Practical implications of the Bamford decision
The High Court handed down its decision in the Bamford case on 30 March 2010.
The Court found that:
- a provision in a trust deed which allows the trustee a discretion to determine whether amounts should be regarded as income or capital for the purpose of the trust will be effective;
- the particular provision in the Bamford trust deed allowed the trustee to include a capital gain in the “distributable income” of the trust; but
- the amount that each beneficiary must include in their assessable income will be determined by reference to the percentage of the distributable income they receive rather than the actual dollar amount of that distribution (proportionate approach).
How should income be defined post Bamford?
While the decision makes it clear that the terms of a trust deed may allow the trustee a discretion as to how to determine the income available for distribution (and in particular to include capital gains in the distributable income) it will still be critical to ensure that the terms of trust deeds allow clients to take advantage of this decision.
In our opinion the better approach will be to define the distributable income of the trust as being equivalent to section 95 net income (excluding notional amounts such as franking credits) but to also allow the trustee a discretion to adopt some other concept of income.
Merely having a provision which allows the trustee a discretion to determine the concept of income is dangerous because the clients will have to remember to exercise that discretion – which will often be overlooked.
In the Administrative Appeals Tribunal hearing in Bamford the ATO argued (and the Tribunal agreed) that even if the clause allowing the trustee a discretion to include a capital gain in the distributable income was effective, there was not sufficient evidence that the trustee had exercised the discretion. It appears that the ATO did not pursue this point before the Federal or High Courts.
However, now that the High Court has handed down its decision, it is reasonable to expect that the ATO will look carefully at transactions where a trust deed does not define income as being equal to section 95 net income and the clients are relying on an argument that the trustee has exercised a general discretion to include a capital gain in the distributable income.
Content and timing of trust distribution minutes
The decision also means that more care will be needed in framing distribution minutes each year to ensure that the different concepts of income are identified and correctly distributed.
A “sleeper” issue that was not relevant in Bamford is that the ATO has flagged that, where a trust deed requires that income distributions must be made by 30 June, distributions that are actually made after that date will be ineffective.
Cooper Grace Ward currently has a number of matters before the Administrative Appeals Tribunal where the ATO is refusing to accept that distribution minutes were made on the purported date and are requiring the clients to establish the validity of those minutes.
There is recent authority that, if the trust deed does not require distributions to be made by 30 June then the trustee has a reasonable time after that date in which to make the distributions (BRK (Bris) Pty Ltd v FCT 2001 ATC 4111).
Therefore Cooper Grace Ward’s view is that, when reviewing the deeds, it is best to delete any requirement that distributions must be made by 30 June to at least provide an argument that post-30 June distributions will still be effective.