Property Update
May 2010
Taxation of Trusts - The Bamford Case
Trusts are an integral part of real estate
investment and development. Unit trusts
and property syndicates are a common
means of bringing money together to
acquire and develop real estate assets.
Many investments in these unit trusts and
syndicates are effected through trusts often family discretionary trusts.
There has been uncertainty in relation to
the determination of the tax liabilities of
beneficiaries and trustees. The recent High
Court decision of Bamford v. FCT [2010]
HCA 10 has provided clarification of two
key issues, being the meaning of:
• ‘income of the trust estate’; and
• that ‘share’ of the income of the
trust estate.
The Commissioner had issued Practice
Statement PS LA 2009/7 in relation to the
first issue, indicating that notwithstanding
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Property Update
May 2010
the decision in the full Federal Court, he
Bamford v. FCT [2010] HCA 10
‘the income of the trust estate’ suggests
would apply his views regarding how
(Bamford case)
that the latter has a content found in the
beneficiaries and trustees are taxed. The
Income of the trust estate
general law of trusts, upon which Div 6
High Court decision corrects this position.
A clause in the trust deed gave the
then operates.’
Background
The taxation of trusts is governed within
Division 6 of Part III of the Income Tax
Assessment Act 1936. Section 97 provides
that where a beneficiary of a trust is
presently entitled to a share of the income
of the trust estate, the beneficiary’s
assessable income includes so much of that
share of the net income of the trust estate.
trustee discretion to determine whether
any receipt, profit or gain or payment,
loss or outgoing or any sum of money or
investment was or was not to be treated as
income or on capital account. The Bamford
Trust had made a capital gain from the sale
of an investment property during the year.
the italicised terms are not defined, but are
power that enabled it to do so, determined
that a capital gain was part of the income
so that the beneficiaries were entitled to it,
there was no reason why this result should
not follow for tax purposes.
The Commissioner assessed the trustee on
The trustee treated the gain on the
the basis that the income of the trust estate
investment property as part of trust income
did not include the capital gain.
and so the Bamford’s were presently entitled
While the ‘net income of the trust estate’ is
defined as the taxable income of the trust,
Therefore, if the trustee, in pursuance of a
The Commissioner argued that ‘income’
referred only to income according to
to that gain. As a result, they were entitled
to all of the income of the trust estate and
ordinary concepts which does not include a
so, no assessment could be levied on the
capital gain. The trust deed cannot change
trustee in respect of income to which no
Unless beneficiaries are presently entitled
this character and, therefore, no beneficiary
beneficiary was presently entitled.
to the entire income of the trust estate, the
could be presently entitled to the capital
trustee is assessed under section 99A at
gain. The taxpayer argued that income
the highest marginal rate plus the Medicare
could be income as determined under the
Levy. If trust income is interpreted as
terms of the trust deed.
critical to the operation of Division 6.
distributable or accounting income, this
can give rise to taxation of the trustee
where the trust deed provides that the
beneficiaries are presently entitled to an
amount which is less. Further, if income
does not include capital gains and the trust
That share of the income of the
trust estate
The ATO assessment adopted the
proportionate approach to the meaning of
The Court regarded the expression as a
‘share’ i.e. the proportion of the income of
reference to the body of trust law which
the trust estate to which each beneficiary is
determines the trust’s distributable income,
presently entitled.
including the exercise of any relevant
discretion by the trustee:
The Bamfords relied on the quantum
approach i.e. the specific dollar share of
only derives capital gains, there may be no
‘The very juxtaposition with s97(1) of the
the trust income to which the beneficiary
income to which beneficiaries are presently
defined expression ‘net income of the
is presently entitled, arguing that a
entitled and the trustee is taxed.
trust estate’ and the undefined expression
beneficiary could not be taxed on more
Property Update
May 2010
income than they could actually demand
income in accordance with the provisions
based on their proportionate share of the
from the trustee. As such, any net income
of the Income Tax Assessment Acts, such
trust income, regardless of whether they
not included in any beneficiary’s assessable
that profit and loss accounts of the trust
received only a specific amount of the
income would be assessed to the trustee.
can be prepared on the basis of net income
income of the trust.
The Court held that the proportionate view
was in accordance with the meaning of
the legislation.
Conclusion
The Bamford case is authority for the
to ensure there are no differences between
income of the trust estate and net income.
compliance with the terms of the trust
the Bamford case decision to ensure that:
deed. In anticipation, taxpayers should:
• they contain provisions permitting
• obtain an original copy of the trust deed;
capital amounts to be treated as
estate is determined by a combination of
income to which beneficiaries are
the terms of the trust deed, any exercise
presently entitled; and
absence of provisions in the trust deed or
trustee discretions, the trust law about the
meaning of income. The trust deed governs
what is income for the purposes of fixing
the proportion to which beneficiaries are
presently entitled.
The proportion is then applied to the net
income to determine the tax liability of the
audit activity will turn to monitoring
Trust deeds should be reviewed in light of
proposition that the income of the trust
of relevant trustee discretions and, in the
It is expected that the focus of the ATO’s
• any provisions that define ’income’,
• be familiar with the terms of the trust
deed;
• consider the implications of the terms of
the trust deed on the preparation of the
or that affect trust income operate
accounts and tax returns - in particular
appropriately as they will have
the calculation of income of the trust;
implications for beneficiaries’
assessable income.
As a result of the proportionate approach,
a distribution that attempts to allocate
specific amounts of net income to particular
• consider the accuracy of the trust
distribution minutes; and
• review the resolutions of discretionary
trusts to ensure an appropriate exercise
of discretion by the trustee.
beneficiaries and the remainder to a
For further details on this case and its
residual beneficiary will be ineffective.
implications, please contact
Implications
Each beneficiary will be assessed on a
Kevin Shields, Partner, on (08) 9288 6909 or
It follows that a trust deed can define
proportion of the net income of the trust,
kevin.shields@lavanlegal.com.au.
beneficiaries.
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