CAUTION: This Case Decision Summary should not be relied upon in deciding whether to enter into any particular arrangement or transaction (referred to as a 'scheme' in Part IVA Income Tax Assessment Act 1936 for the reasons which follow. It is recommended that should you wish to enter into a scheme similar to that summarised you seek further advice or a ruling from the ATO, or advice from a professional adviser.

This Case Decision Summary illustrates the approach taken by the Commissioner of Taxation in applying Part IVA to a real fact situation. The facts have been simplified to focus on key practical issues.

To properly apply Part IVA, the law must be applied to all the relevant facts. In particular, an eight step test must be applied to determine whether, on the facts, a particular scheme objectively has the dominant purpose of obtaining a tax benefit not intended by the law. Where the scheme simply takes advantage of the intended operation of a structural feature of the law, Part IVA will not apply because the required dominant purpose will not exist.

In applying the dominant purpose test, regard must be had to the manner in which the scheme is carried out; that is, whether the scheme bears the stamp of tax avoidance. The Full Federal Court in Bellinz Pty Limited v Federal Commissioner of Taxation 98 ATC 4634 at 4647; 39 ATR 198 at 212 has noted the difficulty in applying Part IVA prior to the scheme being carried out, because the execution of the scheme may in fact be different to that originally proposed. Even where the scheme has been carried out, the Court has noted that a difficulty in coming to a view on the application of Part IVA is to ensure that all relevant facts are considered, including those concerning the manner in which the scheme is carried out.

This Case Decision Summary has been withdrawn.

ATO Case Decision

Case Decision Number:

CDS10313

Subject:

1. Has the trust estate of Unit Trust 1 (UT1) and the trust estate of Unit Trust 2 (UT2) merged to become one ‘trust estate’ within the accepted meaning of the term ‘trust estate’?

2. As a consequence of (1), can the income derived by the trust estate of UT1 be offset against the loss incurred by the trust estate of UT2 for the year of income?

3. Do the unit holders of UT1 need to include in their assessable income any income attributable to UT1 for the year of income?

Decision:

(1) No. The trust estate of UT1 and the trust estate of UT2 have not merged as one ‘trust estate’ within the accepted meaning of the term ‘trust estate’.

(2) No. As a consequence of (1) above the income derived by the trust estate of UT1 cannot be offset against the losses incurred by the trust estate of UT2 for the year of income.

(3) Yes. The unit holders of UT1 have to include in their assessable income any income attributable to UT1 for the year of income.

Facts:

In 1993 UT1 is constituted by deed. The trustee of UT1 is M Pty Limited. The unit holders are taxpayers B,C,D,F & G respectively. On 6 June taxpayers F and G redeem their units in the trust. At the same time taxpayer E is made a unit holder and taxpayer A acquires units in the trust.

When UT2 is constituted by deed the unit holders are taxpayers A,B,C,D and E respectively. The trustee of UT2 has been M Pty Limited.

From 6 June 1995 UT1 and UT2 have common unit holders (taxpayers A,B,C,D, and E respectively) and a common trustee. The unit holders have the same percentage of unit holdings in UT1 and UT2. The trust deeds of UT1 and UT2 are similar although they contained certain differences.

The unit holders/taxpayers contend that UT1 and UT2 merged on 6 June 1995 because the unit trusts had common unit holders and trustees.

Reason for Decision:.

There is no existing precedent to indicate that two trust estates merge when they have a common trustee, common unit holders and the same percentage of unit holdings held by those unit holders.

There is no definition of the term ‘trust estate’ as it relates to trusts in the Income Tax Assessment Act 1936 (ITAA 1936) and therefore regard must be had as to how this term has been interpreted in a legal concept. The expression ‘trust estate’ is considered to mean trust property ie. the property or properties affected under the trust (see Halsbury’s Laws of England, 3rd Ed., Vol.38 p 810).

We consider the decision of the Full High Court in FC of T v Everett, 80 ATC 4076; 80 ATR 608, confirms the interpretation that the expression ‘trust estate’ is synonymous with trust property (see also Howey v FC of T (1930) 44 CLR 289 at p.293).

As the trust estate of UT1 and the trust estate of UT2 have been constituted under separate trust deeds and the trust estates or trust properties have not merged physically through means to effect merger, we consider that they have remained separate trust estates.

We consider the trust estate of UT1 and the trust estate of UT2 are two separate trust estates even though they have common unit holders and a common trustee.

Legislative References:

Income Tax Assessment Act 1936

Relevant Cases:

FC of T v Everett 80 ATC 4076; 80 ATR 608

Howey v FC of T (1930) 44 C.L.R 289

Other References:

Halsbury’s Laws of England, 3rd Ed., Vol.38 p 810

Keywords:

Unit trust

Unit trust restructuring

Everett assignments

Date of decision:

3 April 1998

Year of Income/Date of Transaction:

Year ended 30 June 1997

FOI Number:

I2000313