New ATO position on capital gains & trusts but for how long?

Sep 2, 2009

The revised ATO position follows a Full Federal Court decision, Bamford v Federal Commissioner of Taxation.  This case held that so long as the trust deed defines income to be that amount calculated under the tax legislation, a trust can distribute the capital gain in the same way as it would distribute income.

Prior to this case, the ATO held that, because capital gains are not ordinarily considered ‘income', they could not be treated as such.  This caused significant complications when looking to distribute capital gains to beneficiaries of the trust.

According to Eugene Berkovic, Taxation Director at chartered accountancy firm, GMK Centric, under the previous treatment, taxpayers ran the risk of having capital gains derived from the trust taxed in the hands of the trust and at the top marginal rate.  For trust beneficiaries, this meant missing out on the capital gains tax (CGT) discount (which applies only to individuals, not entities such as trusts) along with any reduction in tax that would apply if the taxpayer concerned was not in the top marginal tax bracket.  

"Following this latest case, however, the ATO is saying that if the trust deed defines income as including capital gains, taxpayers can, under the right circumstances, rely on the Bamford decision to distribute the capital gain as though it were income," he said.

While acknowledging that this new approach offers affected taxpayers more flexibility to maximise tax advantages, Mr Berkovic also offered some cautionary words to those who may consider relying on the new Practice Statement.

"Taxpayers should be aware that the ATO has specifically stated that trust deeds cannot be amended to take advantage of this ruling," he said.  "In addition, the ATO has yet to announce its proposed treatment of taxpayers should the decision be reversed at High Court level, so whether or not they may be hit with retrospective taxes if this occurs is still under question."

Mr Berkovic also highlights the fact that, due to the time lag between when the decision was made in early June and the ATO's response in August, trusts that may be affected may not have dealt with this issue as part of their year-end decision making.

"Taxpayers and their advisers would be well advised to think all the issues through carefully before acting on the new ruling," he said.

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