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:
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
The ATO has published 2 statements in response to Bamford's case:
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Also, the ATO has withdrawn a number of its statements and rulings — see the withdrawn statements and rulings under the heading "Administrative Treatment" here.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.
The ATO's statements in response to Bamford take effect from 2 June 2010.
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.|
The ATO considers that the following propositions, among others, emerge from Bamford:
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, 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'.
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:
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.
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.
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.
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:
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 Section 97(1) is the key section, the case generally concerns Division 6 of Part III of the 1936 Act.
 Commissioner of Taxation v ANZ Savings Bank (1998) 194 CLR 328.
 Paragraph 15.
 Which the Commissioner argued in Bamford.
 In respect of the 2009-2010 and earlier income tax years.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
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