SCCASP Holdings as trustee for the H&R Super Fund v Commissioner of Taxation
[2012] FCA 1052
•26 September 2012
FEDERAL COURT OF AUSTRALIA
SCCASP Holdings as trustee for the H&R Super Fund v Commissioner of Taxation [2012] FCA 1052
Citation: SCCASP Holdings as trustee for the H&R Super Fund v Commissioner of Taxation [2012] FCA 1052 Parties: SCCASP HOLDINGS AS TRUSTEE FOR THE H&R SUPER FUND v COMMISSIONER OF TAXATION File number: QUD 80 of 2011 Judge: LOGAN J Date of judgment: 26 September 2012 Catchwords: TAXATION – appeal from objection decision made by the Commissioner of Taxation – disallowance by Commissioner of objection against amended assessment – applicant trustee of complying superannuation fund – income of trust applied to superannuation fund pursuant to trust instrument – whether distribution to applicant from trust to superannuation fund gives rise to “special income” – whether “income derived” by the entity in the capacity of a beneficiary of a trust estate includes net capital gain – whether the amount attributable to the applicant’s net capital gain has been “derived” notwithstanding not receiving payment of amount or otherwise have income dealt with – applying Allen v Federal Commissioner of Taxation (2011) 195 FCR 416, distribution constituted “income derived” by superannuation and “special income” Legislation: Income Tax Assessment Act 1936 (Cth) ss 6, 19, 25, 95, 97, 101, 267, 273, 283
Income Tax Assessment Act 1997 (Cth) Subdiv 115-C,
122-A, 124-G; ss 6-5, 6-10, 10-5, 102-5, 102-20, 115-210, 115-215, 995-1Cases cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27 followed
Allen v Federal Commissioner of Taxation (2011) 195 FCR 416 applied
Allen v Federal Commissioner of Taxation [2012] HCA Trans 25 considered
Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 followed
Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liquidation) (2005) 225 CLR 488 followed
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 consideredDate of hearing: 7 November 2011 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 60 Counsel for the Applicant: Mr D Russell QC with Mr P Bickford Solicitor for the Applicant: Clayton Utz Counsel for the Respondent: Ms M Brennan Solicitor for the Respondent: Australian Government Solicitor
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 80 of 2011
BETWEEN: SCCASP HOLDINGS AS TRUSTEE FOR THE H&R SUPER FUND
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
LOGAN J
DATE OF ORDER:
26 SEPTEMBER 2012
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The application is dismissed, with costs.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 80 of 2011
BETWEEN: SCCASP HOLDINGS AS TRUSTEE FOR THE H&R SUPER FUND
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
LOGAN J
DATE:
26 SEPTEMBER 2012
PLACE:
BRISBANE
REASONS FOR JUDGMENT
The issue in this taxation appeal is whether an amended assessment of a superannuation fund now known as the H & R Super Fund (the Super Fund), of which the applicant, SCCASP Holdings (SCCASP) is trustee, issued by the respondent Commissioner of Taxation (Commissioner) on 6 May 2009 in respect of the year of income ended 30 June 2004 is excessive. On 15 February 2011, the Commissioner disallowed an objection by SCCASP against that amended assessment. SCCASP has appealed to the Court against that objection decision. In the appeal, SCCASP carries the onus of proving the amended assessment to be excessive.
The background facts did not become the subject of evidentiary controversy on the hearing of the appeal. Instead, the parties were agreed as to those facts. To this end, an agreed statement of facts was tendered. The following account of the background facts is based on my adoption of that agreed statement, as supplemented to the extent I consider necessary, by further details taken from the affidavits of Mr Reginald Allen Rowe and Mr Paul Michael Banister (the latter a chartered accountant in the firm Grant Thornton). Neither of these deponents was required to attend for cross-examination.
The Super Fund was settled on the terms of a deed dated 1 June 1979. It was originally known as the GD Auto Accessories Superannuation Fund Trust. Reg Rowe Agencies Pty Ltd was appointed as the original trustee of the Super Fund.
In the 2004 income year the Super Fund was known as the Super Cheap Car Accessories and Spare Parts Superannuation Fund. Since 1 March 2008 the Super Fund has been known by its present name, the H & R Super Fund.
Deeds of Variation of the Super Fund’s original governing deed were executed on 1 June 1982, 25 September 1989, 29 June 1992, 31 May 1995, 15 November 2000 and 1 June 2003.
The Super Fund is, and was for the 2004 income year, a complying superannuation fund (CSF) that is a self-managed superannuation fund.
