Bamford Case - Discretionary Trust Deed Updates
In light of Bamford's decision, we have been recently receiving all sorts of queries from our accountant clients. Most are relating to updating of all their clients existing discretionary trust deeds and to know if our deed is "OK" vis a vis matters decided in Bamford's case.
Bamford case: a brief summary
On 30th March 2010, High court of Australia delivered a much awaited decision in Commissioner of taxation v Bamford and Bamford v Commissioner of taxation. The high court while affirming the decision of the Full Federal Court of Australia, made the following determinations:
1. 'Income of the trust estate' as defined under sec 97(1) of ITAA 1936 is "reference to income" as determined by the contents or "terms of the trust deed" as against the income determined in accordance with ordinary concepts as argued by the Commissioner;
2. When a trust's "net income as per Section 95 of ITAA 1936" does not equate to "Income of the trust estate as calculated under sec 97(1) of ITAA 1936", the proportionate approach should be used to determine a beneficiary's share of net income
Bamford case has provided clarity to the meaning of the term 'income of the trust estate'. This could mean some existing trust deeds may conflict with the High Courts determination and need to be reviewed for definition of income and to check if the deed contains sufficient flexibility for the trustees to determine the 'trust income'.
The preferred position may be to define "trust income" in the trust deed as equal to net income as defined under Section 95 of ITAA 1936 and trustee to have sufficient discretion to determine the "trust income" in any year.
Trustees should also have discretion to determine whether any receipt or outgoing is to be treated on account of capital or income. If an existing trust deed does not have these two elements, it may not be able to meet the trust's objectives and be complying with decision made in Bamford's case.
Trustees may consider updating their trust deed to comply; however, if an amendment is not done correctly, it can create resettlement issues with the trust. Our position is that all existing trust deeds should be reviewed but it does not necessarily mean that a review will result in an amendment as the trust deed may already be complying with the Bamford's decision.
If you want your client's deed reviewed, please contact us.
Those who have purchased our deeds before 30th March 2010
Our trust deed has always contained a default definition of income that is "equal to net income as defined under Section 95 of ITAA36" and also allows the trustee discretion to determine the trust income in any year along with giving discretion to the trustee to determine any receipt or outgoing to be treated on account of capital or income which means that our deed complies with the decision made in Bamford's case and no amendment is necessary.
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