A recent decision of the Administrative Appeals Tribunal (AAT) has served as a timely reminder of the importance of correctly preparing and finalising trust resolutions. The case involved the Goldenville Family Trust (GFT), where the Tribunal found that certain trust distributions were not valid. As a result, the trust’s default beneficiaries—rather than the intended recipients—were taxed on the trust’s net income for the years in question.
What Happened?
In the 2015, 2016, and 2017 income years, the trustees of the GFT made written resolutions to distribute interest income to two beneficiaries. One of these beneficiaries was a foreign resident. The arrangement appeared to be designed to achieve a more favourable tax outcome, since distributions of interest to non-residents are normally subject to a flat 10% withholding tax.
However, the Commissioner challenged the treatment of the distributions, arguing that the trust resolutions were not valid and that the income itself should not be classified as interest.
The Tribunal’s Findings
The Tribunal identified two key issues:
- Validity of the Resolutions
For trust resolutions to be effective for tax purposes, trustees must make their decisions before 30 June of the relevant income year. While the formal documentation can be prepared later, it must reflect a decision that was genuinely made by year-end. In this case, the Tribunal was not satisfied that the resolutions had been made by 30 June. Evidence suggested the decisions were likely made after year-end, rendering the resolutions invalid.
Because the resolutions were invalid, the trust’s default beneficiaries—who were Australian residents—became entitled to the income, and they were taxed accordingly.
- Characterisation of the Income
Even if the resolutions had been valid, the Tribunal was not convinced that the amounts distributed could be properly classified as interest income. While it accepted that the amounts were income and assessable, there was insufficient evidence to prove they were specifically “interest.” Without adequate supporting material, the Tribunal rejected the trustee’s characterisation.
Key Lessons for Trustees and Advisers
This case provides two important reminders:
- Trust resolutions must be finalised by 30 June. Trustees should ensure decisions are properly documented before year-end, and contemporaneous records should be maintained. Backdating or relying on incomplete resolutions poses a serious risk of challenge.
- Labels are not decisive. Simply calling an amount “interest” or another category of income will not determine its tax treatment. The ATO and courts will look to the substance of the income and how it was derived.
If you would like assistance reviewing your trust arrangements or preparing valid year-end resolutions, you may contact our team to help ensure you remain compliant and protected.
Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Angela Abejo @ Pitt Martin Tax
