Bamford resolved the proportionate approach to Division 6 by distinguishing between distributable and taxable income but did not clarify when entitlement arises. The coming High Court decision in Bendel is expected to examine whether beneficiaries cannot become presently entitled before 30 June while the trustee retains an unsatisfied right of indemnity. This week’s discussion focuses on how payment before year-end can still trigger taxation through section 101 and how the remaining income will be dealt with proportionately under Bamford.
Fixing Present Entitlement
If Bendel confirms that entitlement cannot arise before 30 June due to the trustee’s continuing right of indemnity, there remains a path to tax effectiveness. A trustee may make an actual payment before year-end, which section 101 treats as “paid or applied” for the beneficiary’s benefit. That payment is included in the beneficiary’s assessable income, and Bamford proportionality applies to the remaining undistributed income.
Example
A trust makes a $100 cash payment to a beneficiary on 29 June. The payment is “applied” within section 101, creating assessable income for the beneficiary. When the trust’s net income is later calculated, that $100 forms part of the proportional allocation under Bamford, with the balance divided according to the proportionate shares of the remaining distributable income.
Discussion Focus
• The likely Bendel reasoning that present entitlement cannot arise before 30 June
• The continuing effect of section 101 for actual payments made before year-end
• How Bamford’s proportionate approach applies to the residual net income
• The distinction between payments “of” and “by way of” trust property
• Drafting implications for trust resolutions and June distributions
A modest pre–30 June payment can ensure a tax-effective distribution under section 101, even without present entitlement. Bamford determines the proportional outcome for the remainder. Together, these principles offer a practical solution to Division 6’s timing problem.
Please see below link to case materials which is assumed reading in order to participate in the discussion:
Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10 (30 March 2010)
Discussion led by Adrian Cartland