XLZH and Commissioner of Taxation (Taxation)

Case •

[2025] ARTA 2154

•

3 October 2025

XLZH and Commissioner of Taxation (Taxation) [2025] ARTA 2154 (3 October 2025)

Decision and Reasons for Decision

Applicant:     XLZH

Respondent:  Commissioner of Taxation

Tribunal Number:                2024/4936

Tribunal:  Deputy President G Lazanas

Place:  Sydney

Date:  3 October 2025

Decision:The Tribunal sets aside the Commissioner’s objection decision dated 27 May 2024 and substitutes it with a decision that the Applicant’s objection dated 20 December 2023 be allowed.

......................[SGD]...............................................

Deputy President G Lazanas

Catchwords

TAXATION – CAPITAL GAINS TAX – pre-CGT asset – whether there was a change in majority underlying interests in a pre-CGT asset of a discretionary trust – meaning of majority underlying interests – meaning of underlying interest – meaning of ultimate owner – meaning of beneficial interest - tracing requirements – whether the Tribunal is satisfied, or thinks it reasonable to assume that at all times on and after 20 September 1985 and before a particular time majority underlying interests were had by ultimate owners who had majority underlying interests in the asset immediately before that day – statutory construction of subsection 149-30(2) – objection decision set aside and substituted with decision to allow objection

Legislation

Acts Interpretation Act 1901 (Cth) s 15AA

Income Tax Assessment Act 1936 (Cth) ss 160ZZN, 160ZZRR, 160ZZRS, 160ZZRT, 160ZZS

Income Tax Assessment Act 1997 (Cth) ss 6-5, 104-10, 108-5, Division 149, 960-100,

995-1

Income Tax Assessment Amendment (Capital Gains) Act 1986 (Cth) Taxation Administration Act 1953 (Cth) ss 14ZZE, 357-60 of Schedule 1 Tax Laws Improvement Act (No. 1) Act 1998 (Cth) Schedule 1

Taxation Laws Amendment Act (No.1) 1997 (Cth) Schedule 4 Taxation Laws Amendment (Self-Assessment) Act 1992 (Cth)

Cases

Eichmann v Commissioner of Taxation [2020] FCAFC 155 Gartside v IRC [1968] AC 553

Kennon v Spry (2008) 238 CLR 366

Khoury v Government Insurance Officer of New South Wales [1984] HCA 55; (1984) 165 CLR 622

Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 Swishette Pty Ltd v ACCC (2017) 149 FCR 483

The Commonwealth v Baume (1905) 2 CLR 405

Secondary Materials

Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986

IT 2340: Income tax: Capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date

TR 2006/10: Public Rulings

Statement of Reasons

Deputy President Lazanas

INTRODUCTION

  1. XLZH (the Applicant) asked for a private hearing pursual to s 14ZZE of the Taxation Administration Act 1953 (Cth) (TAA). Accordingly, it is necessary to keep her name confidential. I have also anonymised other entities related to her, including the Applicant’s family members to preserve the Applicant’s confidentiality, as required.

  1. The Applicant is a beneficiary of a discretionary trust (the Settlement Trust) that was settled prior to 20 September 1985, being the start date of the capital gains tax provisions in the income tax law. In the 2020 income year, the trustee of the Settlement Trust (the Trustee) disposed of shares in a company that is referred to in these reasons by the pseudonym Alpha Pty Ltd (Alpha).

  1. The proceedings concern whether the capital gain from the disposal of the shares in Alpha (the Alpha Shares) in the amount of $64,405,094 was correctly assessed to the Applicant, in particular, whether the capital gain ought to be disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). As will become clear, the resolution of that issue depends on the interpretation of certain provisions found in Division 149 of the ITAA 1997 which is concerned with, as the heading indicates, “When an asset stops being a pre-CGT asset”.

  1. The Commissioner of Taxation (the Commissioner) argued that, under Division 149 of the ITAA 1997, the Alpha Shares stopped being a pre-CGT asset on 10 June 2011 when, according to the Commissioner, the “majority underlying interests” in the Alpha Shares changed, with the result that the capital gain on their disposal should not be disregarded. The Commissioner submitted that the Tribunal ought to affirm the objection decision made by him on 27 May 2024 that disallowed the Applicant’s objection dated 20 December 2023.

  1. For the reasons set out below, I have decided that the Applicant’s construction of the relevant statutory provisions is preferable. Consequently, the Alpha Shares continued to be a pre-CGT asset, and the capital gain should be disregarded.

THE ISSUE FOR DETERMINATION

  1. The issue for determination is whether the Alpha Shares stopped being a pre-CGT asset of the Settlement Trust because of Division 149 of the 1997 Act. Specifically, the dispute concerns the statutory construction of subsection 149-30(2) of the ITAA 1997. That subsection requires the determination of whether the Tribunal, standing in the shoes of the Commissioner, is satisfied or thinks it reasonable to assume, that at all times from 20 September 1985 and before a particular time the majority underlying interests in the Alpha Shares were had by ultimate owners that had the majority underlying interests in the Alpha Shares before that day. If so, then subsection 149-30(1) of the ITAA 1997 applies as if that were in fact the case.

RELEVANT STATUTORY PROVISIONS

  1. As set out further below, the facts in this matter were not in dispute. It is appropriate, therefore, to begin with the relevant statutory provisions which are somewhat more problematic. The former statutory provisions are also set out further below, as they provide relevant context and because the Commissioner had issued a ruling in relation to their application.

Division 149 of the ITAA 1997

  1. Division 149 of the ITAA 1997 was enacted by the Tax Laws Improvement Act (No. 1) Act 1998 (Cth)1 and relevantly applies to the 1999 and subsequent income years. As stated above, Division 149 bears the heading “When an asset stops being a pre-CGT asset”. Subdivision 149-A has the heading “Key concepts” and sets out definitions which are, in turn, set out below.

  1. Subdivision 149-B is headed “When asset of non-public entity stops being a pre-CGT asset”. Broadly, Subdivision 149-B of the ITAA 1997 applies to those entities not listed in subsection 149-50(1) with which “Subdivision 149-C – When asset of public entity stops being a pre-CGT asset” is concerned. Amongst other types of entities, Subdivision 149-B is relevantly concerned with discretionary trusts. Subdivision 149-B is the relevant operative Subdivision in the present case and Subdivision 149-C does not apply.

  2. The starting point for the analysis is s 149-10 found in Subdivision 149-A which states: 149-10 What is a pre-CGT asset?

    A *CGT asset that an entity owns is a pre-CGT asset if, and only if:

    (a)the entity last acquired the asset before 20 September 1985; and

    (b)the entity was not, immediately before the start of the 1998-99 income year, taken under:

    (i)former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

    (ii)        Subdivision C of Division 20 of former Part IIIA of that Act;

    to have acquired the asset on or after 20 September 1985; and

    (c)the asset has not stopped being a pre-CGT asset of the entity because of this Division.

    Note:There are transitional rules for assets that stopped being pre-CGT assets under the Income Tax Assessment Act 1936: see section 149- 5 of the Income Tax (Transitional Provisions) Act 1997.


