Matthew Burgess
Partner
May 2013
What you must know post Bamford
Working with trusts
23168331 2
Overview
■ Trusts
■ Bamford
■ Practical issues
■ Case studies
23168331 3
Forms of trust
■ Fixed
■ Unit
■ Discretionary (family)
■ Hybrid
■ Resulting, constructive etc
■ Bare
■ Lineal d...
23168331 4
Legal basics
■ A legal relationship where
□ Legal owner of property – trustee
□ Holds property – trust property...
23168331 5

Settlor
Settlement Sum
Beneficiaries
Example
Trust
Trustee Pty Ltd
23168331 6
Bamford background
■ Income Tax Assessment Act 1936 differentiates between
□ ‘income of the trust estate’
– (tr...
23168331 7
Bamford v Commissioner of Taxation
Bamford Trust
P & D Bamford Enterprises Pty Ltd
Mr B
Church of Scientology
C...
23168331 8
Bamford v Commissioner of Taxation
Facts
■ No definition of ‘income’ or ‘net income’
■ But - trustee could:
□ e...
23168331 9
Bamford v Commissioner of Taxation
2000 income year
Technical question
■ What does the phrase ‘that share of th...
23168331 10
Bamford v Commissioner of Taxation
2000 income year
Answer
■ Following Zeta Force, the proportionate approach ...
23168331 11
Bamford v Commissioner of Taxation
2002 income year
Technical question
■ Are Mr and Mrs B presently entitled t...
23168331 12
Bamford v Commissioner of Taxation
2002 income year
Answer
■ The ‘income of the trust estate’ can be determine...
23168331 13
Action required on deeds
■ Review deeds for correct and effective power
■ Deeds might not do what they purport...
23168331 14
Comments
■ Best practice discretionary trusts require
□ income or capital to be identified
□ the trustee can m...
23168331 15
Recommended approach
■ Review deeds
□ some will need amendment
□ all will need to have relevant powers clearly...
23168331 16
Taxation of trust income – where are we now
■ Interim legislation received assent on 29 June 2011 for streamin...
23168331 17
Dealing with the 2012 year
1 Division 6E –
streaming rules
2 Bamford decision
and DIS
3 Colonial decision
and ...
23168331 18
Streaming with Division 6E
Limited to dividends
& capital gains
Can stream where
trust deed
allows it
benefici...
23168331 19
Streaming with Division 6E
■ Process
□ determine trust income and capital gains
(per trust deed)
□ create spec...
23168331 20
A sign of things to come
‘From the 2011–12 income year, trustees who make
beneficiaries entitled to trust inco...
23168331 21
Australian Tax Office Release – 4 May 2012
Resolution
must be
made by 30
June
No
standard
format
Resolution
ne...
23168331 22
Timing
What can be done?
analysis of
categories of
client
standard letters
with schedules
pre 30 June
informal...
23168331 23
Distributions and resolutions
■ More important than ever to read the deed before 30 June to determine
paramete...
23168331 24
ATO Release – 4 May 2012
■ If a resolution is made before 30 June and formalised after, will the
formal resolu...
23168331 25
Standard structure
■ What is ‘income’ under deed
■ Does the trustee have any powers re determining income
■ Wh...
23168331 26
Reality check
■ Not possible to get it exactly right
■ Cannot expect (for example) to get exactly $80,000 taxa...
23168331 27
Related issues
■ Impact of distributions not made by 30 June
■ default beneficiary clause
■ sometimes trustee ...
23168331 28
Trust tax estimates and accounting
■ Amended assessments will cause changes
□ warn clients about limits of est...
23168331 29
Other Impacts?
■ Also, small business CGT concessions
□ small business participation percentage
□ CGT concessi...
23168331 30
Colonial First State
■ Colonial was the trustee of a retail fund – the retail fund invested in a
wholesale fun...
23168331 31
Colonial First State
■ Doubt has been cast on the ability of certain trusts to allocate particular
components ...
23168331 32
Government review of tax legislation
■ It was announced in December 2010 that the government will undertake
a ...
23168331 33
Response to Colonial
■ Vested test
■ Clearly defined rights
■ MIT focus?
■ What’s next
23168331 34
Practical issues
■ Partly paid units
■ SMSFs
■ Synthetic equity
■ E4
■ Market value
■ Cloning (Div 126G)
■ Var...
23168331 35
Clark
■ Commercial Nominees confirmed
■ Significant variations available at law
■ Always read the deed
■ Stamp...
