The distributions are void. The returns are wrong. What can actually be done about it.
Your client’s trust distributed to a company for several years. The accountant just discovered the company was never an eligible beneficiary under the deed.
The distributions are void. The tax returns are wrong. Now what?
How distributions fail
The obvious cases: resolution not made before 30 June, beneficiary not in the class, no power to distribute that type of income. The less obvious: corporate trustee minutes without evidence of a quorum, appointer consent required but never obtained, a notional settlor exclusion that catches the primary beneficiary.
An invalid appointment is not merely voidable. In FCT v Ramsden [2005] FCAFC 39, a purported appointment outside the beneficiary class was ultra vires and a nullity. The Commissioner assesses on that basis.
The tax consequences
No beneficiary presently entitled means the trustee is assessed under s 99A ITAA 1936 at the top rate.
Where only one appointment in a multi-beneficiary resolution is invalid, whether the valid appointments survive depends on the drafting. Dollar-amount distributions may sever. Proportionate distributions are harder. A “balance” appointment can help: under TD 2012/22, the balance beneficiary picks up the shortfall, but only for dollar-amount resolutions.
The trustee’s period of review does not start until an assessment is issued. Most trustees are never assessed. PS LA 2015/2 aligns it to the trust return lodgement date as administrative practice, but that does not apply where fraud or evasion is alleged. And s 100A carries an unlimited period of review.
What to do
Start with the deed. Read every clause: distribution power, beneficiary class, consent requirements, default provisions, variation power. Identify exactly which distributions failed and why.
Consider rectification. A private deed of rectification binds the parties only, not the Commissioner. A Supreme Court order may be different: it recognises what was always the position.
Consider retrospective variation if the deed permits it. In Gra-Ham v Perpetual Trustees WA Ltd (1989) 1 WAR 65, retrospective amendments were held not beyond power; it depends on construction of the variation clause. But consider Carter [2022] HCA 10: present entitlement crystallises at 30 June, and a variation may not undo the tax position.
Consider voluntary disclosure. Even where the period of review has expired, proactive ATO engagement can mitigate penalties and interest.
For closely held groups, the solution may be simpler: the underpaid beneficiary agrees to the overpaid beneficiary retaining the funds and releases the trustee from claim.
The worst discovery is one that could have been prevented by reading the deed the first time.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.