On 12 June 2003, and with effect from 1 March 2003, SCCASP was appointed as trustee of the Super Fund.
At all relevant times, the directors of SCCASP have been Mr Reginald Rowe and his wife, Mrs Hazel Olive Rowe. They are also the members of the Super Fund.
The Rowe Family Trust (the RFT) was settled on 28 April 1975. Shortly thereafter and in its capacity as trustee of the RFT, the original trustee commenced carrying on a business trading under the name Super Cheap Auto. The nature of that business was the retailing of car accessories, spare parts, hardware and equipment, hand tools, car paints and thinners, oils and lubricants and camping equipment.
From the time when the Super Cheap Auto business commenced and until 1 July 2000, that business was conducted by successive trustees of the RFT (the Trustee Companies). The current trustee of the RFT (and the trustee at all times material to the appeal) is SCA FT Pty Ltd (SCA). Mr Reginald and Mrs Hazel Rowe are and at all material times have been, directors of the Trustee Companies.
On 1 July 2000, the Super Cheap Auto business was transferred by SCA to a wholly owned company, Super Cheap Auto Pty Ltd. SCA elected to obtain roll over relief pursuant to Subdiv 122-A of the Income Tax Assessment Act 1997 (Cth) (ITAA97) when it transferred the Super Cheap Auto business to Super Cheap Auto Pty Ltd.
On 1 July 2000 and on the transfer of the Super Cheap Auto business, Super Cheap Auto Pty Ltd issued 34,112,591 shares SCA as the trustee of the RFT. After 1 July 2000, the RFT acquired additional shares (post-CGT shares) in Super Cheap Auto Pty Ltd.
Pursuant to a Sales Agreement dated 23 April 2004 and in its capacity as trustee of the RFT, SCA transferred 43,851,004 shares in Super Cheap Auto Pty Ltd to Super Cheap Auto Group Limited (the Company). The consideration for the transfer was the issue of the same number of shares in the Company. SCA elected to obtain rollover relief pursuant to Subdiv 124-G of the ITAA97 in respect of that share transfer.
The Company conducted a share split on 19 May 2004. The outcome of that share split was that the share holding by the RFT increased to 93,909,727.
During July 2004 the Company was listed on the Australian Stock Exchange.
In the 2004 income year the trustee of the RFT sold some but not all of its shares in the Company.
The contract to transfer the shares sold was formed on 30 June 2004.
Sub-clause 1(c)(i) of the RFT trust deed defines the Primary Beneficiaries of that trust as including Mr and Mrs Rowe, their children and their spouses, and their grandchildren and their spouses.
Clause 3 of the RFT trust deed provides that the trustee may apply the whole or any part of the income of the trust to any one or more of the Primary Beneficiaries, any company in which the Primary Beneficiaries are shareholders for the time being, or to the trustee of any trust of which any of the Primary Beneficiaries is a beneficiary, whether present or contingent. Clause 3 also provides that any income not so paid or applied in any year of the income shall be deemed to have been paid or applied for the benefit of the Primary Beneficiaries in equal shares.
On 30 June 2004, SCA resolved that 100% of the income of the RFT for the year ended 30 June 2004 would be distributed to SCCASP as trustee of the Superannuation Fund. SCA also resolved that:
The income hereby paid and applied for the benefit of the aforesaid beneficiary be entered into the books of the Trust as having been so distributed and the same be held by the Trustee until paid over absolutely on behalf of the beneficiary in accordance with the terms of the Trust Deed.
SCA further resolved that an amount of $2.89 million be paid to SCCASP in part payment of its entitlement.
The RFT trust deed does not define the term “income”.
On 17 May 2005, the Super Fund, by SCCASP, lodged its income tax return for the income year ended 30 June 2004. In that income tax return an amount of $4,759,424.00 was returned as a special component of the Super Fund's taxable income. The capital gains tax schedule attached to the return showed a net capital gain, being the result of an initial capital gain of $14,001,129.00, less prior year net losses of $4,349.00 and less a 33.33% CGT discount.
The Super Fund's 2004 income tax return also recorded a net capital gain of $9,331,187.00, calculated in accordance with the Rules in Subdiv 115-C of Pt 3-1 of the ITAA97. This amount was included as the standard component of the Super Fund's taxable income. An amount of $1,768,588.00 was claimed in that taxation return as exempt current pension income, which had the effect of reducing the Super Fund's taxable income.
The amended assessment of 6 May 2009 increased the tax payable by the Super Fund by $3,114,512.14.