    1 Schedule 1 (item1), commencing on 22 June 1998: s 2(1).

  1. There was no dispute before me about paragraphs (a) and (b) of s 149-10 being satisfied. This was because it was not in contest that the Settlement Trust last acquired the Alpha Shares before 20 September 1985 and, therefore, satisfied paragraph (a) of s 149-10. It was also the Commissioner’s position that immediately before the start of the 1999 income year, the Settlement Trust was not taken to have acquired the Alpha Shares on or after 20 September 1985 under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) or Subdivision C of Div 20 of former Part IIIA of the ITAA 1936 (which satisfied paragraph (b) of s 149-10).

  1. The dispute concerns paragraph (c) of s 149-10, namely, whether the Alpha Shares stopped being a pre-CGT asset of the Settlement Trust because of Division 149 of the ITAA 1997. Specifically, the dispute is about whether the appointment of a corporate discretionary object to the Settlement Trust on 10 June 2011 had the effect that the “majority underlying interests” ceased from that time onwards. If so, the Alpha Shares ceased to be a pre-CGT asset and the assessment issued to the Applicant is correct.

  1. Section 149-25, contained in Subdivision 149-B, states:

    149-25 Which entities are affected

    This Subdivision provides for when a *CGT asset of an entity stops being a *pre-CGT asset (unless the entity is covered by section 149-50).

    Note:Subdivision 149-C deals with when an asset of such an entity stops being a pre-CGT asset.

  2. The term “CGT asset” is defined in s 108-5 as (a) any kind of property; or (b) a legal or equitable right that is not property. As stated above, the term “pre-CGT asset” is defined in s 149-10.

  1. Subsections 149-30(1), (1A) and (2), contained in Subdivision 149-B, relevantly provide:

    149-30 Effects if asset no longer has same majority underlying ownership

    (1)The asset stops being a *pre-CGT asset at the earliest time when *majority underlying interests in the asset were not had by

    *ultimate owners who had *majority underlying interests in the asset immediately before 20 September 1985.

    (1A)Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.

    (2)If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time *majority underlying interests in the asset were had by *ultimate owners who had *majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case.

  2. The phrase “majority underlying interests” is defined in subsection 149-15(1), as follows:

    149-15 Majority underlying interests in a CGT asset

    (1)Majority underlying interests in a *CGT asset consist of:

    (a)more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and

    (b)more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any

    *ordinary income that may be *derived from the asset.

  3. The phrase “underlying interest” is defined in subsection 149-15(2), in the following terms:

    (2)An underlying interest in a *CGT asset is a beneficial interest that an *ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset.

  4. The phrase “ultimate owner” is defined in subsection 149-15(3). Relevantly, the definition refers to, amongst other entities, “an individual” and “a company whose constitution prevents it from making any distribution, whether in money, property or otherwise to its members”. An “individual” means a natural person other than as a trustee: subsections 995-1(1), 960-100(1) and (3) of the ITAA 1997.

  1. It follows that a trust, which is an “entity” for taxation purposes under subsection 960-100(1) of the ITAA 1997, cannot be an “ultimate owner”, as defined. This means that a tracing exercise must be undertaken to determine the “ultimate owners”.

  1. Subsection 149-15(4) states when an “ultimate owner” indirectly has a beneficial interest in a CGT asset of another entity that is not an ultimate owner. Subsection 149-15(4) provides:

    (4)An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity

    if:

    a.the other entity were to distribute any of its capital; and

    b.the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

  2. Subsection 149-15(5) states when an “ultimate owner” indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity that is not an ultimate owner. Subsection 149-15(5) states:

    (5)An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if:

    a.the other entity were to pay that dividend, or otherwise distribute that income; and

    b.the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

  3. The term “ordinary income” is relevantly defined in subsection 6-5(1) of the ITAA 1997 to mean “income according to ordinary concepts”. It is also worth noting that both subsections 149-15(4) and (5) use the words “if”, “would receive”, “were to pay … or distribute”, and “were then successively paid or distributed”. These are words which convey conditions.

  1. It is clear from the above statutory provisions that the key concepts in both subsections 149- 30(1) and (2) are the “majority underlying interests” of “ultimate owners” in the relevant pre- CGT asset. Both subsections require the “majority underlying interests” of “ultimate owners” in the asset immediately before 20 September 1985 to be compared with the “majority underlying interests” of “ultimate owners” after 20 September 1985 and up to the time in question, namely, when the relevant CGT event happens. It is also evident from the above definitions that “majority underlying interests” refers to the “beneficial interests” that “ultimate owners” have in the asset itself and in any ordinary income that may be derived from the asset. There is, however, no definition of the phrase “beneficial interests” in the statutory provisions and it is necessary to address this in the analysis of the issue.

Former s 160ZZS of the ITAA 1936

  1. When the capital gains tax provisions were introduced in 1985 as Part IIIA of the ITAA 1936, assets owned at the announcement date were grandfathered from the new capital

gains tax provisions, subject to the application of Division 20 of Part IIIA (which relevantly contained s 160ZZS being the predecessor provision to s 149-30).

  1. The structure of former s 160ZZS and related provisions was similar to the provisions in Division 149 that are the subject of analysis here. Former s 160ZZS was part of the original capital gains tax provisions added to the ITAA 1936 in 1986.2 Both, former s 160ZZS of the ITAA 1936 and its replacement in the form of s 149-30 of the ITAA 1997, have tested the continuity of “majority underlying interests” by reference to the concept of a beneficial interest in the asset and in the income that may be derived from the asset.

  1. As enacted, former s 160ZZS relevantly stated:

When asset acquired

160ZZS (1) For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

(2)   …

(3)         In this section, “majority underlying interests” and “underlying interest”, in relation to an asset, have the same meanings as those expressions have in relation to property in Subdivision G of Division 3 of Part III.

  1. The Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 (the Explanatory Memorandum), which led to the insertion of former Part IIIA into the ITAA 1936, relevantly provided as regards Division 20 of Part IIIA, as follows:

    [Division 20] is intended to close potential avenues for avoidance of tax through arrangements to take advantage of the general limitation of Part IIIA to capital gains on assets acquired on or after 20 September 1985. One such case is where there is a substantial change in ownership interests in an entity on or after 20 September 1985 which could result in the new beneficial owners effectively not being subject to the tax on capital gains. Where a change occurs on or after 20 September 1985 in the beneficial ownership of an asset acquired before 20


    2 Income Tax Assessment Amendment (Capital Gains) Act 1986 (Cth) s 19, commenced on 24 June 1986: s 2. Section 160ZZS was repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 (Cth), Sch 1 (item 153), with effect on 14 September 2006.

September 1985, that asset will be deemed to have been acquired on or after 20 September 1985 unless, following the change, there is, broadly stated, a continuity of beneficial ownership of more than 50%. The Division will also apply to prevent potential avoidance of the tax on capital gains where instead of an entity disposing of an asset that it acquired on or after 20 September 1985, the beneficial owners dispose of their interests in the entity which were acquired before 20 September 1985.

  1. There were various amendments to former s 160ZZS in 1992 and in 1997. Amongst other amendments in 1997, ss 1600ZZRR, 160ZZRS and 160ZZRT were introduced and provided, as follows:3

    160ZZRR

    Interpretation

    …

    majority underlying interests, in relation to an asset, means more than one-half of:

    (a)the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and

    (b)the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset.

    …

    underlying interest, in relation to an asset, means a beneficial interest that a natural person holds (whether directly or indirectly) in the asset or in any income that may be derived from the asset.

