Is your trust up to date?

General

A trust is an entity where a trustee holds and controls property or other assets for the benefit of another person or persons (beneficiaries). A discretionary trust allows the trustee to determine both to whom and how the trust’s property is distributed.

There have been changes to the laws relating to trusts which mean that if your trust was created prior to a particular year, it should be reviewed by your lawyer and accountant. If your trust does not comply, you could find yourself with a problem and it could result in you having to pay not only more tax but penalties and interest to the Australian Tax Office (ATO).

The Bamford Case

The High Court of Australia, in Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 (Bamford), held that:

1. the trust deed for the trust can define what income is; and

2. a ‘proportionate approach’ is to be used to determine how much trust taxable income is allocated to a particular beneficiary.

The impact of the first point is that, provided the trust deed contains an appropriate definition of income, trustees can now determine what is or is not income and at what point in time it becomes income.

The second point means that a beneficiary may be liable for tax on amounts not received or distributed to it. This is particularly relevant when the Commissioner issues an amended assessment which increases the net income of the trust. Under this approach each beneficiary bears the tax on the increased amount in proportion to their distribution of the trust as determined before the net income was increased by the commissioner.

Some of other issues which have to be reviewed in trust deeds in order to comply with the rulings are-

1. ensuring that your trust deed correctly deals with notional income such as tax and franking credits;

2. ensuring that your trust deed allows for income streaming such areas like capital gains and franking credits

3. ensure that your trust deed makes it clear that certain resolutions must be made before 30 June in any tax year; and

4. ensuring that you have proper documents (in the form of minutes) which reflect the resolutions made, and to prove the date the resolution was made is before 30 June if required by that date.

So why it is important to update discretionary trusts

Trustees of discretionary trusts, particularly of deeds drafted before September 1985, should have their trust deeds reviewed to determine if:

·         the trustee is able to determine how income is to defined in any financial year;

·         the trustee is able to attribute particular expenses against income of a particular category;

·         the trustee is able to distribute specific categories of income to particular beneficiaries;

In order to take advantage of the Bamford case, discretionary trust deeds will need to be redrafted to:

·         manage the definition of income and the distribution of income;

·         reflect the strict proportional approach and deal with the potential for a difference between trust income and net income of the trust; and

·         generally ensure that there are no unintended tax consequences.

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For more information, please contact Gavin McInnes on 07 3367 8681 or gmcinnes@grmlaw.com.au.

 The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW 's legal practitioners who will consider their particular circumstances.

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