Trust crackdown: ATO’s ruling on Bamford decision could provide more headaches for trusts

A entrepreneurs struggle to digest the Australian Taxation Office’s decision to crackdown on discretionary trusts, experts warn a new compliance headache is emerging concerning the ATO’s reaction to the controversial Bamford case.

The case, which was the subject of a High Court judgement in March, concerned the way income from a trust would be taxed. Essentially, the taxpayer argued that income from a trust should be treated according to trust law, while the ATO argued that income from a tax should be treated as normal accessible income.

The High Court dismissed the ATO’s appeal and in a Decision Impact Statement issued last week, the ATO confirmed the two key outcomes of the case – that trust income would be assessed as per trust law, and that a beneficiaries’ “share” of trust income would be decided as proportion or percentage of total income, rather than a fixed amount.

But the Decision Impact Statement also contained a surprise for tax professionals and those who have a trust, with the ATO taking aim at the controversial issue of income streaming.

Paul Drum, general manager of policy and research at CPA Australia, says the Bamford decision did not even cover income streaming, a process by which a trust can send different incomes types (for example, normal business income, interest income and dividend income) to different beneficiaries.

Drum says that while the ATO has essentially said that trusts that stream income will not be forced to change their ways this financial year, it has raised questions about whether it will allow income streaming in the future.

“After this year it looks like the rules are going to change,” Drum says.

Yasser El-Anasary, tax counsel at the Institute of Chartered Accountants, is wary of another ATO U-turn.

“Up until June 30 this year, by and large trustees will be able to make decisions about distributions in line with what they have done,” he says.

“But this is a big concern going forward to tax practitioners because the ATO has previously issued ruling that indicate streaming in certain circumstances is permissible. I think the ATO has long had a concern about the ability to stream different types of income to different beneficiaries.”

Drum says there are three options in how the income streaming issue can be clarified: the ATO leaves the matter alone; there is legislative change to allow or disallow streaming; or the whole matter becomes subject to review by the Board of Taxation.

He favours the third option, but agrees with many of his colleagues in the tax world that the laws around trusts are in need of a more holistic review.

“It reinvigorates the need for the ATO to have a look at those issues again and see whether or not there can be an interpretation that is more consistent and more certain going forward,” El Ansary says

“I think there will be a need for the Government to undertake a review of the way trusts are taxed. We shouldn’t have this level of complexity and uncertainty. “

Drum says CPA Australia will also continue to lobby against the ATO’s controversial decision to crackdown on the issue of unpaid present entitlements.

Of particular concern is the fact that the ATO has said it will judge whether unpaid present entitlements have been treated as loans or distributions by examining accounting ledgers. Drum and the CPA say this could catch out taxpayers who mislabelled these transactions incorrectly by mistake, and say the ATO should only look at a company’s final accounts.

“The test really needs the final signed financial accounts, rather than the accounting ledger,” Drum says.