Alert

Who does this affect?

Anyone involved in administering trusts (such as the funds management industry), particularly trustees required to determine income for tax purposes or prepare tax distribution statements, trustees currently or considering applying for an ATO ruling, or trustees that are the subject of current or anticipated compliance activity from the ATO.

What do you need to do?

Consider the impact of the ATO's position in calculating income, preparing distribution statements, applying for ATO rulings, and any ATO compliance activity.

Authors
Andrew Clements  
Partner

John Edstein  
Partner

Karen Rooke  
Special Counsel

Kai-Chen Chang  
Solicitor

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Andrew Clements  
Partner
T +61 3 9643 4089

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John Edstein  
Partner
T +61 2 9296 2129

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The Commissioner of Taxation has released a Practice Statement PS LA 2009/7 (Practice Statement) regarding how the ATO intends to administer the rules relating to the taxation of trusts. The Practice Statement seeks to address how the law will be administered pending the outcome of the application for special leave to appeal to the High Court from the recent Full Federal Court decision in Bamford.

A summary on the Full Federal Court’s decision in Bamford is available in our previous alert here. A link to the Practice Statement is available here.

ATO will apply views argued by the Commissioner in Bamford

In the Practice Statement, the Commissioner indicates that, notwithstanding the decision in Bamford, the ATO will apply the Commissioner’s views regarding how trustees and beneficiaries are taxed. This includes the view that:

• the “income” of a trust, which determines the tax liability of a beneficiary in relation to the trust, is determined according to ordinary principles, and cannot be modified by the provisions of the trust deed (contrary to the Full Federal Court’s view in Bamford), and

• the “share” of the taxable income of a trust on which a beneficiary is assessed is determined on a “proportionate” basis (that is, the “proportionate” approach applies).

These views will be applied by the ATO in both its compliance activities, as well as the rulings it issues.

ATO will not select cases for active compliance except where Division 6 is exploited

In terms of the compliance activity that it is intended be undertaken, the Commissioner indicates that:

• it will not select cases for active compliance solely to apply the views it argued in Bamford, except where the trustee and beneficiary have taken a view that deliberately seeks to exploit Division 6 (for example, to effect a mismatch between the beneficiaries’ entitlements under the trust and the tax outcomes), and

• it will continue its ongoing compliance activity with respect to trusts engaged in aggressive tax planning and to detect under reporting.

This provides some comfort for those trustees and beneficiaries who have adopted a position which is consistent with the Full Federal Court’s views in Bamford, and who have not deliberately sought to create a mismatch between the economic and tax outcomes, or engaged in aggressive tax planning or tax evasion more generally.

The Practice Statement also provides a number of examples which assist in explaining the Commissioner’s current position pending the outcome of the Bamford appeal.

ATO will seek to defer rulings, objections and appeals until Bamford is resolved

In terms of applications for rulings, objections and appeals, the Commissioner also indicates that:

• it will advise taxpayers if there is a possibility that their cases will be affected by the Bamford litigation, and

• as far as possible, it will seek the agreement of relevant parties to defer such a ruling, objection or appeal until the resolution of Bamford.

ATO will not impose penalties if taxpayers rely on Bamford

The Commissioner also states that it will not impose penalties where trustees and beneficiaries have assessed their tax position based on the Full Federal Court’s views in Bamford, or any alternative view that is reasonably open having regard to the other relevant authorities.

Practice statement regarding capital gains will be withdrawn if ATO wins Bamford

Practice Statement PS LA 2005/1 provides administrative relief for situations where different trust beneficiaries are entitled to income and capital and the trust has derived taxable income and taxable capital gains. PS LA 2005/1 seeks to ensure that the tax liability on the particular items of income and capital falls on persons entitled to those items.

In the Practice Statement, the Commissioner notes that if his views are successful in Bamford, the practice statement will need to be withdrawn.

For more information please contact the Mallesons Tax Team.