The Australian Taxation Office, has attempted to deal with this with the release of Practice Statement PS LA 2010/1.
So what was the issue in Bamford? Essentially, it boiled down to two questions – did the trust deed have the power to define trust income?, and what approach needed to be taken when assessing the tax on trust income. On the first question, the High Court held that yes, trust deeds can define what is and what is not considered income. It is this second question where the argument really comes in. The Federal Commissioner for Taxation argued that the proportionate approach should be adopted in all cases. Counsel for Bamford, on the other hand, argued that the circumstances surrounding each case should determine whether the quantum or proportionate approach should be taken. The Court held in favour of the Commissioner. It said that the tax should not be limited to fixed amounts of distributed trust income, it should be on the entirety of what is received by the trustee on behalf of the trust.
Quantum v Proportionate Approaches
The primary difference in the approaches is who is taxed what. Under the quantum approach, tax is calculated on the taxable income (which, depending on the definition of trust income under the trust deed may be different to the trust income). So even if the trust income is $10,000, and that is all distributed to the beneficiaries, the trustee is liable for the tax on the difference between the taxable income and the trust income. In contrast, under the proportional approach, if each beneficiary receives $5,000 of the trust income, they will be liable each for 50% of the taxable income.
A further aspect to consider for your trust deed is the “streaming” of income. Streaming is where trust income of one type is given to one beneficiary, and trust income of another type is given to another beneficiary. If a trustee plans on doing this, then it must be expressly provided for under the Trust Deed. The Trust Deed should also make provision for income remaining of the same character that it comes in as.
This shows why you need to regularly review your Trust Deed. Should you have any questions, please feel free to post them below and we will endeavour to answer them.