Decision impact statement
ConnectEast Management Ltd (as Trustee for the ConnectEast Investment Trust 2) v Commissioner of Taxation
Court Citation(s):
[2009] FCAFC 22
2009 ATC 20-095
75 ATR 101
175 FCR 110
Venue: Federal Court of Australia
Venue Reference No: VID 347 of 2008
Judge Name: Sundberg, Jessup, Middleton JJ
Judgment date: 5 March 2009 (corrigendum dated 1 May 2009)
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:- No relevant rulings and determinations considered.
Subject References:
income tax
trust losses and other deductions
fixed trusts
unlisted widely held trust
listed widely held trust
whether classification affected by a higher level trust
Précis
Outlines the Tax Office's response to this case which concerns how the words 'each of one or more trusts of a higher level' in ss.272-127(1) of Schedule 2F to the Income Tax Assessment Act 1936 are to be interpreted
The taxpayer's application for special leave to appeal to the High Court was refused on 4 September 2009
Brief summary of facts
ConnectEast Management Limited is the trustee of three trusts which are referred to in the judgment as the Subsidiary Trust, the Holding Trust and the Investment Trust. ConnectEast Management Limited and other related companies and trusts form the ConnectEast Group which is responsible for constructing and operating the Eastlink Tollway in Melbourne.
The case arose from an objection to a private binding ruling issued by the Commissioner which ruled that the Subsidiary Trust (an unlisted widely held trust (UWHT)) did not acquire the status of a listed widely held trust (LWHT) - a status of higher level - even though all its units were owned by two listed widely held trusts being the Holding Trust and the Investment Trust.
In this case, the taxpayer sought to be reclassified from an UWHT to a LWHT in order to gain access to tests in the trust loss measures unavailable to UWHTs which, if satisfied, would allow for losses from past years to be offset against income from a current year. In particular, the taxpayer sought to be reclassified to ensure that if continuity of ownership ceased to be maintained, the trust would nonetheless still be able to recoup its carry forward losses by relying on the same business test.
Appeals
At first instance, the Federal Court (Heerey J) (2008) ATC 20-024 dismissed the taxpayer's appeal holding that the preconditions for subsection 272-127(1) to be engaged were not satisfied.
The taxpayer appealed to the Full Federal Court. The Full Federal Court (Sundberg, Jessup and Middleton JJ) (2009) ATC 20-095 dismissed the taxpayer's appeal and unanimously agreed with the primary judge's construction of section 272-127.
The taxpayer applied for special leave to appeal from the Full Federal Court to the High Court but leave was refused by Hayne and Crennan JJ on the basis that the taxpayer had insufficient prospects of success.
Issue decided by the Court
The precise issue that fell to be determined by the courts was whether it was possible for paragraph 272-127(1)(b) to apply when two higher level trusts together, but neither individually, had fixed entitlements to all of the income and capital of a subsidiary trust.
At first instance, Heerey J held that section 272-127 requires each of the relevant trusts of a higher level to hold, directly or indirectly (i.e. via interposed entities), fixed entitlements to all of the income and capital of the taxpayer. In this case, neither of the higher level trusts owned, directly or indirectly, 100% of the subsidiary.
His Honour also held that the language of subsection 272-127(1) did not require that where there is more than one trust of a higher level than the subsidiary trust which owns directly or indirectly all of the income of capital of the subsidiary, the higher level trusts must all be of the same level. Rather, the only requirement of the subsection is that the parent trusts must each be "of a higher level" than the subsidiary.
The Full Federal Court agreed with the reasoning of the primary judge and held that subsection 272-127(1) does not permit reclassification of a subsidiary trust in cases of collective ownership. Instead, the subsection only finds operation where fixed entitlements to all of the income and capital of the subsidiary trust are held (directly or indirectly) by a single trust of a higher level.
The Full Court held that this interpretation was consistent with the clear language of the subsection and its clearly expressed purpose, as set out in the relevant passages from the Explanatory Memorandum which accompanied the introduction of Schedule 2F as a schedule to the ITAA 1936.
Tax Office View of Decision
The decision confirms the Commissioner's view that for the operation of subsection 272-127(1) to be engaged it must be the case that there is at least one trust of a higher level which, in its own right, holds directly or indirectly fixed entitlements to all of the income and capital of the subsidiary trust seeking reclassification: see also ATO ID 2006/317.
Administrative Treatment
Implications on current Public Rulings & Determinations
None
Implications on Law Administration Practice Statements
None
Legislative References:
Income Tax Assessment Act 1936
272-127 of Schedule 2F
272-120 of Schedule 2F
272-125 of Schedule 2F
Case References:
Commissioner of Taxation v Cooling
(1990) 22 FCR 42
(1990) 90 ATC 4472
(1990) 21 ATR 13
Esso Australia Resources Ltd v Federal Commissioner of Taxation
(1998) 83 FCR 511
(1998) 40 ATR 512
Ganter v Whalland
[2001] NSWSC 1101
(2001) 54 NSWLR 122
Project Blue Sky Inc v Australian Broadcasting Authority
[1998] HCA 28
(1998) 194 CLR 355
(1998)153 ALR 490