Bamford v Commissioner of Taxation
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.
