Developments in the taxation of trusts – the ATO’s response to Bamford

Commissioner of Taxation v Bamford and Bamford v Commissioner of Taxation

The High Court’s landmark decision in Bamford regarding the taxation of beneficiaries of trusts was recently raised in a previous Briefly.  Given that the ATO has now released its Decision Impact Statement outlining its views and the compliance approach it will take as a consequence of the decision, it is appropriate to reconsider the practical outcomes of the case.

A brief summary of the decision

Both the appeals of the ATO and the tax payer were dismissed.  The High Court:

• rejected the ATO’s attempt to limit the alibility of trustees to give effect to the terms of trust deeds when determining what is income;

• upheld the taxpayer’s argument that, provided the trustee makes the necessary determination as allowed by the trust deed, the ATO 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;

• upheld the ATO’s proportionate view of the operation of section 97(1) of the Income Tax Assessment Act 1936 (Cth) when determining a beneficiary’s tax liability; and

• upheld the ATO’s view that beneficiaries may be taxed on more or less than they actually receive from a trust where there are differences between the income of the trust as determined under the trust deed and the taxable income of the trust.

The ATO’s Decision Impact Statement

Through its Decision Impact Statement, the ATO has confirmed the following:

• trustees can, where permitted by the trust deed and when acting strictly in accordance with the relevant provision of the trust deed, determine what is to be income for the purposes of ‘income of the trust estate’ pursuant to section 97;

• beneficiaries may be taxed on more or less than they actually receive from a trust where there are differences between the income of the trust as determined under the trust deed and the taxable income of the trust;

• the amount included in a beneficiary’s assessable income under section 97 consists of any unallocated proportionate share of the entirety of the net income for tax purposes;

• the following rulings and practice statements will be withdrawn:
  • Taxation Ruling TR 95/29: Income tax: Division 16 – Applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production;
  • Taxation Ruling No. IT 331: Adjustments to estate income as returned to arrive at net income of estate for the purposes of section 95;
  • Practice Statement PS LA 2005/1 (GA): Taxation of capital gains of a trust; and
  • Taxation Ruling TR 92/13 (Trust dividends and franking).

Practical consequences

According to the ATO, despite Bamford resolving some matters, a number of matters remain uncertain regarding the taxation of trusts.  The ATO is consulting with practitioners on these issues and is expected to announce further information in due course.  In the meantime and in the lead up to 30 June, trustees and advisors should be considering the following:

• reviewing trust deeds to ensure that trustees are given 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 trustees determination and refer to the specific income clause or characterisation clause utilised by the trustee; 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.

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Tips and traps for medical practices (and other professional practices)

There are a number of issues that may arise in business structuring for a medical practice.  It is common for medical practices to include:

• a partnership between some or all of the doctors in the practice;

• a trust (service trust) that employs staff and provides administrative services to the practice, and

• in some instances, a second trust (property trust) which owns the premises for the clinic.

The service trust is usually a unit trust with all the units in the trust held by family trusts controlled by the doctors in the partnership and with a company as trustee of the trust, all the shares in which are held by the doctors in the partnership.

Often the only documents evidencing these arrangements are the partnership agreement between the partners in the practice, the constitution for the trustee company and a trust deed for the service trust.  The constitution and trust deed are usually stock standard and make no reference to the role of the trust as service provider to the partnership.

There may also be a service agreement between the service trust and the partnership to record the scope of services provided by the service trust to the partnership and also to record the fees payable by the partnership to the service trust.  This is particularly so in recent years due to efforts by medical practices and their legal and accounting advisers to comply with ATO guidelines which restrict tax deductions on service fees charged by service entities to partnerships.

However, simply having these agreements in place is not always sufficient to protect the interests of the doctors in a medical practice, particularly when changes to the partnership occur.  In many cases, these agreements don’t “talk to each other” so that for example, there is nothing to require a doctor who is retiring from the partnership or selling an interest in the partnership to give up or sell his or her shares in the company which is trustee of the service trust, or to procure his or her family trust to give up or sell its units in the service trust. 

