Court Decisions
Bamford: High Court’s decision
18.05.2010
In a joint judgment handed down on 30 March 2010 the High Court (French CJ, Gummow, Hayne, Heydon and Crennan JJ) dismissed both the Commissioner’s and the taxpayers’ appeals from the decision of the Full Federal Court in the Bamford case (FCT v Bamford [2010] HCA10).
The High Court’s decision has given some certainty in relation to the following two issues that underpin the operation of Div 6 ITAA 1936:
● the meaning of the expression “the income of the trust estate”; and
● what is brought to tax by the operation of the expressions “a share” (of the income) and “that share” (of the net tax income).
The case involved a discretionary trust that was established by a deed dated 9 February 1995. Amongst the “eligible beneficiaries” were Mr and Mrs Bamford and the Church of Scientology Inc (“the Church”). Under the deed, the trustee was to hold “the income arising from the trust fund” for such of the eligible beneficiaries as it selected. Clause 7(n) of the deed empowered the trustee to determine whether any receipt, profit or gain or payment, loss or outgoing is or is not to be treated as being on income or capital account.
The income of the trust estate
For the 2002 income year, the trustee treated as income available for distribution a net capital gain of $29,227 which was equally divided and included in distributions made to Mr and Mrs Bamford by the trustee. The Commissioner, however, assessed the trustee under sec 99A ITAA 1936 on the basis that the net capital gain was not included in “the income of the trust estate” within the meaning of sec 97(1) ITAA 1936 and that there was no income of the trust estate for the income year.
On the meaning of the expression “the income of the trust estate” the Court pointed out that the expression was not defined and held that the meaning of the expression was to be found in the general law of trusts and that what was statutory income under the ITAA 1997 could be included, depending on the terms of the trust deed.
“The share” and “that share”
For the 2000 income year the trustee determined that the income for the year be distributed, as to consecutive amounts of $643 each to a child of Mr and Mrs Bamford, the next $12,500 to Narconon Anzo Inc, the next $106,000 to the Church, the next $68,000 to Mr and Mrs Bamford in a equal shares and the balance to the Church. The trustee determined (pursuant to clause 7(n) of the deed) that certain outgoings be treated as expenses and, in error, treated them as allowable deductions in computing the net tax income of the trust estate. This amount of net tax income was shown as $187,530. Upon making the distributions in the particular sequence, there was insufficient remaining to provide the $68,000 to Mr and Mrs Bamford and no balance to go to the Church. There remained $67,744 which was distributed equally between Mr and Mrs Bamford (ie each received $33,872).
When the allowable deductions claimed in error were added back the net tax income was $191,701. The Commissioner assessed each of Mr and Mrs Bamford on an amount calculated by determining the ratio of the actual distributions ($33,872) to the total income ($187,530) and then applying that ratio to the net tax income ($191,701).
The High Court accepted as correct the view expressed by Sundberg J in Zeta Force Pty Ltd v FCT ([1998 FCA 728) that the reference to “the share” of the income of a trust estate in sec 97 ITAA 1936 is a reference to a proportion which is applied to the amount of the net tax income to determine the amount that is included in the assessable income of the beneficiary (“that share of the net income”).