    …

    160ZZRS Indirect beneficial interest in asset

    A natural person is taken to hold an indirect beneficial interest in an asset of an entity (other than another natural person) for the purposes of this Division where:

    (a)if the entity were to distribute any of its capital; and

    (b)in the case where another entity or other entities are interposed between the first-mentioned entity and the person-if the capital were


    3 Taxation Laws Amendment Act (No 1) 1997 (Cth), Schedule 4, commencing on 20 January 1997:
    s 2(8).

then distributed by the other entity or successively distributed by each of the other entities; the person would have the right to receive any of the capital for the person's own benefit.

160ZZRT Indirect beneficial interest in income derived from asset

A natural person is taken to hold an indirect beneficial interest in income that may be derived from an asset of an entity (other than another natural person) for the purposes of this Division where:

(a)if the entity were to pay a dividend or otherwise distribute any of its income; and

(b)in the case where another entity or other entities are interposed between the first-mentioned entity and the person-if the dividend or income were then paid or distributed by the other entity or successively paid or distributed by each of the other entities; the person would have the right to receive any of the dividend or income for the person's own benefit.

  1. It can be seen from the above extracts that the grandfathering provided for at the time of the introduction of the capital gains tax provisions in former s 160ZZS of the ITAA 1936 continues in Subdivision 149-B of the ITAA 1997. It is also clear that this is achieved through the similar concepts of “majority underlying interests”, “underlying interest” and the tracing of direct and indirect beneficial interests in an asset and in the income that may be derived from an asset of an entity.

THE FACTUAL BACKROUND AND EVIDENCE

  1. The following findings of facts are drawn from the respective Statements of Facts, Issues and Contentions of the parties as well as the T-Documents4, including Supplementary T- Documents5 filed by the Commissioner and, additionally, evidence which was before the Tribunal. This comprised of the following documents, most of which were contained in an agreed Hearing Book:

    (a)Email from Mr Michael Qin of the Australian Taxation Office dated 15 October 2024 setting out paragraphs in the Applicant’s Statement of Facts, Issues and Contentions agreed to by the Commissioner;6


4 Exhibit A1; Hearing Book pp 1-380.

5 Exhibit A2. Hearing book pp 415-420.

6 Exhibit A3. Hearing Book, pp 391-392.

(b)Witness statement of the Applicant’s husband (the Husband) affirmed on 2 December 2024 (Husband’s Statement) together with exhibits;7

(c)Witness statement of a Chartered Accountant engaged by the Applicant and her family affirmed on 3 December 2024 together with exhibits;8

(d)Witness statement of Ms Fiona Moore sworn on 27 May 2025 together with exhibits;9 and

(e)Financial Statements of the Settlement Trust for the years ended 30 June 2009 to 2021 inclusive.10

  1. The Husband’s witness statement recounted the relevant events and exhibited the relevant documents. In her witness statement, Ms Moore set out the relevant distributions made by Alpha and Beta and explained a number of relevant calculations. She also exhibited a spreadsheet file with a series of worksheets that traced the flow of dividends declared or paid by Alpha.

  1. The facts were straightforward and not in dispute, and are set out below in chronological order. Neither the Husband nor any other deponents were required for cross-examination.

The Settlement Trust

  1. In August 1977, the Settlement Trust was settled by deed of trust in the State of New South Wales (the Trust Deed).11 The Trustee of the Settlement Trust when it was settled was X Pty Ltd.

  1. The Husband is the “nominator” (or the appointor). The Husband, as the nominator of the Settlement Trust, alone controlled who was to be appointed as a beneficiary of the Settlement Trust but could not nominate himself as a beneficiary.12


7 Exhibit A4. Hearing Book, pp 421-1159.

8 Exhibit A5. Hearing Book, pp 1160-1470.

9 Exhibit A6 (not included in the Hearing Book).

10 Exhibit A7. Hearing Book pp 1166-1286.

11 Exhibit A4, Husband’s witness statement, [17]; Hearing Book p 426.

12 Exhibit A4, Husband’s witness statement, [18]. Hearing book p 426.

  1. Clause 1(c) of the Trust Deed relevantly defines “beneficiaries” as the following:

    (i)The persons and/or companies listed and described as such beneficiaries in the Schedule hereto;

    (ii)Any such persons or limited liability companies as the nominator … shall by notice in writing to the trustee before the vesting date appoint to be beneficiaries for the purposes of this deed

    not being;-

    the nominator; …13

  2. The beneficiaries as at settlement of the Settlement Trust who were listed in the abovementioned Schedule to the Trust Deed were the family members of the Applicant and the Husband. They were named, together with a description of their relationship to the Husband, where applicable. They were the Husband’s son, daughter, any other children of the Husband born thereafter, any grandchildren or great-grandchildren, the Applicant, any spouses of the Husband’s children, the Husband’s brother and sister and a named charitable trust.14 The Trust Deed provided for an open class of beneficiaries but at no point in time was the Husband a beneficiary of the Settlement Trust as he was not permitted to be appointed under the terms of the Trust Deed.

  1. The Settlement Trust is a discretionary trust as to trust capital and income. Clauses 3 and 4 of the Settlement Trust Deed provide as follows in relation to distributions of income and capital (bold added):

    Until the vesting date the trustee shall stand possessed of the trust fund upon trust as to the income derived therefrom during each year for such one or more of the beneficiaries living or existing at the time of the determination hereinafter mentioned to the exclusion of the other or others of them and in such shares and proportions as the trustee in his absolute discretion shall at any time during the year determine and to the intent that any beneficiary in whose favour such determination is made shall be absolutely and presently entitled to the share of income allocated to him her or it pursuant to such determination PROVIDED HOWEVER that in default of any determination being made by the trustee as to the distribution of the income derived from the trust fund for any year or any part


    13 Exhibit A4, Husband’s witness statement, exhibit H-9; Hearing Book p 719.

    14 Exhibit A4, Husband’s witness statement, [20]. Hearing book p 426.

of that income prior to midnight on the last day of that year the trustee shall hold that income or that part thereof (as the case may be) upon trust for each of the beneficiaries then living or existing in equal shares as tenants in common to the intent that such beneficiaries shall be absolutely and presently entitled.

The trustee shall on the vesting date stand possessed of the capital of the trust fund or such part of it as then remains in his hands upon trust for such one or more of the beneficiaries then living or in the case of a company then in existence in such shares and proportions as the trustee in his absolute discretion may on or prior to the vesting date determine and in default of any such determination as aforesaid being made the trustee shall on the vesting date stand possessed of the trust fund upon trust for all of the children of the nominator living at the vesting date in equal shares as tenants in common absolutely PROVIDED NEVERTHELESS: -…

The Business

  1. In or around July 1979, the Applicant and the Husband founded a business (the Business).15 From its inception to 1 July 1988, the Business was conducted by a company referred to in these reasons as X Pty Ltd. At all relevant times, the directors of X Pty Ltd were the Applicant and the Husband and they each held one share being all the shares on issue.

Incorporation of Alpha and historical sale of the Business by X Pty Ltd to Alpha

  1. In mid-June 1988, a new company – Alpha – was incorporated. On incorporation, the Applicant and the Husband held the two subscriber shares in Alpha. In or around late June 1988, the shares in Alpha were redeemed and X Pty Ltd as Trustee for the Settlement Trust acquired the two ordinary shares. From late June 1988 until late July 2019 the directors of Alpha included the Applicant and the Husband.

