The High Court of Australia handed down its decision in the case
of Bamford v Commissioner of Taxation on 30 March
This case is important for those people who have or advise on
discretionary trusts, particularly if you have applied, or plan to
apply, the small business CGT concessions on assets such as shares
or land held through a trust. We expect that the Australian Tax
Office's audit activity may now focus on these concessions and
This was a test case on the tax treatment of trust
distributions, heard on appeal from the full Federal Court. Both
the taxpayer and Commissioner appealed different parts of the
Federal Court decision, and both their appeals were dismissed by
the High Court.
Five judges heard the case and delivered a joint judgement,
which, as a general rule, better clarifies the law than separate
judgements, which may have differing views on certain points.
In practical terms, the Bamford decision carries
significant weight and is authority for the following:
Contrary to the Commissioner's view, 'income of the
trust estate' includes capital gains (statutory income). This
maintains the status quo and may be seen as a win for the taxpayer,
as it continues to allow trustees to more favourably deal with
trust capital gains.
A strict 'proportionate approach' should be used to
determine how much trust taxable income is allocated to a
particular beneficiary. This is problematic for the taxpayer,
because it means that where the trust income and net income of the
trust for tax purposes are not the same, the beneficiary may be
taxed on an amount to which they are not currently entitled under
the terms of the trust deed itself.
Surprisingly, the Bamford decision did not provide
definitive commentary on whether the terms of a trust deed could
operate to redefine capital gains as income of the trust estate.
Given that income of the trust estate in this case was found to
include capital gains, the High Court appears not to have found it
necessary to address the Commissioner's submission on this
Our recommendations as a result of the Bamford
Now that there is a High Court decision on the tax treatment of
trust distributions, you should take the steps necessary to
maximise the tax efficiency of your trust deed and trust
So that your trust distributions have the intended tax effect,
every existing discretionary trust arrangement should be looked at
for the following:
Trust deeds - especially those drafted before September 1985 -
should be reviewed and updated if necessary so that trustees have
sufficient flexibility in determining how the income and gains of
the trust are distributed.
Trustee resolutions should be drafted:
in accordance with the terms of the trust deed, keeping in mind
that all trust deeds are not the same and applying a common
'pro-forma' approach may have unintended tax
to manage default income distribution provisions that operate
automatically at June 30 of each year; and
reflecting the strict proportional approach that
Bamford requires, to deal with the tax risk of a
difference between trust income and net income of the trust.
You should keep in mind that as discretionary trusts often
produce a desirable tax outcome, the ATO has a strong focus on
them, and tax arrangements should be managed carefully.
For more information on this case or using trusts generally,
please contact HopgoodGanim's Taxation and Revenue team.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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