The recent High Court case of Bamford highlighted the streaming of income to specific beneficiaries and the proportional approach where beneficiaries receive all income (e.g. trading income, interest, franked dividends, and capital gains) as a percentage. In summary the case was about how “trust income” is distributed.

Summary of Recent Changes

The commencement on 29 June 2011 of (Amendments 2011 Measures No 5) to the Income Tax Assessment Act 1997 allows the streaming of franked distributions and capital gains to beneficiaries for tax purposes.

The changes provide certainty for trustees and beneficiaries of trusts by removing discrepancies between the treatments of trust income by trust laws, on the one hand, and by the tax system on the other.  The changes will enable trust income, which includes capital gains, dividend income and franking credits to be distributed by streaming rather than by the proportionate method. This can provide beneficiaries with the optimal tax outcome.

However trustees need to be mindful that this newly introduced measure does not give the trustee the power to stream if the power if not in the trust deed. Morrows Legal will review your trust deed and if necessary prepare a Deed of variation.

The following situations may be beneficial to stream income, rather than adopt the proportional method:

Capital Gains
Distributions to beneficiaries who have existing capital losses
Distributions of Not Taxable Australian Asset capital gains e.g. shares to be streamed to beneficiaries who are non-residents
Distributions to beneficiaries to achieve the 10% income test rule for personal superannuation contributions

Dividend Income
Distributions to beneficiaries such as non-residents, charities, low marginal rate tax payers, operating companies
Enables distribution of dividend income to come under the $5,000 threshold test for the holding period 45 day rule if no trust election has been made

Further information

http://www.ato.gov.au/businesses/content.aspx?doc=/content/00285130.htm

http://www.ato.gov.au/businesses/content.aspx?menuid=0&doc=/content/00245963.htm&page=1&H1

Replacement of Appointor

The Appointor is the person who has the discretionary power under the Trust Deed to remove and replace the Trustee. As such the Appointor is able to control the Trust.

Most deeds however do not provide for the replacement of the Appointor should the Appointor become incompetent. It is too late to address this issue after the Appointor becomes incompetent, for example if he or she suffers from Alzheimer’s disease.

We will cover this in the review to see whether the deed provides for the replacement of the Appointor and Guardian when they become incapacitated.

Borrowing Powers

At the same time Morrows Legal will review your trust deed to determine whether it contains trustee powers that banks now require deeds to contain before they will lend to trusts.

By addressing this issue you will avoid future delays in obtaining bank loans when time may be critical.

Over the next few months our legal team will be available to systematically amend all family trust deeds.  

We recommend Morrows Legal Pty Ltd perform the review and any associated amendments.

Morrows Legal Pty Ltd professional fees to review and prepare a Deed of Variation amending your deed are as follows;

-     Trust Deed Review                                                                 $475 (inc GST)
-     Trust Deed Review & Variation                                             $660 (inc GST)

For additional information please contact our office or send an email enquiry through the contact us tab on our webpage.