  1. On 1 July 1988, the Business assets (except for debtors, stock and fixed assets) were transferred by X Pty Ltd as Trustee for the Settlement Trust to Alpha which then operated the Business.16


15 Exhibit A4, Husband’s witness statement, [6]. Hearing book p 425.

16 Exhibit A4, Husband’s witness statement, [8]; Hearing Book p 425. For completeness, it is noted that the transfer of the Business from the Trustee to Alpha is the subject of a private binding ruling issued by the Commissioner dated 14 April 2022. The Commissioner concluded that the shares in Alpha acquired by the Trustee were deemed to have been acquired before 20 September 1985 pursuant to former subsection 160ZZN(7) of the ITAA 1936; Exhibit A4, Husband’s witness statement, [9]; Hearing Book p 425.

Changes to beneficiaries of the Settlement Trust in 2009 and 2010

  1. In 2009 and 2010, there were other discretionary beneficiaries appointed to the Settlement Trust. The Commissioner does not contend those appointments caused the Alpha Shares to stop being pre-CGT assets. Accordingly, I have not set out all these changes to the beneficiaries of the Settlement Trust. It suffices to note that these additions were all members of the Applicant’s and the Husband’s family, or entities in which the shares were held by members of that family and permitted by the terms of the Trust Deed.

Appointment of Beta as beneficiary of the Settlement Trust on 10 June 2011

  1. On 10 June 2011, a company which I refer to as Beta Pty Ltd (Beta) was appointed as a beneficiary of the Settlement Trust. The Commissioner argued that the appointment of this beneficiary caused the “majority underlying interests” in the asset of the Settlement Trust (the Alpha Shares) to stop being a pre-CGT asset.

  1. The Applicant and the Husband have at all relevant times been the directors of Beta. The sole share on issue in Beta was at all relevant times held by another company being Delta Pty Ltd (Delta) as trustee for the Delta Trust. Beta is not prevented from distributing to its member (Delta, as trustee for the Delta Trust). That is, Beta is not an “ultimate owner” as defined.

  1. Delta was incorporated in April 2011 and had two ordinary shares on issue which were held at all relevant times by the Applicant and the Husband who have also been the directors of Delta. The Delta Trust is a hybrid trust in which there are “unit holders”, and the Applicant and the Husband were at all relevant times the two unit holders. The other individual discretionary objects of the Delta Trust were all family members of the Applicant and the Husband, or entities which can benefit those family members. The Applicant and the Husband control the distributions of the Delta Trust. As the Delta Trust cannot be an “ultimate owner” as defined, it is necessary to additionally trace or look through Beta and the Delta Trust to determine the “ultimate owners” of the asset of the Settlement Trust (the Alpha Shares).

  1. Clause 4 of the deed of trust establishing the Delta Trust executed in May 2011 relevantly provides as follows in relation to distributions of income (bold added):

TRUST AS TO INCOME

1.    Subject to:

i)     clause 49;

ii)the rights, entitlements and restrictions attaching to any Unit issued after the date of this deed; and

iii)the prior written consent of the Appointor and all Unit Holders;

the Trustees may prior to the Vesting Day at any time and from time to time during any Accounting Period and without creating a Perpetuity determine all or any one or more of the following:

(a)  to pay apply or set aside all or any part or parts of the income of the Trust Fund for such Accounting Period for any one or more of:

(1)the Unit Holders;

(2)the Trustees of any Eligible Trust (acting in such capacity);

(3)any Eligible Corporation; or

(4)any other person who from time to time shall be in existence or living prior to the Vesting Day and come within the definition of “Beneficiary” in clause 1 of this deed at the time of the determination;

…

2.    The following provisions shall apply to any determination made pursuant to clause 4(1):

…

(e) the Trustees shall have an absolute discretion in the making of any    determination and shall not be required to assign any reason therefor;…

Further changes to beneficiaries of the Settlement Trust in 2011 and 2014

  1. In September 2011 and in 2014, various grandchildren of the Applicant and the Husband were also added as discretionary beneficiaries of the Settlement Trust. Relevantly, each of these additions were within the permitted classes of beneficiaries under the terms of the Trust Deed. They were members of the Applicant’s and the Husband’s family and the Commissioner did not separately take issue with those additions. As stated above, the Commissioner’s focus was on the appointment of Beta as a discretionary object on 10 June 2011.

  1. For completeness, the Husband has never appointed a beneficiary to the Settlement Trust who was not either a member of his family or an entity controlled by a member of his family.17

  1. The only beneficiary of the Settlement Trust which was not a member of the family or relevantly owned by them is the named charitable trust in the Trust Deed. The charitable trust no longer exists. In his witness statement, the Husband stated that the charitable trust was included in the unlikely event no members of his family would be alive to benefit from distributions from the Settlement Trust.

Disposal of the Alpha Shares

  1. On 19 July 2019, the Trustee disposed of its shares in Alpha to an unrelated third party for in excess of $100,000,000 at which time the Applicant and the Husband resigned as directors.18 The disposal of the shares in Alpha gave rise to CGT Event A1 for the purposes of s 104-10 of the ITAA 1997.

Distribution to the Applicant from the Settlement Trust

  1. In the 2020 income year, the Trustee of the Settlement Trust distributed an amount of

    $64,405,094 to the Applicant as a beneficiary of the Settlement Trust. It was common ground that that distribution was in connection with the proceeds of the disposal of the Alpha Shares.

Distributions to Beta from the Settlement Trust

  1. Since the appointment of Beta as a beneficiary of the Settlement Trust on 10 June 2011 up to and including the 2020 income year, the Husband has not, in any income year, received or been entitled to receive an amount equal to or greater than 50% of income referable to dividends paid in respect of the Alpha Shares.


17 Exhibit A4, Husband’s witness statement, [24]. Hearing Book p 427.

18 Exhibit A4, Husband’s witness statement, [12], exhibit H-5; Hearing Book p 496.

  1. In respect of the 2020 income year, the Applicant was entitled to the whole of the trust income of the Settlement Trust, including the abovementioned capital gain arising from the Trustee’s sale of the Alpha Shares, and the Delta Trust reported no income.

