Bamford Case - can someone explain in plain language what this ruling means?

I recieved a newsletter from a site I suscribe to and they had a link to this site

http://www.taxpayer.com.au/media/news/bamford_case_high_court_decision.html

to explain the Bamford case ruling. I read it, and not being an accountant, have absolutely no idea what they are talking about. BUT I have a trust so I probably need to know.

Can someone infinately more intelligent than me on these matters decipher this into plain speak for me, and others who probably should know?

Thanks in advance
 
Its not a simple thing to explain. If you know the difference between quantum and proportionate approaches as it applies to trust distributions, it helps.

If your trust has an appropriate definition of income, you can apply the proportionate approach to trust distributions, which is a superior way of distributing income.
 
I have read bits of it, and I'm still getting my head around it. Basically the ATO were arguing that the term "income of the trust estate" in s97 only meant income according to ordinary concepts. ie, not including capital gains. If this was upheld, trusts would have issues distributing capital income, for example. The High Court have disagreed with the ATO argument, meaning capital gains can be treated as income, as long as the trust deed allows it.

Most new deeds have a definition of income referring to s95. You may need your deed updated if it doesn't.

The other part of Bamford case was the use of 'proportionate' distribution, if taxable income does not equal accounting income.

eg: Accounting profit $100,000
Child 1 $ 2500
Child 2 $ 2500
Mum $45000
Company $Balance ($50,000)

Taxable Income $150,000 - Using Propertionate method.
Beneficiaries receive taxable distribution IN PROPORTION to their accounting distribution
Child 1 $ 3750
Child 2 $ 3750
Mum $67,500
Company $75,000

This means the children would be required to pay some tax.

In the past, trustees have tried to distribute all of the increase in taxable income (in this case $50,000) to the company, or default beneficiary. The High Court has now said this can't be done, and any difference is to be distributed in proportion to the accounting income, as above.
 
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