SCCASP Holdings Pty Ltd ATF the H & R Super Fund v Commissioner of Taxation

[2014] HCATrans 17

[2014] HCATrans 017

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B30 of 2013

B e t w e e n -

SCCASP HOLDINGS PTY LTD ATF THE H & R SUPER FUND

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

FRENCH CJ
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO BRISBANE

ON FRIDAY, 14 FEBRUARY 2014, AT 10.31 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR I.S. YOUNG, for the applicant.  (instructed by Robert Richards & Associates)

MR B.D. O’DONNELL, QC:   May it please the Court, I appear with my learned friend, MS M.M. BRENNAN, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   Yes, Mr Jackson.

MR JACKSON: Thank you, your Honours. Your Honours, the application concerns one, but an important, provision of the taxation legislation. That provision is section 273(6) of the Income Tax Assessment Act 1936.

FRENCH CJ:   We are focusing on the word “derived”?

MR JACKSON:   Indeed, your Honour, yes.  Your Honours will see the provision at page 65 behind tab 1 in our learned friend’s bundle of authorities.  I will come to its terms a little later, if I may.  Your Honours, could I just deal with one aspect immediately, and that is the suggestion, if it be made, that the provision’s importance for immediate purposes has diminished because it was repealed in 2007?

Your Honours, that is dealt with in our reply at page 69, paragraphs 1 to 2.  I do not want to repeat what is there, but what we say is that the differences between the current and the replacement provisions are trivial and do not touch the central issue.  For the reasons which we have set out at page 60 in paragraph 27 of our summary of argument, the central issue, in our submission, is of importance.

Your Honours, may I take a moment to indicate how the central issue arises, and there is one matter I wanted to clear up in the course of doing so.  The applicant was a beneficiary under a discretionary trust where in the year ended 30 June 2004 the funds of the discretionary trust benefited, if I could use a neutral term, from two sources.  One was the gaining income in the ordinary sense; the other was a capital gain.

FRENCH CJ:   The first was the subject of a resolution to distribute, was it not?

MR JACKSON:   The first, your Honour, yes.  I just want to clear something up about that in just a moment, if I may.

FRENCH CJ:   Yes.

MR JACKSON:   One was income in the ordinary sense, the other was the capital gain, and the amounts were substantial, particularly the capital gain, as your Honours can see at page 55, paragraph 3 of our summary of argument.

CRENNAN J:   You accept that both amounts were properly categorised as assessable income for the purposes of section 97?

MR JACKSON:   Yes, in the end, your Honour, yes.  What I was going to say about it was this, that the trustee resolved that the income according to ordinary concepts be distributed to us.  It did not so resolve in respect of the capital gain.  Your Honours will see that that fact that I just said was accepted by our learned friends ‑ page 64, paragraph 5(a).  Your Honours, the reason why I say that ‑ ‑ ‑

CRENNAN J:   You also – I am sorry to interrupt, but you also accept, do you not, that the – I think it is the Rowe family trust, is entitled to 100 per cent of the distributable income – presently entitled?

MR JACKSON:   Yes, your Honour, I accept that.  Because there was a resolution as to 100 per cent of the income according to ordinary concepts, they then were treated as entitled to a – I am sorry, I am putting it badly, your Honour.  What I am trying to say is this, that the operation of the provision, if I could your Honours to them in just a moment, was that first of all the ordinary income, the amount distributed to them, was their income.  Of course, that becomes part of assessable income. 

So too because of the operation of a provision, even though there was no determination in their favour in respect of the amount of income of that trust brought about by the capital gain, they are treated as having that – it is treated as having that as part of ordinary income.  The question which arises, your Honours, is whether the ultimate rate of tax payable in respect to that is 15 rather than 47 per cent.  It would be 47 per cent if 273(6) applies.

FRENCH CJ:   That is, if it comes within the notion of special income.

MR JACKSON:   Yes, your Honour.  Your Honours, the matter I was wishing to clear up was just this:  if one goes to the Full Court’s reasons at page 33, you will see at paragraph 20 the resolution and, if you go to paragraph 21, you will see the words “in part payment of its entitlement”. 
The reason for the use of the term “part payment” was that there was a further small sum of ordinary income for the year, some $8,000‑odd, that was paid to us at the end of the calendar rather than the financial year.  But for brevity, $2.89 million has been the figure that has been adopted.

