ATO issues state­ment on Bam­ford Case

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In Brief

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.

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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: