Trusts – is streaming of income permitted?

Up until the decision of the High Court in Bamford the Commissioner has accepted that a trustee may stream categories of income to different beneficiaries e.g. capital gains and franked dividends.

The Commissioner having lost categorically is now seeking to claw back that loss by misinterpreting the decision. In a Decision Impact Statement the Commissioner has indicated that he intends to withdraw his previous ruling that allowed for streaming of franked dividends. The Commissioner’s view now is that a “share” means a numerical percentage of all of the trust’s net income i.e. he takes a slice approach which thus prevents streaming. This is notwithstanding that in Bamford the High Court held that the rules of apportionment adopted by the general law of trusts may be displaced by the terms of the trust deed. Thus a provision in the trust deed which enabled the trustee to determine proportions of the distributable income by reference to the categories of income would appear according to the High Court to be permissible and allow the “share” to be worked out accordingly.

There are problems with this view by the Commissioner in that:

• the decision in Bamford is not authority for the adoption of a slice approach to the apportionment of the net income of the trust
• a “share” of the income may be achieved without a slice approach namely by distributing various components that still results in a proportionate share of the total trust income
• the approach by the Commissioner is contrary to the existing the discount capital gain provisions relating to trusts permit a streaming approach to capital gains
• the approach by the Commissioner is contrary to the existing franked distribution provisions relating to trusts also permit a streaming approach to franked distributions with one of the examples in the legislation clearly indicating this as a permissible approach

the approach by the Commissioner is contrary to earlier decisions by the Courts have adopted the principle that amounts distributed to beneficiaries always retain the same character in the hands of beneficiaries as they had in the hands of the trustee which decisions clearly have not been overruled by the High Court in Bamford.

However if the Commissioner does proceed in the manner set out in his Decision Impact Statement then there will be difficulties for trustees streaming income notwithstanding that such a decision by the Commissioner may be contrary to the law.