Even though the RFT trust deed does not define “income”, it was common ground between the parties that the effect of s 95 and s 97 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and s 102-5 and s 115-215 of the ITAA97 was that the net capital gain formed part of the assessable income of the Super Fund in the 2004 income year. In this they were not mistaken.
Where the parties differed was in respect of the question as to whether or not, because it was a net capital gain and thus only “statutory income” (s 6-10 of the ITAA97), the amount so included was “special income” for the purposes of s 273(6) of the ITAA36. Section 273 of the ITAA36 provides:
273 Special income
(1)This section applies to income derived in a year of income by a fund or unit trust (in this section called the entity) that is a complying superannuation fund, a complying ADF or a PST in relation to the year of income.
(2)A dividend paid to the entity by a company that is a private company in relation to the year of income of the company in which the dividend was paid is special income of the entity unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as special income of the entity, having regard to:
(a) the value of the shares in that company that are assets of the entity;
(b)the cost to the entity of the shares on which the dividend was paid by the company;
(c)the rate of the dividend paid to the entity by the company on the shares in the company that are assets of the entity;
(d)whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend;
(e)whether any shares have been issued by the company to the entity in satisfaction of, or of a part of, a dividend paid by the company and, if so, the circumstances of the issue of those shares; and
(f) any other matters that the Commissioner considers relevant.
(3)For the purposes of subsection (2), income that, in the opinion of the Commissioner, was derived by the entity indirectly from a dividend paid by a company, being a private company in relation to the year of income of the company in which the dividend was paid, shall be deemed to have been a dividend paid to the entity by the company.
(4)Income (other than a dividend to which subsection (2) applies or income derived by the entity in the capacity of beneficiary of a trust estate) derived by the entity from a transaction is special income of the entity if the parties to the transaction were not dealing with each other at arm’s length in relation to the transaction and that income is greater than the income that might have been expected to have been derived by the entity from the transaction if those parties had been dealing with each other at arm’s length in relation to the transaction.
(5)A reference in subsection (4) to a transaction includes a reference to a series of transactions.
(6)Income derived by the entity in the capacity of beneficiary of a trust estate (other than by virtue of holding a fixed entitlement to the income) is special income of the entity.
(7)Income derived by the entity in the capacity of beneficiary of a trust estate by virtue of holding a fixed entitlement to the income is special income of the entity if:
(a)the entity acquired the fixed entitlement under an arrangement (see subsection (8)), or the income was derived under an arrangement, some or all of the parties to which were not dealing with each other at arm’s length in relation to the arrangement; and
(b)the amount of the income is greater than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm’s length in relation to the arrangement.
(8) In subsection (7), arrangement means:
(a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b)any scheme, plan, proposal, action, course of action or course of conduct.
(9) This section:
(a)applies to a non-share equity interest in the same way as it applies to a share; and
(b)applies to an equity holder in the same way as it applies to a shareholder; and
(c)applies to a non-share dividend in the same way as it applies to a dividend.
It will be noticed that s 273 uses the word “income”, not the defined term, “assessable income”. Via s 6 of the ITAA36 and s 995-1 of the ITAA97, “assessable income” is defined in a way which materially includes both “ordinary income” (s 6-5 of the ITAA97) and “statutory income”.
This taxation appeal was argued after the Full Court had given judgment in Allen v Federal Commissioner of Taxation (2011) 195 FCR 416 (Allen) and prior to the hearing and determination of an application to the High Court by the taxpayer for special leave to appeal against the judgment of the Full Court. The High Court refused special leave to appeal: Allen v Federal Commissioner of Taxation [2012] HCA Trans 25.
However moot the answer to the question which divides the parties might have been prior to the High Court’s refusal of special leave to appeal, that did not then (much less now) make the judgment of the Full Court in Allen any less binding on me as a judge exercising original jurisdiction in hearing SCCASP’s taxation appeal. At least at first blush, one might have thought, in light of the Full Court’s judgment in Allen, that the question had been decided adversely to SCCASP, ie that the word “income” in s 273 was to be construed as meaning assessable income and thus both ordinary income and statutory income such as the net capital gain such that that gain constituted income derived by SCCASP for the purposes of s 273.
The Commissioner submitted as much. He submitted that the net capital gain was, for the purposes of s 273 of the ITAA36, “income derived” by the Super Fund in the 2004 income year.
