Thomas v Commissioner of Taxation
[2015] FCA 968
•31 August 2015
FEDERAL COURT OF AUSTRALIA
Thomas v Commissioner of Taxation [2015] FCA 968
Citation: Thomas v Commissioner of Taxation [2015] FCA 968 Parties: MARTIN ANDREW THOMAS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
THOMAS NOMINEES PTY LIMITED (ACN 010 049 788) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
MARTIN ANDREW PTY LTD (ACN 063 993 055) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
THOMAS NOMINEES PTY LIMITED (ACN 010 049 788) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
MARTIN ANDREW THOMAS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
MARTIN ANDREW THOMAS PTY LTD (ACN 063 993 055) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
THOMAS NOMINEES PTY LTD (ACN 010 049 788) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
File number(s): QUD 274 of 2012
QUD 275 of 2012
QUD 276 of 2012
QUD 283 of 2012
QUD 284 of 2012
QUD 285 of 2012
QUD 325 of 2013Judge(s): GREENWOOD J Date of judgment: 31 August 2015 Catchwords: TAXATION – consideration of the construction and operation of Division 207 (“Effect of receiving a franked distribution”) of Part 3‑6 of the Income Tax Assessment Act 1997 (Cth) (the “1997 Act”) – (“The imputation system”)
TAXATION – consideration particularly of when a franked distribution flows indirectly to a beneficiary of a trust – s 207‑50(3) – consideration of the notion of a “share amount” – s 207‑50(3)(b) – consideration of the four integers of s 207‑35(3) giving rise to a requirement to include in the beneficiary’s assessable income so much of the franking credit amount on franked dividends made to the trustee as equals the beneficiary’s “share of the franking credit on the distribution” – consideration of s 207‑55 and particularly Item 3 of the table at s 207‑55(3) – consideration of s 207‑57 and the formula in that section and s 207‑45
TAXATION – consideration of the nature of franking credits – consideration of whether franking credits are regarded as “ordinary income” or receipts “in the nature of ordinary income” – consideration of whether franking credits could be regarded as income under the provisions of the relevant trust deed as “categories of income” under that deed – consideration of whether franking credits, if not income according to the terms of the deed or income otherwise, represent something of significant potential commercial value to a beneficiary – consideration of whether the trustee has a duty to consider the way in which franked distributions might need to be addressed so as to enable a beneficiary to properly take advantage of tax offsets according to the integrated operation of Div 207 of the 1997 Act
TAXATION – consideration of the concepts of a “franked distribution” made to the trustee of a trust, distributions by the trustee to or amongst beneficiaries and whether franked dividends might be “separately streamed” to or amongst beneficiaries
TAXATION – consideration of whether a resolution which purports to distribute “franking credits” operates as a proxy for a distribution of the franked dividends to which the franking credits are attached – consideration of the relationship between franked dividends and franking credits – consideration of the notion that franking credits are stapled to franked dividends – consideration of whether resolutions which might purport to allocate the benefits of potential “tax offset entitlements” are to be regarded as a proxy for the distribution of franking credits which in turn operate as a proxy for distribution to the relevant beneficiaries of the franked dividends to which the franking credits are necessarily linked or stapled
TAXATION – consideration of the relationship between s 97(1)(a) of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”) and s 95(1) of the 1936 Act – consideration of the s 95(1) notion of net income of the trust estate and the proportionate relationship required between s 97(1)(a) and s 95(1) – consideration of s 99A of the 1936 Act and the notion of whether a beneficiary is presently entitled by operation of s 101 of the 1936 Act for the purposes of s 97(1)(a) of the 1936 Act – consideration of the principles derived from Commissioner of Taxation v Bamford (2010) 240 CLR 481 and Federal Commissioner of Taxation v Totledge Pty Ltd (1992) 60 FLR 149 and related authorities
TAXATION – consideration of whether estoppel by convention operates so as to attribute a construction to the operation of a trust deed which is inconsistent with the terms of the trust
TAXATION – consideration of the principles deriving from Cridland v Federal Commissioner of Taxation (1997) 140 CLR 330 and particularly at 341 and Federal Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445 at [68] having regard to the discussion at [57] to [67]
TAXATION – consideration of whether the Commissioner is bound to accept facts found by reason of orders made and reasons for judgment given in proceedings in the Supreme Court of Queensland in relation to the construction of resolutions made by the trustee and the terms of the trust deed in issue in the proceedings in the Federal Court of Australia – consideration of the nature of proceedings in which the trustee sought directions and declarations under s 96 of the Trusts Act 1973 (Qld) as to the construction of the resolutions passed by the trustee – consideration of the orders made by the Supreme Court of Queensland which give directions and constitute declarations as to the construction of the resolutions by reference to “the proper construction of the Income Tax Assessment Act 1997 (Cth)” – consideration of whether the Commissioner is bound by such orders – consideration of whether the Commissioner charged with a statutory responsibility for the administration and operation of the income tax laws of the Commonwealth is entitled to call into question matters the subject of orders and determinations of the Supreme Court of Queensland – consideration of the principles identified in Executor Trustee and Agency Co v Deputy Federal Commissioner of Taxes (South Australia) (1938) 62 CLR 545)and in particular the observations of Lathan CJ at pp 561 and 562, Dixon J at pp 569 and 570 and McTiernan J at p 572 and related authorities
Legislation: Taxation Administration Act 1953 (Cth), Part IVC, s 14ZZO
Income Tax Assessment Act 1936 (Cth), ss 6, 6B, 95(1), 95(2), 95A, 96, 97(1), 97(2), 99A, 101
Income Tax Assessment Act 1997 (Cth), Division 207, ss 207‑5, 207‑15, 207‑20, 207‑25, 207‑35, 207‑45, 207‑50, 207‑55 and 207‑57
Trusts Act 1973 (Qld), s 96Cases cited: Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417 – cited and quoted
Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 – cited and quoted
Commissioner of Taxation v Bamford (2010) 240 CLR 481 – cited and quoted
Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 – cited and quoted
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 – cited and quoted
Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 – cited and quoted
Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 - cited
Federal Commissioner of Taxation v Totledge Pty Ltd (1992) 60 FLR 149 – cited and quoted
Shanemist Pty Ltd v Denmac Nominees Pty Ltd [2003] QSC 373 - cited
Unruh v Seeberger (2007) 10 HKCFAR 31 - cited
The Bell Group Ltd (In Liq) and Others v Westpac Banking Corporation and Others (No 9) (2008) 225 FLR 1 - cited
Byrnes v Kendle (2011) 243 CLR 253 - cited
Goldie v Getley (No 3) (2011) 8 Australian Succession and Trusts Law Reports (ASTLR) 166 - cited
Public Trustee v Smith (2008) 1 ASTLR 488 - cited
Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 - cited
Federal Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445 – cited
Executor Trustee and Agency Co v Deputy Federal Commissioner of Taxes (South Australia) (1939) 62 CLR 545 – cited and quoted
Macedonian Church v Eminence Petar (2008) 237 CLR 66 - cited
Grant Tomlinson v Ramsey Food Processing Pty Limited [2015] HCA 28 - cited
Page v McKensey and Ors [2003] NSWSC 759 - cited
Solak v Registrar of Titles [2009] VSC 614 - cited
Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 - cited
Federal Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445 - cited
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746 - cited
Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 (2004) 58 ATR 210 - cited
Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1 – cited and quoted
Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457 - cited
Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 - citedDate of hearing: 29 September 2014 to 1 October 2014 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 588 Counsel for the Applicants: Mr F L Harrison QC and M Robertson QC Solicitor for the Applicants: Stephen Comino & Arthur Comino Counsel for the Respondent: Mr P Looney QC and Ms L Allen Solicitor for the Respondent: Australian Government Solicitor
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 274 of 2012
BETWEEN:
MARTIN ANDREW THOMAS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 275 of 2012
BETWEEN: THOMAS NOMINEES PTY LIMITED (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 276 of 2012
BETWEEN: MARTIN ANDREW PTY LTD (ACN 063 993 055)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 283 of 2012
BETWEEN: THOMAS NOMINEES PTY LIMITED (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 284 of 2012
BETWEEN: MARTIN ANDREW THOMAS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 285 of 2012
BETWEEN: MARTIN ANDREW THOMAS PTY LTD (ACN 063 993 055)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 325 of 2013
BETWEEN: THOMAS NOMINEES PTY LTD (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
31 AUGUST 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.
2.The costs of the proceeding are reserved.
3.The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.
4.The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.
5.Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.
