Commentary on Sections Section 3: Power to compensate income beneficiary
37.Section 3 provides trustees with a power to compensate income beneficiaries where there has been a tax-exempt distribution classified as capital under section 2 (subsection (1)(a)). This power can only be exercised where the trustees are satisfied that it is likely there would have been a receipt of income from the body corporate, had the distribution not been made (subsection (1)(b)). For example, a demerging company may have not have paid a dividend which would otherwise have been paid (or may have paid a smaller dividend) because the directors decided instead to “roll up” profits in the demerger shares.
38.Subsections (2) and (3) enable trustees to use capital in order to put an income beneficiary, to the extent that it is practicable, in the position in which the trustees consider he or she would have been if the trust had received the income which they are satisfied was not paid because of the tax-exempt distribution. Thus in the above example, the trustees could make a payment to the income beneficiary to make up for the non-receipt of the dividend (or larger dividend) which they have concluded would have been paid if the demerger had not occurred. They could alternatively transfer trust property (such as shares) to the income beneficiary. Any such payment or transfer is treated as a receipt of capital in the hands of the income beneficiary.
39.Subsection (4) defines “income beneficiary”; this term is not limited to beneficiaries who are entitled to receive income as of right, but includes beneficiaries who may receive income at the trustees’ discretion. It is defined in terms of persons who are entitled to or may benefit from the income, and does not include, for example, a charitable purpose.