Not so SCCASP. Its submission, artfully put by Mr Russell QC and Mr Bickford, was that Allen was distinguishable and that, in the circumstances of the present case, the net capital gain did not constitute “income derived” by the Super Fund. It was further submitted by SCCASP that, because Allen was distinguishable, the determination of the present case need not await whatever might be the outcome of the special leave application. As it happened, other commitments and, perhaps also an abundance of caution, have dictated that this judgment has come to be delivered after the refusal of special leave.
It is now necessary further to detail the submissions made on behalf of SCCASP.
SCCASP’s Submissions
SCCASP submitted that these were distinguishing features between Allen and the present case:
(a)Allen involved a tax avoidance scheme.
(b)This was submitted to be a feature which “clearly” brought Allen within the operation of s 273(7) of the ITAA36. It was submitted that the circumstances of Allen disclosed a scheme of the very type that anti-avoidance provisions such as s 273 were enacted to foreclose.
(c)Unlike in the present case, in Allen there was a fixed entitlement to the income of a trust and there was an actual payment of the amount of the distribution ($2,500,005.00) to the superannuation fund from that trust.
(d)Also unlike in the present case, in Allen there was no question as to whether the income had been “derived”, for the purposes of s 273(7) of the ITAA36, because the income had been received by the superannuation fund in question.
(e)The main question resolved in Allen was the meaning of the word “income” in s 273(7).
(f)That this was the main question resolved in Allen was, so SCCASP submitted by way of amplification, evident from the following of the Full Court conclusion in that case, “the mischief at which both ss 273(6) and (7) ITAA 36 were evidently aimed is the movement of assessable income, which would otherwise be taxed at the rate of 47% in the hands of the person that derived it, into a CSF by the mere exercise of the discretion (in the case of a discretionary trust) or by non-arm’s length dealing in the case of a fixed trust entitlement” Allen (2011) 195 FCR at [62], emphasis added by SCCASP.
(g)SCCASP further submitted that the end result in Allen was that the Court was satisfied that the word “income” embraced “assessable income”, ie income on ordinary concepts and statutory income. Hence there was no need for the Full Court in Allen to give any consideration to s 6-10(3) of the ITAA97. That was because there was no question that the distribution in question had been “derived” by Allen’s Asphalt in the relevant year of income. Thus, all that was necessary for the Court to decide in Allen was whether a net capital gain was “income” for the purposes of s 273(7), ie whether that sub-section was limited to income under ordinary concepts as defined in s 6-5 of the ITAA97 and did not include statutory income. SCCASP did not gainsay the correctness of the conclusion reached by the Court in Allen in the circumstances of that case.
(h)In contrast, in the circumstances of the present case, although there was a decision made by SCA as trustee of the RFT that 100% of the income in the that trust for the year ended 30 June 2004 would be distributed to SCCASP as trustee for the Super Fund, that decision was made under clause 3. No decision was made under clause 4 of the RFT trust deed to pay or apply any capital amount for the maintenance, education, advancement or benefit of the Primary Beneficiaries (which included SCCASP).
SCCASP submitted that what followed from this was that, although the net capital gain was included in the assessable income of the Super Fund by operation of s 6-10(2) and (3), 10-5 (definition of “trust”) and s 115-215 of the ITAA97 and s 95 and s 97(1) of the ITAA36, in order to be “special income” for the purposes of s 273(6), the income had to be “derived” by it as trustee of the Super Fund. However, so SCCASP submitted, the income could not be “derived” by it in the sense referred to in s 273 of the ITAA36, if it had not been received by the Super Fund or applied or dealt with in any way on behalf of it in its capacity as trustee of the Super Fund or in accordance with directions given by it in that capacity. SCCASP submitted that there had neither been any such receipt nor any such application, dealing with or directions such that the amount of the net capital gain was still held by SCA as trustee of the RFT.
Counsel for SCCASP, frankly conceded that there are passages in the Full Court’s judgment in Allen concerning the meaning of derivation in relation to trust income which are generally expressed and, as a result, are directly against the submission which SCCASP seeks to advance. As to that and in summary, the Full Court’s conclusion was that the scheme of s 95 and s 97 of the ITAA36 is that the income derived by a beneficiary includes that beneficiary’s share of the net income of a trust estate, which, in turn, includes an amount attributable to a net capital gain which, by operation of an income tax law, is included in assessable income: Allen (2011) 195 FCR at [55].
In deference to and so as to answer SCCASP’s submission, it is necessary to set out a passage from Allen which includes the paragraph to which I have just referred:
55As to whether the income can be said to have been “derived”, in Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 at [42] the High Court stated that the first step in ascertaining the meaning of "derived" is to refer to the thing that is said to be derived. In this case the distribution was received by the Super Fund by virtue of its 100% entitlement to the income of the Fixed Trust. Pursuant to s 97 of the ITAA 1936, the beneficiary of a trust estate is treated as having derived income equivalent to its share of the s 95 net income. As we have seen, this share will include an amount attributable to a net capital gain which is included in the assessable income.
