Federal court decision requires action for trust deeds

On 30 March 2010, the High Court handed down a decision in the tax case Bamford v Commissioner of Taxation (“The Bamford Case”). This case has been followed by accountants and lawyers Australia-wide as the case clarified the meaning of income of a trust estate and a beneficiary’s share of that income.

The Bamford Case may not rate high on your list of interests, but we at Baker Affleck have been following the case carefully. The case is a milestone in trust law as it deals with the way “income” and “shares” are treated both retrospectively and prospectively. For the first time, the High Court was dealing with aspects of section 97 of the Income Tax Assessment Act 1936 – so this is big news for all accountants and lawyers.

In basic terms the High Court decision will have two main effects as follows:

Beneficiaries may be liable for tax on amounts not received or distributed to them as well as the share of income it actually received. The court ruling says the term “share” can no longer be referred to as quantum of income but rather it referred to the proportion or percentage to which the beneficiary was entitled. Where an amended assessment results in an increase in trust net income, each beneficiary will bear tax on the increased amount in the same proportion that their distribution bears to the original distribution of trust net income.
The trust deed for the trust can define what income is for its own circumstances. So provided the trust deed contains an adequate description of how income is described and treated for the purpose of the trust, the trustee can subsequently determine what is considered income and what is not considered income

Where to from here:

The Commissioner of taxation has issued a Practice Statement which deals with the ATO’s interpretation of the decision and how the ATO will apply that decision; and
there are a number of outstanding issues that were not addressed by the High Court and a major review of the trust income provisions is now expected.

Baker Affleck will review your trust deeds
Commencing in July 2010, Baker Affleck will be reviewing all our clients trust deeds to ascertain whether deeds need to be amended – we will contact you if these changes affect you.

If you have any questions regarding these changes and how they affect you, please contact Baker Affleck or click here to send an email with your contact details and we will contact you. Our team of Accountants and Tax Specialists are well qualified and happy to assist – this is where our passion and expertise really adds value to you