23168331 36
Amending trust deeds
■ Resettlement issues
□ income and capital entitlements
□ default beneficiaries
□ vesting...
23168331 37
TD2012/D4
■ ‘Resettlement’
■ Commercial Nominees
■ Statement of principles
■ Examples
■ Stamp duty
23168331 38
Hopkins
■ Amended assessments
■ Present entitlements
■ ATO v deed v minute
■ Distributions to ‘non beneficiari...
23168331 39
Harris
■ Family law issues
■ Corporate beneficiary
■ Read the deed
■ 360’ feedback
23168331 40
Summary
■ UPE refresher
■ ATO view – TR 2010/3 and PS LA 2010/4
■ Solutions - the sub trust approach
■ The imp...
23168331 41
Sub trust options
■ Apply above or adopt specific options from PS LA 2010/4
■ option 1 – a 7 year ‘interest’ o...
23168331 42
Options 1 and 2 - risks
■ how is ‘legally binding’ possible?
■ documentation issues ‘investment agreement’
■ i...
23168331 43
Options 1 and 2 – risks (cont)
■ potentially best solution for 2011 year
■ implement ‘investment agreement’
■ ...
23168331 44
Options 1 and 2 - outcome
■ ‘interest’ is ultimately assessable to company beneficiary of the
subtrust
■ if ap...
23168331 45
Option 3
■ Specific investment by trust in income producing (or capital appreciating)
asset
■ Separate account...
23168331 46
Option 4
■ Not specifically recognised in final practice statement
■ UPE in favour of company, placed on sub-t...
23168331 47
Option 4 - outcomes
■ Possible to argue not a ‘loan’ but an ‘investment agreement’
■ Repayments linked to perf...
23168331 48
Rinehart
23168331 49
Contact
Presenter: Matthew Burgess
Position: Partner
Direct line: 0403 209 977
Email: mburgess@mccullough.com....
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Working with trusts - what you must know post Bamford

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This presentation provides an overview of the legal basics of trusts and the practical implications of recent court decisions in related to taxation trusts including Bamford v Commissioner of Taxation, Harris, Clark, Colonial First State and Hopkins.

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  • Dates4 March 2011 announcement6 April 2011 – deferral of full review13 April 2011 – draft legislation ‘quick fix’Received Assent 29 June 2011In order to provide certainty, the Government introduced interim amendments in TLAANo5 2011 to ensure that, where permitted by a trust’s deed, the capital gains and franked distributions of the trust can be ‘streamed’ to beneficiaries that are ‘specifically entitled’ to those amounts and in effect retain their character for tax purposesSteps Indicative timeframes*Release of initial consultation paper November 2011Consultation forums (before and after close of public submissions) January – March 2012Release of policy design paper May 2012Consultation roundtables (before and after close of publicsubmissions)May – June 2012Release of exposure draft legislation July 2012Consultation roundtables (before and after close of publicsubmissions)July –August 2012Possible second round of exposure draft legislation Sept– October 2012Introduction of legislation November 2012* These indicative timeframes assume a target start date of 1 July 2013 Actual timeframes will depend onthe scope of the review (see section 13 of the Consultation Paper) and on broader Government prioritiesThird assistant treasurer – MRRT seems to be bigger issue
  • Briefly, I will review the new streaming provisions1Entitlement condition: the beneficiary must have 'received, or reasonably expected to receive', 'financial benefits' that are referable to the capital gain (reduced by any losses consistent with the application of capital losses for tax purposes) or franked distribution (reduced by directly relevant expenses)2Recording condition: the beneficiary's entitlement to the amount must be recorded in its character as an amount referable to the capital gain or franked distribution in the accounts or records of the trustFurther notes on 6E process in your materials Not every trust needs to use this this yearWe will be talking about distribution minutes shortly
  • Briefly, I will review the new streaming provisions1Entitlement condition: the beneficiary must have 'received, or reasonably expected to receive', 'financial benefits' that are referable to the capital gain (reduced by any losses consistent with the application of capital losses for tax purposes) or franked distribution (reduced by directly relevant expenses)2Recording condition: the beneficiary's entitlement to the amount must be recorded in its character as an amount referable to the capital gain or franked distribution in the accounts or records of the trustFurther notes on 6E process in your materials Not every trust needs to use this this yearWe will be talking about distribution minutes shortly