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 274 of 2012
BETWEEN: MARTIN ANDREW THOMAS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 275 of 2012
BETWEEN: THOMAS NOMINEES PTY LIMITED (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 276 of 2012
BETWEEN: MARTIN ANDREW PTY LTD (ACN 063 993 055)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 283 of 2012
BETWEEN: THOMAS NOMINEES PTY LIMITED (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 284 of 2012
BETWEEN: MARTIN ANDREW THOMAS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 285 of 2012
BETWEEN: MARTIN ANDREW THOMAS PTY LTD (ACN 063 993 055)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 325 of 2013
BETWEEN: THOMAS NOMINEES PTY LTD (ACN 010 049 788)
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
GREENWOOD J
DATE:
31 AUGUST 2015
PLACE:
BRISBANE
REASONS FOR JUDGMENT
Introduction
These proceedings are concerned with seven appeals under Pt IVC of the Taxation Administration Act 1953 (Cth) (the “TAA”) by which the respective taxpayers, a trustee and two beneficiaries of the trust, challenge objection decisions of the respondent Commissioner of Taxation (the “Commissioner”) concerning, put simply, questions going to their respective primary tax liability for one or more of the income tax years 2006, 2007, 2008 and 2009 (depending upon the applicant/appellant) and penalty assessments.
There are also three related Applications for Review before the Administrative Appeals Tribunal (the “AAT”) under Pt IVC of the TAA.
As to the Federal Court proceedings, orders have been made that evidence in one matter (QUD 274 of 2012) will be treated as evidence in all matters. As to the proceedings before the AAT, directions have been made in the AAT that the evidence given in the Federal Court proceedings will be treated as evidence in the AAT proceedings.
These reasons are concerned with the resolution of the matters in controversy in the Federal Court proceedings. As to the appeals which continue to be opposed by the Commissioner and those which are not, see [61] to [71] of these reasons and the background matters commencing at [9] of these reasons.
At the heart of these proceedings is the question of the efficacy, as a question of law and fact, of the treatment by the trustee, by a relevant resolution in each income year, of the “net income of the trust fund” in applying that net income for the benefit of the two beneficiaries in a particular proportion and, by a second resolution passed at the same meeting, applying the net income of the trust fund in a way which, on the face of the second resolution, is directed to a particular proportional allocation of “franking credits” and “TFN withheld” and “franking credits” and “foreign tax credits”. The subject matter of the second resolution is essentially concerned with the trustee’s treatment of franking credits related to dividend distributions to the trustee for the purposes of, put simply, the franking credits regime contained within the Income Tax Assessment Act 1997 (Cth) (the “1997 Act”).
The resolution of the matters in controversy will require a close examination of that statutory regime against the background of the relevant facts and instruments. There are a number of separate questions raised by these appeals. The various issues will be identified once the background matters have been set out framed, in large part, by a “Statement of Agreed Material Facts” filed by the parties although there is also oral evidence.
However, in the course of the opening addresses in relation to the matters in which appeals continue to be opposed by the Commissioner, counsel for the applicants, Mr Harrison QC and Mr Robertson QC, contended that the Commissioner holds an “unshakable determination” to mistakenly attribute to the applicants a particular case that they say is not being put by them, and counsel further observe they do not understand the case being put by the Commissioner: T p 6, lns 26‑31. They also say that counsel for the Commissioner, Mr Looney QC and Ms Allen, say the Commissioner does not understand the taxpayers’ case. In final submissions, Mr Looney QC observed that on the submissions of counsel for the applicants “made thus far”, the position of each side might be akin to two ships passing in the night but if not two ships passing in the night, then “this is going to come down, in large part, to a statutory construction of [Div] 207B”: T, p 155, lns 8‑11; see also T, p 188, lns 20‑24 and lns 39‑44.
It therefore falls to the Court to not only determine the controversy but also to seek to identify the scope of the questions in controversy.
Background matters
The applicants in the various proceedings are Thomas Nominees Pty Ltd (“Thomas Nominees”), Martin Andrew Thomas (“Martin Thomas”) and Martin Andrew Pty Ltd (“MAPL”). Thomas Nominees, in the relevant tax years, was the trustee of the Thomas Investment Trust (the “trust”) established by a trust deed dated 1 February 1979. The trust deed was amended by Deed Poll on 19 September 1986 and on 25 October 1991. A further amendment, of some importance, was made by Deed Poll on 1 October 1992.
Martin Thomas and MAPL were, in the relevant tax years, beneficiaries of the trust. References to the relevant tax years are references to, in the case of Martin Thomas, the tax years ending 30 June 2006, 2007, 2008 and 2009; in the case of MAPL, the tax year ended 30 June 2008; and in the case of Thomas Nominees, the tax years ending 30 June 2006, 2007, 2008 and 2009.
Martin Thomas and Carmel Thomas (his mother) were the directors and equal shareholders of Thomas Nominees.
Martin Thomas was the sole director and shareholder of MAPL.
Martin Thomas was a skilled and experienced business person and he utilised the professional services of a qualified accountant and tax agent, Ms Beth Abbott, a Certified Practising Accountant (“CPA”) of Drake and Associates to lodge income tax returns for each of the relevant tax years. Ms Abbott was retained by Martin Thomas, the trustee, and MAPL from 1998 as their accountant and tax agent.
On a monthly basis, Ms Abbott prepared the financial accounts for the trust based on instructions received from Martin Thomas. Neither Martin Thomas nor Ms Abbott asked either the Commissioner or the Australian Taxation Office (“ATO”) for an opinion on any of the relevant issues prior to lodgement of each applicant’s tax return.
As mentioned, the trust was established on 1 February 1979 by the trust deed. The trust deed was amended on 1 October 1992 so as to amend cl 4 of the trust deed. By the amendment, the former cl 4 became cl 4(1) and cl 4(2) to cl 4(8) were introduced into cl 4. Other than renumbering the earlier cl 4 to cl 4(1), the earlier cl 4 was retained in the amended deed in its entirety.
Clause 4(1) of the amended deed is, relevantly, in these terms:
During the continuation of the Trust hereby created the Trustee shall apply the income of the Trust Property in such manner as it[,] subject only to the provisions herein contained[,] in its absolute and uncontrolled discretion shall think fit for the benefit maintenance education advancement in life and general well being and comfort of the Nominated Beneficiaries [and five other identified categories of beneficiaries] equally or unequally and to the exclusion of any one or more of such beneficiaries as it shall see fit. …
[emphasis added]
Clause 4(1) of the amended deed further provides:
… If during any year the Trustee has not as aforesaid paid or applied the whole of the net income of the Trust Property by the exercise of its discretion such remaining net income for that year that has not been so paid or applied shall be held by the Trustee upon trust to pay or apply the same to or for the benefit maintenance education advancement in life and general well being and comfort [of the nominated beneficiaries in the manner described].
[emphasis added]
The new cl 4(2) is in these terms:
The Trustee may in the books of account and records of the Trust separately record each of the following categories of income received into the Trust property:
(a)dividends which under The Income Tax Assessment Act 1936 – as amended hereinafter referred to as “the Act”:
(i)are fully franked;
(ii)are unfranked;
(iii)to which a foreign tax credit attaches; or
(iv)any other separately identifiable taxation consequence or benefit is attached or arises.
(b)income, including capital gains, which under the Act:
(i)has an Australian source;
(ii)has an ex‑Australian source;
(iii)has a foreign tax or other credit attached; or
(iv)is exempt or otherwise liable not to be taxed;
(v)has or gives rise to any other separately identifiable taxation consequence or benefit.
[emphasis added]
Clause 4(2) is, however, not exhaustive as cl 4(3) provides that the trustee may identify and separately record and maintain in the books of account and records of the trust, income or capital “having, or in respect of which there is attached, individual or unique characteristics” other than as described in cl 4(2) as the trustee by resolution determines.
Clause 4(4), relevantly, is in these terms:
(a)A resolution or determination of the Trustee by which income of the Trust property is distributed or accumulated may separately deal with the whole or part of the income of a category so that the same or any part thereof may be specifically paid, applied or set aside for the benefit of any one or more of the beneficiaries exclusive of the other or others or accumulated, to the extent to which income of the Trust is permitted to be accumulated by this deed and become part of the capital of the Trust property or be held as part of the Trust property as undistributed Tax exempt income as the Trustee may in its absolute discretion determine; and
…
[emphasis added]
Clauses 4(5), 4(6) and 4(7) are in these terms:
4(5)Expenses and outgoings of the trust fund may at the discretion of the Trustee be allocated against and deducted from income or capital of any one or more categories in such manner as the Trustee may see fit.