56The taxpayers argue that a beneficiary of a trust subject to tax as a consequence of s 97 of the ITAA 1936 does not derive income. Rather, the taxpayers say, the income is derived by the trust and then attributed to the beneficiary. But this is to make a distinction without a difference. Whether one speaks of the income being attributed or imputed to the beneficiary, it is clear that the statutory attribution or imputation is the functional equivalent of derivation. Professor Parsons explains the point in Income Taxation in Australia (The Law Book Company Limited, 1985) at p 249:
“Sections 97 and 98 substitute “present entitlement” and “vested and indefeasible interest” as the tests of derivation. And s 101 deems a present entitlement when a trustee exercises his discretion “to pay or apply income ... for the benefit of” a beneficiary. These tests of derivation operate in a special fashion. They are strictly tests of derivation of trust law income by the beneficiary. From that derivation a derivation of income for purposes of the income tax is imputed. The derivation imputed is a derivation of a share of the income for purposes of the income tax, derived by the hypothetical taxpayer referred to in s 95 — the share being the same as the beneficiary's share of trust law income.”
In respect of the observations made by the Full Court concerning derivation and, more particularly, the explanation given by Professor Parsons in his work, Income Taxation in Australia (The Law Book Company Limited, 1985) at p 249 and adopted by the Full Court in this passage from Allen, SCCASP submitted that these failed to take into account the manner in which, since 1999, the capital gains of trust estates have been taxed in the hands of beneficiaries.
As to this post-1999 manner of taxation, SCCASP referred to s 115-215 and s 102-5 of the ITAA97. It drew attention to the inclusion in a beneficiary’s assessable income of a net capital gain calculated as provided for by s 115-215(3), reduced as provided for by s 115-215(4) and to the way in which s 115-215(6) of the ITAA97 ensured that double taxation did not occur by providing for a deduction for a given income year of the part, if any, of the “trust amount” (as defined in s 115-215(2)(b) of the ITAA97) that is attributable to the trust estate’s net capital gain mentioned in s 102-5(1). Section 102-5(1) provides that a person’s assessable income includes the person’s net capital gain, if any, for the income year. That subsection further provides for a number of “steps” by which this net capital gain is to be worked out. These provisions were not, it was submitted, drawn to the Court’s attention in Allen.
It was submitted that the analysis of Professor Parsons cited with approval in Allen was materially cast by reference to amounts included in a beneficiary’s assessable income under s 97 of the ITAA36 because that beneficiary was entitled to a share of the net income of a trust. That share it was submitted might be expected to bear some rational relationship to the income to which that beneficiary was entitled as a matter of trust law. In contrast, so the submission went, an amount included under s 115-215(3) of the ITAA36 could be as much as four times the amount which would be included under s 97, thus explaining the need for the deduction for which s 115-215(6) provides. Yet further, it was submitted that the effect of the “despite s 102-20” qualification created by s 115-215(4A) was that an amount could be included in assessable income under s 115-215(3) of the ITAA36 even without the happening of a “CGT event”. It was submitted that regard to s 102-20 disclosed that a “CGT event” was the usual point of derivation for the purposes of the capital gains tax provisions. SCCASP submitted (and it is the case) that Professor Parsons’ analysis antedated the presence of these provisions in income tax law.
Also as to Professor Parsons’ analysis, SCCASP submitted that, on one reading of the excerpt cited, it amounted to a recognition by him that, in relation to the taxation of trust income, there was no “derivation” in the sense that “derive” is used in respect of ordinary income in s 6-5(2) of the ITAA97. From this it was said to follow that, if “derive” in s 273 bore that meaning, the Super Fund had not “derived” income from the RFT. Alternatively and in any event, it was submitted that Professor Parsons was referring to a much earlier version of the ITAA36, which notably did not then include s 273 and, axiomatically, did not, because he could not at the time of publication, make any reference to the later enacted ITAA97. Yet further, it was submitted that Professor Parsons was a proponent of a “central provision analysis” of the ITAA36. This was said to be evident from other passages in his work, notably, paragraph 4-1. SCCASP submitted, that, on such an analysis, all statutory income would be channelled into assessable income via a general provision such as the former s 25 of the ITAA36 (or presumably s 6-5 of the ITAA97) with the consequence that it could be said to be “derived” in the sense that term is used in that general provision whereas the drafting of both the ITAA36 and, later, the ITAA97 had progressively moved away from such channelling. In turn, that was submitted to make the analysis in Professor Parsons’ work redundant and not of assistance in giving meaning to “derived” in s 273.
