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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 TeamThe Full Federal Court decision in Bamford[2] is an important decision. It confirms that:
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:
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 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.
In respect of the amendments to the 2000 income year tax return:
In respect of the 2002 income year:
In respect of the 2000 income year, the Full Court:
2002 income year
In respect of the 2002 income year, the Full Court:
Broadly, this means that:
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:
Review In light of the Bamford decision, it is important that trust deeds be reviewed, and that they:
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.
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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
Qualifications: BCom, LLB (Hons), Monash University
Daniel is a member of Maddocks Tax and Structuring team. He has expertise advising on both direct and indirect taxes. He has represented private and publicly-listed companies, high net worth family groups and not-for-profit organisations in a broad range of tax and duty matters.
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