4(6)In the event that the Trustee shall not exercise its discretion as provided in the preceding sub‑clause in respect of a financial year, outgoings and expenses of the Trust property for that year shall be allocated firstly against and deducted from income which is not income of a category and to the extent to which the same is not sufficient to absorb all such expenses and outgoings, then the part thereof which is not so absorbed shall be allocated in such manner as the Trustee may decide against income of a category or categories to which a tax credit or rebate does not attach, and thereafter against the remaining income of the Trust property.
4(7)Income or capital of the Trust property to which a default beneficiary becomes entitled and which can be identified from the books and records of the Trust as being of a category, shall retain its separate identity when the same passes to or is received by the default beneficiary or when the default beneficiary otherwise becomes entitled thereto.
[emphasis added]
Finally, cl 4(8) is in these terms:
Notwithstanding anything hereinbefore in this clause contained or implied the Trustee shall have the right to accumulate as an accretion to the Trust Property all or any part or parts of such income of the Trust Property upon which no further tax of any kind or nature is payable by the Trustee or any beneficiary hereunder and subject always to the Trustee having the power to determine at any time or times that all or any part of such accumulated tax free income shall be distributed to such beneficiary or beneficiaries and in such manner equally or unequally as the Trustee in its absolute discretion shall think fit.
[emphasis added]
In 1992, the Commissioner issued draft ruling EDR 89 followed by a public ruling TR 92/13 entitled Income Tax: distribution by trustees of dividend income under the imputation system which was operative in the relevant tax years.
In the relevant tax years the trustee carried on an exchange‑traded option (“ETO”) trading business. The ETO business involved dealing in exchange‑traded options in respect of shares. The options were exercisable by one or other of the parties as provided in the option document at a specified date. The ETO business involved writing or granting “put options” and receiving premiums for writing/granting those put options pursuant to which the trustee became obliged to buy shares at a future date at an agreed “strike” price. If the market value of the shares was less than the nominated strike price at that future date, the trustee would be required to buy those shares for that higher price.
Also, the ETO business involved writing or granting “call options” and receiving premiums by which the trustee became obliged to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was higher than the strike price at that future date, the trustee would be required to sell those shares for that lower strike price. The business also involved acquiring “call options” and paying premiums by which the trustee became entitled to buy shares at a future date for an agreed strike price with the result that if the market value of the shares was greater than the strike price at that future date, the trustee would be able to buy those shares for that lower price.
Similarly, the business involved acquiring “put options” and paying premiums by which the trustee became entitled to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was lower than the strike price at that future date, the trustee would be able to sell those shares for that higher strike price. The trustee’s decisions to grant options or acquire options and so too pay and receive premiums depended upon its view at the time of the best option‑trading strategy.
There is now no dispute between the parties as to the amount of the net income of the trust estate for the purposes of s 95 of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”) arising out of the trustee’s conduct of the ETO business (and otherwise). The agreed net income of the trust for the purposes of s 95 of the 1936 Act in each of the relevant tax years is this:
Section
2006
2007
2008
2009
Section 95 net income
$798,826
$1,839,635
$142,651
$173,743
At all relevant times, Martin Thomas controlled the trustee and MAPL.
In each of the relevant tax years, Thomas Nominees received dividend income (dividends) that were franked in accordance with Div 207 of Pt 3‑6 of the 1997 Act.
Thomas Nominees also derived other income in each relevant tax year and incurred expenses in deriving that income. For each of the relevant tax years, the trustee made formal resolutions in the terms as drafted by Ms Abbott. In each of the relevant tax years, the trustee passed two separate resolutions for each relevant income year.
The resolutions are described as the “net income distribution resolutions” and the “franking credit distribution resolutions”, respectively.
By each of the net income distribution resolutions and the franking credit distribution resolutions, the trustee resolved to apply “the net income of the trust fund” for the relevant tax years to the benefit of the beneficiaries by credit to accounts maintained by the trustee for such beneficiaries as specified in the resolutions.
For example, the “net income distribution resolution” for the income year ending 30 June 2006 is in these terms:
TRUST INCOME Resolved [by Martin Thomas and Carmel Thomas – Mr Martin Thomas’s mother] pursuant to
DISTRIBUTION: the powers vested in the trustee under the Deed of Settlement establishing the abovenamed trust fund [Thomas Investment Trust] that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them.
BENEFICIARY PROPORTION
MARTIN A THOMAS THE FIRST $21,600
[MAPL] THE BALANCEShould the Commissioner of Taxation disallow any amount as a deduction or take any action that would have the effect of creating undistributed net income in the trust as at 30 JUNE 2006 then such net income shall be deemed to be distributed on 30 JUNE 2006 to the abovenamed beneficiaries in proportions as stated above, except where there is a remainder nomination then this amount shall be distributed to that person.
[emphasis added]
The “franking credit distribution resolution” for the income year ending 30 June 2006 is in these terms:
TRUST INCOME Resolved pursuant to the powers vested in the trustee under the Deed
DISTRIBUTION: of Settlement establishing the abovenamed trust fund that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them.
BENEFICIARY PROPORTION
MARTIN A THOMAS FRANKING CREDITS $2,416,217.92
TFN WITHHELD $17,502.00[MAPL] FRANKING CREDITS $228,900.38
FOREIGN TAX CREDITS $4,267.42Should the Commissioner of Taxation … [and concluding language in the same terms as that set out at [33] of these reasons]
[emphasis added]
Apart from the proportions and the reference to the relevant year, each “net income distribution resolution” for the income year ending 30 June 2007, 2008 and 2009 is in the same terms as the resolution for 30 June 2006. Similarly, each “franking credit distribution resolution” for those three income years is in the same terms as the resolution for 30 June 2006 apart from the allotted proportions and the reference to the relevant year.
Set out below are the proportions reflected in the trustee’s “net income distribution resolutions” for each relevant income year:
Beneficiary
2006
2007
2008
2009
Martin Thomas
The first $21,600
The first $4,615
The first $50
$16,600
MAPL
The balance
The balance
The balance
$157,143
Set out below are the proportions reflected in the trustee’s “franking credit distribution resolutions” for each relevant income year (rounded to the nearest whole number):
Beneficiary
2006
2007
2008
2009
Martin Thomas
Franking credits
TFN withheld
$2,416,218
$17,502
$4,765,353
-
$1,030,839
-
$1,050,925
-
MAPL
Franking credits
Foreign tax credits
$228,900
$4,267
$548,489
$1,821
$42,780
$1,185
$46,900
-
In each of the relevant tax years, Martin Thomas lodged his income tax returns which disclosed the amount of franking credits credited to him by the trustee pursuant to the franking credit distribution resolution. The Commissioner paid amounts to him on the basis of the amounts of franking credit distributions stated in those returns.
The income tax returns for the trust for each of the relevant years disclosed the following:
2006
2007
2008
2009
Section 95 Net Income
$798,826
$1,839,635
$142,651
$173,743
Distributions to Martin Thomas:
Share of non PP income
Franking credits
TFN withheld
$21,600
$2,416,217
$17,502
$4,615
$4,765,353
-
$50
$1,030,839
-
$16,600
$1,050,925
-
Distributions to MAPL
Share of non PP income
Franking credits
Attributed foreign income
Other foreign income
Foreign tax credits
$763,149
$228,900
$125
$13,952
$4,267
$1,822,307
$548,488
$0
$12,713
$1,821
$138,109
$42,780
-
$4,492
$1,185
$157,143
$46,900
-
-
-
The statistics in the above table are drawn from the Statement of Agreed Material Facts. However, the Commissioner asserts that the following amounts are referrable to the following categories in the above table concerning MAPL:
2006
2007
2008
2009
Attributed foreign income
Other foreign income
Foreign tax credits
$125
$13,952
$4,267
$12,713
$1,821
-
-
$4,492
$1,185
-
-
-
On 12 May 2009, the Commissioner notified the trustee of his intention to commence an audit for the tax years ended 30 June 2005 to 30 June 2009. The Commissioner subsequently decided that the audit for the year ended 30 June 2005 would not continue.
