Review trust funds, law firm says


Companies using trust funds warned to review how capital gains are allocated

Companies using trust funds have been warned to review how capital gains are allocated, following the outcome of a Federal Court hearing.

The court ruled on how trust funds should be run, saying an income beneficiary’s tax liability should be governed by the ‘proportionate approach’ and that capital gains should not be taxed at the highest marginal rate.

Rather than ruling that trustees should be responsible for taxing capital gains, the court found business owners should have the right to tax capital gains in the hands of beneficiaries, who can take advantage of a 50 percent concession.

Under the proportionate method, beneficiaries are taxed based on their stake in the trust's income.But law firm Malleson says trustees must make this clear when drafting deeds to ensure beneficiaries are not too heavily taxed.

"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," the firm says.

The case involving Phillip and Davina Bamford and their company P&D Bamford Enterprises centred on the definition of ‘share’ and how income should be allocated.

Lawyers for the Bamfords claimed a beneficiary’s share of an income should be proportionate when they are not entitled to a fixed share or specified when a beneficiary is not receiving a proportionate amount.

"In other words, Mr and Mrs Bamford say the word ‘share’…denotes a concept which changes to reflect the method by which beneficiaries’ entitlements to share in the income of the trust estate is determined," court documents say.

But the court rejected the argument, ruling "it is erroneous" for the term ‘share’ to be limited to a fixed amount because it "refers to a beneficiary’s proportionate or fractional entitlement to the income of the trust estate".

"Mr and Mrs Bamford’s contentions must be rejected," the court ruled.

The findings come as the Australian Taxation Office (ATO) looks at reviewing the laws surrounding trust funds.

Referring to a document sent to tax advisers by the ATO, Greg Cahill from law firm Cooper Grace Ward says accountants and advisers need to be aware of a proposal to formally identify trust fund provisions, which are currently uncertain as to how capital gains are treated.

"They [accountants] have to be more careful with how they deal with trust income and capital gain," Cahill says.

Based on the ATO document, Cahill says the tax office will use the proportionate measure when conducting audits, meaning "a lot of the capital gains being derived will be taxed at a higher rate".

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