A recent decision by the Full Court of the Federal Court has shone a spotlight on year end Trust Resolutions that should be a reminder to all Trustees of the importance of taking the time to prepare a valid resolution to distribute the annual income of a trust.
The decision in Lewski Vs Commissioner of Taxation (2017) FCAFC 145 whilst a “win” for the taxpayer has been deemed a “lucky” outcome by many commentators.
The Commissioner of Taxation sought to amend the income of 2 trusts by disallowing carry forward losses of approximately $10 Million and $3 Million respectively. In disallowing these losses, it meant the commissioner then assessed Ms Lewski to this additional income as the presently entitled beneficiary of each trust.
Ms Lewski sought to have the Commissioner’s determination set aside and either reduce or deflect any tax liability to either the trustee of the trust or to alternate beneficiaries under a variation clause in the original trust resolution. In either case, there would have been less tax payable than had Ms Lewski been the beneficiary of that amended income.
The ultimate outcome determined by the court hinged on the resolution documents prepared by the trustee in each of the relevant income years. In each resolution, there was a “variation of income” clause that indicated that should the Tax Commissioner disallow any amount as a deduction or include an amount as assessable income of the trust, there would be a deemed distribution to a default beneficiary.
This variation clause effectively made the trust resolutions contingent upon an event that may occur after the end of an income year. The court ultimately found that because the income distribution was subject to a contingency after the end of an applicable income year, this defeated the present entitlement of Ms Lewski to the income of the trust and as a result she was not assessed to that income.
Takeaway: Avoid variation clauses in trust resolutions.
Whilst the taxpayer had a favourable outcome in this case as a result of the invalidity of the trust resolution, normally, this can result in significant problems for a taxpayer as the trustee would be assessed to that income at the highest marginal tax rate.