Income Tax Assessment Act 1926 (ITAA) is designed to prevent the avoidance of income tax through artificial or contrived arrangements. It applies to various transactions or arrangements that are entered into with the main purpose of obtaining a tax benefit. In the context of Family Trust Distribution minutes, Part IVA can come into play if the distribution of income from a family trust is structured in a way that appears to be for tax avoidance purposes.

When preparing Family Trust Distribution minutes, it’s important to ensure that the distributions are made in a genuine and appropriate manner. Part IVA may be triggered if the Australian Taxation Office (ATO) believes that the distributions are being manipulated solely to achieve a tax advantage. This can happen if the distributions are not consistent with the trust’s past behaviour, the beneficiaries’ circumstances, or the overall economic reality.

To operate within the guidelines of Part IVA, it’s advisable to follow these principles:

• Commercial Reality: Ensure that the distributions align with the commercial and economic reality of the trust and its beneficiaries. Avoid arrangements that do not make sense from a business perspective.
• Substance Over Form: Focus on the substance of the arrangements rather than just their formal structure. The ATO looks beyond the surface to determine the true purpose and effect of the distributions.
• Genuine Family Arrangements: Family trusts should be established for genuine family reasons and not purely for tax avoidance. Ensure that the beneficiaries are genuine and that distributions are made in line with their needs and circumstances.
• Professional Advice: Seek advice from your accountant and financial planner who knows your individual circumstances. They can help ensure that your Family Trust Distribution minutes are compliant and not likely to trigger Part IVA.
• Documentation: Keep detailed records and documentation of the trust’s activities, decision-making processes, and the reasons behind distribution decisions. Transparent and well-documented minutes can help demonstrate the legitimacy of your distributions.

In summary, Part IVA ITAA can impact Family Trust Distribution minutes if the distributions are structured in a way that appears to be solely for tax avoidance. To avoid issues, ensure that your distribution decisions are well-founded, consistent with commercial reality, and genuinely aligned with the needs of the trust beneficiaries.

The ATO continually looks at ways to strike down the ability to stream income to low-tax rate beneficiaries. For example, the ATO is concerned:

• that Mums and Dads are distributing income to their over 18-year-old university children, but the Family Trust never pays the actual money.
• with the Family Trust Beneficiaries forgiving debt.
• distribution to bucket companies (these are companies that are beneficiaries of a Family Trust, see Commissioner of Taxation v Guardian)

Are Family Trust minutes that are based on your final income tax rate a breach of Part IVA?

Usually not. In fact, Legal Consolidated has been preparing Trust Distribution Minutes by reference to each beneficiary’s final tax rate bands since 1994. To date, not one has fallen foul of the ATO. We continuously monitor:

• ATO desktop audits from the 4,600 accountants who build legal documents on our website. We update the Trust Distribution Minutes to fully comply with the ATO’s current policies from time to time; and
• ATO’s public position for Family Trust Distribution Minutes (for example CGT and income).

Not just Legal Consolidated Distribution Minutes, but all Family Trust distribution minutes hunt down persons on the lowest (marginal) tax rates. To date, that, in itself, has not been a breach of Part IVA or fallen foul of the ATO.

Example of how a Family Trust Distribution Statement works

Each financial year your Family Trust gets an income. It may be from passively renting out property. It may be from operating your business.

Someone has to pay tax on that income. Every year you get the choice of which beneficiary pays tax on the income.

Perhaps your son is on paternity leave. His marginal tax rate is low, so you may wish to distribute a big income to your son that year. In the following year, he may be back at work and earning a good salary. In that case, you don’t distribute any income to him from the Family Trust.

Perhaps your 18-year-old grandchild is now at a high school and not earning any money. In that case, you distribute to that grandchild using up their low marginal tax rate.

The beneficiaries that you distribute to rarely get any money. You are just using up their low marginal tax rates.

The money owed to beneficiaries is called Loan Accounts or more precisely Unpaid Present Entitlements (UPEs). Regularly the children or beneficiaries sign a Debt Forgiveness Agreement to reduce the money the Family Trust owes them to zero.

Do I have to do Family Trust Distribution Minutes every year?

Every financial year, the trustee of a discretionary trust exercises its discretion. This is to distribute its “trust law income” among the trust’s beneficiaries. “Trust law income” is defined in your Family Trust Deed.

Sign Annual Family Trust Minute before the end of the financial year?

Build and sign the Statement before the end of each financial year. Otherwise, you pay extra tax.

