Federal Court protects trust tax benefits


In a landmark case the Federal Court has ruled business owners have the right to tax capital gains earned by trusts in the hands of the beneficiary

In a landmark case the Federal Court has ruled business owners have the right to tax capital gains earned by trusts in the hands of the beneficiary.

The much-anticipated decision in Bamford v Commissioner of Taxation, handed down today by the Court, should enable capital gains made by trusts, with appropriate deeds, to be assessed at penal rates (by the trustee) if the trust does not derive other income in the year, says law firm Mallesons.

Instead, the capital gain will be taxed in the hands of the beneficiary.

Second, Mallesons says the Court decided that a beneficiary’s liability to tax in respect of the trust’s taxable income is governed by their proportionate interest in the income, even in circumstances where a beneficiary is only allocated a particular dollar sum.

"It follows that if deeds (and in the case of discretionary trusts, resolutions) are not appropriately drafted, that beneficiaries may be taxed on more than they receive," the firm warns.

Mallesons says the decision is of significant importance to those involved in the administration of trusts and the funds management industry more generally, particularly in the lead up to year-end distributions.

The Commissioner’s arguments in Bamford sought to limit the ability of the trustee to give effect to the terms of trust deeds in determining how a liability to tax will be determined.

The Court decided that the terms of the deed should prevail in determining the ‘income of the trust’ to which beneficiaries are presently entitled and are assessed to tax.

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