  1. The following table shows that dividends of $24,094,000 in respect of the 2009 to 2019 income years were paid by Alpha to the Settlement Trust, and that between 44% and 75% of those amounts were distributed to Beta. This was equivalent to 63% across those income years.19

Alpha dividends received by the Settlement Trust distributed to Beta and the Husband’s

family members

Year

Alpha dividends paid to the Settlement Trust

A

Alpha dividends distributed to Beta bythe Settlement Trust

B

Percentage of Alpha dividends distributed to Beta

C = B/A

Alpha dividends distributed to family beneficiaries by the Settlement Trust

D

Percentage of Alpha dividends distributed to family beneficiaries

E= D/A
2009 237,000 - - 237,000 100%
2010 1,097,000 - - 1,097,000 100%
2011 1,200,000 805,680 67% 394,320 33%
2012 1,320,000 845,691 64% 474,309 36%
2013 1,500,000 656,476 44% 843,524 56%
2014 2,640,000 1,580,589 60% 1,059,411 40%
2015 4,100,000 3,082,578 75% 1,017,422 25%
2016 3,600,000 2,571,197 71% 1,028,803 29%
2017 3,600,000 2,629,064 73% 970,936 27%
2018 2,400,000 1,652,509 69% 747,491 31%
2019 2,400,000 1,400,172 58% 999,828 42%

  1. Beta did not distribute all of the income which it received to the Delta Trust. Excluding the dividends retained by Beta, of the amounts making up for each year the total remaining dividends that were otherwise distributed of $19,160,044, the following table shows the amount for a given year that the Husband received up until the 2019 income year.20


19 The table was contained in Exhibit A6, the witness statement of Ms Fiona Moore, [48].

20 This table was contained in Exhibit A6, the witness statement of Ms Fiona Moore, [50].

Alpha dividends ultimately paid to family members

Year

Alpha dividends paid to ultimate owners

L= D+G

Alpha dividends ultimately paid to Applicant and family members other than the Husband

M= D+I

Proportion of        Alpha dividends ultimately paid to the Applicant and     family members other     than the Husband

N =M/L

Alpha dividends ultimately paid to the Husband

O= H

Proportion Alpha dividends ultimately paid to the Husband

P= O/L
2009 237,000 237,000 100% - 0%
2010 1,097,000 1,097,000 100% - 0%
2011 394,320 394,320 100% - 0%
2012 614,309 474,309 77% 140,000 23%
2013 993,524 843,524 85% 150,000 15%
2014 2,259,411 1,409,411 62% 850,000 38%
2015 2,217,422 1,367,422 62% 850,000 38%
2016 2,228,803 1,378,803 62% 850,000 38%
2017 2,170,936 1,320,936 61% 850,000 39%
2018 3,347,491 3,347,491 100% - 0%
2019 3,599,828 3,599,828 100% - 0%
Total 19,160,044 15,470,044 81% 3,690,000 19%

  1. In summary, the Husband received either 0% or between 15% and 39% of the distributed dividends (or 19% across all the 2009 to 2019 income years).

THE APPLICANT’S SUBMISSIONS

  1. The Applicant submitted that s 149-30 requires the quantification of the “underlying interests” held by individuals immediately before 20 September 1985, and at subsequent times, to determine who are the “ultimate owners” of those interests. Moreover, to identify whether there has been a change in “majority underlying interests” in an asset indirectly, as per the express terms of subsections 149-15(4) and (5), a tracing exercise is required to identify what an individual “would receive” either directly from another entity (paragraph (a) of each subsection) or through interposed entities (paragraph (b) of each subsection). This is based on a statutory hypothesis because the statutory provisions refer to “if” the asset- holding entity “were to … distribute” any of its capital or income, and the capital and or

income were then successively distributed by each entity interposed between the asset- holding entity and the ultimate owners.

  1. In the case of an asset held by an “entity” that is a discretionary trust as was the case here with respect to the Settlement Trust holding the Alpha Shares, the Applicant submitted that no beneficiary has any interest in the Alpha Shares and, therefore, in the capital or the income of the Settlement Trust and so cannot hold a direct beneficial interest. The Applicant submitted that it also cannot be hypothesised for the purposes of subsections 149-15(4) or

    (5) what income or other amounts any object of the trust would receive (directly or indirectly). This is because under the general law a discretionary object has no interest in trust property or income unless and until the trustee exercises their discretion to appoint trust property or income to the object or fails to exercise that discretion in circumstances where there are takers in default.

  1. The Applicant relied on the following dicta in Gartside v IRC [1968] AC 553 (bold added):

    I think that this idea of a group or class right must have arisen in this way. Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes, you cannot tell what any one of the beneficiaries will receive until the trustees have exercised their discretion. But you can say with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income. You can have an equation x + y + z=100 although you do not yet know the value of x or y or z. And that may lead to important results where the trust is of that character.

    (at 606 per Lord Reid)

    ..

    I have said that no one of the discretionary beneficiaries had at the relevant time any right to receive any income, but this is not the whole of the matter. It is also necessary to appreciate that the discretionary beneficiaries taken together had no right to receive any or, a fortiori, all of the income. Two of them were infants but even if they had been of age they could not, with their parents, have called upon the trustees to pay them the income of any year; the reason being that the trustees had power to accumulate so much as they did not distribute, which might be the whole, for the possible benefit of persons unborn. To describe them as “the only people who could during the relevant period obtain any benefit from the property or have any beneficial enjoyment of it” may be misleading, unless one bears in mind that, singly or collectively, they had no right in any year to receive a penny.

(at 615 per Lord Wilberforce)

…

It must follow that the discretionary beneficiaries under the settlement had no “interest” within the meaning of the section: no single member of this class had any right to any income: even if one considers them collectively they had no right to any income because the trustees could accumulate the whole of it. This makes it unnecessary and, indeed, otiose to consider whether the discretionary beneficiaries had “interests in possession,” but the use of these words in the subsection do provide a cross check as to the meaning of “interest.” As is well illustrated by the judgments in the courts below, it is exceedingly difficult to fit the rights of the discretionary beneficiaries either into the category of “interests in possession” or into its statutory counterpart “interests in expectancy”: to say that, as it is not one, it must be the other is not a very satisfactory solution (the categories though mutually exclusive need not be exhaustive) especially if this technique can be used—as it has been used by the courts below—either way. Rather, the difficulty of giving either answer endorses the conclusion that this is not an “interest,” within the meaning of the section at all.

(at 616-617 per Lord Wilberforce)

…

No doubt in a certain sense a beneficiary under a discretionary trust has an interest: the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion “fairly” or “reasonably” or “properly” that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund’s income: it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed…

(at 617-618 per Lord Wilberforce)

  1. The Applicant also relied on Swishette Pty Ltd v ACCC (2017) 149 FCR 483 (Swishette) at [26] where the Full Federal Court held that a person “as an object of the discretionary trust, has no legal of beneficial interest but only the right to due consideration and due administration of the Trust”, citing amongst other cases Kennon v Spry (2008) 238 CLR 366 at 393 [74]-[75]. The Full Federal Court in Swishettte continued at [26]:

… Objects of a discretionary trust have no beneficial interest in the property of the trust and their only interest is characterised as a mere expectancy coupled with a right to due administration of the trust. Whilst the right to due administration includes a right to due consideration in the exercise of the trustee’s discretionary power to distribute capital and income, until the exercise of the trustee’s power in favour of [the person], [the person] has no entitlement to such capital or income. …

  1. The Applicant reasoned that it follows that it would never be possible in the case of a discretionary trust to satisfy the continuity of the “majority underlying interests” test in subsection 149-30(1) as there are no identifiable direct or indirect beneficial interests in the assets of a discretionary trust. As will become clear from my consideration of the issue below, I agree with the Applicant’s analysis under the general law. It is well established that objects of a discretionary trust have no beneficial interest in the property held on trust. However, in my view, the statutory provisions require a different analysis as evident from the conditions contained in subsections 149-15(4) and (5) and the way in which subsection 149-30(1) operates.

  1. The Applicant also submitted that it followed that the mere appointment of a discretionary object, relevantly here the appointment of Beta on 10 June 2011, does not result in any change in “majority underlying interests”. The existence of a new discretionary object does not mean that the hypothetical distributions the subject of subsections 149-15(4) and (5) would be paid to that new object. The addition of an object only raises the possibility that such an object may benefit from the capital or income of the trust.