The 2 months grace period to sign Trust Distribution Minutes was always illegal

Before September 2011 the ATO foolishly and against the law told us that clients could sign the trustee resolutions up to two months after the end of the financial year. However, that is not the law. It was never the law.

The case of Colonial First State Investments Ltd v FC of T [2011] FCA 16 forced the ATO to withdraw the practice concession.

This is another example of how the regulator, the ATO, incorrectly interprets the law. In this instance, the ATO is giving a concession. My doctoral thesis highlights the issues of the ATO’s incorrect application of the law.

Trust Minutes must be signed before 30 June each year

Make sure these Trust Minutes are signed before 30 June. Out of an abundance of caution email a signed copy of the Minutes to your Accountant.

Minutes signed after 30 June are ineffective – and always have been. That means the default beneficiaries become ‘presently entitled’ to the income and get taxed on it. Alternatively, if there is no ‘default beneficiary’ then the Trustee is taxed on the trust’s income. This is at the highest marginal rate. See section 99A Income Tax Assessment Act 1936.

Can I backdate my Trust Minutes?

It is illegal to backdate a legal document in all states of Australia.

In extreme circumstances, in NSW for example, it lands you in jail for up to 10 years. Backdating is fraudulent and illegal.

Why are there Distribution Statements updated for each financial year?

Since 1994, as a tax lawyer, I have provided an Annual Family Trust Minute for each financial year. I attend a lot of ATO audits. My doctorate was in tax. The tax laws change. The ATO changes its mind. We prepare the Family Discretionary Trust Minute of Distribution to reflect those particular rules for each unique financial year.

Latest ATO issues for Family Trust Distribution Statements

• the decision of the Full Federal Court in the Thomas case, which concerned the effect of a Supreme Court order relating to the purported distribution of franking credits separately from the dividends;
• issues that arise out of a power of amendment conferred by a discretionary trust deed, including the extension of the vesting date
• the ATO’s view of how an amount included in a beneficiary’s assessable income under section 99B ITAA97 is treated where the amount had its origin in a capital gain from non-taxable Australian property of a foreign trust
• the ATO’s taxpayer alert for arrangements designed to exploit the proportionate approach to the taxation of trust income

Important Cases for Family Trust Distribution Minutes

As well as keeping a close eye on ATO procedures and checklists each year, Legal Consolidated Trust Minutes take into account these court cases:

• Federal Commissioner of Taxation v Bamford [2010] HCA 10:

This case clarified the principles for determining the “net income” of a trust for tax purposes and highlighted the importance of Legal Consolidated trust deed provisions in allocating income and capital.

The case of the Federal Commissioner of Taxation v Bamford dealt with the complex issue of how the income of a discretionary trust is to be distributed and taxed among its beneficiaries. This case focused on the interpretation of the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth) as they relate to the calculation and distribution of trust income.

The central question was whether the trustee had the power to distribute franked dividends directly to beneficiaries in a particular year, or whether the trustee was required to allocate the income to a separate class of beneficiaries.

The High Court held that:

1. Trust deeds should be the primary point of reference when determining how income is to be distributed among beneficiaries.

2. The trustee’s exercise of discretion in distributing income should be based on a proper construction of the trust deed, taking into account the beneficiaries’ entitlements under the deed.

3. Distributions must be made in accordance with the trust deed’s provisions and the relevant income tax legislation.

4. In determining whether income is properly distributed, the terms of the trust deed are paramount. The trust deed defines the scope and nature of the beneficiaries’ interests.

   The decision highlighted the importance of trust deeds in establishing the entitlements of beneficiaries and ensuring that distributions are made in accordance with both the trust’s terms and taxation laws. It also underscored the need for clear and accurate trustee resolutions to reflect the actual distribution of income and to provide transparency for taxation purposes.

   • FCT v Clark [2011] FCAFC 5: This case emphasised the need for family trust distribution resolutions to be made within the required time frame and in accordance with the trust deed to be effective for tax purposes.

   The case of FCT v Clark highlighted the importance of adhering to specific timing and procedural requirements when making family trust distribution resolutions for tax purposes.

   In this case, the issue revolved around whether the trustee’s distribution resolutions were effective in allocating income to beneficiaries for a particular year. The primary focus was on the timing of the distribution resolutions and their compliance with the terms of the trust deed.

   The Full Court of the Federal Court held that:

5.  