  • Working with trusts - what you must know post Bamford

    1. 1. Matthew Burgess Partner May 2013 What you must know post Bamford Working with trusts
    2. 2. 23168331 2 Overview ■ Trusts ■ Bamford ■ Practical issues ■ Case studies
    3. 3. 23168331 3 Forms of trust ■ Fixed ■ Unit ■ Discretionary (family) ■ Hybrid ■ Resulting, constructive etc ■ Bare ■ Lineal descendant ■ Section 102 trusts
    4. 4. 23168331 4 Legal basics ■ A legal relationship where □ Legal owner of property – trustee □ Holds property – trust property □ For the benefit of others – beneficiaries (beneficial ownership) □ On certain terms/rules – trust deed
    5. 5. 23168331 5  Settlor Settlement Sum Beneficiaries Example Trust Trustee Pty Ltd
    6. 6. 23168331 6 Bamford background ■ Income Tax Assessment Act 1936 differentiates between □ ‘income of the trust estate’ – (trust law income, section 97 income) □ ‘net income of the trust estate’ – (tax law income, section 95 income) ■ Beneficiaries who are presently entitled to a share of the income of the trust estate assessed on that share of the net income of the trust estate
    7. 7. 23168331 7 Bamford v Commissioner of Taxation Bamford Trust P & D Bamford Enterprises Pty Ltd Mr B Church of Scientology Child 1 Child 1 Mrs B
    8. 8. 23168331 8 Bamford v Commissioner of Taxation Facts ■ No definition of ‘income’ or ‘net income’ ■ But - trustee could: □ exercise a power of appointment in favour of beneficiaries in relation to the ‘income’ (distribute income) □ determine whether any receipt or payment was on income or capital account
    9. 9. 23168331 9 Bamford v Commissioner of Taxation 2000 income year Technical question ■ What does the phrase ‘that share of the net income’ in section 97 mean? ■ Commissioner: that proportion ■ Taxpayer: if expressed as a dollar amount, that amount; if expressed as a balance, the balance
    10. 10. 23168331 10 Bamford v Commissioner of Taxation 2000 income year Answer ■ Following Zeta Force, the proportionate approach must apply ■ Calculate the proportion the beneficiary’s entitlement to the trust income bears to the total trust income ■ The beneficiary is assessed on that proportion of the net income
    11. 11. 23168331 11 Bamford v Commissioner of Taxation 2002 income year Technical question ■ Are Mr and Mrs B presently entitled to a share of the income of the trust estate? □ Does the capital gain form part of the income of the trust estate? ■ Commissioner: No – only ordinary income ■ Taxpayers: Yes – because trustee resolved to deal with capital gain as income
    12. 12. 23168331 12 Bamford v Commissioner of Taxation 2002 income year Answer ■ The ‘income of the trust estate’ can be determined in accordance with the trust deed ■ Where the trust deed gives the trustee the power to include capital gains in distributable income and the trustee exercises this power, the capital gain will form part of the income of the trust estate for section 97 purposes
    13. 13. 23168331 13 Action required on deeds ■ Review deeds for correct and effective power ■ Deeds might not do what they purport to □ how is ‘income’ defined under the deed □ how does the re-characterisation work – for income and expenses □ is there a power of attribution of income ■ Ensure trustee actually exercises power of re-characterisation if required ■ Use appropriate minutes/resolutions
    14. 14. 23168331 14 Comments ■ Best practice discretionary trusts require □ income or capital to be identified □ the trustee can make a determination that – a capital gain forms part of the income component – all deductible expenses are to be offset against such part of the income component not comprised of capital gains ■ Still need to consider other differences □ franking credits □ losses
    15. 15. 23168331 15 Recommended approach ■ Review deeds □ some will need amendment □ all will need to have relevant powers clearly identified ■ Trust resolutions to □ firstly – expressly exercise relevant powers defining ‘income of the trust estate’/trust income □ secondly – distribute trust income ■ Tax estimates and trust accounting consistent with ‘real’ trust income and distributions
    16. 16. 23168331 16 Taxation of trust income – where are we now ■ Interim legislation received assent on 29 June 2011 for streaming capital gain and dividends/franking credits ■ TR2012/D1 ■ Full review underway □ Policy Design Paper due in May 2012 □ draft legislation in July and Oct 2012 □ July 2013 commencement (?)
