In our 20 January 2010 post we detailed the Full Federal Court decision in Bamford v Federal Commission of Taxation. The High Court of Australia handed down its decision in this matter in the meantime, on 30 March 2010. The case deals with the basis upon which beneficiaries of trusts should be assessed for tax purposes.
The relevant points to note from the decision are:-
- the term “income of the trust estate” is to be ascertained by the trustee according to appropriate accounting principles and the trust instrument; and
- The “proportionate view” of beneficiaries’ entitlements is the approach to be applied when determining their “share” of the net income of the trust estate to which the beneficiary is presently entitled. Another way of saying this (in the words of Sundberg J) is to say the natural meaning to give to “share” is “proportion” rather than “part” or “portion”.
The practical consequences of this case for discretionary trusts and their trustees and beneficiaries are:
- the annual distribution minutes must be calculated by reference to the trust deed determining the beneficiaries then presently entitled to a distribution from the net income of the trust estate on a proportionate basis rather than on a quantum or “dollar amount” basis; and
- trustees must be aware of the provisions of the trust deed and take care that its administration is compliant with the terms of the deed, particularly in relation to the definition of “income”.
Trust Deed Review
In light of the Bamford decision, it is important that trust deeds be reviewed so they:
- Contain an appropriate definition of 'income' ;
- Contain a power for the trustee to determine whether receipts are to be treated as capital or income and, in the absence of such a determination, that the income of the trust is deemed to be equal to the 'net income' under section 95 of the 1936 Act.
Please speak to us if you are uncertain about the provisions of your trust deed.
Just as the Kenny Rogers classic “Coward of the County” ponders whether to play or to fold the cards, you may be facing a similar quandary in your investment portfolio.
The VIX Volatility Index has risen 30% in the last fortnight based on the debt crisis in Greece and the uncertainty facing the rest of Southern Europe.
There are considerable negative reports in the international press.
In contrast, the Australian stock market has recovered a significant proportion of its GFC related losses and we are constantly being told how strong our local economy is performing with our banks starting to announce extraordinarily strong results. But where are we headed?
The idea that you simply “hold onto your investments because eventually the market will go up” is not the best investment strategy.
Your risk appetite will differ from the next person. You know what keeps you awake at night and your family knows whether you can relax on the weekend. It is of critical importance that you communicate your “risk appetite” to us as your advisers. It may also change over time.
Selling can be a good risk minimisation strategy during times of uncertainty. It is something you should seriously consider. You can always buy back in... the next day, week or in months to follow.
