The High Court decision in the case of Commissioner of
Taxation v Bamford on 30 March 2010 did not once and for all
resolve the uncertainty regarding the taxation of trusts. It is
likely that only legislative reform will be able to achieve this
difficult task. Although legislative reform of the taxation of
trusts was one of the recommendations of the Henry review, there is
no immediate prospect of this occurring. Therefore, the continuing
complexity and uncertainty must be managed.
Do existing trusts require amendments? What provisions should
new trust deeds contain? In this article we summarise the key
considerations following the Bamford decision and the issue of
Practice Statement PSLA 2010/1 on 2 June 2010 by the Australian
Speaking generally, the rules regarding the taxation of trusts
seek to ensure that, between the trustee of the trust and the
beneficiaries of the trust, 100 per cent of the assessable income
of the trust is subject to taxation.
"Net Income" and "Income of the Trust"
– same same but different?
The main difficulties arise due to the use of two different
terms in the legislation governing the taxation of trusts:
the "net income" of a trust. This is accepted to mean
the income of the trust calculated under the Income Tax
Assessment Act 1936 and Income Tax Assessment Act
1997 (together the Tax Act). Accordingly, the "net
income" of a trust includes capital gains, and
the "income of the trust estate". This is generally
accepted to mean the income of the trust calculated according to
trust law and accounting principles. Generally this would not
include capital gains. However, the High Court in Bamford clarified
that, in determining the "income of the trust estate",
the trust deed plays a critical role. The trust deed can define the
"income of the trust estate" to be the same as the
"net income" of the trust calculated under the Tax Act.
In addition, the trust deed can allow the trustee to determine that
a capital receipt is to be treated as income.
Review of trust deeds
Trust deeds should be reviewed to determine whether the
"income of the trust" is defined, and whether the
definition is adequate. Ideally, the trustee should be afforded
flexibility in the method employed to calculate the "income of
While flexibility is the ideal, it means that thought must be
given each financial year to the calculation of the income of the
trust, and which method will ensure that no beneficiary is left
with an unfunded taxation bill and, on a more positive note, that
the tax position of the trust and beneficiaries is optimised.
If a trust deed is to be amended, it is worthwhile considering
the insertion of provisions to:
allow the streaming and matching of income and expenses (a
practice that has received further support from the decision of the
Queensland Supreme Court in the case of Thomas Nominees Pty Ltd
ACN 010 049 788 v Thomas & Anor  QSC 417 (Supreme
Court of Qld, Applegarth J, 11 November 2010), and
to govern who ultimately controls the trust, and ensure there
is an adequate mechanism for that control to be passed on.
Amendments to a trust deed raise the issue of
"resettlement" of the trust, discussed in the ATO's
"Statement of Principles". The Statement of Principles
focuses on when changes to a trust deed will in substance amount to
the creation of a new trust, with potential capital gains tax,
stamp duty and GST consequences.
Normally we would not expect changes to the way in which the
trust defines "income" and the ability of the trustee to
characterise income and capital receipts to be seen as so
fundamental that a new trust is created. However, each case must be
considered on its merits. Where such changes affect the underlying
entitlements of beneficiaries, particularly where there is a
distinction between "income" and "capital"
beneficiaries, a resettlement may arise.
Finally, trustee resolutions should not be overlooked as these
played a critical role in the Bamford decision. Trustee resolutions
need to accord with the way in which the trust deed defines
"income of the trust" and relate to the specific trust
given the types of income and expenditure it has in the relevant
year of income.
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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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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