On 3 November 2009, Drake and Associate wrote to the Commissioner on behalf of the trustee explaining that an error had been made in the income tax returns lodged for the relevant tax years. On 16 November 2009, Drake and Associates again wrote to the Commissioner on behalf of the trustee advising that the letter of 3 November 2009 was itself based on a mistake and the ATO ought to treat it as withdrawn. Financial statements and tax reconciliations were provided to the Commissioner as part of the audit. Corrected financial statements for the years ended 30 June 2005 to 30 June 2008 were provided to the Commissioner by Drake and Associates by facsimile on 4 December 2009. That correspondence enclosed financial statements for the year ended 30 June 2009 prepared by the applicants on the same basis as the earlier corrected financial statements.
Following completion of the audit in 2011, Notices of Amended Assessment were issued to Martin Thomas for each of the relevant tax years and to MAPL for the year ending 30 June 2008. Notices of Amended Assessment were issued to the trustee for the tax years 2006 to 2008. These amended assessments, issued to the beneficiaries and the trustee, were concerned with the primary tax liabilities of those parties. Notices of Assessment were also issued in 2011 to the applicants in respect of penalty assessments as follows: to Martin Thomas for each of the relevant tax years; to MAPL for the year ended 30 June 2008; and to the trustee for each of the tax years 2006 to 2008.
These various assessments are set out in the table below:
Tax Years
Martin Thomas
MAPL
The Trustee
2006
Primary tax – amended taxable income
$7,104,552
-
$7,777,789
Tax payable
$995,538
-
$1,105,963
Penalty assessed
$856,714
-
$276,491
2007
Primary tax – amended taxable income
$13,851,053
-
$15,420,180
Tax payable
$1,648,483
-
$1,854,720
Penalty assessed
$1,604,426
-
$463,680
2008
Primary tax – amended taxable income
$2,494,654
$1,647,581
$4,074,925
Tax payable
$96,775
$451,800
$820,036
Penalty assessed
$280,868
$112,950
$205,009
2009
Primary tax – amended taxable income
$19,129
-
-
Tax payable
$903
-
-
Penalty assessed
$261,886
-
-
The applicants lodged taxation objections in respect of each of these assessments in 2011.
The Commissioner disallowed each of the relevant objections and gave notice of his objection decisions on 18 April 2012 together with his reasons for his decisions.
The applicants challenged the objection decisions of 2012 concerning their primary tax assessments for the tax years 2006, 2007 and 2008 by filing applications in the Federal Court of Australia on 8 June 2012. Those appeals are proceedings QUD 274, 275 and 276 of 2012 by Martin Thomas, Thomas Nominees and MAPL respectively. The applicants also challenged the objection decisions of 2012 concerning their penalty tax assessments for the tax years 2006, 2007 and 2008 by filing appeals in this Court on 15 June 2012. Those appeals are proceedings QUD 283, 284 and 285 of 2012 brought by Thomas Nominees, Martin Thomas and MAPL respectively. The applicants also challenged the decision not to remit the penalties by filing the Applications for Review before the AAT.
In mid‑2012, however, after the making of the April 2012 objection decisions, the Commissioner issued further Notices of Amended Assessment to the beneficiaries concerning their primary tax liabilities in respect of the relevant tax years. On 2 November 2012, consequent upon a review of the Applicants’ Appeal Statement filed on 20 September 2012, the Commissioner advised the applicants that he now accepted one of the grounds relied upon in each of the relevant objections to the effect that all premiums paid by the trustee as part of its ETO options trading business were deductible under s 8‑1 of the 1997 Act.
This change of position is described as the “options concession”.
It seems that this concession led to an agreement between the parties that the net income of the trust estate pursuant to s 95 of the 1936 Act in each of the relevant tax years was that set out in the table at [27] of these reasons.
Having made the options concession, the Commissioner then contended that the expenses of the trust exceeded its income with the result that it had made a net loss for the 2009 tax year and that no beneficiary was presently entitled to a share of the trust income in that tax year. However, the net income of the trust for the purposes of s 95 of the 1936 Act for the 2009 tax year was $173,743, as agreed.
The Commissioner issued the trustee with a Notice of Assessment dated 25 January 2013 for the 2009 tax year imposing upon it liability to tax in respect of the whole of the s 95 net income of the trust estate, in reliance upon s 99A of the 1936 Act.
On 28 February 2013, Thomas Nominees lodged a taxation objection in respect of the 2009 assessment to the trustee. The Commissioner disallowed that objection and gave notice of his objection decision on 17 April 2013 together with reasons for his decision. The trustee challenged the objection decision by filing an application in this Court on 17 June 2013. That appeal is QUD 325 of 2013.
The Commissioner no longer seeks to rely upon the assessments issued to the trustee in each of the 2006, 2007 and 2008 tax years as alternative assessments and does not now oppose the trustee’s appeal against the Commissioner’s objection decision in relation to those assessments. That appeal is proceeding QUD 275 of 2012. Moreover, the Commissioner no longer opposes the appeals in relation to the penalty assessments in respect of MAPL or the trustee. Those appeals are proceedings QUD 283 and QUD 285 of 2012 respectively. The Commissioner no longer opposes the related Applications for Review before the AAT. Those matters are the application by the trustee for the 2007 and 2008 tax years (2450/2012) and the application by MAPL for the 2008 year (2453/2012).
The amounts of the penalty assessments for Martin Thomas were re‑calculated following the Commissioner’s options concession, as follows:
2006
2007
2008
2009
Tax payable/ (refundable) on original assessment
($2,431,319)
($4,769,221)
($1,026,699)
($1,046,641)
Tax payable/ (refundable) on Martin Thomas’ taxable income per Commissioner’s current position
$995,538
$1,648,483
$96,775
$903
Shortfall amount
$3,426,857
$6,417,704
$1,123,474
$1,047,544
Penalty at 25%
$856,714
$1,604,426
$280,868
$261,886
The proceedings in the Supreme Court of Queensland
On 24 August 2010, the trustee commenced proceedings in the Supreme Court of Queensland. The trustee sought directions under s 96 of the Trusts Act 1973 (Qld) as to the proper construction of the trust deed and the dual resolutions passed in the tax years 2006, 2007 and 2008. The proceedings did not engage any question concerning the 2009 tax year. The beneficiaries, Martin Thomas and MAPL, were the first and second respondents to the trustee’s application. Although they were present at the hearing, they played no active part in it: Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417; (2010) 80 ATR 828, Applegarth J at [10]. The trustee put the Commissioner on notice of the application. However, a representative of the ATO advised the trustee’s solicitor that it was not appropriate for the Commissioner to be a party to the application: Applegarth J at [11]. The factual contentions put before Applegarth J in the affidavits of Ms Abbott and Martin Thomas were uncontradicted: Applegarth J at [36].
On 11 November 2010, Applegarth J published reasons for judgment in the proceeding and called upon the applicant to make submissions as to the form of orders to be made.
On 12 November 2010, Applegarth J made orders in these terms:
1.The court directs the applicant under s 96 of the Trusts Act 1973 (Qld), and declares, that:
(a)on the proper construction of the Income Tax Assessment Act 1997 (Cth), franking credits in respect of a franked distribution made to the trustee of a trust confer a financial advantage which falls to be dealt with by the trustee of the trust; and
(b)on the proper construction of the trust deed for the Thomas Investment Trust and of the resolutions of the directors of the applicant for the years ended 30 June 2005 to 2008, those resolutions were effective to:
(i) allocate to the following beneficiaries in the following amounts the benefits pertaining to the franking credits; and
(ii) entitle those beneficiaries to those benefits in the proportions which those amounts bear, each to the other:
Date of Resolution Martin A Thomas Martin Andrew Pty Ltd 30 June 2005 $282,631.49 $17,860.51 30 June 2006 $2,416,217.92 $228,900.38 30 June 2007 $4,765,353.11 $548,488.89 30 June 2008 $1,030,838.70 $42,780.30
(iii) confer on each of those beneficiaries respectively a vested and indefeasible interest in possession in a share of the distributable income that is consistent with the above allocation to those beneficiaries of the benefits pertaining to the franking credits;
(iv) distribute all the distributable income of the Trust in each year among the above beneficiaries in accordance with those resolutions.
2.The court orders that the application for equitable rectification of those resolutions be dismissed.
[emphasis added]
The franking credit proportion of the total franking credits for each income year 2005-2008 allocated to Martin Thomas was approximately 94%, 91%, 89% and 96% respectively.
It will, of course, be necessary to examine the question of whether the direction and declaration of the Supreme Court is binding upon the Commissioner and correspondingly the extent to which the scope and operation of the trust deed, the resolutions and the relationship between those things and the taxation law of the Commonwealth can properly be put in issue in these proceedings in the determination of the appeals from the objection decisions under the scheme contemplated by the TAA.
