As an accountant, I see many and varied trust deeds. Old, new, detailed, client tailored, standard precedent – the list goes on. No one trust deed is the same. 

Even deeds prepared by the same lawyers are different depending on the precedent used at the time of preparation.

Since the High Court handed down its verdict in the Bamford v Federal Commissioner of Taxation case, the variances in some deeds has caused concern. 

This case has surfaced several anomalies and the complexity of the case was made apparent when the two most uncertain and debated parts of income tax law were litigated by Bamford’s; income and share.

Bamford’s argued the meaning of these words in Section 97 of the Income Tax Assessment 1936. The Federal Court allowed the appeal so far as the income point was concerned, but rejected their definition of share.

The High Court in Bamford’s case confirmed that the term “income of the trust” as it appears in the opening words of section 97(1) derives its meaning from the general law of trusts (not from tax legislation). Accordingly, its meaning will be as defined in the trust deed. It was confirmed that if a beneficiary of a trust is presently entitled to a percentage of the income of that trust, then that beneficiary must include that percentage of the trust’s taxable income in that beneficiary’s own assessable income.

As a result of the decision in Bamford’s Case, we recommended that trust deeds are drafted with flexibility. This helps to define the trust income as being equal to section 95 net income excluding notional amounts such as imputation credits.

It also provides that the trustee has a discretion to adopt alternative concepts of income in any year; and it allows the trustee a discretion to make distributions from gross income before deducting expenses.

However, many existing trusts were established with trust deeds that were prepared a long time ago. These deeds should be updated where possible. It is important to carefully check the variation clause to ensure any changes are permitted and also to ensure that the power to make future changes is not unduly limited.

The first step is to ensure that your clients who have deeds (whether you prepared them or not), appropriately deal with the issues from Bamford’s. Make sure you don’t rely on accountants to make sure they are right.

Secondly, work with accountants to review all of your clients’ deeds. From my experience, it is much easier if all of your clients’ deeds are worded the same.

Thirdly, work closely with your client’s accountant to ensure they are properly preparing resolutions that align to their deed and are prepared within required time frames.

Finally, use the opportunity to review the clients’ deeds as a stepping stone to a full estate plan review.

Why are these opportunities for lawyers? 

Lawyers can use these opportunities to ensure their clients don’t receive any nasty surprises. In the Bamford’s case what the defendant thought was the case wasn’t in line with the High Courts’ views on the case.

Accountants are often a primary referral source for lawyers; this opportunity will help support and grow these relationships. Finally, this will allow you to generate additional services by proactively ensuring your clients affairs align to the current law and practice.