The Administrative Appeals Tribunal (AAT) has in a recent decision rejected the Commissioner’s view as to the application of the High Court decision in Bamford. The AAT held that contrary to the Commissioner’s view:
- Bamford did not discredit the earlier decision of the High Court in Charles which held that income in the hands of the beneficiary has the same character in the hands of the beneficiary
- the taxation burden on income of beneficiaries of trusts is not determined by reference to a simple proportionate share of the total of the trust estate i.e. the slice approach does not apply.
Therefore where the terms of the trust deed allow for identification of who is entitled to what, the legislature intended that the taxation treatment should follow on a differentiated basis among beneficiaries. In other words where the trust deed permits streaming of categories of income such as dividends and capital gains to particular beneficiaries, then the taxation treatment in the hands of the beneficiaries is dealt with on the basis as to which beneficiaries are entitled to what category of income. Further the AAT held that the capital gains provisions in relation to treatment of capital gains made by trusts particularly allowed for this to occur.
Although the Government legislated to correct the problem created by the Commissioner’s view, this correction only related to dividends and capital gains. The AAT’s decision means that streaming of other types of income is also permissible e.g. foreign income and interest income.
The Commissioner’s view on Bamford has been discredited. Streaming is permitted provided the trust deed permits that to occur. However it is important if you operate a trust such as a family discretionary trust and you wish to stream income, that you ensure that the trust deed permits this to occur.