Various issues concerning the operation of family discretionary trusts and unit trusts have arisen as a result of a High Court decision which confirmed a previous Full Federal Court decision in Bamford v. Commissioner of Taxation. This decision was handed down on the 30th March 2010 and on the 2nd of June the ATO issued a Decision Impact Statement and a Practice Statement as to the implications of this case.

As a result trust deeds need to be urgently reviewed so as to ensure, among other things, that monies received by a trust for taxation purposes, such as for example, net capital gains, franked dividends and various other concessionary amounts are able to be utilised and where required distributed to the relevant beneficiaries or unit holders, as the case may be.

If this cannot be achieved because of deficiencies in the trust deed then major consequences could follow in taxation terms with tax being levied at the punitive rates applicable where the trust deed does not allow for distribution of various categories of income.

The case revolved around income according to ordinary concepts. On that basis a net capital gain derived by the trustee could not be included as income according to ordinary concepts and any distribution minute accordingly was not effective in distributing the net capital gain.

The result was that the trustee was to be assessed on the net capital gain. {Trustees are usually taxed when a distribution is not made. Trusts have to distribute the net profit for the year to beneficiaries who are then taxed on the distribution otherwise the trustee will be taxed in lieu).

The Bamford Trust Deed contained a re-characterisation clause allowing the trustee to treat the net capital gain as income and as there were beneficiaries presently entitled to that income, the taxation on the gain fell on those beneficiaries at normal marginal tax rates and not on the trustee at the penalty rates prescribed.
The case also confirmed a longstanding contention that a beneficiary of a trust is taxed on the same proportion of net income as the proportion of trust law income (accounting income). This was originally clarified in case known as “Zeta Force Pty Ltd”.

The overall outcome of Bamford vs Commissioner of Taxation is that in determining what is the net income of a trust estate is primarily determined by the contents of the Trust Deed –so the Trust Deed is important.

The outcome of this is that Trust Deeds (some of which were drafted many years ago) should be examined and as a result of examination a Deed of Amendment may need to be prepared dealing with the definition of “income” as well as an income recharacterisation clause.

We can arrange for an examination of a Trust Deed with an expert lawyer for the following fees:
• Examination and Analysis of the Trust Deed – $330 (including GST)
• Preparation of a Deed of Amendment (if required ) - $385 (including GST)

In any event, please contact our office if you wish to discuss this issue further.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.