What was the Bamford decision?

In March 2010 the High Court made a decision in the case of Commissioner of Taxation v  Bamford  [2010] HCA 10  30 March 2010. The decision in Bamford has created some new rules around discretionary trusts. Most family trusts are discretionary trusts similar to that featured in the Bamford decision. This case has been talked about a lot in legal and accounting circles recently. And for good reason. (You know it’s an important case when it gets a one word nickname like ‘Bamford’).

How does Bamford affect my clients?

The Bamford decision changed a lot of the rules applied by the Australian Tax Office when it comes to income and capital in family trusts. This will affect the operation of everyone’s family trust. Unfortunately for some, the effect will not be good unless they amend their trust deeds. This is because many family trusts were created before the Bamford decision was handed down in March 2010. Therefore the trust deeds (which set out the rules of how the trust operates) do not have adequate provisions in light of the Bamford decision.

How do I ensure my clients trust deeds are Bamford compliant?

All trust deeds created prior to the Bamford decision on 30 March 2010 should be reviewed by a solicitor. They should be checked to ensure they have appropriate provisions to deal with income and capital. If they are not Bamford compliant, it is likely we can fix them for you.

Can I make my clients deeds Bamford compliant without re-settling the deed?

Trust deeds are legal documents. Any legal document should be amended by a qualified solicitor. We do not recommend attempting amendment yourself. An amendment may have the effect of determining or re-settling the trust if not done correctly.

What will it cost?

$660.00 incl GST to determine whether your trust deeds are ‘Bamford compliant’ and amend them if they are not.

We have had inquiries from accountants requesting that we review their clients’ trust deeds. In most situations we are finding that they need amendment. The good news is that the amendment can be made without adverse consequences provided its done right. Trust deeds must be amended without accidentally creating a ‘resettlement’ of the trust. You should always have your trust amended by a lawyer whether it is as a result of the Bamford decision or not.

How do I get it done?

Simply call us and email a scanned copy of your existing trust deed. We will read it to determine whether or not it needs to be changed as a result of the Bamford decision. If so, we’ll go ahead and do it.

Resettlement

Division 6 of Part III of the Income Tax Assessment Act 1936 provides rules for working out and assigning tax liability. The Bamford decision changed the way this legislation is interpreted by the courts.

The ATO assumes that if a new trust relationship arises, there must also be a new trust created for Division 6 purposes. This is one of the issues that was considered in Bamford.  A new trust (resettlement) can be deemed to happen even if the trustee remains the same.  The ATO treats it as having disposed of the trust property of one trust estate and reacquired it as trustee of another. This ‘disposal’ triggers consequences under capital gains and other provisions of the tax legislation. A capital gains tax (CGT) event occurs.

The tax legislation ‘takes the law as it finds it’, at common law. One of the reasons the Bamford decision is important is because it changed the common law.  There are no specific criteria in the legislation itself. Therefore we must rely on court decisions for guidance as to when a new trust comes into existence. The decision in Bamford helped to clarify this point further.

Trust settlements are recognised under Australian State stamp duty legislation.  This issue has generated extensive case law on when a trust is ‘settled’ or ‘resettled’.  Whilst Bamford itself if not a stamp duty case, the stamp duty cases indicate that a resettlement arises when the changes to a trust amount to a ‘new charter of rights and obligations’.  These cases give valuable insights into the nature of trusts and the circumstances in which new trusts arise. They should be considered alongside the recent decision in Bamford.

There are a number of factors which go to determine whether a new trust has been created.  Depending on their nature and extent, these changes may amount to a variation, or or a resettlement. In the ATO’s view a new trust arises when there is a fundamental change to the trust relationship.  It is a change in the essential nature and character of the original trust relationship which creates a new trust. Changes potentially leading to a new trust can arise in many ways, including variations under a power in the deed. In the case of a deemed resettlement, the original trust is deemed to be brought to an end and a new trust created. This is something to be avoided when amending trust deeds as a result of the Bamford decision.

There are different trigger points/tests for different types of trusts. Whether alterations to a trust will result in resettlement will depend on establishing whether the essential nature and character of the original trust relationship has fundamentally changed. The only way to know for sure is to weigh up the facts in each individual circumstance in light of the case law. To do this, you need to consider the state of the law, not just the Bamford decision in isolation.

For this reason it is best not to take a ‘one size fits all approach’ to amending trust deeds. Reading the Bamford decision itself will only get you so far. A detailed knowledge of the law before and after Bamford is required. Each individual trust deed should be reviewed by a solicitor for an opinion on that particular trust.