The eagerly waited decision of the Full Federal Court in Bamford v Commissioner of Taxation [2009] FCAFC 66 has been handed down. The case can be found at:
http://www.austlii.edu.au/au/cases/cth/FCAFC/2009/66.html
The decision is of great significance to a number of parties including trustees, advisers and practitioners as the decision clarifies two crucial areas pertinent to the operation of Division 6 of the ITAA 1936 and specifically section 97 of that Division.
The decision confirms that the term ‘income’ of the trust estate for section 97 purposes is income as determined by the relevant trust instrument. As such where a trust deed essentially equates income to taxable income under section 95 of the ITAA 1936, or empowers the trustee to determine the income of the trust, assessable net capital gains can be regarded as income for distribution purposes, and so the trustee is able to decide to distribute the assessable net capital gain to beneficiaries.
The decision also confirms the proportionate method to assessing presently entitled beneficiaries, which the ATO has treated as being the correct approach.
Going forward, for those trusts where income is essentially defined to equate to net income under section 95 of the ITAA 1936 or, where the deed empowers the trustee to determine the income of the trust, we see the two main issues being:
- Drafting of trustee resolutions especially where non-taxable items and capital gains are received (as both assessable and non-assessable gains will need to be considered); and,
- Preparation of financial statements and the treatment given to non-taxable receipts (both of a capital and income nature) and the reconciling of amounts distributed.
We will prepare a more detailed newsletter on this case once a more thorough analysis of the case has been undertaken.
We would also expect the ATO to issue a Decision Impact Statement very shortly which, hopefully, will provide practical guidance for all affected parties.
This edition of ‘The Assessment’ was prepared by Rob Power. If you have any comments in regards to the contents of this edition please feel free contact Rob at robp@webbmartinconsulting.com.au.