Your Honours, having been actually paid the amount of the income, according to ordinary concepts, we were liable to tax on that.  Although we had not received, had not had applied for our benefit and did not have any entitlement to the net capital gain, we were liable to pay income tax on that amount and that was because of the combination of sections 95 and 97 of the 1936 Act and, to put it shortly, your Honours, section 97(1), which your Honours will see commencing at page 14 behind tab 1 in the respondent’s book.

Your Honours will see that in subsection (1) it had the effect of including all the net income of the trust estate in the assessable income of a beneficiary who was presently entitled to 100 per cent of the income of the trust estate.  The term “income of the trust estate” referred to income, according to ordinary concepts, that was decided by the court in Bamford’s Case 240 CLR 481 at page 507, paragraph 45, but then section 97(1)(a) says that the assessable income is to include a similar share of what is the net income of the trust estate, a term defined by section 95 to mean assessable income of the trust estate calculated as if the trustee were a taxpayer.

CRENNAN J:   Just to be sure I have got the context of the argument right, Mr Jackson, may I ask you to look please for a moment at paragraph 54 in the book, the reasons to be found on page 40 of the application.  If one looks at about point 3 of the paragraph:

This form of income, which is part of a taxpayer’s assessable income –

and that is agreed –

is called “statutory income” . . . Assessable income includes both ordinary income and statutory income . . . The capital gain was statutory income for the purposes of defining the trustee’s assessable income and not ordinary income.

Do you agree so far?

MR JACKSON:   Yes, your Honour, yes.  We do not contest but by virtue of section 95 and section 97 and other related provisions, because capital gains are included in the assessable income of a taxpayer and section 95 defines net income of the trust estate to mean assessable income calculated as if the trustee were a taxpayer, the result is that that is included in our assessable income because, amongst other things, the section 101 provides that if there is a discretionary trust then the discretion has been exercised and the taxpayer is deemed the beneficiary in whose favour it has been exercised is deemed to be presently entitled, and accordingly, the whole of the capital gain was deemed to be assessable income.  Your Honours, that was not in dispute.

CRENNAN J:   Where do you get to 273(6)?

MR JACKSON: Yes, that is what I am coming to now, your Honour. What I was going to say was this. What was in dispute is whether we were also liable to tax in respect of that amount at the very much higher rate that I have referred to and that would be so if the case fell within section 273(6). Could I go now to section 273, your Honours? Now, if I could go first to section 273(1), it is on page 64 behind tab 1 in the book. Your Honours, will see that it provides that section 273:

applies to income derived in a year by –

to put it shortly –

a complying superannuation fund –

Now, your Honours, it then in subsections (2) and (3) treats as special income dividends paid to the fund by private companies in the particular circumstances referred to in each case.  Your Honours, section 273(4) then applies to, to put it shortly, non‑“arm’s length” transactions.  You will see from the opening words of (4) are the words in brackets that it excludes:

income derived by the entity in the capacity of beneficiary of a trust estate) –

Then (6) and (7) deal with income derived as beneficiary in a trust estate.  Your Honours will see that subsection (6) refers to “income derived by the entity”, so too does subsection (1).  The expression is used “income derived”.  Your Honours, when one comes to the derivation of the income which is brought about by the capital gain and by the statutory attribution of it to us, may we say these things.  First, it has never been received by the applicant.  Secondly, it has never been applied or dealt with in any way by the applicant or on the applicant’s behalf, nor did we have any entitlement to have it or to give any directions as to its disposition.

CRENNAN J:   But it has been attributed to the applicant.

MR JACKSON:   No, your Honour, it has been attributed to us as being assessable income but, your Honours, that is not quite the test, with respect, that subsection (6) or subsection (1), indeed, of section 273 uses because what there must be for subsection (6) to apply is that the income had been derived by the entity in the capacity beneficiary of a trust estate. 

Your Honours, we would say that if we have not received it, we have never had it dealt with on our behalf and we have no right to give any directions in respect of it then, on no ordinary meaning of the term
“derived”, could we be regarded as having derived it.  Your Honours, the Full Court – if I could go to what the Full Court said – page 42, paragraph 66 said, your Honours, in the last two lines:

The purpose of the word “derived” in s 273(6) is to identify the source, not the receipt.