  1. Notwithstanding the said difficulties with the application of the statutory provisions to discretionary trusts, the Applicant submitted that it is clear that Division 149 is intended to be capable of applying to determine whether an asset of a discretionary trust has either continued to be or stopped being a pre-CGT asset. This was evident from s 149-25 which relevantly applies to an “entity” generally. As stated above, the word “entity” is defined by subsection 995-1(1) as having the meaning given by subsection 960-100(1), and that includes a “trust” for tax purposes: per paragraph (f) of subsection 960-100(1). As such, Subdivision 149-B must, therefore, be capable of applying and determining whether an asset of a discretionary trust is a “pre-CGT asset”.

  1. The Applicant argued that denying pre-CGT asset status simply because of the impossibility in determining who “would receive” a distribution and with it the impossibility in applying

subsection 149-30(1) is an outcome inconsistent with the purpose and object of Subdivision 149-B. The Applicant also submitted that the circumstances in which the mischief to which Subdivision 149-B is directed have not arisen. The evident mischief is that post-20 September 1985, new beneficial owners obtain underlying interests in the asset, with those persons holding a greater than 50% interest in the asset than the original owners, but with those new owners benefiting from the trust having held the asset pre-20 September 1985. The Applicant referred, in this regard, to the extract of the Explanatory Memorandum set out at [27] above where it was stated this “could result in the new beneficial owners effectively not being subject to the tax on capital gains”.

  1. Given Subdivision 149-B must be capable of being applied to assets of discretionary trusts, it follows, according to the Applicant, that the statutory purpose is achieved by subsection 149-30(2) as that addresses the harshness arising from the said impossibility of undertaking the tracing exercise required by subsection 149-30(1). The Applicant argued that subsection 149-30(2) ensures the purpose of Subdivision 149-B is achieved, including for pre-CGT assets of discretionary trusts, effectively providing for the grandfathering of those assets. The Applicant submitted that the construction of the provisions of Subdivision 149-B which best gives effect to its purpose should be preferred. The Applicant relied on Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 at 280-281 [11] and, in addition, s 15AA of the Acts Interpretation Act 1901 (Cth).

  1. The Applicant submitted that where subsection 149-30(2) is engaged, the consequence is that “subsections (1) and (1A) apply as if that [the majority underlying interests in the asset were had by ultimate owners who had majority underlying interests at all times] were in fact the case”. That is, the precise effect of subsection 149-30(2) is to deem continuity of “majority underlying interests” and, therefore, grandfathering of the pre-CGT asset. As set out above, subsection 149-30(2) requires a state of satisfaction by the Commissioner or the Tribunal, or their reaching a view that an assumption is reasonable about specified matters.

  1. The Applicant also argued that arriving at the state of satisfaction or reasonable assumption in subsection 149-30(2) involves a different exercise to that prescribed by subsection 149-

    30(1). It requires consideration of whether the “ majority underlying interests” have changed having regard to the entire period between immediately before 20 September 1985 and the “particular time” to which subsection 149-30(2) refers. The Commissioner claimed the time and day was 10 June 2011, when Beta was added as a discretionary

beneficiary of the Settlement Trust. The Applicant also argued that in applying subsection 149-30(2), it is permissible, if not necessary, to have regard to the “majority underlying interests” collectively across the entire period the subject of that subsection, which is from immediately before 20 September 1985 to a “particular time”. This followed from the use of the words “at all times”.

  1. Finally, the Applicant pointed out that her interpretation of the statutory provisions is how the Commissioner administered the former statutory provision, s 160ZZS of the ITAA 1936, in respect of discretionary trusts. In this regard, the Applicant noted that the Commissioner’s ruling, IT 2340: “Income tax: Capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date” (IT 2340), relevantly provides:

    5.  In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

    6.  Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

    7.   In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

    8.   On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

    RESPONDENT’S SUBMISSIONS

  1. The Commissioner’s position on whether discretionary beneficiaries can have a relevant “beneficial interest” differed from that of the Applicant. The Commissioner stated that if the

Applicant were right as to her interpretation, then the Alpha Shares were “deemed to have been acquired by the taxpayer after [19 September 1985]”, under former subsection 160ZZS(1) because, there were no “majority underlying interests” or “beneficial interests” in the Alpha Shares held by “natural persons”. It would have been impossible under former subsection 160ZZS(1) for the Commissioner to be “satisfied or to think it reasonable to assume” that the opposite was the case, which was the only way to avoid the deeming of post-CGT status. The result would also be that the cost base of the Alpha Shares would be the lower market value that they had in 1985, and the capital gain would be higher. However, the Commissioner stated he did not maintain that the Alpha Shares lost their pre- CGT status in 1985, and he was not seeking to impose tax on the larger capital gain that would result.

  1. The Commissioner considered it open to adopt the position, contrary to that of the Applicant, that beneficiaries of a family discretionary trust can, all together, have “beneficial interests” and, therefore, “majority underlying interests”. On this basis, the Commissioner argued that continuity of “majority underlying interests” for the purposes of Subdivision 149-B where the trust continues to be administered for the benefit of the same family members both pre-CGT and throughout the test period can be measured.

  1. Accordingly, the Commissioner considered that the Alpha Shares remained pre-CGT assets until 10 June 2011 when the Husband (who was not previously a direct or indirect beneficiary of the Settlement Trust) became a person possibly able to benefit from the Alpha Shares, indirectly via Beta and the Delta Trust. The Commissioner claimed that the Alpha Shares ceased to be a pre-CGT asset for the purposes of subsection 149-30(1) on that date.

  1. Moreover, the Commissioner was not satisfied and did not think it reasonable to assume that the requirements of subsection 149-30(2) were met and argued that it was additionally not possible for the Tribunal to be satisfied or think it reasonable to assume that the requirements of subsection 149-30(2) were met. The Commissioner argued that the Applicant’s interpretation of that subsection effectively operated to reverse the result arising from the application of subsection 149-30(1) and that that was not appropriate, in all the circumstances. According to the Commissioner, subsection 149-30(2) cannot do that because the matter as to which the Commissioner or the Tribunal can be satisfied of, or think it reasonable to assume, is that the “majority underlying interests” have remained the same over the relevant period of time. Where discretionary beneficiaries are incapable of

having “beneficial interests” (as contended by the Applicant), the Commissioner maintained they are also incapable of having “majority underlying interests” or continuity thereof under subsection 149-30(2). Therefore, it followed that the Commissioner (and the Tribunal) would not be able to be satisfied or think it reasonable to assume otherwise.

  1. The Commissioner further submitted that the Applicant treated subsection 149-30(2) as if it were a broad discretion to disregard the operation of subsection 149-30(1) but that it was expressed very differently to other income tax law provisions providing for the exercise of a discretion where, for example, the general rule would be unreasonable or if there were special circumstances. The Commissioner argued subsection 149-30(2) did not contain that kind of broad discretionary power.

  1. The Commissioner noted that the Applicant incorrectly wished to resort to a test based on to whom dividend distributions had been paid. The Commissioner stated that the pattern of distributions is simply not the test; rather, the statutory provisions turn on the key concepts of “beneficial interests” and “majority underlying interests” and, therefore, only hypothetical distributions of income and corpus were to be considered in reliance on subsections 149- 15(1), (4) and (5).

