Following the High Court’s decision in favour of the taxpayer in Bamford, the Government legislated to make it clear that, where permitted by the terms of the trust deed, streaming of dividends and capital gains to beneficiaries of the trust may be made by the trustee. This is achieved by the trustee making the beneficiaries “specifically entitled” to those amounts.

In relation to streaming of capital gains, in order for a beneficiary to be specifically entitled to an amount of a capital gain made by a trust. then in accordance with the terms of the trust deed (including in accordance with the exercise of a power conferred by the terms of the trust):

  • the beneficiary must have received or must be reasonably expected to receive an amount equal to the financial benefit that is referable to the capital gain, and
  • the beneficiary’s entitlement is recorded in its character as an amount referable to the capital gain in the accounts or records of the trust within 2 months after the end of the income year.

The timing of a CGT event is determined by the date of the contract rather than the date of completion. Therefore there will be an issue where the date of the contract is in one income year and the date of completion is in another income year as to whether or not in the first income year the beneficiary can be said to be reasonably expect to receive an amount equal to the financial benefit that is referable to the capital gain when the amount of the financial benefit is not known in that year particularly since completion might in fact not occur.  

In the draft ruling the Commissioner says that the test of whether the beneficiary is “reasonably expected to receive” is not directed to an expectation that the disposal will occur but rather that, assuming there is a disposal that gives rise to a capital gain, there is a reasonable expectation that an amount referable to any such capital gain made by the trust estate will be received by the beneficiary.

In order to satisfy this test, there must be a valid and irrevocable resolution by the trustee in accordance with the terms of the trust deed to distribute an amount to a beneficiary that is referable to a capital gain made by the trust estate (in the event that a capital gain is made). It is therefore important that where a contract is entered into in one income year where there may be a capital gain made by the trust, the trustee must ensure that such a valid and irrevocable resolution is made by the trustee before the end of that income year. If it is done after the end of the income year, then it is too late.

Trustees therefore need to ensure that they visit their taxation affairs before the end of an income year to ensure that appropriate resolutions are passed before the end of the income year where streaming in particular of capital gains is proposed.