The ATO considered that the income of the trust is income according to ordinary (tax) concepts and that the trust deed cannot deem statutory income (such as a capital gain or some FX gains) to be income of the trust.
This meant that if the trust did not derive income according to ordinary concepts (e.g. net profit from rental activities, fund managment activities, etc), but it derived a capital gain from the sale of a shopping centre, or a FX gain from the close out of a foreign currency hedge, the ATO condidered that that income could not be deemed to be income of the trust. Hence the statutory income could not be treated as income of a beneficiary; the trust could be liable to tax on the statutory income.
Subject to any appeal to the High Court, Bamford appears to have settled that income of a trust means ‘income ascertained by the trustee according to appropriate accounting principles and the relevant trust instrument and in accordance with the ordinary concept of income’ contrary to the ATO’s view. Hence the trust can base distributions on accounting income and avoid being liable to tax on statutory income which it could not treat as income of the trust.
How this plays out will depend on the trust deed, because the decision confirms that the term income of the trust estate (for section 97 purposes) is income as determined by the relevant trust instrument. As such where a trust deed essentially equates income to taxable income (under section 95 of the ITAA 1936), or empowers the trustee to determine the income of the trust, assessable net capital gains can be regarded as income for distribution purposes, and so the trustee is able to decide to distribute the assessable net capital gain to beneficiaries.
I am not entirely sure, but my sense is that this is good news for CER holders. Time will tell. We should know something in a week or two.
See this link for more information: http://www.cpaaustralia.com.au/cps/rde/xchg/SID-3F57FECA-B668C678/cpa/hs.xsl/724_29414_ENA_HTML.htm
ProjectX
CER Price at posting:
12.0¢ Sentiment: Hold Disclosure: Held
