The High Court's recent decision in Bamford's case provides welcome clarity on the acceptable definition of "income" in trust deeds. Here's a summary. And some pointers.
They key message is:
The position for Cleardocs deeds is explained in the article. Basically, they allow the flexibility which the High Court has confirmed is valid.Tina Savona
The Bamford decision
has provided certainty in relation to some long-debated issues regarding
the taxation of trusts.
The decision is authority
for the view that:
In light of the certainty provided by Bamford's case, some trustee(s) may wish (if the trust's deed allows) to change the definition of income used in the trust's deed. However, that may not be required even if the relevant definition is not the definition considered in Bamford's case.So:
The review of the deed needs to consider whether or not the manner in which "income" is defined in the relevant trust deed is suitable for the particular trust given the underlying activities and assets of that trust.
If you are in doubt about whether your trust deed complies with the requirements set out by the High Court in Bamford's case, seek legal advice. You should also ensure that the trust deed contains a power to adopt a different definition of income from year to year if needs be, and that the power is exercised on or before 30 June for that year.
It is important that trust deeds be reviewed, and that:
In our ClearLaw article here we reported that the Full Federal Court in Bamford v Commissioner of Taxation  FCAFC 66 held that for the purposes of section 97(1) of the Income Tax Assessment Act 1936 the term:
We also reported that on the basis of those holdings by the Court, the Court went on to hold:
On 30 March 2010, the
High Court unanimously:
Argument The Commissioner
appealed in relation to the definition of "income". He argued that
the meaning of "income" for the purposes of section 97 was income
according to ordinary concepts (which would exclude a capital gain)
and could not be influenced by any trustee power or discretion in the
deed. He submitted that the capital gain was taxable in the hands of
the trustee under s 99A.
Decision The High
Court followed the decision of the Full Federal Court in Cajkusic
& Ors v Commissioner of Taxation
 FCAFC 164 and found that "income" means income
as defined by the trust deed.
The High Court confirmed
that the term "income of the trust" as it appears in the opening
words of section 97(1) derives
its meaning from the general law of trusts (not from tax legislation). Accordingly, if the provisions of a trust deed
(either because of the definition of "income" or under a specific
power granted to the trustee) permit the trustee to treat a capital
receipt or expense or outgoing as "income", then that is effective
for the purposes of section 97 of the 1936 Act.
Argument The Bamfords
appealed in relation to the definition of "share". They argued that
they should only be assessed on the specific amount of Trust income
to which they were entitled — a fixed dollar amount of taxable income
that should remain the same regardless of the denial of deductions.
The High Court followed the findings of the Full Court and confirmed
that the term "that share" in section 97(1) of the
1936 Act referred to a beneficiary's proportionate, or fractional,
entitlement to the income of the trust estate. The Court endorsed the
proportional approach of Sundberg J in Zeta Force Pty Ltd v Commissioner
of Taxation — "the natural meaning to give to the word "share"
where it appears for the second time [in s 97(1)] is "proportion"
rather than "part" or "portion".
In simple terms this
means that if a beneficiary of a trust is presently entitled to a percentage
of the income of that trust, then that beneficiary must include
that percentage of the trust's taxable income in that beneficiary's
own assessable income.
For more information please contact Maddocks in Melbourne (03 9288 0555) and ask for a member of the Tax & Revenue Team.
You can access various ClearLaw articles for more relevant information relating to discretionary, hybrid and unit trusts — including tables comparing the features, benefits, etc of each type of trust:
Download a checklist of the information you need to order a document package.
Geoff Musgrove is a partner in the Maddocks Commercial team.
Geoff's principal areas of practice are:
Geoff acts for a wide range of commercial, government, accounting, manufacturing, professional and rural industry clients.
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.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.