Trust Income Distribution: Bamford v Commissioner of Taxation [2010]
The High Court has recently delivered (30 March 2010) an important judgement in relation to the manner by which trusts (both private and public) are taxed. The judgement was a unanimous verdict by the five sitting Justices.
This case involved a private trust and distributions made from such trust by the taxpayer. It was heard by the High Court after both the taxpayer and CT appealed an earlier decision by the Full Federal Court. The High Court upheld the decision of the earlier court and dismissed both appeals.
The judgement provides certainty to taxpayers in determining:
- (i) the definition of "income" of the trust fund/estate;
(ii) that a beneficiary will be taxed based on their proportionate share of the trust income and not the amount of income that they are entitled to.
In relation to the first item the High Court has confirmed that the trust deed will determine the 'income of the trust estate'. That is, the wording of the deed can allow income of the trust to include capital gains. This is an important advancement as the ruling provides guidance to taxpayers and their advisers as to how to deal with such gains within a trust environment.
Prior to this there was uncertainty as to what constituted "income of the trust estate". This decision clarifies concept of "income" being that definition as found within the trust deed establishing the trust.
The High Court also provides clarification as to 'what share of income' a beneficiary must disclose in their personal assessment. It upheld the commonly held view that the proportional approach is the correct way to allocate taxable income to beneficiaries. Therefore if trust beneficiaries are presently entitled to a 100% share of trust income then they will be required to include in their assessable income 100% of their share of the taxable income of the trust.
As a result of Bamford, trustees of private trusts should:
- review the terms of their deeds to ensure that such deeds allow for the ability to re-define capital gains as trust income;
- strictly follow the provisions of the trust deed as to distributions made from trust income; and
- ensure that all trustee decisions are appropriately resolved and minuted.
Please contact Andrew Penton should you wish to review the terms of your trust deed or discuss any matter pertaining to your current financial structure.