The taxation of trusts has always been a hot topic that
generates significant debate. The debate keeps rolling as the
taxpayers and the Commissioner have been granted special leave to
appeal to the High Court against the Full Federal Court decision in
Bamford v Commissioner of Taxation.
In Bamford, the Full Federal Court accepted the
Commissioner's view and applied the proportionate approach to
determine how taxable income should be divided amongst
beneficiaries where it differs from trust or accounting
However, the Full Court also held that the amount ultimately
assessable to beneficiaries can be an amount "ascertained by
the trustee according to appropriate accounting principles and the
relevant trust instrument and in accordance with the ordinary
concept of income..."
The Court held that if a trust deed gives the trustee the power
to reclassify receipts as either capital or revenue, and the
trustee exercises its discretion, this reclassification will be
effective for taxation purposes. Accordingly, the trust deed
is paramount in determining the beneficiaries' assessable
income. The whole of the trust deed must be considered,
rather than just the discretions contained in the income
If the High Court upholds the Full Federal Court's decision,
this will support the approach that is currently adopted by many
trustees and beneficiaries.
The Commissioner has issued Practice Statement PS LA 2009/7
(Practice Statement), which indicates that the ATO
will continue to apply the Commissioner's views regarding how
trustees and beneficiaries are taxed, despite the Full Federal
Court's decision in Bamford.
The ATO will not select cases for active compliance solely with
a view to applying the views the Commissioner argued in
Bamford, except where taxpayers are deliberately
exploiting the operation of the tax law to avoid some or all of
their tax liability. However, the ATO will continue its
ongoing compliance action in respect of trusts engaged in
aggressive tax planning and to detect under reporting by
beneficiaries and/or trustees.
The Practice Statement provides that the ATO will not impose
penalties on trustees and beneficiaries who have lodged their
income tax returns based on the Full Federal Court's views in
Bamford or any alternative view that is reasonably open
having regard to the other relevant authorities. The ATO will
also take these views into account when determining whether to
remit any shortfall interest charge or general interest
charge. This treatment will not apply to taxpayers involved
in tax avoidance schemes.
The ATO will seek agreement from relevant taxpayers to defer the
issue of rulings and objection decisions, and to adjourn
Administrative Appeals Tribunal and Federal Court hearings in cases
that involve the issues raised in Bamford. If a
taxpayer does not agree to a deferral or adjournment, the ATO will
issue a ruling or an objection decision that reflects the
Commissioner's views as argued in Bamford, or will ask
the court or tribunal to adjourn the matter. If a case
proceeds to hearing, the ATO will acknowledge that the court or
tribunal is bound by Bamford but formally submit that the
Full Federal Court's decision regarding the "income of the
trust estate" is wrong and request that the court or tribunal
reserve its decision until the outcome of Bamford is
The Bamford decision highlights just how important it
is for trustees and advisors to read trust deeds carefully from
start to finish! It provides an incentive for trustees to
consider whether the provisions in their trust deeds suit their
requirements and, if not, whether they can be amended to suit their
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).