Australia: Trust Deed Trumps All: The Bamford Decision

Last Updated: 11 June 2009
Article by Ian Kearney, Stephen O'Flynn and Simon Tucker

On Wednesday the 3rd of June a collective sigh of relief could be felt (if not actually heard) amongst the tax community as the Full Federal Court handed down its much anticipated decision regarding Bamford v Commissioner of Taxation [2009] FCAFC 66 ("Bamford").

In a nutshell, the Federal Court was tasked with determining the proper construction of section 97 of the Income Tax Assessment Act 1936 ("ITAA 1936"), which states:"

"...where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate..."

Prior to Bamford

Prior to the Bamford decision there was significant uncertainty surrounding the operation of section 97. This uncertainty primarily centred on the two discrete but nevertheless connected issues, namely what is meant by the word "share" and what is meant by the term "income of a trust estate" and, more specifically, the extent to which the terms of a trust deed could influence or determine what was the income of a trust estate.

The application of section 97 has caused much uncertainty in the recent years, particularly in relation to the issue of trust "income". Much of the debate was prompted by the important Full Federal Court judgement in Cajkusic & Ors v Commissioner of Taxation [2006] FCAFC 164 ("Cajkusic") and the ATO's reaction to it.

The decision in Cajkusic appeared to indicate that:

  • trust "income" for the purposes of section 97 was tantamount to distributable income, determined under the terms of the relevant deed; and
  • provisions in a trust deed that empowered the trustee to determine what receipts were on income account and what receipts were on capital account were relevant for the purpose of determining what was section 97 'income'.

Following Cajkusic, the ATO released a decision impact statement1 expressing its interpretation of the Cajkusic's judgment. The ATO decision impact statement expressed the view that the distributable income of the trust was not analogous to income of a trust, but rather was the quantum that any beneficiary may have a present entitlement to. Furthermore, the ATO rejected the proposition that the trust deed could govern what was "income" for the purposes of section 97.

Facts of Bamford

The broad facts of Bamford involved two scenarios:

Mr and Mrs Bamford were directors of P&D Bamford Enterprises Pty Ltd (the Trustee) and, during the 2000 and 2002 tax years, the Company acted as trustee of the Bamford Trust, established under the Bamford Trust Deed dated 9 February 1995 (the Trust). Importantly, the Bamford trust deed allowed the trustee a discretion in determining whether a receipt, profit or gain, loss or outgoing was to be treated as on income or capital account.

The 2000 income year

During the 2000 tax year the trustee made a contribution of $175,000 to the Bamford International Superannuation Fund in respect of Mr and Mrs Bamford in their capacity as employees of the Company. In order to fund the contribution the Trustee borrowed the sum of money from and incurred interest on that borrowed amount during the 2000 income year.

The Commissioner properly disallowed the deductions claimed for the contributions of the expenses referred to above, with the result that the taxable income of the Trust well exceeded its accounting net income. The Commissioner sought to assess Mr and Mrs Bamford on their proportion of the increased taxable income, whereas the Bamfords argued that the distribution resolution fixed a dollar amount of taxable income that should remain the same regardless of the disallowance of deductions.

The 2002 income year

In the 2002 tax year, the net income of the Trust included a capital gain of $29,227 that was reduced to nil as a result of carried forward losses from the above mentioned deductions. The denial of the deductions meant that the revised position was that a net capital gain existed in the Trust. The issue at hand was whether a resolution on the part of Trustee that capital gains be distributed to Mr and Mrs Bamford could be effective.

The Bamfords argued that it was effective, given the power afforded to the Trustee under the Deed to treat capital receipts as income. The Commissioner argued that "income" for the purposes of section 97 purposes meant income according to ordinary concepts and could not be influenced by any discretion contained in the deed, so that the capital gain should be assessed to the Trustee under section 99A on the basis that there was no income to which any beneficiary could be presently entitled.

The Full Federal Court decision

When considering the issues of share, the court ruled in favour of the Commissioner and confirmed that the proportionate view was the correct view of the operation of Division 6, rather than the quantum view that was asserted by the taxpayer. The proportionate view essentially means that whatever proportion of trust 'income' that beneficiaries are presently entitled to, they will be assessed on the same proportion of trust taxable income. This outcome is consistent with the current ATO view and reaffirms the treatment of most judicial decisions that precede it.

However, in relation to the meaning of the term income of a trust estate, the court ruled contrary to the Commissioner's assertions and, consistent with how many tax practitioners viewed the Cajkusic decision, ruled that the term was in fact analogous to the more commercially common expression distributable income.

It was explained that distributable income was an amount that was to be determined by the trustee "according to appropriate accounting principles and the relevant trust instrument and in accordance with the ordinary concept of income, which the 1936 Act adopts when it refers to "income""2

As a consequence of this the court found in favour of the taxpayers in relation to the second issue and ruled that if a trust deed gives the trustee the power to reclassify receipts, being either capital or revenue, and the trustee exercises this discretion, it will be effective for the purposes of section 97. This was expressed at paragraph 59 of the judgement:

"where a trust instrument permits the trustee to treat a capital receipt as income for the purposes of fixing the entitlements of beneficiaries to distributions, a beneficiary who thereby becomes entitled to a share of that capital gain is presently entitled, within the meaning of s 97, to that part of the income of the trust estate"


Whilst it would be an exaggeration to say that the Bamford decision has eliminated uncertainty in relation to the operation of section 97, it has provided welcome clarity as to the question of whether 'income' is a deed dependent concept, given the polarised views that existed in relation to the Cajkusic judgement. As we head towards June 30, the decision will give many trustees greater flexibility (trust deed permitting) a greater degree of flexibility in relation to their distribution policy. This is an important issue not only in relation to private trusts, but also in relation to widely held trusts, where distribution policy may be under review.

It is important that those responsible for the administration of trusts be mindful of this landmark decision and consider, having regard to the terms of their trust instrument, what the decision might mean for them.


1 VID 279 of 2006

2 Emmett J at paragraph 43 of Bamford v Commissioner of Taxation [2009] FCAFC 66

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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