Tax treatment of trust distributions...what is "income of the trust"?

Bamford v Commissioner of Taxation

The Full Federal Court handed down an important decision in June 2009 Bamford v Commissioner of Taxation which clarifies the taxation treatment of trust distributions.

The ATO sought to limit the ability of the trustee to give effect to the terms of trust deeds in determining how a liability to tax will be determined.

The Court decided the terms of the deed should prevail in determining the ‘income of the trust’ to which beneficiaries are presently entitled and are assessed to tax.

The Court held that a strict proportionate approach (not absolute dollar amounts) will be used to determine the share of taxable income allocated to each beneficiary – that is the relative percentages of the ‘income of the trust estate’ will be applied to the ‘net income’.

This case should also remove the risk for trustees (with appropriately drafted deeds) that capital gains made by trusts will be assessed at penal rates (by the trustee) if the trust does not derive other income in the year. Instead, the capital gain will be taxed in the hands of the beneficiary.

Subject to this case being appealed to the High Court, it is now worthwhile clients considering a review of their trust deeds to ensure the deed provides the ability to redefine capital gains as ‘income of the trust estate’ and to otherwise optimise treatment of all types of income and gains.

Other consequences of this case include:

• Terms and mechanisms set up by a trust deed must be followed strictly 
• Trust distributions must be made in accordance with the trust deed 
• Trust minutes should be carefully drawn – any amendments to ‘net income’ will be allocated to beneficiaries including minors based on their percentages of the ‘income of the trust estate’ so that minutes distributing dollar amounts of net income to some beneficiaries and the balance to a stated beneficiary will not be effective 
• Written agreements should be put in place by 31 August (ATO’s administrative deadline for trust minutes) regarding the distribution of capital gains. 

The High Court granted leave for both parties to appeal this decision on 3 November - we shall watch and follow this appeal closely – otherwise, please speak with us if you consider it timely to review your trust deed.

Superannuation - Concessional Contributions Cap Reduced

What is a concessional contribution?

Concessional contributions include:

• compulsory and voluntary super guarantee contributions, 
• any of the fund’s costs met by you as the employer for the employee such as super administration fees and insurance, 
• salary sacrificed amounts, and 
• any amount an employee is allowed as a personal super deduction in their income tax return. 

The cap (or maximum) for individual contributions to superannuation has been reduced as follows:

1. If you are under the age of 50 as at 30 June 2010 - $25,000, indexed (was $50,000) 
2. If 50 or over at 30 June 2010 - $50,000, not indexed (was $100,000) until June 2012 

You should note a contribution is counted towards a cap in the year your super fund allocates it to your account, not when the contributor pays it.

Any contributions that are over the reduced cap will be taxed an additional 31.5% (in addition to the standard 15%) - a penalty worth avoiding!

Furthermore, any excess also counts towards the non-concessional contributions cap, which, if exceeded, means the tax payable could be extremely large – up to 93%!

Non-concessional contributions (NCCs) are personal contributions for which the individual does not claim a tax deduction; contributions made by a spouse; amounts in excess of the concessional contributions cap; and certain amounts transferred from an overseas pension arrangement which are not subject to tax in the fund.

You should note that the annual limit for NCCs is $150,000 (indexed) and that members under age 65 at any time in a financial year may contribute up to $450,000 by bringing forward up to two future years’ entitlements.

Any NCC in excess of this cap is taxed at 46.5%.

Please speak to us about the amount and type of contributions paid to your super fund in order not to exceed the new cap limits.