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The definition of 'trust income': the trust deed prevails

Accountants and lawyers have long debated the appropriate definition of 'income' to include in trust deeds. Decisions over the years have provided varying guidance, but the Full Federal Court's recent decision in Bamford represents a further step in what has become the preferred direction — namely, the definition in the trust deed (or the definition adopted by the trustee from year to year), will determine what constitutes 'income of the trust estate' for the purposes of section 97 of the 1936 Act.[1]

The decision also provides that the correct method of determining a beneficiary's 'share' of trust income is the proportionate approach.

The case confirms the approach taken in Cleardocs trust deeds. Other deeds should be reviewed as explained in this ClearLaw article.

Tina Savona - Maddocks Tax & Revenue Team


The Full Federal Court decision in Bamford[2] is an important decision. It confirms that:

  • the terms of the trust deed prevail in determining what is meant by the 'income of the trust' to which beneficiaries are presently entitled and assessed for tax; and
  • the 'proportionate approach'[3] — and not the quantum approach — is the correct approach in relation to how Division 6 of 1936 Act operates.

The case confirms the approach taken in Cleardocs trust deeds.


The meaning of the words 'a share of the income of the trust estate', as used in section 97 of the 1936 Act, has been the subject of conjecture for many years. The ongoing doubt about their meaning has:

  • led to uncertainty in the taxation of trust beneficiaries under section 97; and
  • cast doubt on the extent to which a trustee (under a trust deed) can determine or influence what is and what is not the income of the trust estate.

Although the 2006 decision in Cajkusic & Ors v Commissioner of Taxation[4] (Cajkusic) suggested that the terms of the trust deed should prevail in determining the 'income of the trust', the Commissioner of Taxation disagreed with this interpretation (and said so in a later Decision Impact Statement which you can view here).

The decision in Bamford has provided some welcome clarity on the trust deed's role in defining 'income of the trust estate' for the purposes of section 97.


The first and second taxpayers (Mr and Mrs Bamford) were a married couple and the directors of the third taxpayer, which was the trustee of the Bamford Trust (Trust).

The Trust was a family discretionary trust and the Bamfords were discretionary beneficiaries of the Trust.

The Trust's deed allowed the trustee a discretion in determining whether a receipt, profit or gain, loss or outgoing was to be treated as an income or capital account.

The ATO's assessment

The Commissioner denied deductions claimed by the Trust in the 2000 income year.

The denial for the 2000 income year resulted in the taxable income of the Trust exceeding its ordinary income. The Commissioner sought to assess Mr and Mrs Bamford on their proportion of the increased taxable income.

As a result of the deductions being disallowed, the Trust did not have sufficient carry forward losses to apply against capital gains in the 2002 income year. Consequently, the Trust had an unexpected net capital gain. The Commissioner sought to assess the capital gain against the trustee at the highest marginal rate.

The issues

In respect of the amendments to the 2000 income year tax return:

  • The Bamfords 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 quantum approach); and
    • any remaining amount should be taxed in the trustee's hands.
  • The Commissioner argued that the proportionate approach applied, and the additional Trust (taxable) income should be taxed in the hands of the Bamfords in proportion to the actual amounts they received (the proportionate approach).

In respect of the 2002 income year:

  • The Bamfords argued that:
    • the Trustee's resolution (made under a power in the Trust's deed), that capital gains be distributed to Mr and Mrs Bamford as income, was effective; so that
    • all relevant capital gains had, in fact, been distributed to Mr and Mrs Bamford as income and should be assessed in their hands (at a lesser marginal tax rate) and not in the hands of the trustee.
  • The Commissioner 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 all relevant capital gains should, therefore, be taxed in the hands of the trustee; and
    • could not be influenced by any trustee power or discretion in the deed.

The Court's Decision

2000 income year

In respect of the 2000 income year, the Full Court:

  • found in favour of the Commissioner; and
  • held that the term 'a share of the income of the trust estate' in section 97(1) referred to a beneficiary's proportionate, or fractional, entitlement to the income of the trust estate. It could not refer to a fixed amount.

