The High Court of Australia has recently handed a decision of FCT v Bamford [2010] HCA 10 dealing with the determination of trust income.

In response, the ATO has released a Decision Impact Statement (“DIS”) and Practice Statement Law Administration PS LA 201011 which outlines how the ATO will treat the determination of trust income. The High Court decision and ATO response are significant and affect every trust in Australia. In particular they affect how trust deeds and income distribution resolutions must be drafted to obtain the optimum tax outcome. You should be talking to your accountant to ensure you are actually optimizing your tax situation and consider a review of your trust deed(s) to see if any changes are needed or whether they are possible.

The decision confirms that it is possible to define and modify what is meant by ‘trust income’ through drafting of the deeds which creates some circumstances removing adverse tax consequences or allow even more beneficial tax consequences to be achieved. There are still caveats on such drafting application of anti-avoidance rules or trust stripping rules in circumstances involving a deliberate mismatch between income entitlements and tax outcomes. There needs to be significant care taken in drafting yearly income distribution resolutions and to ensure that the trust deed confers sufficient powers to allow a trustee to determine trust income in each income year.

As such, all trustees in the 09/10 income year and onwards should take the following steps:

1.  Review the trust deed in conjunction with their tax and legal advisors to ensure it defines trust income and if so, does it allow minimization of adverse tax consequences. Consideration also needs to be given to whether it allows modification of trust income and to be able to reclassify income or capital and allocate expenses and losses. Are there sufficient streaming provisions.

2.  Consider amending the trust deed if possible taking into account trust resettlement problems.

3.   Review distribution resolutions for favourable tax outcomes to be achieved.

Should you require Trust Law advice, please contact the Principal Solicitor for GMH Legal, Mr George Hanna on 02 9587 0458 or by email on ghanna@gmhlegal.com .