REVIEWING YOUR TRUST DEED/TESTAMENTARY TRUST WILL

In Commissioner of Taxation v Bamford, the High Court considered a number of long-debated issues in relation to the taxation of trusts. In this case, a taxpayer sought to reclassify the capital gain from the sale of a capital asset as income of the trust rather than capital pursuant to the terms of the Trust Deed. This was objected to by the Commissioner of Taxation on the grounds that the amount of capital gain did not fall within the definition of income according to ordinary concepts under the Income Tax Assessment Act 1936. Despite the Commissioner’s objection, the Court allowed the reclassification of the amount as income  confirming in its decision that the income of a trust is to be determined in accordance with the terms of the trust deed.  The Court in its decision also considered  the amount that a taxpayer receiving distributions from a trust should include in their assessable income. Here, the Court decided that if a beneficiary of a trust is presently entitled to a percentage of the income of that trust, then that beneficiary must include that percentage of the trust’s taxable income in that beneficiary’s own assessable income.

In light of the  Court’s decision , it is important that Trust Deeds and Testamentary Trust Wills are reviewed  to ensure that the definition of income in the documents are appropriate given the objectives of the trust. The decision also means that it may be beneficial to ensure that the terms of the trust deed/testamentary trust Will gives trustees the discretion to alter the definition of income of the trust fund as well as the discretion to decide if amounts should be recognised as income or capital in order to provide maximum flexibility in calculating trust income so that tax savings may be achieved.

If you have a Trust Deed or Testamentary Trust Will which needs to be amended or reviewed, please contact Owen Hodge Lawyers.

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