Time To Review Your Trust Deed ?

Creating an effective trust distribution is critical.
What is income and how do we distribute?
IncomeUnder s97(1) of the ITAA 1936, a beneficiary (who is not under a legal disability) is presently entitled to a share of the trust’s income, and the assessable income of that beneficiary includes their share of the trust’s net income.
Under s95(1) of the ITAA 1936, net income is defined, broadly, as the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer for that income, less all allowable deductions.
Due to the terminology used in these two sections, there has been some uncertainty in relation to the calculation and taxation of trust income.
In the case of Bamford, The Court decided that the terms of the trust deed should prevail in determining the ‘income of the trust’ to which beneficiaries are presently entitled and are assessed to tax.:-
• If the trust deed is silent - then “income of the trust estate” is determined according to ordinary concepts;
• If the trust deed adopts income determined according to Australian Accounting Standards - then that is the prevailing income concept; or
• If section 95 concepts are adopted - then the calculations used to determine “net income” prevail.
This clearly highlights the importance of having a relevant and up to date definition of income in every trust deed, regardless of when the trust deed was executed.
In particular, with capital gains, does the deed provide the ability to redefine capital gains as “income of the trust estate”?

How To Distribute the Income
In the case of Bamford, the Court decided that a beneficiary’s liability to tax in respect of the trust’s taxable income is governed by their proportionate interest in the income, even in circumstances where a beneficiary is only allocated a particular dollar sum.
It follows that if deeds (and in the case of discretionary trusts, resolutions) are not appropriately drafted, that beneficiaries may be taxed on more than they receive.

It is critical then, that the financial statements (and minutes) reflect the trust’s income as defined in the deed.

If you would like more information or advice in relation to your Trust Deed, please contact me at sarah.willoughby@willoughbys.com.au