Trusts Need Review in light of Bamford's Case - but not quite yet

A prominent Melbourne barrister and PhD in Law has called for all discretionary and fixed trust deeds to be reviewed in light of the decision in Bamford v Commissioner of Taxation [2009], a case dealing with aspects of the taxation of trusts.

In light of the Full Federal Court’s decision in Bamford’s case, it is now settled law that each beneficiary will be taxed on their proportionate share of the net income of the trust to which they’re presently entitled regardless of whether the trustee formally distributed a fixed amount of trust income or a proportion of the trust income to them and regardless of whether the trust income differs from the net income of the trust.

Bamford’s case also decided that the terms of the trust deed can modify the ‘income of the trust estate’ to which the beneficiaries are presently entitled.  This allows tax to be brought into line with distributed amounts possibly avoiding the situation of having to pay tax on amounts not actually received.

Both new and existing discretionary and fixed trust deeds should be reviewed in light of the Bamford decision to ensure that they contain provisions permitting capital amounts to be treated as “income” to which beneficiaries are presently entitled.  Trust deeds should also be reviewed to ensure that any provisions that define “income” or that affect distributable trust income will operate appropriately in view of the Bamford reasoning, as such provisions may have an effect on the assessable income for the beneficiaries.

Does the deed have a trustee discretion to treat capital as income? Is the definition of “income” sufficiently wide? Can distributable income equal taxable income? If changes are made in any of these areas how will that affect the rest of the deed?  Do such changes constitute a resettlement of the trust?  All these issues need to be canvassed eventually … but not yet.  The ATO has sought leave to appeal Bamford’s Case to the High Court.  If leave is granted then we’ll have to wait to see if the High Court agrees with the Federal Court before undertaking the task of reviewing the deed.