In a unanimous decision, The High Court of Australia has handed down its judgment in the important Bamford case.
The High Court indicated the importance of this matter with the speed with which the decision came. Argument was heard by the court early this month and the decision was given today. It is a relatively short document.
The case concerned two issues related to the taxation of trusts and beneficiaries.
First Issue
The first issue related to a capital gain that the trustee of a trust had made. The Commissioner of Taxation (“the Commissioner”) argued that the capital gain was not included in “the income of the trust estate” of which sub-section 97(1) of the Income Tax Assessment Act 1936 speaks. If this was correct, this meant that there was no income of the trust estate to which sub-section 97(1) could apply and that the trustee would be assessed under the (punitive) taxing provision, section 99A. The Commissioner argued that the capital gain, while available for distribution under the terms of the trust deed, was not “income according to ordinary concepts” and could not, therefore, be included in “the income of the trust estate”.
The High Court disagreed with the Commissioner’s argument. In the view of the High Court, the term “income of the trust estate” does not only include income under ordinary concepts. It also included statutory income and, capital gains, which are not income according to ordinary concepts, are treated as assessable income by the income tax law.
Second issue
The second issue concerned the question of whether the term “that share” in sub-section 97(1) was a proportionate share. In the case at hand, the taxable income of the trust was higher than the distributed income. This was due to an error of the trustee in computing the taxable income of the trust by considering that certain outgoings were deductible when they were not. The Commissioner assessed the beneficiaries on the total (correct) taxable income according to the proportion each beneficiary had received of the distributed income. The taxpayer argued that this treatment was incorrect.
The High Court decided that the Commissioner was correct and applied the decision of Sundberg J in Zeta Force Pty Ltd v Commissioner of Taxation. Accordingly, when dealing with sub-section 97(1), one must first determine the income of the trust estate (according to appropriate accounting principles and the trust instrument) and determine the proportion of the amount that a beneficiary is presently entitled to. Once that percentage has been calculated, it is applied to the net income (the taxable income) of the trust to determine how much of that net income a particular beneficiary will need to declare in their own tax return.