Discretionary Trust Deed

Accountants and lawyers have long debated the appropriate definition of "income" to include in the trust deed. Decisions over the years have provided different directions, but the recent decision of the Full Federal Court in Bamford represents another step in what has become a preferred direction - namely, the definition of the trust (or definition adopted by the trustee of a year), will determine what constitutes income of the trust estate "within the meaning of Article 97 of 1936 Act.1

The decision also provides that the correct method of determination "of a beneficiary share" of income trusts is the proportional method.
The case confirms the approach adopted in the indentures Cleardocs. other acts should be considered as explained in this article ClearLaw.

Summary

The Full Federal Court's decision Bamford2 is an important decision. It confirms that:

aec the terms of the trust deed prevail in determining what constitutes "income from the trust" to which beneficiaries are presently entitled and assessed for taxation, and
aec "proportionate approach'3 - and not the quantum approach - is the right approach with regard to how Section 6 of the 1936 Act works.
The case confirms the approach adopted in the indentures Cleardocs.

Background

The meaning of "one share of income of the trust estate" used in Article 97 of the 1936 Act was the subject of speculation for many years. The permanent shadow over their meaning has:

aec leads to uncertainty in the taxation of beneficiaries of the trust under section 97;
aec cast doubt on the extent to which a trustee (under a deed of trust) can determine or influence what is and what is not the income of the trust estate.
Although the 2006 decision in Cajkusic & Ors v Commissioner of Taxation4 (Cajkusic) suggested that the terms of the trust must prevail in determining the "income of the trust, the Commissioner of Taxation disagreed with this interpretation (and said later in a decision of impact you can see here: http://law.ato.gov.au/atolaw/view.htm?docid=LIT/ICD/VID279of2006/00001.

Bamford's decision has provided some welcome clarity the indenture role in the definition of "income of the trust estate" within the meaning of Article 97.
Facts

The taxpayers first and second (Mr. and Mrs. Bamford) were a married couple and the directors of the taxpayer third, who was the trustee of the Trust Bamford (Trust).

The Trust is a discretionary family trust and Bamford have been the beneficiaries of discretionary trust.

The Trust will act authorized the trustee discretion in determining whether an acknowledgment of receipt of profit or gain, loss or outgoing should be treated as income or capital.

ATO assessment

The Commissioner denied the deductions claimed by the Trust for the year 2000 on income.
The refusal in 2000 resulted in income the taxable income of the trust, beyond its ordinary income. The Commissioner sought to assess Mr. and Mrs. Bamford on their proportion of the increase in taxable income.

Following the deductions to be dismissed, the Fund did not have enough forward of losses to apply against capital gains for 2002 income. Therefore, the Trust has a net gain unexpected. The Commissioner sought to assess the capital gain against the trustee at the highest marginal rate.

Issues

Regarding the amendments to the declaration of the 2000 income tax year:
aec The Bamford argues that:
No they should be valued on the precise amount of trust income to which they are right - a fixed amount of taxable income that should remain the same regardless of e.