Welcome Tom Pledge

Tom can be contacted on 08 8210 1262 or tpledge@normans.com.au, and to read more about Tom please see www.normans.com.au/people/tpledge.html.

Developments in the taxation of trusts: Commissioner of Taxation v Bamford and Bamford v Commissioner of Taxation

In what is being described as a landmark decision, the full bench of the High Court recently unanimously dismissed both the taxpayers’ appeal and the Commissioner of Taxation's appeal from the decision of the Full Federal Court in Bamford v FCT [2009] FCAFC 66 (3 June 2009).

In dismissing the Commissioner's appeal, the High Court has held that the phrase ‘income of the trust estate’ in section 97(1) of the Income Tax Assessment Act 1936 (Cth) is a reference to income as determined by the terms of the trust deed.  The decision confirms that, where allowed by the trust deed, a trustee can determine that any capital gain made by the trust can be treated as income for the purposes of determining whether a beneficiary is ‘presently entitled to a share of the income of the trust estate’.  The consequence being that, provided the trustee makes the necessary determination as allowed by the trust deed, the Commissioner should be prevented from assessing capital gains at penal tax rates in the hands of the trustee if the trust does not derive any other income in that financial year.

In dismissing the taxpayers’ appeal, the High Court upheld the proportionate view of the operation of section 97(1) when determining a beneficiary’s tax liability when a trust’s net taxable income for tax law purposes does not equate to its ‘income of the trust estate’ for trust law purposes.  In particular, the High Court held that the "share" of the net income of the trust estate that is included in the beneficiary's assessable income under section 97(1) is calculated by reference to the proportionate share of the income of the trust estate (the distributable income) to which the beneficiary is presently entitled for trust law purposes.  The consequence being that beneficiaries may be taxed on more or less than they actually receive from a trust where there are differences – as is often the case – between the income of the trust as determined under the trust deed and the taxable income of the trust.

Practical consequences

The decision of the High Court has brought into question the Australian Tax Office Practice Statement PS LA 2005/1 (GA) which allows a departure from the proportionate approach to tax the recipient of a capital gain even though they did not receive the income.  Despite the recent decision of the High Court in Bamford, as at the date of this article the Practice Statement has not been withdrawn or amended.  It is expected that the Australian Tax Office will issue a decision impact statement outlining its views and the consequences of the decision shortly. 

There may be further implications depending on the ATO’s approach.  In the meantime, and in the lead up to 30 June, trustees and advisors should consider:

• reviewing trust deeds to ensure that trustees are given, if required and appropriate, the discretion to determine income according to ordinary concepts or to allow the trustee to specifically determine what is to be income and what is to be capital

• developing tailored minutes that record the determination of the trustee and refer to the specific income clause of the trust deed relied on, and

• warning beneficiaries when estimating tax assessments that any increase in the net taxable income of the trust will flow through from the trust to all beneficiaries in accordance with the proportionate approach.

For more information please contact Tom Pledge, Senior Associate in the Corporate and Commercial Services team on 8210 1262 or tpledge@normans.com.au.

Tips and traps in company deregistration

If a company is no longer trading and there is no prospect that it will trade again, the company may be deregistered. Until deregistered, even an inactive company will be subject to the requirements of the Corporations Act 2001 (Cth) and be required to pay the yearly annual review fee to ASIC.

A company can be voluntarily deregistered if:

• it is not trading and all members (shareholders) agree to the deregistration, or

• if the company has assets less than $1000 and no outstanding liabilities, is not a party to any legal proceedings and has paid all fees and penalties payable under the Act.

Alternatively, companies may be deregistered through a members’ voluntary winding up (involving the appointment of a liquidator to sell the company’s assets and pay its debts).

ASIC may also decide to deregister a company if:

• it has not paid its annual review fee for at least 12 months after the payment due date

• it has not responded to a company compliance notice requesting particulars at least 6 months after the response was required, or

• it has not lodged any other document in the last 18 months and ASIC has no reason to believe that the company is carrying on business.

It is this last avenue of deregistration that can often cause problems for companies that have assets that may have been forgotten about, as upon deregistration, these become the property of ASIC. Any property held by the company on trust becomes the property of the Commonwealth on the same terms of the trust and the same obligations as the company when it was trustee.

Assets of companies which may have been forgotten about when a company is deregistered can include:

• land

• bank accounts

• shares

• insurance policies

• motor vehicles

• interests in contracts, and

• intellectual property such as copyright and registered trademarks, designs and patents.

There are three options when the assets of a deregistered company have not been dealt with prior to deregistration. Make an application to reinstate the company, request that ASIC perform an act in relation to those assets on the company’s behalf using its powers under section 601AF of the Act or purchase the assets back from ASIC. All three options can become expensive.

Application to reinstate

It may be a simple matter of the application to deregister being inaccurate, in that the assets of the company were not correctly listed (due to some defect or oversight in the process of deregistration). If the company is reinstated for the purposes of transferring the assets out of the company, the application for deregistration will need to be made again once the transfer of assets has been attended to.

Request that ASIC take action

Section 601AF of the Act also provides that ASIC may do an act on behalf of the deregistered company or its liquidator if satisfied that the company would be bound to do the act if it still existed. For instance, if certain IP rights had been assigned to another company under an agreement but the registration had not properly been transferred, ASIC may agree to transfer the IP on the deregistered company’s behalf. However, convincing ASIC to do so can be an onerous process that involves preparing an application that includes the documents necessary to affect the transfer, a number of statutory declarations explaining the background of the matter, evidence of why the transaction should be performed and payment of a fee.

Purchase back the assets

If property of a deregistered company was not entitled to be transferred before registration, or if ASIC is not convinced that it should exercise its power under section 601AF, ASIC may use its power under section 601AE of the Act to deal with the assets in any way it sees fit, including to sell the assets by auction, public tender or private contract.  A party may want to buy a particular asset, for example, if the members of the former company have set up a new company which they intended to transfer the asset to and didn’t.  To do so they need to make an application to ASIC for the property to be sold to the new company. The application must include a statutory declaration, valuation of the property by a licensed valuer, transfer and supporting documents and in some cases, a deed of indemnity. ASIC has complete discretion as to whether they agree to the sale. Any money ASIC receives from the sale will be used to offset it costs.

In light of the above, directors and members ought to be aware of the need to follow a thorough deregistration process, and ensure that even if a company is not trading, the annual review fee is paid and any other notices from ASIC have been responded to in order to avoid deregistration by ASIC.

For more information please Penny Chalke, Associate in the Corporate and Commercial Services team on 8210 1260 or pchalke@normans.com.au.

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