In summary, the position in relation to the various appeals and Applications for Review seems to be this.
As to the appeal by Martin Thomas from the objection decision of the Commissioner in relation to the amended assessments directed to him for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 274/2012.
That position prevails in relation to MAPL’s appeal for the tax year 2008: QUD 276/2012.
As to the alternative assessment issued to the trustee, Thomas Nominees, for the tax years 2006, 2007 and 2008, the Commissioner no longer opposes the trustee’s appeal: QUD 275/2012.
As to the assessment issued to the trustee for the tax year 2009, the Commissioner challenges and opposes the appeal: QUD 325/2013.
As to the appeal by Martin Thomas from the objection decision in relation to penalty for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 284/2012.
As to MAPL’s appeal from the objection decision concerning penalty, the appeal is no longer opposed by the Commissioner: QUD 285/2012.
Nor is the trustee’s appeal from the objection decision concerning penalty for the tax years 2006, 2007 and 2008 opposed by the Commissioner: QUD 283/2012.
As to Martin Thomas’s appeal from the refusal to remit penalties for the tax years 2006, 2007, 2008 and 2009, the Commissioner opposes that application: Tribunal proceedings 2445/2012.
The Commissioner no longer opposes MAPL’s application for the tax year 2008 concerning the remission of penalties: Tribunal proceedings 2453/2012.
Nor does the Commissioner oppose the trustee’s application in respect of the refusal to remit penalties for the tax years 2006, 2007 and 2008: Tribunal proceedings 2450/2012.
I propose to now examine aspects of the statutory regime relevant to these proceedings before examining aspects of the contested evidence given by Ms Abbott and Martin Thomas. The statutory provisions of the 1936 Act and the 1997 Act relevant to these proceedings in the form in which these provisions took throughout the income tax years in issue are set out in Schedule 1 to these reasons.
Trust income under the 1936 Act and the franking credits regime under the 1997 Act
Trust income
Division 6 of Pt III of the 1936 Act addresses the topic of “Trust income”.
The term assessable income has by s 6(1) of the 1936 Act the meaning given by Div 6 of the 1997 Act and an assessment in the case of a trustee of a trust estate (relevantly, the class of trustee such as Thomas Nominees) involves the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax and the tax payable on that net income (or that no tax is payable): s 6(1), 1936 Act. The assessable income of, for example, an Australian resident includes income according to ordinary concepts, ordinary income, derived directly or indirectly from all sources, and amounts that are not ordinary income but which are included in assessable income by provisions of the 1936 and 1997 Acts about assessable income: s 6‑5(1) and s 6‑10(1) and (2), 1997 Act.
Such amounts of non‑ordinary income included in assessable income are called statutory income: s 6‑10, 1997 Act.
If an amount would be statutory income apart from the fact that the addressee (of the section) has not received it, it becomes statutory income as soon as it is applied or dealt with in any way on behalf of that person or as that person directs: s 6‑10(3), 1997 Act.
Classes of statutory income are set out, as a guide to the operative provisions, at s 10‑5 of the 1997 Act and those classes include credits on franked dividends within Div 207 of Pt 3‑6, 1997 Act.
Exempt income is not assessable income but some ordinary income and some statutory income is neither assessable nor exempt income: s 6‑1, 1997 Act.
Section 95 of the 1936 Act defines net income, in relation to a trust estate, to mean the total assessable income of the trust estate calculated under “this Act” as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions (except deductions under Div 16C or Sch 2G) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Div 36 of the 1997 Act in respect of such of the tax losses of previous years as are required to be met out of corpus.
A trustee, of course, is not liable as trustee to pay income tax upon the income of the trust estate, except as provided by “this Act”: s 96, 1936 Act. The term “this Act” is defined to include the 1997 Act: s 6(1), 1936 Act. A trust estate is taken to be a resident trust estate in relation to the year of income if the trustee was a resident at any time during the year of income: s 95(2), 1936 Act.
Section 97(1)(a)(i) of the 1936 Act provides (subject to Div 6D) that where a beneficiary of a trust estate (who is not under any legal disability) is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary shall include so much of that share, of the net income of the trust estate, as is attributable to a period when the beneficiary was a resident.
As to the position where a beneficiary is presently entitled to a share of the income of the trust estate but under a legal disability, see s 98, 1936 Act.
Section 95A(1) of the 1936 Act provides, for the purposes of that Act and the 1997 Act, that where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for, the benefit of the beneficiary.
Section 95A(2) of the 1936 Act provides, for the purposes of both Acts, that where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate, but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate. However, when s 97(1)(a)(i) of the 1936 Act refers to the “income of a trust estate” to which a beneficiary is presently entitled, that reference does not include a reference to income of the trust estate to which a beneficiary is deemed to be presently entitled by virtue of s 95A(2) where the beneficiary is a natural person: s 97(2).
Section 99A of the 1936 Act addresses the circumstances when certain trust income is to be taxed at a special rate.
Section 99A(4) is in these terms:
Where there is no part of the net income of a resident trust estate:
(a)that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b)in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
(c)that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;
the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.
Section 101 of the 1936 Act addresses the topic of present entitlements in the context of the exercise of a discretionary power by a trustee.
It provides (framed in the masculine) that where a trustee has a discretion to pay or apply income of the trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion. It follows that in those circumstances, such a beneficiary would be “presently entitled to a share of the income of the trust estate” for the purposes of s 97(1)(a)(i). Section 97(2) which operates to exclude the deeming effect brought about by s 95A(2) does not exclude the deeming effect of a beneficiary being presently entitled to amounts paid to him or applied for his benefit by the trustee in the exercise of a discretion, by force of s 101, for the purposes of s 97(1)(a)(i).
In the case of a corporate trustee exercising a discretionary power to apply the income of the trust property, the making of each payment to the beneficiary may well properly involve the exercise by the corporate trustee of a discretion to so apply the income without the formal passing of a resolution: Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 per Gummow J at 553.
Although the phrase net income, in relation to a trust estate, is defined by s 95(1) of the 1936 Act, the phrase income of the trust estate in s 97(1) is not defined. Nevertheless, as a matter of construction, the references in s 97(1) to a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate, coupled with the definition of trustee in s 6(1) of the 1936 Act, suggests a reference to the general law of trusts: Commissioner of Taxation v Bamford (2010) 240 CLR 481 (“FCT v Bamford”) by the Court at [36] to [39].
The “income of the trust estate” is the distributable income of the trust estate ascertained by the trustee (applying the general law of trusts), determined according to appropriate accounting principles taking account of relevantly applicable presumptions (if any) about receipts, outgoings and losses: FCT v Bamford at [17]) and the terms of the trust instrument, measured in respect of distinct income years.
The shorthand description “distributable income” would normally be understood as a matter of orthodoxy as a reference to the income of the trust estate available for distribution to beneficiaries or accumulation by the trustee reflecting a net accretion to the trust estate for the relevant income year.
The determination of a beneficiary’s share of the distributable income, so understood, to which the beneficiary is presently entitled, is the determinant of the beneficiary’s share or proportion of the s 95(1) net income of the trust estate to be included in the assessable income of that beneficiary: FCT v Bamford at [45]; Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 74‑75, per Sundberg J.
Thus, s 97(1)(a)(i) adopts a so‑called proportionate approach to determining the share the s 95(1) net income of the trust estate to be included in the assessable income of the beneficiary (that is, the same proportion as that beneficiary enjoys of the distributable income to which the beneficiary is presently entitled). Where there is no part of the net income of a resident trust estate that is included in the assessable income of a beneficiary of the trust estate pursuant to s 97, s 99A(4) is engaged and in that event the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate determined by the Parliament.
As to the question of when a beneficiary is presently entitled to a share of the income of a trust estate, the High Court observes, (by the Court: Mason CJ, Deane, Dawson, Toohey and McHugh JJ) in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271 that the parties, in that case, had agreed that the authorities establish that (a) a beneficiary is presently entitled to a share of the income of a trust estate if, but only if, the beneficiary has an interest in the income which is both vested in interest and vested in possession, and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. The High Court proceeded to determine the question in issue in the appeal in Harmer upon an acceptance of the correctness of that agreed position.
The Court observed at 271:
That being so, the question on the appeal is whether any one or more of the claimants either were “presently entitled” in that sense [as described above] to the interest earned on the funds deposited with the Building Society or had a “vested and indefeasible interest” in that interest.