SCCASP also drew attention in its submissions to the time when an amount becomes statutory income, as provided for by s 6-10(3) of the ITAA97:
(3)If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.
It submitted that this provision also was not referred to by the Full Court in Allen. As I understood it, the purpose of the reference to this omission was that it was significant in this case because the amount concerned had neither been received nor, so it was submitted, applied or dealt with in any way on behalf of the Super Fund.
SCCASP further submitted that s 10-5 of the ITAA97 was another noteworthy omission from the Full Court’s observations in Allen in the passage quoted. It was submitted to be noteworthy because of the reference in s 10-5 in respect of “trusts” as the provision which included in assessable income amounts which are not ordinary income, in respect of present entitlement to the net income of a trust estate to, materially, s 97 and s 101 of the ITAA36. This reference in s 10-5 was correct, SCCASP submitted, because s 115-215 did nothing more than “inform” the calculation of capital gains under s 102-5 of the ITAA97 and the latter section was separately tabulated in the s 10-5 list as the provision which included “capital gains” in assessable income. SCCASP also undertook an analysis of the various provisions mentioned in s 10-5 of the ITAA97 to the end of demonstrating that there was no consistent use of the expression “income derived” or even a general employment of the term “derived” in provisions including amounts in assessable income.
SCCASP also submitted that the observations in the passage from Allen quoted above were obiter dicta and, though “highly influential”, were not binding. In the reference only to s 97 of the ITAA36, absence of reference to s 115-215 of the ITAA97 and in the critique offered, detailed above, of the passage in Professor Parsons’ work cited by the Full Court were said to lie reasons why those observations should not be followed and applied by me.
Commissioner’s submissions
The Commissioner submitted that to limit the ratio of Allen to the finding that “income derived” in s 273(7) and thence s 273(6) is limited to that part of the income included in assessable income that was actually or constructively received or the subject of a trust distribution would ignore the proper application of s 97(1)(a) relied upon by the Full Court particularly at paragraphs 52, 55 and 56 of the judgment. It was further submitted by the Commissioner that the Full Court’s statement that “(p)ursuant to s 97, the beneficiary of a trust estate is treated as having derived income equivalent to its share of the s 95 net income” was an essential finding of the Court. It left no room for a division of the share of the s 95 net income into amounts that may for other purposes be characterised as “trust law income” to which that beneficiary is presently entitled. Put another way, the Commissioner’s submission was that the ITAA36 looks at the s 97(1)(a) amount and treats that amount as being derived, not the amount of the income of the trust estate to which the beneficiary is presently entitled.
The Commissioner submitted that in Allen it was common ground that the amount of $2,500,005 was included in the Super Fund’s assessable income as statutory income, hence the primary issue in that case was whether “income derived” in s 273 encompassed statutory income. No issue arose as to whether the amount included in assessable income, arising as a result of a trust “distribution”, was itself comprised of trust law income. Thus, so the Commissioner submitted, it would be incorrect, as had SCCASP, to analyse the Full Court’s decision as one that was concerned only with whether trust distributions fell within s 273. Rather, the Commissioner submitted that the Full Court’s findings are to be understood in the context of the well established principle that income included in the assessable income of the beneficiary by reason of s 97(1)(a) is not limited to income received or distributed to the beneficiary because the beneficiary is to include in its assessable income its share or proportion of the s 95 net income of the trust estate, that share or proportion being the same share or proportion of the trust law income to which the beneficiary is presently entitled. That principle, the Commissioner submitted, was established, if not confirmed, by Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 (Bamford); Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 (Zeta Force). The Commissioner submitted that the Full Court’s reasons in Allen are consistent with this principle and rely upon it.
The Commissioner further submitted that, to limit “income derived” in s 273(6) to amounts actually or constructively received or to which the beneficiary was presently entitled, would defeat the mischief identified by the Full Court in Allen in respect of s 273(6), namely, to address “the movement of assessable income, which would otherwise be taxed at the rate of 47% in the hands of the person who derived it, into a CSF by the mere exercise of a discretion”: Allen at [62].
Thus, so the Commissioner submitted, the income “which comes home” to the beneficiary and is thereby “derived” is “any” income that is included in the assessable income of the beneficiary by reason of s 95 and s 97(1)(a). In some cases, a corresponding amount may be received” or “distributed” as it was by the trustee of the CSF in Allen but it is not necessary that it be so.
