Revenue aspects of testamentary trusts

Commissioner says proportionate approach prevents “streaming”

Secondly, because the High Court accepted the proportionate approach as the relevant mechanism for matching “trust income” with “tax income”, the Commissioner reasoned that there was no longer any scope for trust funds to “stream” distributions of specific amounts comprising specific types of income to particular beneficiaries. The view which he took is best described by looking at “steaming” as allowing different fruit received by a trustee to be distributed to beneficiaries separately, whereas the High Court’s adoption of the proportionate approach was taken to mean that a trust fund effectively operates as a metaphoric “blender” of all income components and is conceptually incapable of identifying different amounts of income of particular descriptions or classes.

The recent Federal Court decision in Colonial First State Investments Limited v Commissioner of Taxation[44], may be argued to provide support for that view. On the other hand, in Greenhatch v Commissioner of Taxation[45], two senior members of the Administrative Appeals Tribunal were sharply critical of the Commissioner’s view.

5.7      Amendments arising out of the Bamford decisions

The Bamford decisions and the Commissioner’s reaction to them have resulted in the Assistant Treasurer announcing a program for the review of the present provisions dealing with the taxation of trust as part of the “rewrite” of Division 6 into the 97 Act.[46]

As an interim measure, the Tax Laws Amendment (2011 Measures No.5) Bill 2011 (TLAB5) was passed in June 2011. The amendments were gazetted shortly before the close of the financial year.

Put shortly, the legislation puts in place measures to:

  1. 1.       prevent tax avoidance using tax exempt beneficiaries as a result of trustees classifying capital receipts as “income” of the trust for the purposes of the trust deed and vice versa; and
  2. 2.       make statutory provision for “streaming” of :

2.1.    capital gains; and

2.2.    franked distributions.

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