    17. 17. 23168331 17 Dealing with the 2012 year 1 Division 6E – streaming rules 2 Bamford decision and DIS 3 Colonial decision and DIS 4 ATO position in TR 2012/D1 In light of the Deed
    18. 18. 23168331 18 Streaming with Division 6E Limited to dividends & capital gains Can stream where trust deed allows it beneficiaries become specifically entitled ‘recorded’ by 30 June (dividends) and 31 August (capital gains)
    19. 19. 23168331 19 Streaming with Division 6E ■ Process □ determine trust income and capital gains (per trust deed) □ create specific entitlements to the ‘economic’ amount capital gains and franked dividends □ issues with ‘section 95’ clauses to be managed
    20. 20. 23168331 20 A sign of things to come ‘From the 2011–12 income year, trustees who make beneficiaries entitled to trust income by way of resolution must do so by the end of an income year (June 30) for that to be effective for determining who is to be assessed on the trust's income’ Rulings IT 328 and IT 329 have been withdrawn with effect from September 2011 If a trustee makes a resolution after the end of an income year there is a risk that the trustee may be assessed on the trust income at the highest marginal tax rate’ ‘This campaign will be followed up with some limited compliance activities to determine whether your clients who are trustees have resolved to distribute trust income by 30 June’ NTLG trust sub-committee meeting on 21 February 2012 and Tax Agent Bulletin
    21. 21. 23168331 21 Australian Tax Office Release – 4 May 2012 Resolution must be made by 30 June No standard format Resolution need not be in writing - franked dividends and capital gains
    22. 22. 23168331 22 Timing What can be done? analysis of categories of client standard letters with schedules pre 30 June informal resolutions – later document ‘formally’ on behalf of trustee resolutions – reflect formula or % determination Australian Tax Office’s expectation is clear
    23. 23. 23168331 23 Distributions and resolutions ■ More important than ever to read the deed before 30 June to determine parameters on □ What □ When □ How ■ No ‘magic’ pro forma resolution ■ But standard structure is possible
    24. 24. 23168331 24 ATO Release – 4 May 2012 ■ If a resolution is made before 30 June and formalised after, will the formal resolution be accepted as evidence?  An individual trustee documents by way of a note, dated 29 June, that they have resolved to distribute the trust income in a certain way This note is later typed as an official minute, which refers to the resolution of 29 June  The trustees of a larger trust group may map out where distributions are to be made to with appropriate percentages This ‘map’ is signed by the relevant trustees before 30 June to evidence the resolutions that have been made  The official minutes will refer to the date when the distributions were mapped out, but may be drawn up after the end of the year
    25. 25. 23168331 25 Standard structure ■ What is ‘income’ under deed ■ Does the trustee have any powers re determining income ■ What are the types of income – is specific streaming of classes desirable/required/possible ■ Intended beneficiaries – are they valid ■ Determine a formula
    26. 26. 23168331 26 Reality check ■ Not possible to get it exactly right ■ Cannot expect (for example) to get exactly $80,000 taxable income) ■ Need to allocate resources – clients with substantial tax issues ■ Giving ‘Mum & Dad’ all the income may actually make sense – ‘$360k test’
    27. 27. 23168331 27 Related issues ■ Impact of distributions not made by 30 June ■ default beneficiary clause ■ sometimes trustee taxed – depends on deed ■ Section 264 interview ‘stories’
    28. 28. 23168331 28 Trust tax estimates and accounting ■ Amended assessments will cause changes □ warn clients about limits of estimates ■ Make trust accounting ‘real’ □ eg can’t have trust income to make up deemed assessable amounts or non-deductible expenses, unless there is ‘excess’ capital to deem as that income □ if not ‘real’, ATO may challenge? – refer DIS comments
    29. 29. 23168331 29 Other Impacts? ■ Also, small business CGT concessions □ small business participation percentage □ CGT concession stakeholder □ ‘Income’ rather than ‘income of the trust estate’ – (eg in section 152-70(1) table, item 3(a)) □ not covered by Bamford decision ■ Attribution □ also warn clients □ current pending decision □ maybe still a role for PS LA 2005/1(GA) agreements
    30. 30. 23168331 30 Colonial First State ■ Colonial was the trustee of a retail fund – the retail fund invested in a wholesale fund ■ It was proposed that the Constitution of the wholesale fund be amended ■ Colonial applied for a private ruling regarding the amendment ■ The proposed amendments to the constitution sought to give the trustee discretion to: □ stream different types of income to certain redeeming unitholders and □ stream short term capital gains to a unitholder who redeemed their units within 12 months and stream long term capital gains to redeeming unitholders who had held for longer than 12 months Facts