[emphasis added]
Those propositions derive from Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 at 215‑216, 219‑220; Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 at 450‑452 and Federal Commissioner of Taxation v Totledge Pty Ltd (“FCT v Totledge”) (1992) 60 FLR 149 at 157 and 158.
In Harmer v Federal Commissioner of Taxation, the question of the role or engagement of s 101 of the 1936 Act did not arise. Section 101, however, was considered by Latham CJ and Williams J in Federal Commissioner of Taxation v Whiting at 215. Section 101 was said to be entirely consistent with the construction attributed to s 97 of the 1936 Act. At 215, their Honours said this:
Section 98 deals with the case of a beneficiary who is presently entitled, but who is under a legal disability. In such a case the beneficiary under a legal disability may have a vested interest, but the trustee is nevertheless required to pay the tax. The circumstance which distinguishes this case from the case of a beneficiary presently entitled to whom s 97 applies is the existence of a legal disability. That legal disability does not prevent the beneficiary from having a vested interest. The effect of it is to prevent him receiving payment, because he is incapable of giving an effective discharge to the trustee. This provision, therefore, supports the view that when the Act speaks of a beneficiary being presently entitled to a share in income, it refers to the right of a beneficiary to obtain immediate payment, rather than to the fact that a beneficiary has a vested interest.
Section 101, which provides that where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion, fits in with this construction.
[emphasis added]
It follows that a beneficiary is presently entitled to a share of the income of a trust estate (within s 97 of the 1936 Act) if the beneficiary has an interest in the income of the trust estate, vested in interest and possession (otherwise described as a vested indefeasible interest vested in possession), coupled with an immediate legal right to demand and receive payment. Actual payment or application of income of the trust estate to or for the benefit of a beneficiary gives rise to a present entitlement under s 101, consistent with such a construction of the notion of being “presently entitled” for the purposes of s 97 of the 1936 Act.
The relevant trust deed might provide expressly and unambiguously (or where ambiguity arises a proper construction of the instrument will be necessary), that an object of the trust has an entitlement to be paid gross income as received. Where the instrument is silent about the nature and extent of a beneficiary’s interest, if any, in the gross income of the trust estate, the nature and extent of that interest (if any) falls to be determined according to settled principle (that is, the accepted precepts of the general law of trusts). As to that, Bowen CJ, Deane and Fitzgerald JJ said this in FCT v Totledge at 157:
A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee’s proper costs, expenses and outgoings. Regardless of whether one regards his interest as beneficial “ownership” subject to a charge in favour of the trustee (see, for example, per Lord Wrenbury in Baker v Archer‑Shee) or whether one regards the concept of equitable “ownership” misleading where other than a bare trust with one ascertained beneficiary is involved, the life tenant or a beneficiary entitled to income under a trust ordinarily has a present beneficial interest in gross income as derived.
[emphasis added]
[footnotes omitted]As to s 97(1), their Honours said this at 159:
… the preferable construction of s 97(1) is to treat the requirement of present entitlement to a share of the income of the trust estate as not being concerned with distinctions between gross income as derived and “surplus income” after payment of costs, expenses and outgoings but as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate. Such a right to demand and receive payment represents a present entitlement to receive a share of what retains its character as income of the trust estate regardless of whether, upon closer analysis, it can be seen to reflect a beneficial interest in gross income as derived or whether it represents no more than, for example, the right of an annuitant to be paid a particular amount from surplus or net income.
[emphasis added]
Plainly enough, there is likely to be (or may well be) in most cases a difference between the distributable income of the trust estate and the s 95(1) net income of the trust estate as not all outgoings, costs and expenses will necessarily be allowable deductions for the purposes of the 1936 and 1997 Acts.
The franking credit regime
Put simply, the 1997 Act establishes an imputation system (see particularly Div 207) for determining how and when the income tax paid by a corporate tax entity (as that term is defined) is imputed to its members who might be shareholders, beneficiaries or partners. The tax is imputed to members by marking or franking the relevant distribution. A franked distribution has tax credits (franking credits) which reflect the tax already paid by the corporate tax entity on its profits distributed to members. The tax credits that can be imputed to members are recorded in the corporate tax entity’s “franking account” as “franking credits”. The franking credit related to a distribution is an imputation credit in the member’s hand which will usually give rise to a tax offset dollar‑for‑dollar and also, in the case of individuals, relevantly in issue here, an eligibility for refunds of excess imputation credits.
Section 63‑10(1) of the 1997 Act (and all references are to the 1997 Act unless otherwise indicated) tells the addressee that if you have one or more tax offsets for an income year, they are applied against the person’s basic income tax liability in the order shown in the table and to the extent that an amount of a tax offset remains, Item 40 in the table provides that a tax offset which is subject to the “refundable tax offset rules” (see Div 67) gives rise to a “refund of the remaining amount”.
Section 67‑25 provides that tax offsets available under Div 207 (which sets out the effects of receiving a “franked distribution”) are subject to the refundable tax offset rules unless otherwise stated in the section. Section 67‑25(1B) does so state in this circumstance: if a trustee to whom a franked distribution flows indirectly (as that term is understood in s 207‑50(4)), is entitled to a tax offset under Div 207 for an income year because of the distribution and the trustee is liable to be assessed under s 99A of the 1936 Act on a share or all or a part of the trust’s net income for the relevant year, the tax offset is not subject to the refundable tax offset rules. Thus, in principle, a trustee might well seek to exercise powers conferred under the trust (or a settlor might seek to include terms) that avoids the circumstances contemplated by s 99A arising so as to ensure that the tax offsets available under Div 207 are, by s 67‑25(1), subject to the refundable tax offset rules so as to preserve the right to a refund on the amount of the excess tax offset: s 63‑10(1), Item 40.
Subdivision 202‑A (s 202‑5) provides that an entity franks a distribution (see s 960‑120 as to a distribution; such as a dividend) if it is a franking entity (as to which see s 202‑15) which satisfies the residency requirement when the distribution is made; and, the distribution is a frankable distribution (as to which see s 202‑40); and, the entity allocates a franking credit to the distribution (as to which see s 202‑5).
Subdivision 202‑B addresses the question of whether an entity is a franking entity at a particular time and Subdiv 202‑C addresses which distributions can be franked. The object of Subdiv 202‑C is to ensure that only distributions equivalent to realised taxed profits can be franked: s 202‑35. The maximum franking credit for a distribution (of, for example, dividends by a corporate tax entity) is equivalent to the maximum amount of income tax that the entity making the distribution could have paid, at the prevailing corporate tax rate, on the profits underlying the distribution: s 202‑55.
A franking credit is the amount of a credit that arises in the franking account of an entity and the table at s 202‑15 sets out when such a credit arises.
A franking account is an account for each entity that is, or has at any time been, a corporate tax entity (as defined). The maximum franking credit for a distribution is calculated, relevantly for the income tax years in question, according to the following formula: the amount of the frankable distribution multiplied by 30 and divided by 70: s 202‑60(2). If the frankable distribution is, for example, $3,500, the maximum franking credit according to the formula is thus $1,500.
An entity that makes a frankable distribution must give the recipient a distribution statement reciting, among other things, the amount of the distribution and the amount of any franking credit specified on the distribution: s 202‑75(1); s 202‑80(3).
Section 207‑5(1) provides that if a corporate tax entity (such as a company) makes a franked distribution to a member (a shareholder in the case of a company), then as a general rule, an amount equal to the franking credit on the distribution is included in the member’s assessable income (s 202‑5(1)(a)) and the member is entitled to a tax offset (dollar‑for‑dollar) of the same amount (s 202‑5(1)(b)). If the member is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member’s assessable income for the purposes of s 207‑5(1)(a): s 207‑5(3).
As to the tax offset, however, s 207‑5(4) provides (and s 207‑5(3) and s 207‑5(4) need to be read together) that a tax offset in relation to that distribution is only available to an entity (which might be a trustee or a beneficiary or a partner in the partnership) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. In that case, the tax offset available to the relevant entity described above, is equal to its “share of the franking credit on the distribution”: s 207‑5(4).
Section 207‑5(4) has the following note which forms part of the provision:
Note:That share [of the franking credit on the distribution] is a notional amount and the entity [trustee, beneficiary or partner] can have that share without actually receiving any of the franking credit or distribution.
