The recent AAT decision of The Trustee for the Whitby Trust and Commissioner of Taxation
[2019] AATA 5637 signifies the dire tax implications of family trusts failing to observe documentary formalities.

The decision also highlights the importance of taxpayers holding contemporaneous objective evidence in order to satisfy their burden of proof under the tax objection and litigation process.

What happened?

For the 2011 – 2014 income years, the corporate trustee (Trustee) of a family discretionary trust (Family Trust) purported to distribute its net income to a specified beneficiary (Resolutions).

The Resolutions were in the form of minutes of meeting of directors and were executed by one of the Trustee’s directors as the chairperson.  

The AAT held, having regard to the evidence led, that the Resolutions were ineffective.

From the perspective of the Trustee’s constitution:

• A valid resolution at a meeting of the directors of the Trustee required at least two directors to be present. This was not apparent on the Resolutions as they did not note which other directors were in attendance (the Trustee had three directors).

• When cross-examined before the Tribunal, one of the Trustee’s directors had no recollection of attending a directors’ meeting, nor was aware that the Trustee acted in its capacity as the trustee of the Family Trust.

From the perspective of the trust deed:

• The Trustee required the written consent of all the guardians of the Family Trust in order to validly distribute income to beneficiaries. In this instance, only one of the guardians had provided written consent.

• It was not permissible, having regard to the trust deed as a whole and the clear language, for income to be distributed with the consent of only one guardian. It was irrelevant that the other guardian may have been unaware of her appointment.

Principles

Trustees, when purporting to make beneficiaries presently entitled to the income of a family trust, must ensure that resolutions are made in accordance with the trust deed as well as the trustee company’s constitution. 

The failure to observe documentary formalities will result in income distributions being ineffective for tax purposes and for default beneficiaries or trustees to be subject to unexpected tax (for trustees, at punitive rates).

If you require assistance in ensuring trustee resolutions are drafted in accordance with a trust’s constituent documents, please contact one of our experts:  

Edward Hennebry
Associate
T +61 3 9611 0113
E: ehennebry@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327|  T +61 3 9611 0105
E: dsmedley@sladen.com.au