Every income year, a discretionary trust must exercise its discretion to distribute its trust law income among the trust’s eligible beneficiaries. These decisions are recorded in the trust’s distribution minutes which must be signed prior to 30 June each income year.
However, there are a number of ‘tax traps’ that can spring up if these distribution minutes do not use certain specific words.
The main thing to remember is that trusts can only ever distribute trust law income, as it is defined in the trust deed. Trust deeds can use many different phrases to refer to trust law income (e.g. ‘trust income’, ‘income of the trust fund’ etc.), and the minutes must use the exact same words. If the minutes refer to some other concept of income, such as ‘net income’, ‘taxable income’ or ‘assessable income’, then those distributions will not be effective. That could result in the trustee being taxed on all the income that year, at the top marginal rate!
For this reason, the specific words in your trust distribution minutes are very important.
If you want your distribution minutes to be reviewed so they will not trigger a ‘tax trap’ like this, call Andreyev Lawyers on 1300 654 590. You can also download a copy of our Trust Distributions Guide here.