Issue 2 : What is income?
Under Div 6 ITAA 1936, a beneficiary who is presently entitled to a share of the income of a trust estate is (broadly) taxed on that share of the net income calculated for tax purposes in accordance with sec 95 ITAA 1936.
There has been an ongoing debate as to whether the trust deed can govern the content of the expression “income” of a trust estate, for example, by providing that the income is an amount equal to the net income for tax purposes or by giving to the trustee the power to determine the nature of an amount. This issue was considered in the decision of the Full Federal Court in Cajkusic v FCT ([2006] FCAFC 164; 2006 ATC 4752), and observations of the court indicated that the trust deed could govern the content of what is “income”. This approach appears to be consistent with the view of an earlier (and differently constituted) Full Federal Court in Richardson v FCT ([2001] FCA 1354; 2001 ATC 4621). The Commissioner, however, issued a decision impact statement in which he stated his disagreement with the view of the Court in the Cajkusic case.
The issue has now been raised in a case recently decided by the AAT (Bamford & FCT [2008] AATA 322; 2008 ATC ¶10-022). For the income year in question, the net income of a discretionary trust for tax purposes solely comprised a net capital gain. The AAT took the view that, although it was not clear, the trustee had exercised a discretion conferred by the trust deed to treat the capital gain as income. Nevertheless, the AAT considered that the notion of “income” in Div 6 ITAA 1936 did not include an amount which was of a capital nature, even if the trust deed gave the trustee the power to recharacterise the amount. The AAT accordingly adopted the Commissioner’s view expressed in the decision impact statement and upheld the Commissioner’s assessment of the trustee on the amount of the net income for tax purposes under sec 99A ITAA 1936.
It seems likely that an appeal to the Federal Court will be taken from the AAT decision in this case. It is thought, however, that the case is not an ideal test case, given the somewhat flimsy basis on which the contention that the trustee characterised the capital gain as income rests.
Disclaimer
The material contained in this publication is of a general nature and is not advice. No representation or warranty is made as to its correctness. Readers must obtain their own professional advice before making any decisions as to their own or their clients’ affairs.
