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 Four years later, many trust deeds remain unchanged and outdated when it comes to how to treat trust income for distribution.
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 estate".
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.
