Federal Commissioner of Taxation v Clark

[2011] HCATrans 236
(2011) 80 ATR 20

Federal Commissioner of Taxation
v. Clark

High Court of Australia

Judges: French CJ
Crennan J
Kiefel J

Judgment date: 2 September 2011



MR D.M.J. BENNETT, QC: In both matters, if your Honours please, I appear with my learned friends, MS M.M. BRENNAN and MR D.F.C. THOMAS for the applicant Commissioner and we are agreed that they should be heard together. They are identical. (instructed by Australian Government Solicitor)

MR S.L. DOYLE, SC: May it please the Court, in both matters I appear with my learned friend, MR M.L. ROBERTSON. (instructed by Ernst & Young Law)

FRENCH CJ: Yes, Mr Bennett.

MR BENNETT: If your Honour pleases. Under the Income Tax Assessment Act, a trust estate can carry forward capital losses. There is no definition of "trust estate". That result is reached through a number of sections, which I do not need to take your Honours to, but they start with section 95 of the 1936 Act which conveniently appears at page 90 of the application book. Your Honours see at the bottom of that page section 95(1) says that:

"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 -

et cetera. Now, a trust or trust estate is not, of course, a legal personality. It is the trust developed from the use.....and it referred to a situation, of course, where one person holds property on trust for another. So when the Act talks about a trust estate it is creating a legal fiction. Your Honours would have seen the words "as if" in section 95(1). That is why equitable doctrines are not much help. In any event, there are not any relevant equitable doctrines. There are no equitable doctrines about a trust estate having any sort of personality or continuity or no continuity.

FRENCH CJ: What is the character of the discontinuity that you rely upon in this case? There is a change in the ownership of the units. There is a change in the identity of the trustee. There is a waiver of the initial trustee's indemnity rights and then there is the writing down or the - I am sorry, the forgiveness of various receivables and recapitalisation. Is it a combination of all of those things that you say means that what makes capital gains in 2001 is different from what made capital losses in 91, 92 and 93?

MR BENNETT: Yes, your Honour. It is a new trustee, new beneficiary, new property.

FRENCH CJ: So what is precisely new?

CRENNAN J: So you are not saying there is no continuity, but your argument seems to be there is insufficient continuity by reason of these matters that the Chief Justice has identified?

MR BENNETT: Yes, your Honour. It is a bit like the Plutarch's paradox of Theseus' ship. I do not know if your Honours are familiar with that. Philosophers have debated it - - -

FRENCH CJ: .....little else, Mr Bennett.

MR BENNETT: The point was that if you take Theseus' ship and you gradually replace every one of the timbers in it till there is none of the original left, is it still Theseus' ship? Americans have talked about George Washington's axe which has had three new handles and four new blades. Here, there is just nothing that continues except the constitution of the trust.

May I say this about that? When one talks about two things being the same, the word "same" has, of course, two quite different meanings. In one sense, these two cups are the same, they are identical. In another sense, if I take a sip from one and then take a sip from the same cup, I am using the word "same" in a very different sense. I am using it to mean that one as opposed to the other. The error here is to say, well, because it is identical in the sense that it has the same terms, identical in that sense, it is the same trust, or as we say if you look at what a trust is you change the trustee, the beneficiary and the property, it is like grandfather's axe.

CRENNAN J: But commonly you can change all those things but you still have the deed of trust and you can have property being sold at either a loss or a gain under the terms of the trust. In other words, the changes you are talking about do not sort of terminate the existence of the taxpayer.

MR BENNETT: Well, your Honour, that is, we would submit, with respect, the argument we seek to oppose in this Court. The test laid down by this Court in the Commercial Nominees Case, which I will take your Honours in a minute - - -

CRENNAN J: It is conveniently at 113 of the application book.

MR BENNETT: Yes, it is.

CRENNAN J: You are relying, as we would understand it, on the second limb, not that the trust was terminated but the changes were such as to produce the result that the trust estate does not derive the income in question.

MR BENNETT: Whatever "it" is did not receive the income.

CRENNAN J: Whatever "it" is - well, it has to be the taxpayer.

MR BENNETT: Yes. Your Honour, that simply is the error we point to. We remind your Honour of what Justice Dowsett said in his dissenting judgment at the end of it at pages 100 to 101 where, having said that the:

Changes in the ownership of units were clearly contemplated by the trust deed. Changes in the terms of the trust were also contemplated, as was augmentation of the fund. But where a trust has been effectively deprived of all assets and re-endowed, I see no way in which it can be said that the original trust estate has continued.