Your Honours, in our submission, that cannot, with respect, be right.  It really neglects an important part of the provision – the word “derived” – and the word “derived” carries with it some notion of, first, possible acquisition, secondly, an ability to deal with the money or the income, and perhaps thirdly, some concept of some right in relation to it, none of which we had.  Your Honours, could I go, then, to paragraphs 68 to 69, in the Court of Appeal at page 43?  The Full Court said, in effect, particularly in paragraph 69, that:

Whether the entity (the Super Fund) actually receives the money is a matter between the beneficiary and the trustee of the discretionary trust (RFT)

Your Honours, that is correct as far as it goes, but how can the income be derived if, first, it is not paid or otherwise applied for or on behalf of the beneficiary and the beneficiary has no entitlement to require that to happen?  Your Honours, we would submit, it is not derived just because other provisions make it assessable income.

CRENNAN J: But, are not their Honours approaching section 273(6) on the basis that the section is concerned with income which is already past the barrier of being considered income. Getting back to my point, which I know you do accept, that there has been an attribution already at the time at which one comes to consider section 273(6) which rather throws the semantics of the section – the weight of it – on to the fact that it is the capacity of the beneficiary of a trust estate which is being considered, that is to say, whether the income is derived in that capacity because it has already passed the barrier of being considered assessable income.

MR JACKSON:   Well, your Honour, that does involve, with respect, a couple of things.  The first is it is a section of the Act that treats income in a particular way and the particular way is, ultimately, to apply a much higher tax rate to it.

CRENNAN J:   It is a section par excellence, though, where context is pretty important, is it not?

MR JACKSON:   Your Honour, I accept the steps that one has.  The money is income.  No question about it.  It is income because various provisions of the statute say it is, and they say it is even though it would not be income according to ordinary concepts.  But, accepting that, one then has a provisions in section 273, and 273(6) in particular, that is looking to see whether income – let us assume of that general kind – is income which falls within the terms of subsection (6).

Now, your Honours it is not correct, and in saying this I am conscious that I am diverting for a moment from answering your Honour’s question, but it is not correct to say, we would submit, as the Full Court said at pages 43 to 44, particularly the top of 44, adopting Allen, was that there would be no operation of section if we are correct.  Because the reality is that in some cases like this the section would not operate but it would apply to distributions and applications of fund on behalf of beneficiaries where the money was distributed or where there was some entitlement to have it distributed.

FRENCH CJ:   Is it oversimplifying your argument to say that it amounts to a proposition that “income derived” in the ordinary meaning of the term “derived” does not pick up income statutorily attributed, which would not otherwise fall within the concept of derivation?

MR JACKSON:    Yes, your Honour, yes it is, and, your Honour, the point I wanted to make about it is that, we would submit, it just is not correct to say that the section would have no operation – has an operation in many, many cases because there is a distribution.  There are circumstances where there would be an entitlement to have to have the money, if there had been resolutions of a particular kind and, your Honours, so it is not correct to say that there is no operation.  It is just, in our submission, that one looks at the words of the provision and when one looks at the words of the provision, it speaks of “derivation” and the current situation ‑ ‑ ‑

CRENNAN J:   Do you, by the way, submit that Allen has been wrongly decided?

MR JACKSON:    I am sorry, your Honour.  I just did not catch what ‑ ‑ ‑

CRENNAN J:   Do you, by the way, submit that Allen has been wrongly decided in the Full Court of the Federal Court?

MR JACKSON:    Well, your Honour, properly worked in that case because the money had been received, so ‑ ‑ ‑

FRENCH CJ:   So, you are not worried about the refusal of special leave in Allen, on the basis that it was distinguishable?

MR JACKSON:    Well, your Honour will see, but we would say that is a distinction.  Could I also say that if one is actually looking at what was said in Allen, your Honour, the passage quoted at top of page 44 of the application book, you will see what was said:

If the “income derived”  . . . did not include trust distributions –

the emphasis was on “distributions” and, your Honours, if one goes then to what was said by the court dismissing the special leave application at page 78, your Honours will see the case was dealing with the question of the word “income”, not concentrating on the issue presently raised.  Your Honours, we would submit this is an issue of some significance.  It is of general application and is one which merits the attention of the Court.

