He said the facts of the case are complex but the key aspect related to a purported nomination of a beneficiary.

“The relevant clause in the trust instrument gave the principal of the trust the power to nominate beneficiaries by notice in writing to the trustee,” Burgess said.

“Under the purported written nomination, the principal did sign the document, however, it was noted in the instrument that the signature was in his capacity as a director of the trustee company. The court held that the document failed to satisfy the requirements under the trust deed for the principal to provide the trustee with written notification of the appointment of the beneficiary.”

He added that this meant that the subsequent distributions of income to the beneficiary, who was not validly appointed, failed.

The court said that the attempted distribution of income to an invalidly appointed “beneficiary” is a nullity and on this basis, the distribution can be set aside as void “ab initio” – in other words, the distribution itself is taken to never have occurred.

“This aspect of the decision relied on an earlier case of Re Cavill Hotels Pty Ltd [1998] 1 QdR 396,” Burgess said.

“The ruling also stated that where a purported distribution of income fails, the entitlement of valid potential beneficiaries will depend on the relevant original distribution minute initially. Additionally, if the relevant distribution minute does not address who receives a failed distribution, then the default provisions, if any, under the trust instrument will apply.”

Furthermore, the court stated that the ability of any default clause under a trust instrument to operate effectively will depend upon whether they trigger a distribution within the relevant income year.

“There is also a risk that if there is no valid default or gift over provision, then the assets of the trust pass on a resulting trust to the settlor,” Burgess said.

“This outcome is at best problematic, particularly given that the settlor is often an unrelated third party such as an accountant or lawyer.”

He said that the decision means that, practically, a trustee would need to reimburse the trust, or each underpaid beneficiary to the extent of the invalid distribution from their assets.

“Trustee exposure also potentially extends to other losses. For example, overpaid income tax that may have become unrecoverable from the Tax Office due to being out of time,” Burgess said.

“While in theory the trustee would be entitled to recover amounts it personally compensates the trust for from the overpaid beneficiary, practically if that beneficiary does not have assets, recovery attempts may fail.”