Federal Commissioner of Taxation v Thomas

The High Court of Australia considered appeals from the Full Court of the Federal Court concerning the application of Division 207 of the *Income Tax Assessment Act 1997* (Cth) to a trust. The dispute arose from resolutions passed by the trustee of a trust, which purported to distribute franking credits to beneficiaries separately from and in different proportions to the income comprising franked distributions. The trustee had also obtained directions from the Supreme Court of Queensland under section 96 of the *Trusts Act 1973* (Qld) concerning these resolutions. The Commissioner of Taxation contended that these directions did not conclusively determine the application of Division 207.

The central legal issue before the High Court was whether the directions obtained by the trustee from the Supreme Court of Queensland, in conjunction with the trustee's resolutions, were effective to determine the application of Division 207 of the *Income Tax Assessment Act 1997* (Cth) in a manner that was binding on the Commissioner. This involved considering the nature of judicial advice in the context of trust distributions and its interaction with the imputation system, particularly the concept of "streaming" franked distributions. The Court also had to determine whether the trustee's actions, as sanctioned by the Supreme Court, validly allocated franking credits to beneficiaries independently of the underlying franked income.

The High Court allowed the appeals in part and dismissed the cross-appeals for certain income years. The Court reasoned that while the trustee had broad discretion under the trust deed to apply income and to record categories of income separately, and that the deed contemplated differential distribution of franked distributions, the directions obtained from the Supreme Court did not conclusively determine the application of Division 207 in the manner contended by the taxpayers. The Court emphasised that the imputation system operates by attaching franking credits to franked distributions, and that the legislative framework for streaming under section 207-35 of the *Income Tax Assessment Act 1997* (Cth) requires that franked distributions be streamed in the same proportions as other income. The Court found that the resolutions and directions did not achieve this, and therefore the objection decisions for the relevant income years were remitted to the Commissioner for determination in accordance with the Court's reasons. The Court also made specific orders regarding costs.