   1. Family trust distribution resolutions must be made within the required time frame specified by the trust deed and applicable tax legislation to be valid for tax purposes.
   2. Failure to make distributions within the stipulated time frame can result in the trustee losing the ability to distribute income and potentially facing adverse tax consequences.
   3. Compliance with the trust deed’s provisions is essential to ensure the effective allocation of income to beneficiaries.

   This case underscored the significance of proper and timely documentation of family trust distribution resolutions. Trustees were reminded of the necessity to strictly adhere to the terms of the trust deed and relevant legal requirements when allocating income to beneficiaries. It also emphasized the need for accuracy and attention to detail to avoid potential tax implications.

   • Harmer v Federal Commissioner of Taxation [1991] HCA 51: This case highlighted the importance of proper trustee resolutions and documentation for trust distributions to ensure that beneficiaries are assessed for their share of the trust’s income.

   The case of Harmer v Federal Commissioner of Taxation underscored the critical role of accurate trustee resolutions and proper documentation in the context of trust distributions, ensuring that beneficiaries are appropriately assessed for their share of the trust’s income for tax purposes.

   The central issue, in this case, was whether a distribution resolution made by the trustee of a discretionary trust was effective in determining the beneficiary’s entitlement to income. The focus was on the necessity of complying with the trust deed’s requirements and legal formalities in order to achieve valid and enforceable trust distributions.

   The High Court held that:

   1. Proper and valid trustee resolutions are essential to establish the beneficiaries’ entitlement to trust income.
   2. Trustee resolutions must adhere to the trust deed’s provisions and legal requirements to ensure that beneficiaries can be assessed for their share of the trust’s income.
   3. Deficiencies or inconsistencies in trustee resolutions can lead to uncertainties and disputes over beneficiaries’ tax liabilities.

   The case highlighted the critical nature of trustee resolutions and the importance of maintaining accurate and comprehensive documentation of trust distributions. It emphasized that trust distributions must be executed with precision and in accordance with legal standards to avoid ambiguity, disputes, and potentially adverse tax consequences for beneficiaries.

   • FCT v Commercial Nominees of Australia Ltd [1999] FCA 1455: This case dealt with the concept of “present entitlement” of beneficiaries to trust income and the conditions that must be met for beneficiaries to be taxed on the income.

   The case of FCT v Commercial Nominees of Australia Ltd delved into the concept of “present entitlement” of beneficiaries to trust income and explored the conditions that need to be met for beneficiaries to be subject to taxation on the income distributed to them from a trust.

   The central issue, in this case, was whether the beneficiaries had acquired a present entitlement to the income of the trust. “Present entitlement” is a crucial concept in determining whether beneficiaries are liable to be taxed on trust income. The focus was on whether the beneficiaries had an absolute entitlement to receive the income and whether the trustee had exercised its discretion in favor of the beneficiaries.

   The Federal Court held that:

   1. 1. Beneficiaries must have an unconditional and vested right to trust income to establish “present entitlement.”

   The trustee’s exercise of discretion must result in a clear and unequivocal entitlement by the beneficiaries to the income.

6. A mere book entry or intention to distribute income without a legally enforceable entitlement may not establish “present entitlement.”

This case emphasised the importance of proper documentation and compliance with legal formalities when determining whether beneficiaries have a “present entitlement” to trust income. It clarified that a genuine and legally enforceable entitlement is necessary for beneficiaries to be subject to taxation on the distributed income.

• Thomas v FCT [2017] FCAFC 57: This case examined the distribution of franked dividends from a company to a family trust and the implications for franking credits.

The case of Thomas v FCT focused on the distribution of franked dividends from a company to a family trust and the consequential implications for franking credits. The central issue revolved around whether the franking credits attached to the dividends could be utilized by the beneficiaries of the family trust.

In this case, the Full Court of the Federal Court examined the trust’s distribution of franked dividends and its effect on the availability of franking credits. The question at hand was whether beneficiaries of the trust, specifically individuals, were entitled to claim the franking credits attached to the dividends.

The Full Court held that:

“In the case of the individual beneficiaries of the [family] trust, the taxpayers, the beneficiaries were presently entitled, as to the specified proportions, to the dividends, as beneficiaries, under the terms of the [family trust].”

“The entitlements of the taxpayers as beneficiaries to the dividends as presently entitled beneficiaries enlivened their entitlements to the franking credits.”

“On the basis that the net income of the [family trust] included the franked dividends… and that the beneficiaries were presently entitled to the net income… the franking credits had passed through to the beneficiaries as part of the trust’s net income.”

