Bamford v FCT on Trust Deeds

7/04/2010

IMPLICATIONS OF FCT v BAMFORD; BAMFORD v FCT [2010] ON TRUST DISTRIBUTIONS

High Court dismisses appeals from the decision of Full Federal Court in Bamford

On 30 March 2010, the High Court of Australia in FCT v Bamford; Bamford v FCT [2010] HCA 10 by a unanimous decision dismissed both the taxpayer and the Commissioner's appeal from (and endorsed) the decision of the Full Federal Court of Australia in Bamford v FCT [2009] FCAFC 66 (Bamford).

The case concerned:

1. the meaning of the words "that share" in the phrase "that share of the net income of the trust estate" in s 97(1)(a)(i) in Division 6 Part III of the Income Tax Assessment Act 1936 (ITAA 1936), and

2. the meaning of the words "the income of the trust estate" in s 97(1) of ITAA 1936.

The Implications for Trust Minutes

The High Court endorsed the proportional approach of Sundberg J in Zeta Force Pty Ltd v FCT (1998) 84 FCR 70, rather than a parts approach, in allocating that share of the net income (defined in s 95(1) of ITAA 1936) under s 97(1)(a)(i) of ITAA 1936.

This is consistent with the Full Federal Court which unanimously agreed with the Administrative Appeals Tribunal (AAT) that a beneficiary was to be taxed on its proportionate fractional entitlement to the income of the trust estate rather than on a specified or fixed amount.

The court unanimously held that the term that share in the phrase that share of the net income of the trust estate in Section 97)(1)(a)(i) of ITAA 1936 refers to a beneficiary's proportionate entitlement to the income of the trust estate, even where a beneficiary is only allocated a fixed dollar amount of income under the trust distribution minutes.

The Implications for Trust Deeds

The High Court took the view that the income of the trust in s 97(1) of ITAA 1936 has a content found in the general law of trusts.

This is consistent with the Full Federal Court which, by majority with Stone and Perrett JJ, overturned the AAT's finding that income of the trust estate in Section 97 of ITAA 1936 meant ordinary income, instead holding that the expression should be interpreted as meaning the income of the trust as understood by trust law. This is consistent with and follows the Full Federal Court decision in Cajkusic v FCT (2006) 155 FCR 430 (Kiefel, Sundberg & Edmonds JJ, 24 November 2006).

Hence, if under the terms of a trust deed a capital receipt is deemed to be included in the income of the trust it will be

so treated in determining the income of the trust. Therefore, where the trust deed provides the necessary powers, the trustee can re-characterise any capital gain as income of the trust estate, which can be appointed to a beneficiary to have a present entitlement to the net capital gain.

As a result, the capital gain can be assessed to the beneficiary. This should remove the risk that capital gains made by a trust are assessed at penal rates to the trustee, where the trust does not have any other income in that year.

Practice Statement Law Administration PSLA 2009/7 and PSLA 2005/1(GA)

Under PSLA 2009/7 the Commissioner indicated that trustees and beneficiaries can adopt the Full Federal Court's views in Bamford provided they do not deliberately seek to create a mismatch between the economic and tax outcomes, or engage in aggressive tax planning or tax evasion.

The decision of the High Court may result in uncertainty as to what the Commissioner regards as a deliberate attempt to exploit the provisions relating to the taxation of trusts.

The decision of the High Court may also result in uncertainty as to whether the Commissioner will allow taxpayers the choice of how the capital gains of a trust are to be taxed under PSLA 2005/1(GA).

Action to take

In view of the decisions of the High Court and Full Federal Court in Bamford, trust deeds (for all types of trusts) and distribution minutes (for discretionary and hybrid trusts) should be reviewed and/or drafted to ensure that beneficiaries are not taxed on more than they receive from their trusts, particularly where there are capital gains in the trust. This may include:

1. reviewing trust deeds to ensure the deed provides the ability to re-define capital gains as income of the trust estate;

2. drafting a specific trustee determination that capital gains be treated as income of the trust; and

3. drafting trust minutes by 30 June to ensure an appropriate exercise of discretion by the trustee of a discretionary trust to allocate the percentages of income of the trust to beneficiaries [because minutes of a discretionary trust distributing dollar amounts of net income (calculated under s 95 ITAA 1936) to some beneficiaries and the balance to a stated beneficiary, will not be effective as in Bamford].

The above actions must be taken by 30 June when trust distributions must be made.