FRENCH CJ:   Thank you, Mr Jackson.  Yes, Mr O’Donnell.

MR O’DONNELL:   Both the Full Court and Justice Logan ultimately held that the case was resolved by the reasoning in Allen.  In our submission, that was correct, and our learned friend’s argument has not undermined the reasoning in Allen.

CRENNAN J:   But Mr Jackson has made a point of distinction.

MR O’DONNELL:   Yes.  In Allen the capital gain was received but that was not the point of the Full Court’s reasoning in Allen, in my submission.  The point of the reasoning in Allen was they said the concept of income derived refers to what the trustee receives, not what the beneficiary receives.  They said what the beneficiary receives is not income derived in the beneficiary’s hands, it is a trust distribution; therefore it is not within 273(6).

The Full Court rejected that argument saying that what 97 attributes to the beneficiary is statutory income.  Once section 97 attributes income of the trustee to the beneficiary, it must answer the description of “income derived” by the beneficiary.  Could I take your Honours to Allen which is in the respondent’s book at tab 5, page 428.  Your Honours will see the taxpayer’s argument in the opening sentence of paragraph 54.  The court answers that in 55 and 56.  Could I particularly address your Honours to 55 in the last sentence beginning “Pursuant to s 97”.  Then in paragraph 56, the sixth line down, where the Full Court says:

it is clear that the statutory attribution or imputation is the functional equivalent of derivation.

So it is the work of section 97 which in the Full Court’s view created conflict of the income being derived by the beneficiary, not the fact the beneficiary received the money.  The court had earlier noted that the attribution by section 97 operates whatever the beneficiary’s entitlement.  As is accepted here, the capital gain was attributed to the beneficiary by 97, regardless of whether the beneficiary had an entitlement.

CRENNAN J:   And there is the concession about 100 per cent entitlement.

MR O’DONNELL:   I am sorry, your Honour?

CRENNAN J:   And there is the concession about 100 per cent entitlement.

MR O’DONNELL:   Yes.  It would seem very strange then to reintroduce the need for an entitlement in section 273.  As your Honour pointed out, we have already passed the barrier of asking is this assessable income of the beneficiary?  It is.  Section 97 says it is.  So it is derived by force of section 97, not because of any receipt, and, in our submission, that was the ratio of Allen. 

In our submission, Justice Logan, at that first instance, put the matter well.  In the application book at page 18, paragraph 53, passing over the first four lines, commencing:

I am bound by Allen –

The last comment his Honour makes in that paragraph is:

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.

In our submission, it is common sense.  Once you have already attributed the income to the beneficiary, it needs to pass through the filter of 273 to determine whether it should be taxed at the high rate or the low rate.  It would undermine the section if you could avoid income attributed to the beneficiary passing through the 273 filter by the mere expedient of not creating any entitlement in the beneficiary.  Their Honours in the Full Court, in our submission, picked this up correctly at page 43, paragraph 70, when they said:

The decisions to which the appellant referred did not assist in determining the meaning of the word “derived” in the context of s 273 –

because of the different context.  The context of the case, as my learned friends cite, in section 6‑5 and 6‑10, largely address whether one can say that income has become the ordinary income of the taxpayer or statutory income of the taxpayer in order to determine is it going to be assessable income of the taxpayer.  The context of 273 is dealing with amounts which have already become assessable income of the taxpayer and, therefore, the context of “derived” is focusing on the expression “capacity as beneficiary”. 

It is not that the beneficiary derives the amount under section 97, it derives it in the capacity as beneficiary and, hence, we submit the Full Court was correct to emphasise 273(6) as requiring this connection with the source.  Does it come to the person through a trust as beneficiary?  Your Honours will also see in the Full Court’s reasons at page 44, paragraph 75, where their Honours quote from Allen, dealing with:

The mischief at which both s 273(6) and (7). . . were evidently aimed.

