The Bamford tax decisions were handed down on 30 March 2010 by the High Court of Australia. This was important because the highest court in Australia had the opportunity to give its views on some of the difficulties involved with the taxation of trust income.
I will not discuss the facts of the cases. In summary, the High Court decided two key things.
These were that:
[1] The capital profit made by a trust was “income of the trust estate” as a result of the valid exercise by the trustee of a power under the deed. The income of the trust estate refers to the accounting or distributable income of the trust; and [2] The term “that share” in section 97 of the Income Tax Assessment Act 1936 referred to a proportion of the income of the trust estate and not a part or portion. This meant that the High Court affirmed what is know as the “proportionate” approach as the correct method of allocating the taxable income of a trust to its beneficiaries.The ATO has reacted to this decision with some very important changes in its views. On the 2nd of June 2010, the ATO released its decision impact statement on the two Bamford cases.
These include:
[1] A provision of a trust instrument, or a trustee acting in accordance with a trust instrument, may treat the whole or part of a receipt as income of a period and it will thereby constitute income of the trust estate – that is the accounting or distributable income. [2] If a trust instrument does not specify when a receipt is to be treated as income of a period, and the trustee does not have any special power to characterise the receipt, then the question of whether the whole or part of a receipt constitutes income of the trust estate will fall to be determined in accordance with the general presumptions of trust law. [3] The provisions of a trust instrument, or a trustee acting in accordance with a trust instrument, may determine whether an outgoing is properly chargeable against the income of a period (absent which the question will fall to be determined in accordance with the general presumptions of trust law). [4] Subject to the possible operation of provisions outside the trust tax provisions, the amount included in a beneficiary’s assessable income under section 97 consists of an un-dissected or un-allocated proportionate share of the entirety of the tax net income.What flows from this is that the ATO is withdrawing a number of rulings that have been part of the way trustees and tax practitioners have dealt with the taxable income of trusts for many years. Significantly, Taxation Ruling TR 92/13 is being withdrawn. This ruling dealt with dividends received by trusts and specifically whether franked dividends could be streamed to beneficiaries.
It appears that the ATO may now be going to adopt the view that trust income of various types cannot be streamed to different beneficiaries. The ATO states in the decision impact statement that it will be consulting on a new interpretative product that will consider the current imputation provisions in the 1997 Tax Act.
The ATO also released a Law Administration Practice Statement. This is PS LA 2010/1 in relation to the Bamford decisions. This advises tax officers that the Commissioner has changed his view in relation to the way beneficiaries and trustees are taxed due to the Bamford decisions.
Broadly, the assessments of beneficiaries and trustees will not be altered if trustees and beneficiaries lodge tax returns based on the Commissioner’s prior interpretation of the law for the 2009/2010 income year and earlier years. However, if there is a deliberate attempt to exploit the trust tax provisions or there is a dispute in relation to these years, tax officers must apply the law as the Commissioner now views it.
The PS LA also states that if there is uncertainty as to whether a trustee or a beneficiary should be assessed on trust income, assessments should be raised against both the trustee and the beneficiaries.
These two documents herald an important change in the way the ATO expects trustees of trusts to allocate taxable income to beneficiaries. If you deal with trusts, it is most important that you understand these changes.