Alert

Who does this affect?

Anyone involved in the administration of trusts, particularly in the funds management industry

What do you need to do?

Consider the impact of the decision and review the trust deed for any current or proposed trusts

Authors
Andrew Clements  
Partner

Karen Rooke  
Special Counsel

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Andrew Clements  
Partner
T +61 3 9643 4089

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The Full Federal Court today handed down the much anticipated decision in Bamford v Commissioner of Taxation. The case deals with the basis upon which beneficiaries of trusts should be assessed for tax purposes. The decision is of significant importance to those involved in the administration of trusts and the funds management industry more generally, particularly in the lead up to year end distributions.

The issue

There has been a long-standing debate regarding the concepts which underpin the tax treatment of beneficiaries of trust and how they are taxed. The Bamford decision will provide significant assistance for the funds management industry and those involved in the administration of trusts as to the basis upon which beneficiaries should be assessed.

In particular, it deals with the vexed question of whether it is possible for the amount distributed to beneficiaries to be based on the taxable income of the fund without adverse tax consequences. The decision should provide those involved in the administration of trust with much welcomed assistance in determining their year end tax allocations.

Decision in Bamford

The Commissioner’s arguments in Bamford sought to limit the ability of the trustee to give effect to the terms of trust deeds in determining how a liability to tax will be determined.

The Court decided that the terms of the deed should prevail in determining the ‘income of the trust’ to which beneficiaries are presently entitled and are assessed to tax.

The impact of the decision

There are some important practical consequences for taxpayers arising out of the decision.

First, the decision should remove the risk for trusts with appropriate deeds, that capital gains made by trusts will be assessed at penal rates (by the trustee) if the trust does not derive other income in the year. Instead, the capital gain will be taxed in the hands of the beneficiary.

Second, the Court decided that a beneficiary’s liability to tax in respect of the trust’s taxable income is governed by their proportionate interest in the income, even in circumstances where a beneficiary is only allocated a particular dollar sum. It follows that if deeds (and in the case of discretionary trusts, resolutions) are not appropriately drafted, that beneficiaries may be taxed on more than they receive.

It will interesting to be see how the ATO will respond to this decision.

For more information please contact the Mallesons Tax Team.