    31. 31. 23168331 31 Colonial First State ■ Doubt has been cast on the ability of certain trusts to allocate particular components of income (eg capital or other taxable gains) to particular unitholders ■ Concerns regarding the status of certain Australian unit trusts as ‘fixed trusts’ for Australian tax purposes ■ Proposed new management investment trust regime (effective from 1 July 2011) will address the issues in Colonial Key points
    32. 32. 23168331 32 Government review of tax legislation ■ It was announced in December 2010 that the government will undertake a full review of the way in which trusts are taxed ■ While there is a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out ■ July 2012 discussion paper on fixed trusts
    33. 33. 23168331 33 Response to Colonial ■ Vested test ■ Clearly defined rights ■ MIT focus? ■ What’s next
    34. 34. 23168331 34 Practical issues ■ Partly paid units ■ SMSFs ■ Synthetic equity ■ E4 ■ Market value ■ Cloning (Div 126G) ■ Variation power
    35. 35. 23168331 35 Clark ■ Commercial Nominees confirmed ■ Significant variations available at law ■ Always read the deed ■ Stamp duty (other states & trustee duty) ■ Private rulings ■ Splitting & cloning
    36. 36. 23168331 36 Amending trust deeds ■ Resettlement issues □ income and capital entitlements □ default beneficiaries □ vesting date ■ Creation of a new trust ■ Statement of principles ■ Stamp duty and CGT
    37. 37. 23168331 37 TD2012/D4 ■ ‘Resettlement’ ■ Commercial Nominees ■ Statement of principles ■ Examples ■ Stamp duty
    38. 38. 23168331 38 Hopkins ■ Amended assessments ■ Present entitlements ■ ATO v deed v minute ■ Distributions to ‘non beneficiaries’ ■ Accountant’s evidence ■ Taxpayers 46, not 2
    39. 39. 23168331 39 Harris ■ Family law issues ■ Corporate beneficiary ■ Read the deed ■ 360’ feedback
    40. 40. 23168331 40 Summary ■ UPE refresher ■ ATO view – TR 2010/3 and PS LA 2010/4 ■ Solutions - the sub trust approach ■ The impact of not adopting the sub trust approach
    41. 41. 23168331 41 Sub trust options ■ Apply above or adopt specific options from PS LA 2010/4 ■ option 1 – a 7 year ‘interest’ only ‘loan’ ■ option 2 – a 10 year ‘interest’ only ‘loan’ ■ option 3 – an investment by the main trust in an income producing asset ■ option 4 - ?
    42. 42. 23168331 42 Options 1 and 2 - risks ■ how is ‘legally binding’ possible? ■ documentation issues ‘investment agreement’ ■ if merely allocation of main trust income (as draft allowed) – not legally binding ■ if actual loan - parties are main trust and sub-trust? ■ can this loan in itself cause Div 7A issues? – interposed entity rules
    43. 43. 23168331 43 Options 1 and 2 – risks (cont) ■ potentially best solution for 2011 year ■ implement ‘investment agreement’ ■ ‘investment agreement’ needs to be drafted correctly to preserve the position and satisfy the ATO requirements □ arguably still a UPE if documented correctly □ cash flow ‘interest’ due by lodgment date for 2012 ITR □ although ‘interest’ must accrue from 1 July 2011
    44. 44. 23168331 44 Options 1 and 2 - outcome ■ ‘interest’ is ultimately assessable to company beneficiary of the subtrust ■ if applied to income producing assets then ATO position that ‘interest’ is deductible to main trust that retains use of the funds ■ given that the ‘interest’ is potentially funded out of the trust income it can give rise to a neutral outcome ■ no separate tax return
    45. 45. 23168331 45 Option 3 ■ Specific investment by trust in income producing (or capital appreciating) asset ■ Separate accounts and ITR (not required for options 1 and 2) ■ Arm’s length return ■ Payments must be made to company each year by ITR due date
    46. 46. 23168331 46 Option 4 ■ Not specifically recognised in final practice statement ■ UPE in favour of company, placed on sub-trust ■ Sub-trust invests funds back into main trust ■ Main trust pays ‘rate of return to sub-trust’ □ Contemplated in draft PS LA 3362 □ Contemplated in TR 2010/3 at example 8 (an ‘investment on terms’ as opposed to legally binding loan)
    47. 47. 23168331 47 Option 4 - outcomes ■ Possible to argue not a ‘loan’ but an ‘investment agreement’ ■ Repayments linked to performance of trust business/investment ■ Lower or nil if losses in trust
    48. 48. 23168331 48 Rinehart
    49. 49. 23168331 49 Contact Presenter: Matthew Burgess Position: Partner Direct line: 0403 209 977 Email: mburgess@mccullough.com.au Website: www.matthewburgess.com.au
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