Australia: Trust Deed Reviews Are More Vital Than Ever

Last Updated: 22 May 2011
Article by Steve Di Leo

Assistant Treasurer Bill Shorten's announcement on 4 March 4 2011 that the Federal Government will adopt two Board of Taxation recommendations to clarify the definition of 'distributable income' of trusts and allow streaming of capital gains and franked distributions was enthusiastically welcomed.

Yet, uncertainties remain for the 600,000 trusts in Australia. As a result, trust deed reviews are as vital as ever. Indeed, for many clients, the Assistant Treasurer's announcement gives a greater reason to review trust deeds than ever before.

Announcement and Consultation Paper

The Assistant Treasurer aims to achieve certainty for trusts in the near term, which is why the consultation paper makes it clear that the changes to the law are a 'stop gap' measure. They are really only tweaks to the existing rules before the real reform begins with a wholesale re-write of Division 6 of the 1936 Tax Act. In the coming years, this Division will be completely modernised and incorporated into the 1997 Tax Act.

The key propositions of the consultation paper are:

  1. Defining distributable income using tax concepts
  2. Defining distributable income using accounting concepts
  3. Defining distributable income to specifically include capital gains
  4. Allowing the streaming of capital gains and imputation credits

1. Defining distributable income using tax concepts

The consultation paper proposes to define 'distributable income' ('income of a trust estate') by aligning it with 'net income' (s 95 taxable income) adjusted for various amounts. Adjustments would be made 'to reflect the actual cash available for distribution' to beneficiaries. For example, when obtaining the taxable income of the trust it is established that amounts of income have been grossed up because of franked dividends received, these would need to be backed out. Similarly, if the trust received the small business tax break for depreciating assets purchased during the Global Financial Crisis (GFC), this would need to be reversed.

One key issue for consideration is what specific amounts will be included in the list of adjustment items under this proposal. If the list of items is too long, then this change will not meet its stated aim of aligning tax and trust income. If it is too short, there are likely to be occasions when the amount calculated as 'distributable income' will not reflect the amount of cash available for distribution. This is discussed further below.

2. Defining distributable income using accounting concepts

Under this proposal, distributable income is defined as equal to the trust's accounting profit as determined in accordance with Generally Accepted Accounting Principles (GAAP). If distributable income is defined in this way, there is still the possibility for significant mismatch between distributable income and taxable income. It could potentially entrench the unfairness and unintended outcomes within Division 6 that this change is intended to overcome.

3. Defining distributable income to specifically include capital gains

Defining distributable income to specifically include capital gains is a halfway house between both proposals. While it will alleviate some potential unfair outcomes – for instance, taxing income beneficiaries on distributions made to capital beneficiaries – it will continue to result in problematic outcomes.

4. Allowing the streaming of capital gains and imputation credits

For taxpayers utilising trusts, the proposal to allow the streaming of capital gains and imputation credits is welcome as it at least partially restores trustees to the position they were in before the High Court handed down the decision in the Bamford case.

With These Changes, Why is it Still Important to Review Your Trust Deed?

Although the Assistant Treasurer's announcement provides a measure of certainty, there are still compelling reasons to continue with your trust deed review:

  1. Streaming clauses: Now that streaming will be given the authority of legislation, it is important to review trust deeds with no streaming clauses or ineffective streaming clauses. If your trust deed falls into this category, it will be essential to incorporate appropriate streaming clauses to allow income to be distributed in the most tax effective way going forward.
  2. Expense clauses: Expense clauses give trustees guidance as to what sort of expenses can be set off against the various classes of income. Prior to the Bamford decision, TR 92/12 allowed trustees to reduce dividends by expenses. Provided $1 of franked dividends were distributed, the trustee could attach as many imputation credits as were available (provided the other rules were adhered to). If this position is restored to its pre- Bamford status, your trust deed will need appropriate expense clauses.
  3. Corpus: How flexible is your corpus clause? If, for example, your trust makes a $1 million capital gain and reduces this by prior year capital losses to $0, there are no expenses. In effect, 'distributable income' is $0 but there is $1 million to distribute to beneficiaries. If the Government adopts the proposition to define distributable income using tax concepts, it may be that the only way your trust can make distributions in the above scenario is by a distribution of corpus. Does your deed adequately define corpus to enable you to do this?
  4. Distribution minutes: Unfortunately, the consultation paper is silent on the effects the new definition of distributable income will have on distribution minutes. For example, if your trustee has $100 in income and pays a 'management fee' of $100 to a related company, while there is no cash left to distribute, the $100 fee is non-deductible, meaning there is $100 of 'distributable income'. If the distribution minutes indicate a distribution of $100 to Beneficiary A (to avoid an s 99A assessment), how do you stop Beneficiary A making a claim for the $100 in equity for the $100 outstanding?
  5. Other unpaid present entitlement Issues. If, as in the above scenario, there is $100 of 'distributable income' but no cash to pay the $100, the present entitlement to Beneficiary A is unpaid. If Beneficiary A happens to be a company, the trust is potentially within the ambit of Division 7A.

While the clarifications are welcome, uncertainties remain. On this basis, it is important to continue to have your trust deeds professionally reviewed to ensure they are flexible enough to adapt to the changes ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.