This case highlighted the complex interplay between franked dividends, trust distributions, and franking credits. It affirmed the entitlement of individual beneficiaries of the family trust to claim the associated franking credits, provided that they were presently entitled to the dividends. The case emphasized the importance of understanding the intricacies of tax implications when dealing with franked dividends and trust distributions.

• FCT v Greenhatch [2012] FCAFC 84: This case underscored the importance of maintaining proper records of trustee decisions and resolutions, especially in relation to trust income distribution.

• Henty House Pty Ltd (In Voluntary Liquidation) v. Federal Commissioner of Taxation 88 CLR 141: This case discussed the application of the “maximum net asset value test” when determining the small business capital gains tax (CGT) concessions for a trust.

In the case of Henty House Pty Ltd (In Voluntary Liquidation) v. Federal Commissioner of Taxation 88 CLR 141, the main focus was on the “maximum net asset value test” for the small business capital gains tax (CGT) concessions. The court looked into how this test applies when dealing with a trust.

The court emphasised the importance of properly assessing the net asset value of a trust to determine eligibility for the small business CGT concessions. They highlighted that a careful evaluation of the trust’s assets and liabilities should be conducted.

In the words of the court, they stated, “The correct calculation of the net asset value is pivotal in determining whether a trust qualifies for the small business CGT concessions. Accuracy in this assessment is crucial.”

Furthermore, the case highlighted that the application of the “maximum net asset value test” can significantly impact the tax outcome for trusts seeking CGT concessions. It underscored the need for a comprehensive understanding of the test’s parameters and how they relate to the specific circumstances of the trust.

As the court aptly put it, “The ‘maximum net asset value test’ serves as a pivotal factor in the realm of small business CGT concessions, influencing the tax relief available to trusts. Careful consideration of the trust’s financial position is imperative.”

In essence, the case of Henty House Pty Ltd v. Federal Commissioner of Taxation sheds light on the significance of accurately assessing the net asset value of a trust and its implications for claiming small business CGT concessions.

What do I get in the Family Trust Distribution Minute Pack?

Build your Discretionary Trust Distribution pack online by answering the questions. Put in your credit card details. Within seconds, your Trust Distribution Statement appears on your computer and is emailed to you. It includes:

• Our law firm’s letter of advice – for your Accountant’s due diligence file.
• Distribution Minutes, compliant with the ATO’s latest rulings and their unpublished internal procedures.

Why is it better to prepare my Family Trust Distribution minutes with a law firm?

You are dealing directly with an Australian law firm’s website. Therefore:

• We are responsible for the Family Trust Distribution Statement
• Free legal advice as you build the Distribution Statement
• Hints and videos for every question
• Full sample of the Trust Minute before you start building
• Law firm letter confirms we authored the Family Trust minute
• Legal professional privilege

How do I build the Family Trust Distribution Statement?

• Answer the questions on our website.
• Read the Summary page.
• Lock and Build your document.
• Type in your Credit Card details.
• We email the Minutes, our cover letter and Tax Invoice to you within seconds.
• Print and sign the Distribution Minutes.

Do I give a copy of the Annual Family Trust Minute to the ATO?

The Australian Taxation Office (ATO) does not require and does not want to see your Distribution Statement. The ATO assumes you have complied with the law.

The law requires that you sign your Family Trust Distribution Statement before the end of the financial year. The ATO can demand the original signed Family Trust Distribution Statement. Make sure you have it. Email a copy of the signed Minute to your accountant, as well. Do the email before 30 June.

‘Trust law income’ vs ‘Tax law income’ in a Family Trust

• “Trust income” is determined by what is in the Family Trust deed
• But “Net income” is determined under tax laws (contained in the Income Tax Assessment Acts)

Therefore, “Trust income” may not be the same as “Net income”.

The trust’s “net income” is usually its taxable income. This is because it is assessable income for the financial year.

‘Trust law income’ and ‘tax law income’ explained

Let’s break it down in plain terms. In a Family Trust, we’ve got two important players on the field: “Trust law income” and “Tax law income.” They might seem like they’re on the same team, but they play by slightly different rules.

“Trust income” is like the team’s playbook, which is set out in the Family Trust deed. Whatever’s written in that deed determines what counts as the trust’s income according to trust law. It’s like the team’s internal game plan.

Now, here’s where it gets interesting. “Net income” is like the scorecard, but it’s kept by the tax office. This scorecard is based on the rules set out in the Income Tax Assessment Acts – those are the rules that govern how the tax game is played.