Here it is more than that, of course, as I say it is - - -

CRENNAN J: The logical problem all the time, though, is that the trust estate is not terminated. There is no creation of a new trust estate.

MR BENNETT: No, your Honour, but in a sense no such thing as the trust estate. There is no entity we are talking of. We are talking about a relationship between a trustee and a beneficiary in relation to certain property. When you change all three of those - - -

FRENCH CJ: I am sorry - do you not at paragraph 23 of your submissions say you rely upon circumstances to demonstrate the absence of continuity between the trust estate in existence at the time of the gains and the trust estate in existence at the time of the capital losses?

MR BENNETT: Yes, we have to say that, your Honour, because that is the phrase the Act uses.

FRENCH CJ: It does not talk about continuity. It just says "in relation to" the trust estate, does it not?

MR BENNETT: Yes. But your Honour at the end of the day it is just the - every relevant element has changed except that it happens to have the same constitution. The only continuing property was $10 and as Justice Dowsett points out at page 100, no one could suggest that it was the $10 which led to the profits that were made in the second of the relevant years.

KIEFEL J: His Honour seemed to think that the intention of those involved was that there would be a new trust on the same terms and conditions.

MR BENNETT: Your Honour, that is one way of putting it.

KIEFEL J: But that is not to answer the question whether the original trust with its settlor has ceased to exist.

MR BENNETT: The settlor is probably the same, the settlor's failure relevant to a modern trust.

KIEFEL J: Yes, that is true.

MR BENNETT: It is usually the accountant's secretary, as I understand it.

CRENNAN J: You do not suggest in any way that the trust was not properly constituted, anything like that?


CRENNAN J: It has always had a trustee. It has always had some property. It has always had objects. I mean, changes in unit holders and membership and so on or trustee even, are commonplace.

MR BENNETT: They are, your Honour, but not where one has all three, the trust property, the trustee and the beneficiaries and where, as here, the purpose of the transaction is to transfer it, whatever "it" is, from one family to another. It is a convenient vehicle because the case raises squarely, can you simply take a family trust situation, transfer it effectively to another family with different property, totally re-endow it, different trustee and different beneficiaries and say it is the same trust for tax loss purposes. That is a question squarely and simply raised by this case.

Now, our learned friends say in their submissions that the case is not a convenient vehicle because the parties contemplated a potentially significant and genuine continued involvement of the old family, the Denoon family, which owned it originally.

FRENCH CJ: That was conditional upon them putting in 1.8 million, was it not?

MR BENNETT: Precisely, your Honour. We say two things: (a) intention is irrelevant in this area or contemplation or whatever one calls it, but (b) as your Honour the Chief Justice points out, it was conditional on an event which never occurred. So it does not help. What the common intention in relation to the events as they turned out was that it would entirely be transferred. The fact that they had an alternative contemplation of a different regime which did not happen just does not affect and cannot affect that result.

FRENCH CJ: The regime was, was it not, that the Denoon entities retained five units but had no rights associated with those units until they put in an equivalent injection to the Clark entities. That did not happen and then they disposed of them in the direction of the Clark entity.

MR BENNETT: Precisely, your Honour. All of that is simply the detail of how the transfer was affected. That cannot affect the result. So one has a very simple case where every plank in Theseus' ship has been changed, so far as is relevant, or if you like, the axe has had a new handle and a new head. There is simply no continuity and the Full Court, in our respectful submission, misconstrued the test by making the first limb of the test a requirement whereas the two limbs are alternative and if the second limb is to have any meaning it must be, we would respectfully submit, the simple facts of this case. It is an important issue of tax law, one which is not answered by the Act and on which this Court has spoken and, we submit, been misconstrued. We submit, therefore, that special leave should be granted.

FRENCH CJ: Thank you, Mr Bennett. We will not need to call on you, Mr Doyle.

This application for special leave by the Commissioner of Taxation raises the question whether a trustee of a unit trust could set-off, against capital gains, capital losses incurred some years before under a different trustee with different unit holders, with an intervening excess of liabilities over assets, subsequent recapitalisation of the trust and a waiver by the original trustee of its right to be indemnified from the assets of the trust.

The Full Court of the Federal Court held, contrary to the Commissioner's contentions, that there was an identity between the trust estate in the year in which the assessable capital gain was made and the trust in the years in which the capital losses were incurred so as to allow the latter to be offset against the former.

In our opinion, the decision of the Full Court involved characterisation and evaluation of the continuity of the trust in the trust estate. It is not attended with sufficient doubt to warrant the grant of special leave. Special leave will be refused with costs.