ATO issues statement on Bamford Case
Last month we discussed the High Court decision in the Bamford case. We highlighted that the ATO was expected to issue a Decision Impact Statement in the near future. The ATO has now done so with its statement dated 2 June 2010.
Summary of the Bamford case
To recap, this was the first time that the High Court had been approached to consider two important concepts in trust law — the meaning of “share” in the Bamfords’ appeal and the definition of “net income” in the Australian Taxation Office’s appeal. The case involved consideration of key aspects of Section 97 of the Income Tax Assessment Act 1936 (ITAA36).
The High Court rejected the arguments used by the Commissioner and held that the terms of the trust deed should prevail in determining how the beneficiaries should be assessed to tax. The Commissioner did have a victory in that the High Court found against the Bamfords on the argument put forward that they should only be assessed on the quantum of trust income that was distributed to them and instead imposed the proportionate approach. (Please see the article Family Trusts after Bamford in last month’s Swaab Connect for a fuller discussion of the case.)
Summary of the ATO statement
In its statement, the ATO highlights what it views as being the practical result of the decision.
First, a provision of a trust instrument, or a trustee acting in accordance with a trust instrument, may treat the whole or part of a receipt of income of a period and it will therefore constitute income of the trust estate for the purposes of Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936).
Secondly, if a trust instrument does not specify when a receipt is to be treated as income of a period, and the trustee does not have any special power to characterise receipts, then the question of whether the whole or part of the receipt constitutes income of the trust estate for the purposes of Section 97 of the ITAA Act will fall to be determined in accordance with general trust law and similarly in relation to determining whether an outgoing is properly chargeable against the income of a period.
Finally, subject to the possible operation of provisions outside Division 6 of the ITAA 1936, the amount included in a beneficiary’s assessable income under Section 97 of the Act consists of an undissected or unallocated proportionate share of the entirety of the net income.
ATO to withdraw rulings and practice statements
The ATO expects to withdraw the following rulings and practice statements:
Taxation Ruling TR95/29 — Income Tax: Division 16 — Applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production
Taxation Ruling No. IT331: Adjustments to estate income as returned to arrive as net income of estate for the purposes of Section 95 ITAA 1936
Law Administration Practice Statement (general administration) PS LA 2005⁄1 (GA): taxation of a capital gains of a trust.
Implications for family trusts
If you have a family trust in place you should seek legal advice to ensure it has an adequate definition of income, adequate trustee powers which allow your trustee, amongst other things, to characterise receipts and also powers allowing a trustee to determine whether an outgoing is properly chargeable against the income of a particular period.
The ATO has invited comments on the statement issued and we will keep you updated as to whether any further amendments are made to this Decision Impact Statement or any others.
For further information please contact: