Case summary of Bamford v FCT [2009] FCFCA 66 – compiled 14 October 2009
Bamford v FCT, the story so far –
Section 97 (1) of the ITAA 1936 provides that:
“ … where a beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate:
(a) the assessable income of a beneficiary shall include:
(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident…” (italics and emphasis added)
Mr and Mrs Bamford were beneficiaries of a discretionary trust. In the 2000 tax year, trust minutes provided for a specific amount to be distributed to each of them. Other beneficiaries were also entitled to specific amounts set out in the minutes and one of them (“the residual appointee”) was additionally entitled to the residual distributable income.
The Bamfords conceded that certain sums were not deductible in calculating the net income of the trust for the tax year.
They contended that the net income of the trust resulting from denial of the deductions did not increase their personal assessable incomes for the tax year, on the basis that they were respectively presently entitled to a specified amount of the net income of the trust for 2000. In particular, the taxpayers argued that:
(a) where a beneficiary’s present entitlement is to a proportionate part of the income of the trust estate, the term “that share” (s 97(1)(a)(i)) refers to that proportionate part of that income;
(b) where a beneficiary is presently entitled to a specified amount of the income of the trust estate, the term “that share” (s 97(1)(a)(i)) refers to that specified amount;
(c) “Where a beneficiary’s entitlement to income of the trust estate is an entitlement to a proportionate part of the income, the word ‘share’ also means a proportionate part. … [W]here a beneficiary’s entitlement is to a specified amount and no more, the word ‘share means that amount. … [T]he word ‘share’ in s 97 denotes a concept which changes to reflect the method by which the beneficiaries’ entitlements to share in the income of the trust is determined.” (underlining added)
(d) “[W]here there is a disparity between the net income of the trust estate and the distributable income, entitlement to which is governed by the trust instrument, the amount in respect of which each beneficiary is assessable must be calculated as if the terms of the trust instrument and any relevant appointment operated upon the amount of the net income of the trust estate as if it were distributable income.” (underlining added)
In pursuance of contentions (c) and (d), the Bamfords did not merely claim that the excess of net income over distributable income was not included in their assessable income. They contended that the excess should be ascribed to the residual appointee – one may add, in contrast to the trustee being taxed on this.
The Commissioner contended that “… the expression ‘that share’ means the beneficiary’s proportional or fractional entitlement to the income of the trust estate that has been distributed or that is available for distribution”.
The AAT adopted the Commissioner’s position.
The Full Federal Court also concluded that “[t]he term “that share” in s 97(1) refers to a beneficiary’s proportionate or fractional entitlement to the income of the trust estate”. A beneficiary who is presently entitled to income of the trust estate in a given year must include “in that beneficiary’s assessable income the proportion of the net income of the trust estate equal to the proportion that the income of the trust estate to which the beneficiary is presently entitled bears to the income that had been distributed during the year or remains available for distribution as at the end of the year, in accordance with ordinary principles of trust and trust accounting”. “That share” does not refer to a fixed amount.
In relation to the 2002 tax year, the trustee contended that the Commissioner’s denial of a claimed deduction for carry forward losses did not render the trustee liable to pay tax under s 99A of the ITAA 1936 on the resulting net income. In particular, the trustee contended that:
(a) In pursuance of a power conferred by the trust deed, the trustee had treated a net capital gain made by the trust in the 2002 tax year as income and distributed this income to Mr and Mrs Bamford.
(b) The expression “income of the trust estate” (s 97(1)) refers to an amount that was income for dispositive purposes under the provisions of the trust deed.
(c) As a result of contentions (a) and (b), in the 2002 tax year there was “income of the trust estate” (s 97(1)) and this had been distributed to Mr and Mrs Bamford.
(d) As all the income of the trust estate for the 2002 tax year had been distributed to the Bamford’s, the net income arising from the disallowance of the deduction was to be wholly included in their assessable incomes and not taxed in the hands of the trustee under s 99A.
The Commissioner rejected contention (b). He contended that “income of the trust estate” referred only to income according to ordinary concepts.
The AAT decided that “income of the trust estate” meant ordinary income – the term excluded the net capital gain which the trustee had determined (under the power conferred by the trust deed) should be treated as income for purposes of making distributions.
The Full Federal Court rejected the Commissioner’s contention. Emmett J concluded that: “where a trust instrument permits the trustee to treat a capital receipt as income for the purposes of fixing the entitlements of beneficiaries to distributions, a beneficiary who thereby became entitled to a share of that capital gain is presently entitled, within the meaning of s 97, to that part of the income of the trust estate”. For slightly different reasons, Stone and Perram JJ concluded that “the terms of the trust may have the effect of altering the income of the trust for s 97 purposes”.
This edition of ‘The Assessment’ was prepared by Andrew Orange. If you have any comments or queries please feel free to contact Andrew at andrewo@webbmartinconsulting.com.au.
