Last month we discussed the High Court decision in the
Bamford case. We highlighted that the ATO was expected to
issue a Decision Impact Statement in the near future. The ATO has
now done so with its statement dated 2 June 2010.
Summary of the Bamford case
To recap, this was the first time that the High Court had been
approached to consider two important concepts in trust law - the
meaning of "share" in the Bamfords' appeal and the
definition of "net income" in the Australian Taxation
Office's appeal. The case involved consideration of key aspects
of Section 97 of the Income Tax Assessment Act 1936
The High Court rejected the arguments used by the Commissioner
and held that the terms of the trust deed should prevail in
determining how the beneficiaries should be assessed to tax. The
Commissioner did have a victory in that the High Court found
against the Bamfords on the argument put forward that they should
only be assessed on the quantum of trust income that was
distributed to them and instead imposed the proportionate approach.
(Please see the article Family Trusts after Bamford in
last month's Swaab Connect for a fuller discussion of the
Summary of the ATO statement
In its statement, the ATO highlights what it views as being the
practical result of the decision.
First, a provision of a trust instrument, or a trustee acting in
accordance with a trust instrument, may treat the whole or part of
a receipt of income of a period and it will therefore constitute
income of the trust estate for the purposes of Section 97 of the
Income Tax Assessment Act 1936 (ITAA 1936).
Secondly, if a trust instrument does not specify when a receipt
is to be treated as income of a period, and the trustee does not
have any special power to characterise receipts, then the question
of whether the whole or part of the receipt constitutes income of
the trust estate for the purposes of Section 97 of the ITAA Act
will fall to be determined in accordance with general trust law and
similarly in relation to determining whether an outgoing is
properly chargeable against the income of a period.
Finally, subject to the possible operation of provisions outside
Division 6 of the ITAA 1936, the amount included in a
beneficiary's assessable income under Section 97 of the Act
consists of an undissected or unallocated proportionate share of
the entirety of the net income.
ATO to withdraw rulings and practice statements
The ATO expects to withdraw the following rulings and practice
Taxation Ruling TR95/29 - Income Tax: Division 16 -
Applicability of averaging provisions to beneficiaries of trust
estates carrying on a business of primary production
Taxation Ruling No. IT331: Adjustments to estate income as
returned to arrive as net income of estate for the purposes of
Section 95 ITAA 1936
Law Administration Practice Statement (general administration)
PS LA 2005/1 (GA): taxation of a capital gains of a trust.
Implications for family trusts
If you have a family trust in place you should seek legal advice
to ensure it has an adequate definition of income, adequate trustee
powers which allow your trustee, amongst other things, to
characterise receipts and also powers allowing a trustee to
determine whether an outgoing is properly chargeable against the
income of a particular period.
The ATO has invited comments on the statement issued and we will
keep you updated as to whether any further amendments are made to
this Decision Impact Statement or any others.
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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