[emphasis added]
Section 207‑15(1) provides that Subdiv 207‑A sets out, as a general rule, the “tax effect of receiving a franked distribution”. However, the subdivision does not apply to a partnership or trustee to whom a franked distribution is made (such as the franked dividends made to the trustee in this case) or an entity to whom a franked distribution flows indirectly (such as the beneficiaries of the Thomas Investment Trust): s 207‑15(2).
Section 207‑25 provides a description or explanation of the matters Subdiv 207‑B addresses.
Section 207‑25 says that Subdiv 207‑B deals with an entity that receives a benefit of a franked distribution where the distribution is made to a partnership or the trustee of a trust and the benefit is received by the relevant entity either directly or through other interposed partnerships or trusts. In those circumstances, the distribution is regarded as flowing indirectly to the entity. What follows is that on the basis of a notional amount of the entity’s share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under Subdiv 207‑B.
As to the operative provisions of Subdiv 207‑B, s 207‑35(1) provides for a “gross‑up” notion in the following way.
If a franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust and the recipient entity is not a corporate tax entity when the distribution is made (accepting and recognising that Thomas Nominees as trustee of the trust was not a corporate tax entity and that s 207‑35(1)(c) is not engaged), then the assessable income of the trust (or partnership) for that income year includes the amount of the franking credit on the distribution.
Section 207‑35(3) bears the sub‑heading: “Allocation of the additional amount of assessable income”. It provides that despite any of the provisions of Div 6 (and also Div 5) of Pt III of the 1936 Act, if four particular integers are engaged, then a certain consequence arises.
The four integers or pre‑conditions to that consequence are these.
First, a franked distribution is made, or flows indirectly to, a trustee of a trust or a partnership in an income year: s 207‑35(3)(a).
Second, the assessable income of the trust or partnership for that income year includes an amount (called the franking credit amount) which is (in whole or in part) the additional amount of assessable income included under s 207‑35(1) in respect of the distribution: s 207‑35(3)(b).
Third, the distribution flows indirectly to an entity that is a beneficiary, a partner or the trustee of the trust: s 207‑35(3)(c).
Fourth, the entity (partner, beneficiary or trustee) has an amount of assessable income for the relevant income year that is attributable to (that is, plays some part in) the distribution (in whole or in part): s 207‑35(3)(d).
The consequence is this. If those four integers are engaged, then the entity’s assessable income (the assessable income of the beneficiary, relevantly) for that income year also includes so much of the franking credit amount as is equal to the entity’s share of the credit on the distribution: s 207‑35(3).
The entity’s share of the franking credit on the distribution is determined by s 207‑57: s 995‑1.
Section 207‑35 at the foot of s 207‑35(3) contains a worked example illustrative of the operation of the section (which also forms part of the section). The worked example is this:
Example:A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust’s assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year [made up of the $70 distribution, the $30 franking credit on the distribution [included by s 207‑35(1)] and $100 from other sources]. There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust’s income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.
The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207‑55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P’s assessable income also includes the full amount of the franking credit (as P’s share of the franking credit on the distribution is $30 under section 207‑57). Q’s share of the net income therefore does not include any of the franking credit.
[emphasis added]
The above example seems to recognise that so long as the trust deed confers power on the trustee to apply classes of income of the trust estate to particular beneficiaries to the exclusion of others (or differentially among beneficiaries), Div 207 recognises that a trustee might stream all of (or most of) the franked distribution to one beneficiary and other income to another beneficiary. Beneficiaries might have differential shares of the s 95(1) net income of the trust estate yet 100% of the franked distribution is allocated to a particular beneficiary which leads to a particular consequence under s 207‑55 and a determination of the beneficiary’s share of the franking credit on the franked distribution under s 207‑57.
In Walstern, Hill J said this at points 6 and 7 at [108] at p 26:
6.An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be “about as likely as not correct” when regard is has to the material constituting “the authorities”; and
7.Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of “authority” a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer’s view is ultimately seen to be wrong it is nevertheless “about” as likely to be correct as the correct view. A question of judgment is involved.
As to the reasonable care test, it calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer’s tax obligations. The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount. One factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken: Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457. As to the amendment power, the Court in Aurora determined that the Commissioner has the power to amend a penalty assessment pursuant to both s 14ZY of the TAA and s 33(3) of the Acts Interpretation Act.
The contention of Mr Thomas that he ought not to be vexed with an accrual of interest on an old assessment in the circumstances of these proceedings derives from Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 in which Starke J at pp 30‑31 in the circumstances of that case observed that it appeared to his Honour “somewhat unfair and unjust that the appellant should have to pay heavy interest from a past date upon a sum ascertained for the first time by an assessment amended pursuant to the judgment of the Court”.
In these proceedings, the contention is that it would be unfair and unjust to Mr Thomas to vex him with an accrual of interest on an assessment in the circumstances of the considerations going to the operation of the relevant provisions of the income tax law.
As to the issue of validity, Mr Thomas contends that the assessment process was a tentative one and thus no definitive determination was made and thus the assessments are not valid. Mr Thomas says that in any event errors were made in the process rendering the assessments a nullity. The Commissioner issued alternative assessments for penalty in respect of the same income to Mr Thomas, MAPL and the trustee. The contention seems to be that issuing alternative assessments to these three entities in respect of the same income renders the penalty assessment made to Mr Thomas invalid because it is simply one of three possible assessments and in that sense tentative and non‑determinative.
In circumstances where the Commissioner found it necessary to issue three separate penalty assessments, it seems to be suggested by Mr Thomas that his position could not be said to: “not be reasonably arguable”. That follows, he says, because at least two other entities were thought by the Commissioner to be susceptible of penalty assessments in respect of the same income. Mr Thomas contends that no true analytical assessment process was undertaken in the determination of the penalty assessments with the result that the Commissioner issued penalty assessments to all three entities and thus the assessments were necessarily merely tentative or speculative.
It is well established, however, that the making of alternative assessments by the Commissioner of primary tax to a number of taxpayers in respect of the same income year and including in the assessable income of each taxpayer the same amount of income does not render the primary assessments tentative.
The same position prevails in relation to penalty assessments.
In respect of the second contention that errors occurred in the process of making the penalty assessments issued to Mr Thomas and thus the assessments are rendered a nullity, Mr Thomas has failed to identify the content of the contended errors.
I accept the Commissioner’s submission that Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation does not provide a basis for setting aside the penalty assessments.
The much more fundamental question is whether Mr Thomas acted reasonably and whether having regard to the relevant authorities that which is argued for is about as likely to be correct as incorrect or is more likely to be correct than incorrect.
I do not accept that simply because the judgment in the Supreme Court of Queensland proceedings came along later in time and after the moment in time when the tax returns were lodged by Mr Thomas in each income year that the Supreme Court proceedings are irrelevant to the question of what may or may not have been about as likely to be correct as incorrect at the time of lodging the tax returns.
Mr Thomas acted on the advice of Ms Abbott.
Mr Thomas and Ms Abbott took a position which was dependent upon a certain conception of franking credits and the way in which they might be treated. They were wrong about that. However, having regard to the views they formed; the position that was ultimately adopted by Applegarth J which was consistent with those views formed at the time by them; the difficulty each of the parties have had in coming to grips with their respective contentions about the structure, operation and application of the franking credits regime to the circumstances of the trustee, Mr Thomas and MAPL; and the statements in TR 92/13(OR) which are at least confusing (and not surprisingly withdrawn), I am satisfied that Mr Thomas acted reasonably and that in all the circumstances the position Mr Thomas and the trustee adopted was reasonably arguable.
The penalty assessments addressed to Mr Thomas are to be set aside and no further penalties imposed.
I propose to direct each of the parties to submit proposed final orders in disposition of each of the Federal Court matters. Similar orders will be made in the Administrative Appeals Tribunal concerning the matters before the AAT.
The Tribunal is to convene immediately after these Federal Court proceedings.
I certify that the preceding five hundred and eighty‑eight (588) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 31 August 2015
SCHEDULE 1
STATUTORY PROVISIONS
Income Tax Assessment Act 1936 (Cth)
Section 6(1)
In this Act, unless the contrary intention appears:
…
distribution, when used in a franking context, has the same meaning as in the Income Tax Assessment Act 1997.
…
frankable distribution has the same meaning as in the Income Tax Assessment Act 1997.
franked part of a distribution has the same meaning as in the Income Tax Assessment Act 1997.
franking credit has the same meaning as in the Income Tax Assessment Act 1997.