The construction our learned friends advance would undermine the ability of 273 to deal with that mischief.  If the trustee of the trust wished to ensure that a large capital gain, as here, received only a 15 per cent tax rate, not 47 per cent tax rate, the trustee could simply distribute the ordinary income of the trust to the superannuation fund, make no distribution about the capital gain.  On our learned friends’ construction, 273(6) would then not apply to the capital gain and the trustee has thereby avoided the higher rate of tax.  In other words, the applicant’s construction would undermine the ability of 273(6) to address the mischief which it has raised.

The last point we point out, your Honour, is the obvious one, that 273 has now been repealed.  We do not say that the new equivalent is functionally different but a more appropriate vehicle to consider.

FRENCH CJ:   The key elements of its language are the same as the key elements here.

MR O’DONNELL:   That is so, your Honour, and we say it has the same effect.  A more appropriate vehicle ‑ ‑ ‑

CRENNAN J:   Addressed to the same mischief.

MR O’DONNELL:   Yes, your Honour.  A more appropriate vehicle, we say, would be a case arising under the current legislation, not the repealed legislation.  They are my submissions.

FRENCH CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honour, may I just say this in relation to the passage in Allen, which is behind tab 5 in our learned friend’s book.  Your Honours will see in paragraphs 54, 55 and 56 that the expression which is in the end used is the one in the fifth line of paragraph 56:

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.

Your Honours, once one gets to expressions like “functional equivalent” there does seem to be some movement from the words of the statute. Could I just say this, your Honour: if one is looking at the words of section 273(6), your Honours will appreciate that it is a provision which is not just creating a liability to taxation. It is a provision which is one which is saying that sums of money which fall into a particular category are liable to be taxed at a very significantly higher rate than what otherwise be the case.

It has an operation in relation to some sums of money to which I have referred already.  It does not, in our submission, have an operation in relation to sums of money that, to use the words of the provision, are not “income derived” and when I say that when they are not circumstances in which there could be, by any view of the ordinary concept of derivation used in the Act, something which is derived.  In that regard, your Honours, could I go just for a moment ‑ ‑ ‑

CRENNAN J:   Do you take a narrower view of the mischief to which the section is aimed – that is to say, must there be a distribution?  Is it only aimed at ‑ ‑ ‑

MR JACKSON:   Your Honours, I suppose there is a question whether one is starting off with mischief or not, with any mischief, because what you have is a situation where the statute brings into play capital gains.  Capital gains are treated as being income.  That is a purely statutory construct, if I can use that expression.  Having done that, it is a question of endeavour to obtain in relation to trusts of the kind referred to in 273(1), a circumstance where a higher rate is payable.

Now, the statutory criterion used is to say, “Is the income one is talking about income which is derived?”  Your Honours, if I could just go for a moment to the bottom of page 70 and the top of page 71 of the application book in our reply, we would say – the last few words on page 70:

and this is after all a taxing statute, imposing a high rate of tax.

It imposes a high rate of tax in particular circumstances and, we would submit, it is for the legislature to express its intention clearly.  Your Honours, that is not the case if one is simply talking about things like functional equivalents as distinct from looking at the words actually used.  Those are our submissions.

FRENCH CJ:   Thank you, Mr Jackson.

The applicant is one of the beneficiaries of a discretionary trust. In the 2004 year of income the trustee of the trust made a capital gain, but did not resolve to distribute any part of it. The net capital gain was in excess of $9 million and was treated by the Commissioner as ‘special income’ within the meaning of section 273(6) of the Income Tax Assessment Act 1936 (Cth) upon which the applicant was liable to pay tax at the ordinary rate rather than the concessional rate.

The special leave question is said to be whether the capital gain, which it is common ground was statutory income of the applicant, was ‘special income’, that is to say, income derived by the entity in the capacity of beneficiary of a trust estate within the meaning of section 273(6) of the Income Tax Assessment Act.

As with the application for special leave in Allen v Commissioner of Taxation [2012] HCATrans 25, the application for special leave in this case involves a question whether the construction of the relevant provision as applying to statutory income of the applicant is correct. As in that case, and in accordance with established principles, the Full Court adopted the construction which it did by reference to text, purpose and context. Its decision, in our opinion, is unattended with sufficient doubt to warrant the grant of special leave. Special leave will be refused with costs. Thank you, please call the next matter.

AT 11.07 AM THE MATTER WAS CONCLUDED