Does the trustee of a discretionary trust decide what is the 'income' of the trust?
The definition of the 'income of a trust estate' is important as it determines who - the trustee or the beneficiaries of a trust - is liable
to pay tax on the taxable income of the trust estate. This issue attracted considerable attention in 2010 in Bamford's case, which is authority
for the view that the income of the trust is whatever the trust deed determines it to be.
The trust deed will set out whether the trustee has power to decide what is the 'income' of the trust.
If your discretionary trust has a Cleardocs trust deed: Yes, the trustee decides. The Cleardocs discretionary trust deed contains a
'default' definition of 'income of the trust fund'. The trustee may, at any time prior to 30 June in a financial year, decide to adopt another
definition of 'income of the trust fund' for that financial year and the trustee can do so by signing a minute to this effect.
If your discretionary trust does not have a Cleardocs trust deed: Your trust deed may or may not allow the trustee to decide what is the
'income' of the trust. You should check the terms of your trust deed and obtain professional advice about whether the trustee has the ability
to adopt a different definition of 'income' - and in what circumstances.
Does the trustee of a discretionary trust have to distribute all of the net income of the trust in a given financial year?
This depends on the terms of your trust deed.
If your discretionary trust has a Cleardocs trust deed: The trustee does not need to distribute all of the net income of the trust in a
given financial year: rather, the trustee has the discretion to either distribute or accumulate the income. If the income is accumulated, it is
taxed in the hands of the trustee at the highest marginal tax rate and becomes part of the capital of the trust fund.
The trustee must make a decision whether to distribute or accumulate the income by 30 June in that financial year. If the trustee does not
exercise their discretion, the trustee will lose their discretion in respect of income in respect of which the discretion has not been
exercised, and the income will be automatically distributed to certain beneficiaries in accordance with the trust deed (and held on trust
pending payment).
If your discretionary trust does not have a Cleardocs trust deed: Your trust deed may or may not require the trustee to distribute all
of the net income of the trust in a given financial year. You should check the terms of your trust deed and obtain professional advice about
your trust deed's requirements.
Can the trustee of a discretionary trust distribute a dollar amount rather than a percentage of income of the trust?
Yes. When you order from Cleardocs, in the minute or resolution resolving to distribute and/or accumulate net income of the trust, you can
specify either:
- percentages (up to 100%) that each beneficiary is to receive; or
- maximum dollar amounts that each beneficiary is to receive - and to whom the balance of the net income less these dollar amounts (if any)
will be distributed.
Before choosing the second option, the trustee will need to ensure there is sufficient income of the trust to make the distribution. If the
trustee makes a resolution to distribute income it does not have - or fails to make a decision with respect to income it does have - this can
cause issues (see above).