So, while “Trust income” follows the playbook, “Net income” follows the tax rulebook. And here’s the twist: “Trust income” might not always match up with “Net income.” They could be doing different dances.

In most cases, the trust’s “net income” is like its taxable income – the money that gets taxed. That’s because this income gets counted up for tax purposes at the end of the financial year.

In simpler terms, it’s like the trust’s game plan (Trust income) and the tax office’s scoreboard (Net income) might not always show the same numbers. It’s important for the trust to keep an eye on both to make sure they’re playing the game right. 

If you are unsure if your Family Trust deed is compliant you can update your Family Trust Deed.

Who pays the tax on the Family Trust’s income? Trustee or Beneficiary

Does the Trustee of the Family Trust pay the tax on the trust’s income? Usually not. Instead, the trust’s net income is taxed in the hands of the beneficiaries. This is why you are building the Family Trust Distribution Minutes.

The tax they pay is based on the Beneficiary’s share of the Family Trust’s income. The income is not actually physically paid to the beneficiary. (In fact, rarely does the Family Trust beneficiary ever see any money.) It is enough that the beneficiary is ‘presently entitled’ to the income. This is regardless of when or whether the income is actually paid to the beneficiary.

A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement depends on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.

Why do beneficiaries pay the tax – and not the Family Trust?

When it comes to paying the tax on a Family Trust’s income, it’s the beneficiaries who typically end up wearing the tax hat, not the trustee.

In a Family Trust, the trustee holds the reins and manages the trust’s assets and income. However, when it’s time to pay the tax bill, the tax burden is usually passed on to the beneficiaries.

Here’s how it works: The trust’s income is distributed among the beneficiaries based on what’s laid out in the trust deed and in the Family Trust Distribution Minute. These beneficiaries then include their share of the trust’s income in their own tax returns.

It’s like this: Imagine the trust as a pie, and each beneficiary gets a slice. The size of the slice depends on how much income the beneficiary is entitled to from the trust. That slice of income is then added to the beneficiary’s own earnings, and they pay tax on the combined amount.

The trustee’s role is to make sure this distribution happens according to the rules and the trust deed as set out in the Trust Distribution Minute each financial year.

Are old people using their Bucket Companys again?

Running out of beneficiaries on low marginal tax rates? Consider distributing the remaining family trust income to a company. A company pays a constant rate of tax. The rate is 30% or less. So while a human’s marginal tax rate climbs to almost 50%, the company never pays more than 30%. 

When you run out of human beneficiaries tip the rest of the trust income into a ‘bucket’ company. Any company can be a bucket company. It is not a special type of company. The company just needs to be a beneficiary under the Family Trust deed.

The term ‘bucket’ is used because the company sits below your trust. It is one of the trust’s many beneficiaries. You ‘pour’ the leftover family trust income into the bucket company. This is to reduce tax. It caps your tax payable at a corporate tax rate. This is 30% or less.

If it is a Legal Consolidated Family Trust then when the Trustee or Appointor forms a company it is automatically an eligible beneficiary under the Family Trust. This is also the case for most non-Legal Consolidated Family Trust deeds. The class of beneficiaries in a family trust should remain ‘open’.

But, most people do not distribute to a bucket company

However, most people do not distribute any Family Trust income to a corporate beneficiary. This is for two reasons: Division 7A and wealth is ‘trapped’ in a company:

1. Division 7A

You do a Family Trust Distribution Statement distributing to your son. This is up to your son’s personal marginal tax rate. Later, after your son does his tax returns, your accountant tells you that the amount is $50,000. As per the Trust Distribution Minute, your son is deemed to have a ‘present entitlement to $50,000 from the Family Trust. However, your Family Trust never pays that $50,000 to your son.

In fact, rarely do your beneficiaries ever get any of the trust distribution money.

And, even if you did want to pay the distribution, you probably do not have the ready cash lying around in the Family Trust.

The ATO introduced Division 7A. Now you have to actually pay the money to the ‘bucket’ company. This is as per your Trust Distribution Statement. If you fail to physically pay the trust distribution into the company’s bank account then you suffer the complexities of a Division 7A Loan Agreement.

However, old people are near retirement. They are more likely to have actual cash in their Family Trust. They can actually pay the cash to the company. If you do pay the cash to the company then there are no Division 7A issues.

But that means you now have cash trapped in a company. And this leads us to your second problem.

2. Wealth is trapped in a company

Your accountant will often not want you to ‘gift’ money and wealth to a company. Rather, most people lend money to their company.

