Bamford v FCT continued

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.