If you operate your business using a trust structure then the
decision in Bamford v Commissioner of Taxation is of
importance to you.
In this 2010 case, the High Court of Australia confirms that the
terms of a trust deed are of vital importance concerning the
taxation of trusts. Four years later, many trust deeds remain
unchanged and outdated when it comes to how to treat trust income
One part of the decision in Bamford concerned the interpretation
under s 97 of the Income Tax Assessment Act 1997 (the Act)
in respect of the meaning of "net income of the trust
The High Court in Bamford's case held that:
Under the Act, "net income" means taxable income,
that is, income after all allowable deductions have been
subtracted. Accordingly, the "net income" of a trust
includes capital gains; and
"income" of the trust estate means the
income of the trust calculated according to trust law and
accounting principles. While this would not generally include
capital gains, significantly, it was held that a trust deed can
define the "income of the trust estate" to
include both income and capital gains.
In Bamford's case, applying the above principles, capital
gains made by the trust could be distributed to, and taxable to,
income beneficiaries instead of being taxable to the trustee at the
highest marginal tax rate.
What does this case mean for you?
If you have not already done so, your trust deed should be
reviewed to ensure "income of the trust" is defined.
Your trust deed should also ensure that the trustee has
sufficient powers to permit a trustee to determine trust income in
each income year.
Trust resolutions concerning distributions should be drafted in
accordance with the terms of the trust deed.
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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