Carter v FCT: Trustee resolutions – Why it’s important to get it right


With 30 June approaching, one of the recurring annual year end processes required of a trustee is to ascertain the quantum/proportion of the income of the trust estate that is to be appointed to certain beneficiaries. Often a desired tax outcome is one of the factors considered in making this decision. A trustee’s decision to appoint income must be undertaken before the expiration of the income year (generally this is by 30 June) unless an earlier date is specified under the deed and that decision is generally documented by way of a written and signed trustee’s resolution.

Once the beneficiaries who are presently entitled to the income of a trust estate are identified, Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936), relevantly subsection 97(1), then seeks to assess those beneficiaries not under any legal disability on a share of the net income of the trust estate based on their present entitlement to a share of the trust’s distributable income. A beneficiary may be presently entitled whether or not the precise entitlement can be ascertained immediately before the end of the income year and whether or not the trustee has the funds available for immediate payment.

In the event of a trustee failing to appoint income, or alternatively if the purported distribution is determined to be ineffective for tax purposes, it is considered that no beneficiary is presently entitled. Consequently, the trustee will generally be assessed on that income at the top marginal tax rate.

To counter this potential outcome, many modern trust deeds include a default beneficiary clause. The intended operation being the default beneficiary/beneficiaries become presently entitled to the income that was otherwise not dealt with by the trustee so that it be assessed at their marginal rates of tax, which are often a lower rate of tax than would otherwise be payable by the trustee.

The recent case of Commissioner of Taxation v Carter [2022] HCA 10 (Carter) highlights the importance of reading and understanding the trust deed in making effective distributions and the dire implications if a purported distribution is found to be ineffective for tax purposes.

Key facts

The Carter case involved a prolonged dispute with the Commissioner.

The respondents were the default beneficiaries of a discretionary trust. The trustee power to distribute income was subject to the consent of named guardian(s). During the relevant years under dispute two individuals were named as joint guardians.

Signed documents purporting to be minutes of meetings recording resolutions to distribute the trust’s income for the 2011 to 2014 income years were found to be invalid. The documents did not indicate whether they were minutes of a meeting of directors or general meeting. The documents did not record who was purportedly present at the meeting, and there was no evidence that a quorum was present or that the resolutions were validly passed. There was also no evidence of any consent of the joint guardians for any of the 2011 to 2014 income years’ distributions to the named beneficiaries. Additionally, one of the joint guardians did not even know they were named as guardian.

None of the named beneficiaries were aware of the distributions that were purportedly made to them as set out in the signed documents.

The default beneficiaries attempted to disclaim their present entitlement for each of the relevant years by way of a series of disclaimers. The first and second set disclaimers were drafted on the basis that the takers in default could disclaim their interest in the income of the trust for particular years. The Commissioner accepted that the first set of disclaimers for the 2011 to 2013 income year were effective but found that the second set of disclaimers for the 2014 income year were ineffective (even though the second set of disclaimers contained recitals to substantially the same effect as the first disclaimer). A third set of disclaimers were then made in response to the Commissioner’s position that the second set of disclaimers were ineffective.

The Administrative Appeals Tribunal held that the third set of disclaimers were ineffective because they were made after the respondents, with knowledge, had failed to disclaim within a reasonable period of time and had therefore tacitly accepted the gifts or entitlements (of trust income).

The respondents appealed to the Full Court of the Federal Court, which held that the third set of disclaimers were effective and dismissed the Commissioner’s notice of contention that the third disclaimers, even if effective at general law, did not retrospectively disapply section 97(1).

The Commissioner subsequently appealed to the High Court where the matter turned on the correct construction of section 97 i.e., to assess the beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate.

To quote the High Court:

  1. The phrase “is presently entitled to a share of the income of the trust estate” in s 97(1) is expressed in the present tense. It is directed to the position existing immediately before the end of the income year for the stated purpose of identifying the beneficiaries who are to be assessed with the income of the trust…
  2. …the relevant criterion in s 97(1) is the present legal right of the beneficiary to demand and receive payment of a share of the distributable income of a trust estate. The criterion for liability looks to the right to receive an amount of distributable income, not the receipt…

  1. Put in different terms, the taxation liability of the beneficiaries is determined by ascertaining the proportion of the distributable income of the trust estate to which each beneficiary is presently entitled at that point in time – just prior to midnight at the end of the year of income – and then applying that proportion to the “net income of the trust estate”.

Accordingly, the respondents were appropriately assessed by the Commissioner under section 97(1) given their status as default beneficiaries.

The ATO has released a  Decision Impact Statement on the High Court decision. The ATO’s view is that the High Court decision settles an important practical question regarding the effectiveness of legally effective disclaimers made after financial year end for tax purposes. The ATO has also withdrawn ATO ID 2010/85 Trust income: disclaimer of an entitlement to trust income and will also update relevant website guidance to reflect the view of the High Court. The closing date for comments is 8 July 2022.

Key lessons

The Carter case serves as a timely reminder to trustees and their advisors of the importance of reviewing and understanding the terms of the relevant trust deed so as to ascertain what powers the trustee has in respect of the administration, determination and distribution of trust income and/or capital.

Any resolutions to distribute trust income (and/or capital) must be consistent with the terms of the relevant trust deed (and where applicable full compliance with the constitution of the trustee company), and (subject to the terms of the deed) be resolved by the end of the relevant income year – i.e., just prior to midnight at the end of the year of income (30 June).

If the resolution is validly made by 30 June and can be substantiated with contemporaneous evidence, the ATO generally will accept records created after 30 June as evidence of the making of a resolution by that date (refer ATO factsheet Trustee resolutions QC 25912). For completeness we note that companies are generally required to record resolutions in their minute book within one month of the resolution being passed.

Disclaimers of trust income for tax purposes cannot be effective if they occur after the end of the income year that gave rise to present entitlement. Due to this decision, a beneficiary (including a default beneficiary) will have an unavoidable tax liability even if they are unaware of their present entitlement and whether or not the trustee has the funds available for immediate payment.

If the default clause is triggered and, absent any valid disclaimer made prior to year end, there may be other unintended tax consequences. In the context of the trust loss provisions, the distribution of trust income to default beneficiaries may in some instances cause the trust to fail the pattern of distribution test, thus jeopardising its ability to recoup prior years carry forward tax losses. Where the trust has made a family trust election or an interposed entity election, a distribution to a default beneficiary may be subject to family trust distribution tax (currently at the rate of 47%) if the taker in default is not a member of the test individual’s family group.

Accordingly, it is critical for trustees to identity and understand the key clauses of the trust deed to ensure that the distribution of trust income occurs in an effective manner.


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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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