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The ATO responds to Bamford's case on Discretionary Trusts

The Australian Taxation Office (ATO) has taken a restrictive approach in response to the High Court's decision in Bamford's case in which the High Court:

  • confirmed that "income" of a trust means income as defined by the trust deed; and
  • confirmed that if the beneficiaries of a trust are presently entitled to income of the trust, then they must include that share of the income in their assessable income for that tax year.

This article discusses the ATO's response.

The position for Discretionary trusts with a Cleardocs deed is explained in an earlier ClearLaw article here. The Cleardocs deed allows the flexibility which the High Court in Bamford's case has confirmed is valid.

Emily Millane

What is the ATO's response to Bamford's case?

The ATO has published 2 statements in response to Bamford's case:

  • a Decision Impact Statement setting out the ATO's view on the decision. You can read the Decision Impact Statement here; and
  • a Practice Statement Law Administration setting out how ATO staff will approach compliance issues under the relevant section of the Income Tax Assessment Act 1936 — that section provides that a beneficiary who is presently entitled to a 'share of the income' of the trust must include their proportionate share in their assessable income.[1] You can read the Practice Statement here.

Although neither of the ATO's statements are legally binding, they do set out the Commissioner of Taxation's approach.

Also, the ATO has withdrawn a number of its statements and rulings — see the withdrawn statements and rulings under the heading "Administrative Treatment" here. In particular, from the beginning of the 2010-2011 income year, Taxation Ruling 92/13 (trust dividends and franking) no longer applies. However, taxpayers may still rely on that ruling for the year ended 30 June 2010 and for earlier years.

When are the ATO's statements effective?

The ATO's statements in response to Bamford take effect from 2 June 2010.

What did the High Court decide in Bamford?

The High Court decided 2 key matters — each with an important implication:

What was decided for the Bamford trust? What is the implication?
A capital profit made by the trust was 'income of the trust estate' for the purposes of the 1936 Act for that tax year. That was so because the trust deed gave the trustee the power to treat capital profit as income. The income of a trust estate is what the trust deed says it is.
A beneficiary's 'share' of income means their proportionate entitlement of the trust estate. (It does not mean a fixed dollar amount to which they are entitled.) If a beneficiary is entitled to a percentage of a trust estate, then their percentage must include the percentage of the trust's taxable income in the beneficiary's individual income tax return.

What implications does the ATO see in the case?

The ATO considers that the following propositions, among others, emerge from Bamford:

  • trust deeds may treat the whole or part of a receipt of capital as income — which means that for the purposes of section 97 of the 1936 Act, the receipt is 'income of the trust estate'; and
  • if the trust deed doesn't specify when a receipt is income, and if the trustee has no power to characterise receipts, then the question of whether the whole or a part of a receipt constitutes 'income of the trust estate' is determined in accordance with trust law principles.

Can receipts be "recharacterised" the other way — that is, can income be treated as capital?

Bamford's case was about a trustee treating capital as income — which the High Court decided was allowed.

But, curiously the reverse is not allowed — in a 1998 case involving ANZ Bank[2], the High Court decided that a trustee was not allowed to treat income as capital. In the ANZ case, the Court said the words of the trust could not alter the 'character of the moneys in the hands of the trustees'.[3]

In Bamford's case, the High Court did not comment on whether a trust deed can have the effect of treating income as capital.

In the ATO's statement on Bamford's case, the ATO emphasises that even in light of Bamford's case, the Commissioner does not feel free to consider that the ANZ case was wrongly decided.

So the position is:

  • in the ANZ case in 1998, the High Court decided that a trustee is not allowed to treat income as capital; but
  • in Bamford's case in 2010, the High Court decided that a trustee is allowed to treat capital as income.

The ATO makes clear that it will proceed on that basis.

The Commissioner's comments fortify our suggestion in earlier ClearLaw articles that when in doubt, you should have your trust deed reviewed by a lawyer.

How will ATO staff apply the law?

ATO staff:

  • should accept that trustees and beneficiaries have taken 'reasonable care to comply with taxation law' if they prepare returns for the 2009-2010 or earlier income years on the basis that income means income according to ordinary concepts.[4]
  • should be prepared to look beyond the distribution statement in a trust's tax return when determining who should be assessed on the trust's tax net income — that is, they should not see the statement as the sole basis for an assessment.
  • should not select a taxpayer for an active compliance check merely to correct errors in the taxpayer's tax return which, with the benefit of the Bamford decision, may be seen to be wrong (unless the taxpayer has made a deliberate attempt to exploit Division 6 of the 1936 Act).[5]

Tell the ATO what you think

The ATO has invited comments on the Decision Impact Statement. Responses are due by 28 July 2010. Have a look at the Decision Impact Statement for where to send your response at the ATO.

More information from Maddocks

For more information, please contact Maddocks in Melbourne (03 9288 0555) and ask for a member of the Tax and Revenue or General Commercial Teams.

More Cleardocs information on trusts —


In addition to our previous ClearLaw article on the Bamford decision, you can access various ClearLaw articles for information on discretionary, hybrid and unit trusts — including tables comparing the features and benefits of each type of trust:

Order Cleardocs trust packages

Download checklist

Download a checklist of the information you need to order a document package.

[1] Section 97(1) is the key section, the case generally concerns Division 6 of Part III of the 1936 Act.

[2] Commissioner of Taxation v ANZ Savings Bank (1998) 194 CLR 328.

[3] Paragraph 15.

[4] Which the Commissioner argued in Bamford.

[5] In respect of the 2009-2010 and earlier income tax years.


Lawyer in Profile

Jack Coventry
Jack Coventry
Senior Associate
+61 3 9258 3819

Qualifications: BA (Philosophy), Monash University, JD (Juris Doctor), University of Melbourne

Jack is a member of Maddocks Commercial team. He advises a range of corporate and private clients on:

  • M&A transactions,
  • corporate reorganisations, and
  • legal and tax structuring.

Jack acts for clients on both buy-side and sell-side and specialises in founder-owned businesses and Australian subsidiaries of multi-national companies. He works across a number of sectors including information technology, professional services, and property development and management including land lease.

Jack’s structuring work includes assisting multinationals to structure Australian operations, listed companies to achieve regulatory compliance / optimisation and providing general tax structuring. He has also represented clients in tax controversies including before the General Anti-Avoidance Review Panel (GAAR Panel) and the Federal Court of Australia.

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