  1. The Commissioner also emphasised that the Applicant’s position relied on the view that discretionary trusts must be able to satisfy continuity of majority underlying interests for pre- CGT purposes and that pre-CGT status would only be lost where tax avoidance was established. The Commissioner submitted that the legislative context does not support that proposition because although the mischief is addressed by the legislation, the application of the section does not turn on a finding as to a tax avoidance purpose.

  1. Finally, the Commissioner argued that while the Applicant referred to IT 2340, it was not a binding ruling for the purposes of the TAA. The Commissioner added that although IT 2340 gives examples, it is not intended to be an exhaustive description of the operation of the legislation. The Commissioner submitted that the additional work that subsection 149-30(2) does over and above subsection 149-30(1) is to enable the Commissioner to conclude based on factual uncertainty, that the requisite continuity of “majority underlying interests” does indeed exist. The Commissioner gave the following as examples of its operation:

    Where the asset is held by a company and there is 3-year period within the total test period for which the share registers cannot be found. Under

    subsection 149-30(2), the Commissioner may look at the dividends and other distributions paid in those 3 years and other information to satisfy himself that the share ownership did not change in that 3-year period in order to be satisfied and think it reasonable to assume the requisite continuity existed. The Commissioner noted that evidence of distributions may in some cases indirectly reveal whether one can be satisfied that “majority underlying interests” were maintained.

    A taxpayer may be able to find the trust deed for the trust that holds the asset but only locate 2 of the 4 amending deeds that were executed. Under subsection 149-30(2), the Commissioner may look at the trust distributions, and other information, to be satisfied and think it reasonable to assume that the missing amending deeds did not effect a break in the relevant continuity.

  2. In summary, the Commissioner was of the view that subsection 149-30(2) does not do what the Applicant contended for, as a matter of statutory construction, which is to contradict a result arrived at with certainty under subsection 149-30(1).

IS THE TRIBUNAL SATISFIED OR THINK IT REASONABLE TO ASSUME THAT MAJORITY UNDERLYING INTERESTS IN THE ALPHA SHARES WERE HAD BY ULTIMATE OWNERS WHO HAD MAJORITY UNDERLYING INTERESTS IN THE ALPHA SHARES IMMEDIATELY BEFORE THE RELEVANT DAY?

  1. I was satisfied or think it reasonable to assume that at all times on and after 20 September 1985 and before a particular time (10 June 2011) majority underlying interests in the Alpha Shares were had by ultimate owners who had majority underlying interests in the Alpha Shares immediately before that day for the purposes of subsection 149-30(2). Consequently, the Alpha Shares continued to retain their pre-CGT status, and the assessment issued to the Applicant is excessive. My reasons are, as follows.

  1. First, once it is accepted that Subdivision 149-B applies to assets held by a discretionary trust as a trust is an “entity” for tax purposes as per the definition of “entity” (see [19] above), the provisions in Subdivision 149-B have to be read as permitting a sensible identification of whether an asset of a discretionary trust has stopped being a pre-CGT asset. This is notwithstanding the fact that discretionary objects cannot have a beneficial interest, at law, in the assets of the trust as was made clear in the Applicant’s submissions and the authorities relied on by the Applicant (see [58]–[59] above). It is incontrovertible that, at law, no beneficiary is entitled to income or capital of a discretionary trust until the trustee exercises their discretion to distribute income or to make an appointment of capital to that beneficiary. It follows, that as the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's

discretion is exercised, prima facie it would not be possible to satisfy a test which traces beneficial interests in the assets of a discretionary trust.

  1. However, in my view, for the purposes of applying s 149-30 of the ITAA 1997, the “ultimate owners” in the case of an asset of a discretionary trust are deemed to have interests in the trust’s assets akin to ownership interests. That is, the statutory provisions, in particular, subsections 149-15(4) and (5) adopt a non-technical meaning of the phrase “beneficial interest”. For the purposes of Subdivision 149-B, the “ultimate owners” are taken to effectively have ownership interests in the assets of a discretionary trust on the basis that they may benefit. This is achieved by the conditional language used in subsections 149- 15(4) and (5) highlighted at [56] above. As can be seen from the statutory provisions set out at [16] to [21] above, the hypothetical premises are that distributions of capital and income of the trust are made to “ultimate owners” whether directly or indirectly. The absence of a definition of “beneficial interests”, particularly in a statutory context where there are numerous other definitions, reinforces my view that the words “beneficial interests” are to be interpreted more broadly for the purposes of Division 149. IT 2340, a ruling issued by the Commissioner (which is canvassed in further detail below) also supports this view albeit in relation to the application of former s 160ZZS. The Commissioner relevantly states as follows at paragraph 2 of IT 2340 (bold added):

    … (… like other provisions of the [ITAA 1936] concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be “looked through” in order to determine whether there has been a change in the effective interests of natural persons in the assets.

  1. Notwithstanding the above analysis, the difficulties with the application of the statutory provisions remain in the present case despite the broader meaning of “beneficial interests” and the evident requirement for tracing through interposed entities. It is impossible, as a factual matter, to be able to measure whether the “majority underlying interests” were not had by “ultimate owners” who had “majority underlying interests” in the asset before 20 September 1985 when there is a change to the discretionary objects, as was the case here with the addition of Beta on 10 June 2011. This is because the mere appointment of a discretionary object does not, by virtue of that fact alone, mean that more than 50% of the

“beneficial interests” that “ultimate owners” had (whether directly or indirectly) in the asset and in any income that may be derived from the asset have changed (or have not changed). It means, as the Applicant submitted, only that there is a possibility that distributions of capital and income would be received by that beneficiary for his, her or its own benefit. Significantly, a comparison of the percentage change of the beneficial interests the “ultimate owners” had cannot be performed for the purposes of subsection 149-30(1).

  1. Thirdly, I also disagree with the Commissioner’s related argument that there was a change in the “majority underlying interests” because there was a change in the group of discretionary objects of the Settlement Trust when Beta was added as a discretionary object. Pursuant to subsections 149-15(4) and (5), it is impossible to establish whether there was a change of the requisite degree even if a group of discretionary objects were chosen as the test group. This is because it would be necessary to know the percentage beneficial interest as explained above, of each “ultimate owner”. It is acknowledged that the Commissioner’s argument would be right if there were, for example, the appointment of an entirely new group of discretionary objects not forecast in the trust deed but that is not the present case.

  1. Fourthly, I agree with the Applicant’s interpretation of subsection 149-30(2) which is that it can reverse the application of subsection 149-30(1) or it can apply where it is impossible to know whether subsection 149-30(1) applies. It will be recalled that subsection 149-30(1) relevantly provides that the asset stops being a pre-CGT asset when majority underlying interests in the asset were not had by ultimate owners who had such interests before 20 September 1985. As stated above, there are inherent difficulties in applying the statutory provisions to trusts and there can generally be no factual certainty where there are changes to the beneficiaries of a trust.

