Bamford

You may have heard or seen in the media over the last twelve months much about the implications of Bamfords case in relation to trust deed changes and distributions of income from trusts.  Our advice, and our view at this point in time, is that there is still clarification to come from the Australian Taxation Office (ATO) and to amend trust deeds now would be somewhat premature, when in fact, there might be a further change just around the corner.  Our advice has been that we should be receiving some more clarification early in 2011.  Until we receive this clarification either from the ATO or a funded test case in relation to this matter we should not be rushing in unnecessarily and amending trust deeds.

A new practice statement – PS LA 2010/1 – has been issued, and according to this practice statement, the Commissioner will not generally seek to alter returns for the 2009-10 or earlier income years if taxpayers have relied on a view of Division 6 that was reasonably open prior to the Bamford litigation. Our advice has been, and is confirmed by PS LA 2010/1, that the ATO will be taking the approach that the changes as a result of Bamford will start from 1 July 2010, that is, the 2010/11 financial year. 

The landscape of trust distributions, the meaning of trust income and the taxation of it, has been argued about for a long time. The decision of the High Court in Bamford is a welcomed one in some respects endorsing the proportionate approach, which we have been using for some time, where the income of the trust is different to the taxable income of the trust and, more importantly, that the income of the trust is determined and derived from trust law principles, subject to the overriding provisions of the trust deed.

There appear to be two key issues that remain unresolved and are:

• The tax consequences of streaming different classes of income to different beneficiaries; and
• The trust law implications of trust instrument terms or trustee determinations which equate trust law income with taxable income where the taxable income includes notional amounts such as franking credits.

In the near future, post further clarification on the above issues, we will need to review your trust deeds and the relevant powers of the trustee in determining trust income and the ability to stream income between different categories or classes. Where a trust deed lacks all or any of the kinds of definitions, consideration will be given to amending the deed to give the trustee the widest possible powers in determining and distributing the trust income. This is provided the trustee has a sufficiently wide power of variation and the amendments do not give rise to a resettlement of the trust.

We confirm there will need to be action on the review of trust deeds prior to 30 June 2011 and we have already been in discussions with a number or organisation in order to be able to secure most practically tax effective (and costs effective) product for our clients.

We have a history of ATO U-turns and we suspect due to gaining momentum and pressure from professional bodies their current U turns in relation to income streaming, beneficiary entitlement accounts and income averaging for primary producers will have some further changes, stay tuned!

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