In our last Bulletin, we commented on the impact of the Commissioner of Taxation v Philip Bamford & Ors [2010] HCA 10  decision on Discretionary Trust Deeds. Particularly, how the terms income of the trust estate and net income of the trust estate are interpretedand how theyare central to the taxation treatment of trusts.  Although an understanding of these terms is vital in determining the taxation treatment of any particular trust, their precise meaning has been the subject of some dispute since Bamford.

The Australian Taxation Office’s Say on Bamford:

This year, the ATO released its own take on the Bamford decision, namely Draft Taxation Ruling TR 2012/D1. 

Of particular note is the ATO’s view that clauses in a trust deed (referred to as “Income Equalisation Clauses”) designed to align (or give the trustee the power to align) the concepts of the income of the trust estate and the net income of the trust estate in order to avoid the issues which arose in Bamford are not always effective.   

While the ATO accepts that such clauses are generally effective, it considers that purely notional amounts cannot, even with the benefit of such a clause, be taken into account in calculating the income of the trust estate.  Examples of such notional amounts are franking credits, deemed dividends and certain shares of income from a trust included under section 97 in the calculation of the net income of another trust, but which does not represent a distribution of income of the first trust.

Practical Implications: What does this mean for Family Trusts?

Given the ATO’s view that not all income equalisation clauses are effective, there may still be a mismatch between trust income and taxable income in family trusts. This means that in some situations, the proportionate approach to trust distributions established by Bamford may result in trustees being liable to pay the highest marginal rate on some or all of the trust’s income.

If you are a trustee, the Draft Ruling may make it necessary for you to make complex enquiries in relation to the nature of amounts (both actual and notional) flowing through a trust, so that any potential Bamford-type issues can be identified and addressed. You will need to take particular care when the income flows through multiple trusts.

Will the Draft ruling affect the new law on streaming?

The ATO’s views in the Draft Ruling will not affect the recent streaming provisions relating to franked dividends and capital gains. Gold and Platinum members read on to see how the Draft Taxation Ruling may affect other areas.

The Future of Trusts and Tax:

The Treasury is reviewing the existing taxation law relating to trusts, and a comprehensive re-write of the relevant provisions has been foreshadowed. Make sure to remain up to date with taxation rulings issued by the ATO in order to structure your trust fund to maximise your returns!

Related Documents

• Trust Distribution Minutes
• Family trust
• Family trust - Update for Bamford and streaming

Indemnification involves a company undertaking to protect its directors, officers and employees against any liabilities that they may incur in the course of performing their company duties. Large companies tend to indemnify their directors, officers and employees to the greatest extent that the law will allow.

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As a preliminary step to indemnification, make sure your company directors, officers and employees are complying with any current regulations under the Australian Consumer Law. The better your company complies, the less liability you can incur- It’s that simple!

If you have chosen to indemnify your employees, make sure you’re doing it right. Law Central’s Indemnity Kit is a clear and simple way of doing so.

If you have additionally taken out Directors and Officers insurance policies- read the small print. Pay particular attention to how the terms “claim”, “loss” and “investigation” are defined so that the policy is wide enough to cover personal liabilities if need be.

Related Documents

• Director's Indemnity Agreement