  1. Critically, in my view, subsection 149-30(2) is an entirely concessional provision as evident from its statutory context and language and, therefore, it “should be construed beneficially”: see Eichmann v Commissioner of Taxation [2020] FCAFC 155 (Eichmann) at [41]. The statutory context makes clear that subsection 149-30(2) applies as an exception to subsection 149-30(1), which may prima facie apply. The fact that subsection 149-30(1) is extraordinarily difficult to apply in certain circumstances, including with respect to discretionary trusts, informs the “beneficial” interpretation of subsection 149-30(2). In Eichmann, the Full Court was considering statutory provisions conferring small business

relief and held that the provisions should be construed beneficially rather than restrictively in order to promote the purpose of the concessions conferred. The Full Court relevantly held at [40]:

It follows that because [the relevant provision] is beneficial in nature, “its language should be construed so as to give the most complete remedy which is consistent “with the actual language employed” and to which its words “are fairly open”: Khoury v Government Insurance Officer of New South Wales [1984] HCA 55; (1984) 165 CLR 622 at 638 per Mason, Brennan, Deane and Dawson JJ…

  1. Furthermore, contrary to the Commissioner’s submission that subsection 149-30(2) cannot operate to reverse subsection 149-30(1), the inclusion of the second limb “or [the Commissioner] thinks it reasonable to assume” shows that the Commissioner (or the Tribunal) can think it reasonable to assume, that the necessary continuity exists despite subsection 149-30(1) applying or absent forming a view that it applied.

  1. In summary, it is concluded that subsection 149-30(2) has an application over and above subsection 149-30(1), contrary to the Commissioner’s submissions. Moreover, “it should be construed so as to give the most complete remedy”: Eichmann at [40]; see [83] above. This construction of subsection 149-30(2) is open on the express words used in the subsection and is also influenced by the statutory context. It is also coherent with the principle that “[n]o clause, sentence or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent”: The Commonwealth v Baume (1905) 2 CLR 405 at 414.

  1. Fifthly, it is acknowledged that the Applicant also argued that there was no warrant for subsection 149-30(1) to apply as there was no mischief in the present case in circumstances where that subsection is a form of an anti-avoidance provision aimed at preventing circumvention of the rules regarding the continuity of the pre-CGT status of assets. The Commissioner rightly pointed out that that mischief can be gleaned from the Explanatory Memorandum (see [27] above) and is addressed by the statutory provisions but that it did not mean that the application of subsection 149-30(1) turned on a finding as to a tax avoidance purpose. The subsection applies on its terms. Furthermore, the “beneficial” interpretation of subsection 149-30(2) arrived at above is not diminished by the mischief addressed in subsection 149-30((1). In my view, on its terms, subsection 149-30(2) is capable of “switching off” the application of subsection 149-30(1).

  1. Sixthly, with reference to the application of IT 2340, it is noted that it is a formal ruling issued on 24 July 1986, that is, before 1 July 1992 (when the formal rulings regime commenced).21 It is not a binding public ruling for the purposes of s 357-60 of Schedule 1 to the TAA. The Commissioner nevertheless considers it to be “administratively binding” on him. Specifically, he acknowledges in paragraph 39 of TR 2006/10: “Public rulings”, under the heading “Status and binding effect of formal rulings which are not public rulings” that “the policy of the ATO is to stand by what is said in a formal ruling and to depart from a formal ruling only when there are good and substantial reasons to do so”.

  1. As to the substantive content of IT 2340, it deals with questions regarding the application of s 160ZZS "to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts”. As former s 160ZZS of the ITAA 1936 expresses the same ideas and its purpose was also relevantly identical to Division

    149 of the ITAA 1997, IT 2340 is arguably still “administratively binding” on the Commissioner, and the Commissioner did not suggest otherwise.

  1. For the purposes of s 160ZZS and now Subdivision 149-B, according to IT 2340, a beneficiary of a discretionary trust is treated as effectively having an ownership interest in the trust's assets. It is also stated in paragraph 5 of IT 2340, that when considering the question of whether “majority underlying interests” have been maintained in the assets of the trust "it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised". The distributions made to beneficiaries can be considered, contrary to the Commissioner’s argument before the Tribunal that that was not appropriate or only permissible in certain situations of factual uncertainty.

  1. Further, in paragraph 8 of IT 2340, the Commissioner considers the situation where “there is in practical effect a change of 50% or more in the underlying interests in the trust assets” (see [67] above). He refers to an example of “where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions” and in that situation states the subsection would have its intended application. The Commissioner did not refer to any examples where there is a mere addition of a discretionary object and where it is difficult to evaluate whether there is


21 See Taxation Laws Amendment (Self-Assessment) Act 1992 (Cth).

a change in the “majority underlying interests”. Moreover, the example given at [75] above did not assist him except to highlight that consideration may be given to the way the income and any capital is distributed. The Commissioner stated that where distributions were reviewed and remained as to a majority, the requisite state of satisfaction or the making of a reasonable assumption for the purposes of subsection 149-30(2) can be reached, with which I agree.

  1. Sixthly, there is merit in the Applicant’s argument that applying subsection 149-30(2) on its terms requires a conclusion that “at all times” the majority underlying interests in the Alpha Shares were had by the same “ultimate owners”, thus permitting a wider survey of what transpired. The Applicant was able to satisfy me that the assets of the Settlement Trust always have been held for the benefit of the same family group, being the Applicant’s and the Husband’s family.

  1. In the period from 10 June 2011 when Beta was added as a beneficiary to the date of CGT event A1 in the 2020 income year when the Alpha Shares were sold, the Husband did not receive 50% or more of the income referable to dividends on the Alpha Shares. The proportion of dividends on the Alpha Shares that were paid to members of the Applicant’s family and to related entities other than Beta (all of whom could benefit under the Settlement Trust), as compared to the Husband demonstrated that in the period between 2011 to 2020, the Husband received less than 50% of the dividends sourced from Alpha. It is clear on the evidence that the same majority group of ultimate owners benefited at all relevant times. The Husband did not receive more than 50% of the relevant income or capital in any single year within the period covering the 2011 and 2020 income years, or collectively across all ten of those income years.

CONCLUSION

  1. For the reasons set out above, I am satisfied, or think it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the Alpha Shares were had by ultimate owners who had majority underlying interests in the Alpha Shares immediately before that day such that that subsections (1) and (1A) apply as if that were in fact the case. The Alpha Shares continued to be pre-CGT assets including to the time of CGT event A1 resulting from the disposal of the Alpha Shares by the Trustee of the Settlement Trust.

DECISION

  1. The Tribunal sets aside the Commissioner’s objection decision dated 27 May 2024 and substitutes it with a decision that the Applicant’s objection dated 20 December 2023 be allowed.

I certify that the preceding 94 [ninety- four] paragraphs are a true copy of the reasons for the decision herein of Deputy President G. Lazanas.

............[SGD]..........................................................

Associate

Dated: 3 October 2025

Dateofhearing: 5 June 2025

CounselfortheApplicant:

Bradley Jones SC, Michael Cosgrove

SolicitorsfortheApplicant:

Fiona Moore, Richelle Suarez, EY

CounselfortheRespondent:

Chloe Burnett SC, Eugene Chan

SolicitorsfortheRespondent:

Benjamin Borelli, Monique Kotevski, Gadens

Key Legal Topics

Areas of Law

  • Taxation Law

Legal Concepts

  • Statutory Construction

  • Capital Gains Tax

  • Underlying Interests

  • Beneficial Interest

  • Tracing Requirements

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