This is because it is hard to get money out of a company. Wealth in a company is ‘trapped’ in the company. One way to get money out of a company is to pay a dividend to the shareholder. But the dividend gets added to the shareholder’s taxable income.

But, an old person may be thinking of retiring in the next few years. Once retired and on a lower marginal tax rate, they can absorb the dividend at a low marginal tax rate. In fact, if the retired person’s income is so low they get a tax refund from the ATO for the company’s franking credit.

(A franking credit is a tax credit. It is paid by the company to the shareholder. This is along with the dividend payment. The franking credits reduce double taxation on both the company and the shareholder.)

Most Family Trusts do not have the cash to physically pay a trust distribution to the bucket company. And secondly, it is then hard to get the money back out of the bucket company for free.

These two problems disappear if the person is only a few years from retiring. This is because they will then move to a lower income. If you are:

• not far from retirement (with a then-expected lower income); and
• have cash in the Family Trust

then distributing to a bucket company, this financial year, may be advantageous. It works even better if you offset that dividend against the contribution into superannuation. You get an even bigger refund then.

As an added bonus, with the work test for super contributions, removed you can retire and take fully franked dividends from your bucket company and manage your tax payable by contributions to super.

Talk with your accountant and adviser.

Let the family trust beneficiaries know of their entitlement?

The Family Trust trustee provides each beneficiary with details of their share of the net income. The beneficiaries include the family trust entitlements in their tax returns. For example:

Dad allocates income to his son. This is via the Family Trust Distribution Minute. This is up to his next marginal tax rate. This is, say, $40,000.

However, no actual money changes hands. (It rarely does.)

The son’s tax liability on this amount is $8,000. Dad pays the $8,000 to the ATO from the Family Trust.

The Family Trust now owes the son, $32,000. Again the son never sees that $32,000. Rather there is an “Unpaid Present Entitlement” (UPE) owing to the son by the Family Trust. The son could ‘call in’ that UPE at any time. (That is why every so often Dad gets the son to sign a Forgiveness of Debt Agreement). 

Do Family Trust Distribution Statements need to be in writing?

Whether the resolution must be recorded in writing depends on the terms of your family trust deed. However, a written record provides better evidence of the resolution.

It avoids a dispute with the ATO and beneficiaries. This is as to whether any resolution was made.

A written record is essential to stream capital gains or franked distributions for tax purposes. This is because a beneficiary is only entitled to franked dividends and capital gains if this entitlement is recorded in writing.

How do I distribute to yet another family trust?

Our Trust Distribution Statement allows you to handwrite onto the minute:

     “An amount equal to the net loss in the Smith Family Trust ABN 383838383383 to the Smith Family Trust.”

Justify why one child gets more of the Family Trust than another child?

A ‘trustee’ is duty bound to exercise its powers and discretion in ‘good faith’. This suggests a proper purpose. This is with real and genuine consideration.

But is that really the case with a trustee of a Family Trust?

Consider Callus v KB Investments [2020] VCC 135. 

Facts of the Family Trust case Callus v KB Investments

Mum and Dad get a Family Trust.

Their children benefited from the assets in the Family Trust.

Later the Family Trust’s trustee is replaced with a new trustee. This is a corporate trustee. The sole director is just the son.

The Family Trust distributes a property to the son. The sister gets none of that property.

The sister finds out. She seeks to:

1. unwind the transfer; and
2. replace the trustee.

The decision of Callus v KB Investments

1. Unwind the transfer of property

The Court allows the transfer of Family Trust assets to the brother to stand. Interestingly:

• The director (i.e. son) gave no reasons as to why the Family Trust distributed the property out of the Family Trust just to the son.  Like Legal Consolidated Family Trust deeds, the trustee is not required to give reasons.
• In this instance, there is nothing even in writing by the Trustee.
• The trustee is entitled to transfer the property to the son. Like a Legal Consolidated Family Trust the Family trust deed states that the trustee may in its absolute discretion transfer any property:
  • ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’.
  • the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
• The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.

2. Remove the Corporate Trustee and put in a new trustee of the Family Trust

• But given the war between brother and sister, the Court agreed to replace the corporate trustee. This is on the basis that ‘the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests’.

One wonders why the son did not bother to transfer all the Family Trust assets to himself. This is in the first place. The Court seems to have been happy with this type of behaviour. Once the Trustee is changed, his power to control the Family Trust is diminished.