2002 income year

In respect of the 2002 income year, the Full Court:

  • found in the taxpayers' favour; and
  • held that the expression 'income of the trust estate' should be interpreted as meaning the income of the trust as understood in trust law subject to the terms of the trust deed.

Broadly, this means that:

  • if a trust deed allows the trustee to treat a capital receipt as 'income' for the purposes of fixing the entitlements of beneficiaries to distributions, then the trustee can effectively treat it that way; and
  • a beneficiary who becomes entitled to a share of that capital receipt as a result of the trustee treating it as 'income of the trust estate' must include their share (or proportion) of the net income of the trust estate in their assessable income. The trustee is not liable to be assessed on the amount under section 99A.


Bamford's case stands for the proposition that 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 as 'income', then that is effective for the purposes of section 97 of the 1936 Act. Naturally, such a characterisation does not affect the character of that receipt or outgoing for the purpose of the section 95 definition of 'net income'.

It follows that, if the relevant trust deed:

  • Does not contain a definition of income, then:
    • 'income of the trust estate' will be determined according to ordinary (or trust law) principles and the beneficiaries presently entitled to the ordinary income will be taxed on their proportionate or fractional entitlements; and
    • to the extent that there is taxable income of the trust (e.g. capital gains) but no ordinary income of the trust, the trustee may be taxed in respect of this amount.
  • This is consistent with the current ATO view and reaffirms the treatment of most judicial decisions that precede Bamford.
  • Does contain a definition of income, then:
    • those beneficiaries presently entitled to income that is defined in the trust deed to be 'income of the trust estate' will be taxed on their proportionate entitlements.
    • in simple terms, this means that if (as a result of the manner in which income is defined in the relevant trust deed) only one beneficiary is presently entitled to the 'income of the trust estate', then that beneficiary may be liable for all of the tax that has accumulated over that year. That is so even if they were not the only recipient of all of the physical (or ordinary) income of the trust.
  • This ruling is contrary to the Commissioner's assertions and, consistent with how many tax practitioners viewed the decision in Cajkusic.

Recommended Actions

Review In light of the Bamford decision, it is important that trust deeds be reviewed, and that they:

  • Contain an appropriate definition of 'income'. For example, Cleardocs' deeds adopt a definition equivalent to taxable income ('net income' under section 95 of the 1936 Act). The benefit of adopting this definition is that (as long as the beneficiary is made presently entitled and that present entitlement is satisfied), the beneficiary (and not the trustee) will be taxed on that portion of the tax income of the trust that is attributable to that beneficiary.
  • 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. For example, Cleardocs' deeds contain a discretion for the trustee to adopt another definition in respect of a year of income by signing a minute to that effect.
  • The benefit of adopting a provision with this sort of trustee discretion is the flexibility it provides. If, for instance, 'income' is defined as ordinary income and taxable income of the trust (for example, capital gains) but in a particular year there is no ordinary income, then the trustee is able to make the relevant determination — that is, the trustee can determine to treat capital gains as 'income'.

All Cleardocs trust deeds have an appropriate definition of 'income' and allow this discretion — even after Bamford's case. Other trust deeds should be reviewed.

Amend If you have a trust with a deed containing an inadequate definition of 'income' or with inadequate flexibility, then the trustee(s) should consider arranging to amend the deed. When doing so it is, as always, vital to avoid a resettlement of the trust.

Essential trust resources

Stay on top of the tax issues and developments affecting trusts with Thomson Reuters' Australian Trusts Tax Handbook. Available in book, ebook and online. Order or find out more today.

Questions & more information

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Maddocks Tax and Revenue Team.

[1]Income Tax Assessment Act 1936 (Cth)
[2]Bamford v Commissioner of Taxation [2009] FCAFC 66
[3]The proportionate view essentially means that whatever proportion of trust 'income' that beneficiaries are presently entitled to, they will be assessed on the same proportion of the trust's taxable income. This is different to the so-called 'quantum' view, which provides that a taxpayer is only taxed on the amount they actually receive or are entitled to demand (i.e. a particular dollar sum)
[4][2006] FCAFC 164


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