Subscribers to our Companies, Trusts, Partnerships and Superannuation product, and LEAP Office users, will be acquainted with the content written by Greg Vale, a By Lawyers author.
Following the Bamford decision Greg circulated a letter to his clients, which is reproduced below for your information.
Our trusts take into account this decision.
Getting it right – the impact of bamford on trust deeds and trust resolutions
On 30 March 2010 the High Court handed down its much awaited decision in Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10.
In response to Bamford on 2 June 2010 the ATO released a Decision Impact Statement (‘DIS’) and Practice Statement Law Administration PS LA 2010/1, which outlines how the ATO will treat the determination of trust income.
The High Court decision and ATO response are significant and affect every trust in Australia. In particular they affect how trust deeds and income distribution resolutions must be drafted to obtain the optimum tax outcome.
The significance of the High Court’s reasoning in Bamford is that it confirms that it is possible to define and modify ‘trust income’ through the drafting of one’s trust deed. The advantage of being able to define and modify trust income is that it can create circumstances which remove adverse tax consequences or even allow more beneficial tax outcomes to be achieved.
Articles Whilst written for Federal practitioners this article has interest and relevance for practitioners in all states.
Although the ATO accepts that Bamford means that trust deed clauses can be used to define trust income and can thus influence how the net income of a trust will be taxed, it provides a series of caveats, including the potential application of the general anti-avoidance rule or trust stripping rules in circumstances involving a deliberate mismatch between income entitlements and tax outcomes.
Great care is required in the drafting of the yearly income distribution resolutions. Following Bamford, there is a clear benefit in ensuring that one’s trust deed confers sufficient powers to allow a trustee to determine trust income in each income year. Accordingly, in relation to the 2009/2010 income year and onwards, we consider that all trustees should undertake the following steps in light of Bamford.
Step 1 – Trust deed review
Trustees should review the trust deed in conjunction with their tax and legal advisors to determine whether: 1. The trust deed defines trust income and if so, how the definition operates to determine its capacity to minimise adverse tax consequences going forward; 2. The trust deed provides the trustee with adequate powers to modify trust income, including the power to reclassify items as income or capital and vice versa and allocate expenses and losses as appropriate; 3. There are appropriate streaming provisions and whether they are adequate going forward.
Step 2 – Consider amending the trust deed
Where the trust deed does not contain an adequate definition of trust income or powers to enable the trustee to stream or modify what constitutes trust income, then trustees should consider whether it is beneficial to amend the trust deed to resolve these deficiencies. Tax and legal advice should be sought prior to amending the trust deed so as to avoid any adverse tax consequences. For example, the ATO have already flagged the issue of trust resettlements in this context.
Step 3 – Review the drafting of the trustee resolutions
Trustees should review how they draft their distribution resolutions to ensure that an appropriate tax outcome will be achieved. Binetter Vale Lawyers can carry out the necessary review of your client’s trust deeds and provide advice as to the appropriate amendments in the wake of the decision in Bamford and considerations to take into account when drafting income distribution resolutions for a total of $250 (unless advised otherwise in advance). Separately, for an additional charge to be advised as part of the trust deed review, we are able draft the relevant deeds of amendment and provide tax and legal advice on the issue of resettlement as appropriate.
Further, any deeds of amendment will be accompanied with advice as to the types of resolutions appropriate for that deed.
*This article has interest and relevance for practitioners in all states.