Trust streaming – where are we after the Greenhatch cases?

“Streaming” is the ability of the trustee of a trust fund to direct amounts or proportions of specific types of trusts receipts (capital gains, franked and unfranked dividends, interest, royalties, exempt income, foreign income etc) to specific beneficiaries.

The trust fund effectively acts as a “conduit”, directing particular streams of income to particular beneficiaries as part of the total flow of trust income.

Prior to the High Court’s decision in the Bamford cases (Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10), streaming on a “conduit” basis was uncontroversial. The ability to stream was:

  • recognised by the High Court in Charles v Commissioner of Taxation [1954] HCA 16; and
  • acknowledged by the Commissioner of Taxation in taxation ruling TR 92/13.

In Bamford, the High Court decided that, under s 97 of the Income Tax Assessment Act 1936, the “proportional approach” should apply to assessment of a trust fund’s net income.

This effectively meant that each beneficiary’s share of the trust fund’s tax burden in any tax year is borne in the same proportion as that beneficiary’s present entitlement to the trust fund’s income (as defined for the purposes of the trust deed) bears to the total trust fund income.

The Commissioner took the High Court’s acceptance of the “proportional approach” to mean that it was no longer possible for trust funds to “stream” specific types or amounts of income to particular beneficiaries.

In the Commissioner’s view, rather than acting as a “conduit”, a trust fund acts instead more like a kitchen “blender”, delivering income to beneficiaries in proportional amounts, but  in the case of each beneficiary having  the form of an un-dissected or homogeneous sludge.

As a result, he withdrew TR 92/13 on 22 June 2011.

Shortly prior to 30 June 2011, the Government apparently followed the Commissioner’s view and legislated amendments to protect the only types of streaming which are expressly assumed as occurring in the tax legislation – capital gains and franked dividends.

Apart from also dealing with some specific aspects of primary production income averaging and farm management deposits, the amending legislation did not address any other elements of income streaming.

The result was the introduction of new Division 6E in the Income Tax Assessment Act 1936 and new provisions which enabled capital gains (in Subdivision 115-C of the Income Tax Assessment Act 1997) and franked distributions (in Subdivision 207-B of that Act) to be expressly streamed for tax purposes.

However apart from capital gains and franked distributions, no other form of streaming has been given legislative backing.

Therefore as matters stand in early July 2012, the taxation consequences of trust funds streaming receipts other than capital gains and franked dividends is uncertain, with the Commissioner apparently saying it can no longer be done.

The “legislated streaming” steps taken for capital gains and franked dividends in the 2011 tax year were intended to be interim measures, pending a proposed “re-write” of the trust provisions. Other forms of streaming were to be considered by Treasury as part of a consultation process.

That process is currently under way, but it remains to be seen whether this important issue will have a satisfactory outcome.

It is submitted that the Commissioner’s view on the implications of Bamford is misconceived.

In particular, that view incorrectly conflates the role of the proportional approach in identifying a taxpayer’s “present entitlement” to trust income in gross terms for the purposes of section 97 of the 36 Act, with the ability of the trustee to identify the character of component parts of that “present entitlement”.

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