Due to the decision impact statement on the Bamford High Court decision and recent statements by high ranking Australian Taxation Office ("ATO") officers, there is a great deal of uncertainty concerning the future ability of a trustee of a trust to stream different classes of income to different beneficiaries of the trust.
First some background. The trustee (or trustees) is the legal owner of the assets of the trust. The trustee derives income from the assets of the trust. This can be just about any type of income that you can think of. It can include interest, dividends, distributions from other trusts, capital gains, trading income and so forth. The trustee must apply that income for the benefit of the beneficiaries and in accordance with the powers given to the trustee under the trust deed. In a discretionary trust, the trustee has the absolute ability to decide how much is to be distributed to each beneficiary and how much is not to be distributed.
It is usually the case that the beneficiaries of the trust have different marginal tax rates and different tax rules can apply to them, depending on what type of taxpayer they are. It is prudent for the trustee to direct certain types of income to certain types of beneficiaries in order to lower the overall tax payable by the beneficiaries on the income derived from the trust. Accordingly, the concept of the streaming of income to beneficiaries has been a widely accepted part of trust administration for some years. This concept came particularly to the fore when the dividend imputation and capital gains tax rules were enacted in the mid 1980's.
The ability to stream income to beneficiaries rests on the assumption that income of different types can be separately identified by the trustee. Further, the expenses that relate to that income can also be separately identified. Alternatively, the expenses of the trust may need to be apportioned over the various types of income. So, the underlying assumption is that income can retain its character, and therefore its tax characteristics, as it flows into and then out of the trust.
Streaming was approved (in a sense) by the ATO when it issued a public ruling in 1992 on the distribution by trustees of dividend income under the imputation system. This was TR 92/13. The ruling referred to the dividend imputation legislation as it existed at that time. This legislation has since been repealed and replaced with another set of dividend imputation rules.
The Bamford Decision
What's all this got to do with the Bamford decision? On one view, nothing. The High Court did not refer to the issue of streaming in the Bamford decision. But, due to the statements that the High Court made in relation to the method by which Sub-section 97(1) of the Income Tax Assessment Act 1936 operates when determining the taxable income of a beneficiary, the ATO considers that TR 92/13 must be withdrawn. Nevertheless, the ATO states that tax returns for the 2009/10 income years and earlier years which are/were reasonably prepared on the basis of TR 92/13 "will not be disturbed".
Why does the ATO consider TR 92/13 should be withdrawn? This is because, according to the High Court, under Sub-section 97(1), a beneficiary is assessed in the following manner:
[1] The beneficiary's percentage share of the trust law income for a particular income year is determined.
[2] The taxable income of the trust is determined.
[3] The percentage under [1] is applied to the taxable income in [2] and the resultant amount is the taxable income of the beneficiary.
In the above process, on one view, there is no regard to the classes of income that have been received by the trustee and whether the trustee has decided to allocate certain classes of income to certain beneficiaries. But there are other provisions in the income tax law that refer to the taxation of the beneficiaries of a trust in relation to certain classes of income. Regard must also be had to these provisions.
Is streaming dead after 30 June 2010?
I think that it is a bit early to say that streaming is dead, although perhaps casket measurements should be taken. I have attended two recent seminars. At one seminar, the speaker (non-ATO) said that the ATO would no longer sanction streaming. At another seminar, there was a senior ATO technical officer speaking. There was no indication from him that streaming was definitely not going to be permitted by the ATO. There is to be a review of the area by the ATO and this will include the scheme of the law in the current imputation provisions and relevant capital gains tax provisions.
Unfortunately, nothing can be said about the future of the streaming of income to beneficiaries with any certainty. We will have to wait for future ATO pronouncements and possible changes to the law. Based on past experience, this will also create further uncertainty. But, this is the Australian tax system.
Wishing you easier business.
John M. Jeffreys
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