02/08/2010

Now that the dust has settled on the High Court’s decision in Bamford’s Case, the question that is most on the mind of tax advisers, accountants, planners, lawyers and clients is: what now?

We know what Bamford decided: (1) once the trustee determines a beneficiary’s proportion of the trust income they are to receive, that proportion is fixed – the so-called ‘proportionate approach’; and (2) the trust deed can redefine income for s.97 purposes including treating a capital receipt by the trustee as income.

But what is the practical effect of the decision? Many discretionary trust deeds may need amendment but I would argue that it is too early to make those changes just yet.  We may learn much between now and 30 June 2011, the effective deadline for these amendments.

As important as any amendments to the deed may be, there will be other matters that trustees and their advisers must focus on in effectively administering a discretionary trust, particularly record-keeping and now the trustee’s resolution minutes.

In the post-Bamford environment, minutes are likely to need to become more detailed and specific with not only reference to the asset class of the distribution but perhaps also to any deductions relating to that specific asset class that are to be accounted for in the distribution.

I argue for caution and delay in amending deeds because there is much we don’t yet know about the post-Bamford world.  Unfortunately the ATO isn’t being entirely helpful when it comes to resolving some of the areas of uncertainty.

To be fair, they did agree to allow taxpayers some time to consider the Bamford decision’s impact.  The Decision Impact Statement states that any change in the law applies only from 1 July 2010.  Effectively we now have a year to work out what to do.

But the Decision Impact Statement and Practice Statement PS LA 2010/1 muddy the waters and hint at the ATO using intimidation rather than law to collect revenue.  How else can you explain statements in the DIS which attribute findings to the High Court which are simply not part of the Bamford judgement and which fly in the face of long authority to the contrary?

The DIS also lists some issues that the ATO considers “uncertain”, such as the effect of a clause in a trust instrument that permits a trustee to treat as capital what is otherwise received as income.  It is hard to see how this can still be considered “uncertain” in light of clear statements permitting it in Bamford and before that in Cajkusic’s Case.

The ATO also states that it intends to apply Bamford only to those cases which are ‘on all fours’ with (ie identical to) Bamford.  It is a gross misapplication of our court precedent system to maintain that cases are only binding on other cases with identical facts.  If that were the case the precedent system would be of little use or effect.

And what are we to make of the ATO’s decision to withdraw Tax Ruling TR 92/13?  The Ruling dealt with streaming of classes of income to particular beneficiaries.  It required good record-keeping so that the source of a distribution could be effectively traced.  But in an act that looks a bit like petulance at his loss in the most important limb of Bamford’s case the Commissioner has chosen to withdraw the Ruling, effectively withdrawing his tacit acceptance of the validity of streaming.

The reason given?  Because of Subdivision 207-B, a subdivision introduced in 2002 dealing with franked dividends.  It apparently has taken the Commissioner eight years to decide that this Ruling and the Subdivision are incompatible!

There’ll be no replacement to TR 92/13 until next year; hopefully before 30 June next year.  In the meantime advisers and clients will be operating in the dark.

So if there’s still plenty we don’t know, what is it we do know?  We know that the ATO will likely insist that the trustee strictly observes the provisions of the trust deed. We know that income can be redefined for trust law purposes.  And we know that many discretionary trust deeds will need to be reviewed.  The goal in such amendments is to ensure maximum flexibility of the trustee’s powers to redefine income.

There’s a couple of other reasons why you would want to delay amending the deed.

Firstly, there may be further Court pronouncements which will bear on the issues and that might assist our understanding – see for example the post-Bamford case of Clark v Inglis (2010) NSWCA 144.

Secondly, apart form the ATO’s revised ruling on streaming we are also awaiting rulings on franking credits and capital gains it the trust context.

Advisers have much work to do in helping their clients with the effects of Bamford and these uncertainties only make it more difficult and expensive for clients.  But when it comes to amending the trust deed, caution and careful consideration are the catchwords.

Please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222 for more information.