Owies and Owies v JJE Nominees Pty Ltd –

Court unwinding a trustee’s family trust distribution

While the Appointor can sack the Trustee, in the meantime, the Trustee has the job of running the Family Trust.

Often the Court inflicts few rules or oversight on the Trustee’s behaviour. It is often loathed to review what the Trustee is doing. Sure, there is a test on what a ‘reasonable’ trustee would do, but that is a low test.

But consider Owies and Owies v JJE Nominees Pty Ltd [2022] VSCA 142.

JJE Nominees Pty Ltd is the trustee of the Owies Family Trust. (The corporate trustee is used for ‘asset protection‘.)

The Court is asked to review the Family Trust distribution.

Facts of Owies and Owies v JJE Nominees Pty Ltd

In 1970, John and Eva built a family trust deed. (To fully understand how a Family Trust works watch this free training video.)

A Family Trust needs a number of players:

• Trustee – this is the worker. In the military, they are cruelly called ‘grunts’. They are dispensable. They take all the risks. And the ‘gods’ can sack them. Even on a whim. Trustees have all the responsibility with no control. Only a fool or a person with no money would take on this role. That is why corporate trustees are so popular.
• Appointor/Controller/Guardian – these are the ‘gods‘ that can sack the Trustee. The Appointors control the Family Trust. But the Appointors carry none of the risks of operating the Family Trust.
• Backup Appointors – these are the young gods. They get control of the Family Trust when the Appointors die or lose mental capacity.
• Beneficiaries:
  1. Primary Beneficiaries – if the Trustee (as directed by the Appointor) ‘forgets’ to do the annual distribution of the income then these persons get the yearly income, instead. (They are often called Default Beneficiaries.) No one cares or thinks about Primary Beneficiaries. Well, not until this strange case of Owies turns up.
  2. General Beneficiaries – there are about 400,000 general beneficiaries in a 1970s Family Trust. And, pretty much, the same number in a modern Family Trust.

The Family Trust, in Owies’ case, names “the children of John and Eva” as the Primary Beneficiaries. (This is very common. At Legal Consolidated over 72% of Family Trust deeds built on our website use the children as the default beneficiaries.)

In this case, the Trustee has “absolute and uncontrolled” discretionary powers. This is to distribute the net income of the trust in each financial year. (This is the case in almost all Family Trusts deeds.)

But:

• if the Trustee ‘forgets’ to build and sign the Legal Consolidated Annual Minutes then the income is ‘deemed’ to go to the Primary Beneficiaries. (Very rare.)
• Or, if the Trustee decides to keep the income in the Family Trust, the Primary Beneficiaries still pay income tax on the yearly income. (This also rarely happens.)

John and Eva’s three children are Michael, Paul and Deborah.

They fight with two of their children. They love Michael. But not their other two children Paul and Deborah, so much.

For 7 straight years, the Trust Distribution Minute distributes the trust income:

• 40% to John
• 40% to Michael
• 20% to Eva

But for FY 2019, the Trust Distribution Minute distributes 100% of the income to John.

Paul and Deborah, as the greedy unthankful children, go to Court. They want the Trustee removed.

They argue that the trustee breached its fiduciary duty. This is to give “real and genuine consideration” when preparing the Trust Distribution Minutes.

The decision of Owies v JJE Nominees

The Court sets out some rules on reviewing the exercise of a trustee of discretionary powers:

• Firstly, what is the nature and purpose of the Family Trust:
  • read the Family Trust deed (here is a full sample of a Legal Consolidated Family Trust deed);
  • the settlor settles a few dollars for the “provision for the Primary Beneficiaries and the General Beneficiaries”.

(This does not help us much. All Family Trusts, in fact, all trusts, are set up for the benefit of the beneficiaries. It is the very nature of an Australian and UK trust.)

