Up until the decision of the High Court in Bamford the Commissioner accepted that a trustee may stream categories of income to different beneficiaries e.g. capital gains and franked dividends. 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 expressed in that Decision Impact Statement is that a “share” means a numerical percentage of all of the trust’s net income i.e. he will take a slice approach which therefore prevents streaming of various classes of income. This view flies in the face of the general principles in the decision in Bamford where 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.
This slice approach also is inconsistent with other provisions of the Tax Acts which clearly indicate streaming of income is permissible such as the example in the dividend imputation rules and the CGT provisions in relation to the discount capital gain provisions applicable to trusts.
The Queensland Supreme Court has recently rejected this slice approach by the Commissioner. The Court found that the existing franked distribution provisions relating to trusts in the Tax Act permitted a streaming approach to franked distributions in accordance with one of the examples in the legislation.
The Commissioner had been given the opportunity to appear and make submissions but did not do so merely sending a letter to the Court. In that letter to the Court, the Commissioner said there was uncertainty as to whether or not there could be streaming of franked dividends because franking credits were merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach. However the Court rejected this assertion. The Court found that franking credits confer a financial advantage which fall to be dealt with by the trustee in accordance with the trust deed. The trust deed in this case provided for income streaming of franked dividends. Therefore it was permissible for the trustee to allocate the franking credits differentially between beneficiaries.