The Commissioner submitted that Subdiv 115 does not deny s 97 its full operation but rather it operates by virtue of s 97 providing a mechanism whereby the beneficiary of a trust estate is treated as having a capital gain so as to allow for the beneficiary to apply the method statement in s 102-5 to apply capital losses and any appropriate discount percentage to the gain. The Subdivision applies only if a trust estate’s net income takes into account a net capital gain for the income year: s 115-210. That is, in the appropriate case, it is the very operation of s 97(1)(a) that triggers the operation of Subdiv 115 and determines the “trust amount”: s 115-215(2). The net capital gain so calculated is included in the beneficiary’s assessable income by reason of s 102-5 whilst a deduction is provided for the trust amount attributable to the trust estate’s net capital gain.
Consideration
An assumption which formed part of SCCASP’s critique of the excerpt from Professor Parson’s work cited with approval by the Full Court in Allen was that the share of the net income of the trust estate included in a beneficiary’s assessable income under s 97 of the ITAA36 might be expected to bear some rational relationship to the income to which that beneficiary was entitled as a matter of trust law. Approaching the resolution of this appeal on the basis of such an a priori assumption or expectation would serve only to distract from the task of construing the language adopted by Parliament in s 273(6) in the context in which it appears.
As far as capital gains and the taxation of trusts are concerned, the position is as stated by the High Court in Bamford at [12]:
If a “net capital gain”, as defined in s 995-1(1) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act), is made it will be taken into account in computing the net income of the trust estate within the meaning of s 95(1) of the 1936 Act as part of the assessable income, which is defined by reference to Div 6 of the 1997 Act. Special rules found in Subdiv 115-C of the 1997 Act then may allow beneficiaries to reduce their liability by their available capital losses and unapplied net capital losses.
The High Court’s reference in this passage to assessable income being defined by reference to Div 6 of the 1997 Act is amplified by a footnote reference (fn 55) to the definition of “assessable income” in s 6(1) of the ITAA36 and to ss 6-10 and 102-5 of the ITAA97. The reference to s 6-10 of the ITAA97 evidences the recognition by the High Court that statutory income forms part of assessable income. In turn, the reference to s 102-5 of the ITAA97 evidences recognition by the High Court that one such form of statutory income is the net capital gain for a particular income year which s 102-5 includes in assessable income. It is any such net capital gain which is included in the net income of the trust estate within the meaning of s 95(1) of the ITAA36.
The Full Court held in Allen, at [55], that the effect of s 97 of the ITAA36 is that, “the beneficiary of a trust estate is treated as having derived income equivalent to its share of the s 95 net income … [and] … this share will include an amount attributable to a net capital gain which is included in the assessable income”. The Full Court’s statement as to the effect of s 97 of the ITAA36 is in harmony with the analysis of Sundberg J in Zeta Force quoted with approval by the High Court in Bamford at [45]. In particular, it is in harmony with His Honour’s observation that, “Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate”.
I am not persuaded that the observations concerning derivation made by the Full Court in Allen at [55] and [56] do not form part of the ratio of that case. Those observations were responsive to a particular and deliberate submission (recorded in Allen at [37]) made on behalf of the appellant in that case and which required the Full Court to consider the meaning of both “income” and “derived” as part of a composite in s 273 of the ITAA36. On this basis, I am bound to hold that the net capital gain was, for the purposes of s 273 of the ITAA36, “income derived” by the Super Fund in the 2004 income year.
Even if the Full Court’s observations in Allen were to be regarded as but obiter I am not persuaded that SCCASP’s submissions provide any warrant for departing from them in deciding whether the amount in question was income “derived” by the Super Fund. Once it is appreciated, as it must be in light of what the High Court stated in Bamford at [12], quoted above, in relation to capital gains and the taxation of trusts, that a net capital gain forms part of the net income of the trust estate within the meaning of s 95(1) of the ITAA36, then it necessarily follows that the share of that gain which is included in the beneficiary’s assessable income pursuant to s 97 is included in the same way as any other part of the net income of the trust estate. In the passage quoted with approval in Allen, Professor Parsons was offering his opinion as to the meaning and effect of, materially, s 97. That effect is the same no matter what may be, by virtue of the operation of particular provisions of the ITAA36 or the ITAA97, the components of the net income of the trust estate in question.
