Discovering that distributions have been made to an invalid beneficiary may only be the beginning of your problems.
When assessing who is a valid beneficiary of a trust, advisers may be tempted to look exclusively at the names listed in a schedule to the trust deed. However, in an age where variations to trust deeds are frequently implemented to exclude certain persons from being eligible objects of the trust (typically to manage state tax surcharge risks), considering the entirety of the trust deed (and the effect of any variations) is paramount.
Take the following scenario:
in each of the income years from 2008 to 2015, the trustee of a discretionary trust (the trust) made a private company (the company) presently entitled to a share of the trust’s income. These amounts have remained unpaid (unpaid present entitlements (UPEs));
some of these UPEs:
are quarantined “pre-2009” UPEs (therefore, apart from in limited circumstances, under TD 2022/11,2 they are not exposed to Div 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA36));
are post-2009 UPEs on sub-trust interest-only arrangements under PS LA 2010/4 (withdrawn); and
have been replaced with secured loans that comply with s 109N ITAA36 and are subject to minimum yearly repayments under s 109E ITAA36; and
when preparing the 2022 accounts for the trust, the trust’s newly appointed tax adviser realised that the company has never been an eligible object (beneficiary) of the trust.
Surely this should not cause too many problems and can be easily fixed?
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