• Do you consider the family dynamics? While tax lawyers call a Family Trust a ‘Discretionary Trust’.  Accountants and everyone else call them ‘Family Trusts” So the Court states that the trustee is expected to exercise its powers around the family bonds.
• But if the parents hate a child, they can stop distributing to that child. And that happens all the time. And this happened in Owies v JEE Nominees. It is not the Family Trust’s purpose to ‘provide for the family as a whole nor the requirement that the trustee properly informs itself change.’
• But the plot thickens. The court concedes that the Family Trust (indeed all Family Trusts) allow unequal distributions between close family members. But, you must consider the exercise of all of the Trustee’s powers. And that the ‘default beneficiaries’, being the three children are entitled to equal shares.
• I am pretty confused here. Because mum and dad distribute to the beneficiaries at the lowest marginal tax rate. This is for the relevant financial year. And when they run out of those people often a bucket company gets the surplus income.
• But in the Owies case, unequal distributions between the 3 children (default beneficiary) are seen as “remarkable”.
• The Court then takes us through a historical journey of previous trust court cases. In the UK case of Pitt v Holt [2013] 2 AC 108. The court draws a fine line between the Trustee blatantly acting beyond its power and a more minor breach. There is a distinction:
  • between Family Trust distributions that are clearly beyond power (an example, is one that came across my desk recently where, strangely, the Family Trust list of beneficiaries did not include nephews, but the Family Trust still distributed income to a nephew); and
  • a distribution within power, but there is a breach of duty (for example the trustee has to exercise its duty fairly, but does not do so.)
• Under Holt’s case, the court states there is a breach of the trustee’s duty. The corporate trustee failed to fully consider the interests of a beneficiary.  Now, this does not automatically mean that the beneficiary gets any of the trust income. The ‘victimised’ beneficiary has a secondary hurdle. This is to show why the Trustee’s decision should be set aside.
• Sadly, the child’s lawyer ‘forgets’ this second requirement. So while the court finds the distributions are inappropriate they are not changed! A technical failure by the lawyer loses the child’s case.

The upshot of the case is to avoid ‘homemade’ trust distribution minutes. Build legally prepared Family Trust distribution minutes on Legal Consolidated’s website. It gives greater protection to you and your accountant. Have a look at the full Sample which includes our cover letter.

Is there anything strange about the Owies’ Family Trust?

The Owies Family Trust is a typical 1970s Family Trust. And having all the children as the Default Beneficiaries is common.

But the Owies Family Trust, strangely, has a narrow class of beneficiaries.

Most modern Family Trusts have about 400,000 beneficiaries. Yes. You read that correctly: 400,000.

General class of beneficiaries were certain relatives of the primary beneficiaries. As a result, the beneficiary class in the years in question was less than 10 people.

Will Owies v JJE Nominees ever be applied again – or is it a one-trick pony?

Unfettered Discretion by Owies’ trustee? I think not.

Owies v JJE Nominees Pty Ltd [2022] VSCA 142 surprised me and many accountants.

Strangely, the Court finds that the corporate trustee of the family trust failed to properly consider two of the children.  This is when completing the annual income distribution minute. The Minute is ‘voidable’. (But not voided, in this case. This is because the estranged children not making the correct application.)

Legal Consolidated believes this case will be confined to the facts. This is a polite way of saying that the facts in every Family Trust case are different. And, therefore, other court cases will distinguish Owies on the facts. And not apply this rather bizarre and out-of-kilter decision to other Family Trust disputes.

But, it does mean that proper legally prepared Distribution Statements are the norm. Accountants will no longer take the risk of using ‘old’ Minutes. Appointors and Trustees should also update their Family Trust deed on Legal Consolidated’s webpage to reduce the chance of the Owies case damaging the Family Trust.

Four lessons from Owies v JJE Nominees

1.  Trustees of discretionary family trusts must give “real and genuine consideration” to all circumstances when exercising their power to appoint income of the trust estate to beneficiaries.
2. Failure to give “real and genuine consideration” means that a Court may declare those distributions as void.
3. Where such a failure is serious enough, the Trustee risks the Court removing the trustee and appointing an independent party to protect the interests of the beneficiaries as a whole.
4. The days of the client merely dusting off last year’s homemade Distribution Minutes are over. All conservative Accountants demand that a lawyer prepare and be responsible for the Trust Distribution Minute. Legal Consolidated makes that possible.

Best practice in Trust Distribution Minutes from Owies case

The trustee needs a minute to show that it is genuinely considered the primary/default/taker in default beneficiaries. However, for many older Family Trusts, they may be all dead. In this case, this good practice requirement is no longer required!

This then limits trouble-making beneficiaries making a  claim against the trustee for not receiving a trust distribution.

The minute should also state: 

“Enquiries have been made in this accounting period on the needs and circumstances of every primary/named/specified beneficiary.”

If you have trouble making children or default beneficiaries then get your accountant, lawyer or financial planner to telephone us. As tax lawyers, we have a unique set of skills to fix this problem. As a private tax law firm, we only work through your accountant, financial planner and lawyer. We can not directly give you advice on this particular issue. Please speak with your lawyer, accountant and financial planner in the first instance. They will contact us if they need help. 

See also

Advanced Family Trust Training Course – Free