As was the Full Court in Allen (at [45]), I am obliged to follow the approach to statutory construction counselled by the High Court in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27 at [47]. I must therefore look to the text of s 273, having regard to its general purpose and policy and the mischief it is seeking to remedy. I am bound by Allen to conclude that “income” in s 273 of the ITAA36 means assessable income and therefore includes both ordinary and statutory income. SCCASP did not submit otherwise. Construed in context as part of the compound concept “income derived” in s 273(6), “derived” must bear a meaning which accommodates how a particular type of assessable income which can form a component of the net income of the trust estate namely a net capital gain is included in the assessable income of a beneficiary. That inclusion occurs pursuant to s 97 of the ITAA36. That being so, “derived” for the purposes of s 273(6) must bear a meaning which extends to include “attributed to” or “imputed to”. Having regard to the “mischief” to which s 273(6) and s 273(7) are directed, as described by the Full Court in Allen at [62] (quoted above) and given that “income” is to be regarded as a reference to “assessable income” it would make no sense to construe the word “derived” in s 273 in a way included some types of assessable income but excluded others.
This approach to the construction of compound concept “income derived” in s 273(6) is no different to that of the High Court in Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liquidation) (2005) 225 CLR 488 at [42] when giving meaning to “derived” as part of a phrase which directed attention to profits which were derived. The meaning “cannot be ascertained without at least some reference to the thing said to be derived”. Here, that “thing” is a share of the net income of a trust estate included by operation of s 97 of the ITAA36. It was just this approach which the Full Court followed in Allen at [55] when construing s 273.
The operation of s 97 of the ITAA36 in the 2004 income year was not constrained by s 6-10(3) of the ITAA97 (any more than, were the income ordinary income, it was not constrained by s 6-5(3) and s 6-5(4)) in the same way as the operation of s 97 as then enacted was not, at the time when Professor Parsons was writing, constrained by an earlier analogue, the now former s 19 of the ITAA36. Where a beneficiary of a trust estate is not under any legal disability and is presently entitled to a share of the income of the trust estate, the effect of s 97 is, materially, that the assessable income of that beneficiary includes so much of that share of the net income of the trust estate as is attributable to a period when that beneficiary is a resident. That is so whether or not that share has been received, applied or dealt with by or on behalf of that beneficiary. It is enough that the beneficiary is presently entitled to that share.
When in Allen at [56] the Full Court referred to the attribution or imputation of income to a beneficiary as being the “functional equivalent of derivation”, their Honours were referring firstly to the operation of s 97. Secondly, in this reference the Full Court was not excluding that functional equivalent from the meaning of “derived” in s 273 but instead highlighting that, construed in the context of the compound concept “income derived”, there was nothing incongruous about giving “derived” a meaning which embraced the way in an amount could be included in the assessable income of a beneficiary. In so doing, the Full Court rejected a submission to the contrary made by the appellant in that case.
SCCASP’s case is not assisted by reference to s 10-5 of the ITAA97. Capital gains are indeed included by operation of s 102-5 of the ITAA97, but, so far as trusts are concerned, that inclusion is in the net income of the trust estate within the meaning of s 95. Thereafter and as s 10-5 also accurately offers guidance, it is, materially, s 97 which includes any present entitlement to that net income in the beneficiary’s assessable income. As for s 115-215 of the ITAA97, this is nothing more than, as the High Court stated in the passage which I have quoted from Bamford, one of a number of special rules found in Subdiv 115-C of that Act which allow beneficiaries to reduce their liability by their available capital losses and unapplied net capital losses. Its presence does not gainsay the correctness of the Full Court’s treating what Professor Parsons had to say about the operation of s 97 as being of continuing relevance.
I do not, with respect, see any utility in making a value judgment as to whether what occurred in Allen was tax avoidance and whether what occurred here was not. The task is to construe s 273 and to decide whether it has application to the facts at hand. The making of such a value judgment is not warranted by s 273(6). Applying s 273 to the facts at hand yields this conclusion. The Super Fund has derived income in its capacity as a beneficiary of the RFT. That being so, the effect of s 273(6) of the ITAA36 is that that income is special income.
It is common ground that, in the event that these conclusions were reached, the amount of the Super Fund’s exempt current pension income should be reduced by $856,882 with the Super Fund’s taxable income being correspondingly increased by the same amount. That is because the exemption in s 283 applies to ‘normal assessable income’ and pursuant to s 267 normal assessable income is defined to exclude special income. The further consequence of the conclusions is that SCCASP has not shown the amended assessment to be excessive.
It follows that the taxation appeal must be dismissed.
I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate:
Dated: 26 September 2012
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