The operation of Division 6 of the Income Tax Assessment Act 1936 has long been identified as resulting in anomalous consequences. There have been a number of reports since the Review of Business Taxation (Ralph Review) in 1999 that have recommended either adopting a flow through approach or an entity approach to the taxation of trust income. Following the outcome of the Bamford case (Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10 (30 March 2010)) the Government undertook to review the operation of the Division; and the Treasury proceeded with a public consultation process.

Examine the merits of each of the two approaches. Which do you think is more appropriate having regard to the legal nature of a trust and the practical and compliance issues around the taxation of trusts? Are the two in conflict and how would you resolve the conflict?

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