6B Income beneficially derived
(1)For the purposes of this Act, an amount of income derived by a person, not being a dividend paid by a company to the person as a shareholder in the company, shall be deemed to be attributable to a dividend:
(a) if the person derived the amount of income by reason of being the beneficial owner of the share in respect of which the dividend was paid; or
(b) if the person derived the amount of income as a beneficiary in a trust estate and the amount of income can be attributed, directly or indirectly, to the dividend or to an amount that is deemed, by any application or successive applications of this subsection, to be an amount of income attributable to the dividend.
Division 6 – Trust income
95 Interpretation
(1)In this Division:
…
net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 16C or Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.
A trust may be required to work out its net income in a special way by
Division 266 or 267 of Schedule 2F.
…
(2)For the purposes of this Division, a trust estate shall be taken to be a resident trust estate in relation to a year of income if:
(a) a trustee of the trust estate was a resident at any time during the year of income; or
(b) the central management and control of the trust estate was in Australia at any time during the year of income.
…
95A Special provisions relating to present entitlement
(1)For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary.
(2)For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate.
96 Trustees
Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.
97 Beneficiary not under any legal disability
(1)Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
(a) the assessable income of the beneficiary shall include:
(i)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
…
(2)A reference in this section to income of a trust estate to which a beneficiary is presently entitled shall be read as not including a reference to income of a trust estate:
(a) to which a beneficiary is deemed to be presently entitled by virtue of the operation of subsection 95A(2) where the beneficiary:
(i)is a natural person;
(ii)is a resident at the end of the year of income;
(iii)is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and
(iv)is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; or
(b) to which a beneficiary is presently entitled where the beneficiary:
(i)is a non‑resident at the end of the year of income;
(ii)is not a beneficiary to whom subsection (3) of this section or subsection 97A(1) or (1A) applies in relation to the year of income; and
(iii)is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate.
99A Certain trust income to be taxed at special rate
…
(4) Where there is no part of the net income of a resident trust estate:
(a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
(c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;
the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.
Note:If the trust estate’s net income includes a net capital gain, Subdivision 1115‑C of the Income Tax Assessment Act 1997 affects the assessment of the trustee.
(4A) Where there is a part of the net income of a resident trust estate:
(a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and
(c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;
the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.
Note:If the trust estate’s net income includes a net capital gain, Subdivision 115‑C of the Income Tax Assessment Act 1997 affects the assessment of the trustee.
101 Discretionary trusts
For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.
Income Tax Assessment Act 1997 (Cth)
Division 207 – Effect of receiving a franked distribution
…
Guide to Division 207
…
207‑5 Overview
(1)If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule:
(a)an amount equal to the franking credit on the distribution is included in the member’s assessable income; and
(b)the member is entitled to a tax offset equal to the same amount.
(2)In some cases a residency requirement must be satisfied for the general rule to apply.
(3)If a franked distribution is made to a member that is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member’s assessable income as mentioned in paragraph (1)(a).
(4)However, a tax offset in relation to that distribution is only available to an entity (who may be a partner, beneficiary or a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution.
Note:That share is a notional amount and the entity can have that share without actually receiving any of that franking credit or distribution.
…
Operative provisions
207‑15 Applying the general rule
(1)This Subdivision sets out, as a general rule, the tax effect of receiving a *franked distribution.
(2)This Subdivision does not apply to:
(a)a partnership or trustee to whom a *franked distribution is made (except a partnership or trustee that is a *corporate tax entity, or a trustee of a trust that is a *complying superannuation entity or *FHSA trust, when the distribution is made); or
(b)an entity to whom a franked distribution *flows indirectly.
Note:Subject to the other provisions in this Division, Subdivision 207‑B applies to an entity excluded from the application of this Subdivision because of this subsection.
…
207‑20 General rule – gross‑up and tax offset
(1)If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity’s assessable income in relation to the distribution under any other provision of this Act.
(2)The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution.
Subdivision 207‑B – Franked distribution received through certain partnerships and trustees
Guide to Subdivision 207‑B
207‑25 What this Subdivision is about
This Subdivision deals with an entity that receives a benefit of a franked distribution where:
(a) the distribution is made to a partnership or the trustee of a trust; and
(b) the benefit is received either directly or through other interposed partnerships or trusts.
The distribution is regarded as flowing indirectly to the entity under this Subdivision.
On the basis of a notional amount of the entity’s share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision.
…
Gross-up and tax offset
…
207‑35Gross‑up – distribution made to, or flows indirectly through, a partnership or trustee
Additional amount of assessable income
(1)If:
(a)a *franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and
(b)the entity is not a *corporate tax entity when the distribution is made; and
(c)if the entity is the trustee of a trust – the trust is not a *complying superannuation entity or *FHSA trust when the distribution is made;
the assessable income of the partnership or trust for that income year includes the amount of the *franking credit on the distribution.
(2)The amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of this Act.
Note:The amount will affect the income tax liability of a partner in the partnership, or a beneficiary or the trustee of the trust: see Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936.
Allocation of the additional amount of assessable income
(3)Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, if:
(a)a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and
(b)the assessable income of the partnership or trust for that year includes an amount (the franking credit amount) that is all or part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and
(c)the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or that trustee of the trust; and
(d)the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution;
then, the entity’s assessable income for that year also includes so much of the franking credit amount as is equal to its *share of the *franking credit on the distribution.
Example:A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust’s assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year.
There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust’s income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.
The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207‑55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P’s assessable income also includes the full amount of the franking credit (as P’s share of the franking credit on the distribution is $30 under section 207‑57). Q’s share of the net income therefore does not include any of the franking credit.
207‑45Tax offset – distribution flows indirectly to an entity
An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is:
(a)An individual; or
…
Key concepts
207‑50When a franked distribution flows indirectly to or through an entity
(1)For the purposes of this Subdivision, this section sets out the only circumstances in which a *franked distribution:
(a)flows indirectly to an entity (subsection (2), (3) or (4)); or
(b)flows indirectly through an entity (subsection (5)).
...
Beneficiaries
(3)A *franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if:
(a)during that income year, the distribution is made to the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and
(b)the beneficiary has this amount for that income year (the share amount):
(i)a share of the trust’s *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or
(ii)an individual interest in the trust’s net income for that income year that is covered by section 98A or 100 of that Act;
(whether or not the share amount becomes assessable income in the hands of the beneficiary); and
(c)the beneficiary’s *share of the distribution under section 207‑55 is a positive amount (whether or not the beneficiary actually receives any of that share).
…
207‑55 Share of a franked distribution
Object of section
(1)The object of this section is to ensure that:
(a)the amount of a *franked distribution made to a partnership or the trustee of a trust is allocated notionally amongst entities who *derive benefits from that distribution; and
(b)that allocation corresponds with the way in which those benefits were derived.
Note:An entity can derive a benefit from the distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207‑50.
(2)An entity’s share of a *franked distribution is an amount notionally allocated to the entity as its share of the distribution, whether or not the entity actually receives any of that distribution.
(3)That amount is equal to an entity’s share of the distribution as the focal entity in column 3 of an item of the table.
Note:An entity’s share of the distribution is based on the share of the distribution of each preceding intermediary entity through which the distribution flows, starting from the intermediary entity to whom the distribution is made.
This means that in some cases (see items 2 and 4), more than one item of the table will need to be applied to work out the share of the distribution of an ultimate recipient of the distribution.
Share of a franked distribution Item Column 1
For this intermediary entity and this focal entity:
Column 2
The intermediary entity’s share of the franked distribution is:
Column 3
The focal entity’s share of the franked distribution is:
1 … … … 2 … … … 3 the trustee of a trust is the intermediary entity and the trustee or a beneficiary of the trust is the focal entity if:
(a) a *franked distribution is made to the trustee; and
(b) the trustee or beneficiary has, in respect of the trust, a share amount mentioned in subsection 207‑50(3) or (4)
(a) if the trust has a positive amount of *net income for that year – the amount of the franked distribution; or
(b) otherwise - nil
so much of the amount worked out under column 2 of this item as is taken into account in working out that share amount 4 … … … 207‑57 Share of the franking credit on a franked distribution
(1)An entity’s share of a *franking credit on a *franked distribution is an amount notionally allocated to the entity as its share of that credit, whether or not the entity actually receives any of that credit or distribution.
(2)Work out that amount as follows:
Entity’s *share of the *franked distribution Amount of the *franking credit
on the *franked distributionx Amount of the *franked distribution
[Note: The presence of an * in the text denotes a reference to a defined term in the relevant legislation.]
5
7
4