Similarly, there may be nothing to require or even provide for a new partner joining the partnership to be issued with shares in the trustee company or units in the service trust.  Indeed, the constitution of the trustee company and or the trust deed for the service trust may require any new shares and units to be offered first to existing shareholders and unitholders on a pro-rata basis before they can be offered to anyone who is not a current shareholder or unitholder. 

The same transitional issues may arise in respect of changes to the shareholders and unitholders in the property trust following changes in the partnership. 

In practice, these transitional issues are often dealt with appropriately because of the goodwill of all parties involved or due to a belief by those parties that the transition has to proceed that way, even if not properly provided for in relevant documentation.  However, there is always the risk that someone at some time refuses to follow or allow the usual transitional arrangements or at least threatens to do so.  This can frustrate relationships and cause delays and can also be a barrier to growing the medical practice or ensuring an appropriate succession plan for the current partners in the practice.

To avoid this risk, we recommend that medical practices review the agreements they have in place to ensure that they allow them to achieve the desired outcome consequential on any changes to the partnership, and that any transitional issues which may arise can be averted in advance.

Needless to say, these issues are not confined to medical practices and are equally relevant to other professional service practices such as dental, physiotherapy, accounting, architecture and engineering.  Partners in these types of practices should also review their agreements for the same purpose.

For more information please contact Johanna Churchill, Partner in the Corporate and Commercial Services team on 8210 1236 or jchurchill@normans.com.au.

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Removing State boundaries in business names

Under new legislation developed by the Council of Australian Governments, businesses will be able to register their business names on a national register, rather than having to do so separately in each State and Territory.

The new National Business Name Registration system will be under the control of the Australian Security and Investment Commission (ASIC), which will be responsible for all registrations, changes, cancellations and general monitoring of the register.

The new system is expected to commence in April of 2011, subject to the legislation being passed by each State and Territory. Until that time, existing State and Territory Business Name registers will continue to operate for registration, renewal and cancellation of business names.

Why do business names need to be registered?

Business name registration is designed to protect consumers, as it allows them to identify the person or company behind a particular business.   This is particularly important if consumers wish to bring legal proceedings in respect of the business.  Additionally, the new system will also enable other businesses, as well as the public, to access contact details, Australian Business Numbers (ABN) and trademark information for all businesses on the register.

Who will have to register?

Companies and individuals who are not trading under their own personal or company were name must register their business name. However, if a business name is already registered on a State or Territory Register it will automatically be rolled into the national register. Identical business names which have been registered under State or Territory systems will also be allowed to co-exist on the new register, and given a geographic description to distinguish them. 

The system will not allow you to register a name which is identical or nearly identical to a business name already on the register, a name which is likely to be offensive, a name which is likely to mislead or deceive consumers or traders or a name which contains prohibited or restricted words without the appropriate permission.

In order to register a business name under the new system, an applicant will need to have an ABN or the applicant can apply for one at the same time as registering the business name.

An applicant whose application for a name is rejected will be able to request a review of the decision. Third parties may also apply for a review if the registration of a particular business name is likely to cause them detriment. Appeals against decisions of ASIC for the registering of a business name may be made to the Administrative Appeals Tribunal.

Benefits of the new system

The national system will mean that, provided it trades under the same business name in each State or Territory, a company operating nationally or over several states will only have to register the business name once and only renew it once when it comes up for renewal.  A significant benefit to franchisees is that they will be able to register their business name online without the need for written permission from the franchisor.

As the register will also be holding trademark information, an online search can be made by an applicant to ensure that a proposed business name does not infringe any trademark.

It is proposed that the new register will operate 24 hours a day, 7 days a week and will allow for online applications and searches to occur at any time. The proposed fees for registering a business name are $30 for one year and $70 for three years. This is lower than in nearly every State and Territory, including South Australia, where a three year business name registration costs $150.

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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