Decision impact statement
Leighton v Commissioner of Taxation
Court Citation(s):
[2011] FCAFC 96
2011 ATC 20-273
84 ATR 547
Venue: Federal Court of Australia
Venue Reference No: VID 918 of 2010; M 121 of 2011
Judge Name: Justices Edmonds, Gilmour and Logan
Judgment date: 10 August 2011 (Full Federal Court)
Appeals on foot: No.
Decision Outcome: Adverse
Impacted Advice
Relevant Rulings/Determinations:- None
Subject References:
Income Tax
Definition of 'trustee'
Non-resident individual
Assessable as trustee
Proceeds of sale of shares
Income of a trust estate
Précis
This case concerned whether the taxpayer, a non-resident, was liable to tax as a trustee under former section 98(3) of the Income Tax Assessment Act 1936 ("ITAA 1936") on income from trading Australian shares through stockbrokers in Australia.
Brief summary of facts
Mr Leighton, a non resident of Australia for tax purposes residing in Monaco, was engaged in share trading activities (via Australian stockbrokers) involving the buying and selling of shares in Australian public companies. The share trading was through accounts held by two foreign resident companies of which he was a director (Salina Investments Ltd ("Salina") and Kolton Holdings Limited ("Kolton")).
The beneficial owners of Salina and of Kolton were unidentified third parties who were Mr Leighton's clients. Mr Leighton entered into a Custodian Agreement, in his own name, with Westpac Custodian Nominees Limited (Westpac Custodian) under which Westpac Custodian agreed to hold and administer relevant securities. When instructed by Mr Leighton to do so, Westpac Custodian released the shares to the stockbrokers to enable sales to be settled.
Funds for share purchases were provided by or on behalf of Salina and Kolton. Moneys were transferred to a bank account in Australia which Mr Leighton opened in his name (the Westpac Bank Account). The proceeds of share sales were deposited into the Westpac Bank Account and then, usually, remitted to the Monaco bank account operated by a company of which Mr Leighton was a director. Occasionally, moneys remained in the Westpac Bank Account to settle future purchases of shares.
During the 2002, 2003 and 2004 income years (the "relevant years"), there were approximately 676 share buy and sell transactions in Australian shares that were the subject of dispute in the proceedings.
The hearing at first instance proceeded on the basis of an agreed statement of facts. Gordon J found that Mr Leighton was liable to be assessed as trustee by the Commissioner under the former s98(3) of ITAA 1936 in relation to the share trading activities in respect of each of the relevant years.
The taxpayer appealed to the Full Federal Court.
The Commissioner filed a special leave application in the High Court on 7 September 2011 which he discontinued on 24 January 2012.
Issues decided by the Full Federal Court
The matter concerned whether the income generated by the sale of the Australian shares was net income of a trust estate on which Mr Leighton was liable to be assessed as trustee under former s98(3) of the ITAA 1936.
The Court (Edmonds, Gilmour and Logan JJ) in a joint judgment held that Mr Leighton was not so liable.
The Full Court noted that the proceedings were conducted on the basis of facts that had been agreed between the parties: [2-3]. The Court also stated that it was common ground between the parties that Salina and Kolton were each carrying on a business of trading in shares, which shares were the trading stock of those businesses: [16].
Having regard to relevant authority, the Full Court observed that "to be liable as a 'trustee', Mr Leighton must stand in some relation to a proprietary right by virtue of which net income of the trust estate arises": [9].
However, the Full Court found on the facts of the case the share proceeds deposited by the brokers into the Westpac Bank account in Mr Leighton's name represented the realisation of income already derived by Salina and Kolton. It was the companies themselves that derived income from the sale of the trading stock represented by the shares irrespective of whether they received payment, or a third party such as Mr Leighton received payment on their behalf: [18]. Accordingly, the Full Court found that while the proceeds, upon being deposited into the Westpac Bank account, were impressed with a trust in favour of Salina and Kolton, those proceeds did not comprise the income of a trust estate: [22].
ATO view of Decision
In reaching its decision, the Court proceeded on the basis it was common ground between the parties that over the relevant years Salina and Kolton were each carrying on a business of trading in shares, with the shares being trading stock of those businesses.
The ATO accepts that once it was concluded that Salina and Kolton were each carrying on a business of trading in shares, the shares being trading stock of those businesses, and that the companies derived income from the sale of that stock; it followed that the income would not also be income of a trust estate on which former s98(3) would operate.
If instead in a particular case it were to be concluded as a matter of fact, relevant shares were assets held on trust such that the proceeds of any sale of the shares were properly characterised as the income of a trust, in the Commissioner's view the outcome would be different.
Administrative Treatment (Implication on current Public Rulings and Determinations)
Relevant ATO precedential documents
None
Relevant Law Administration Practice Statements
None
Legislative References:
Income Tax Assessment Act 1936
6
95
98
98A
Income Tax Assessment Act 1997
6-5
8-1
70-5
Income Tax Assessment Act 1922
4
31
Evidence Act 1995 (Cth)
191
Taxation Administration Act 1953
Case References:
ACC v Visy Industries Holdings Pty Ltd (No 3)
[2007] FCA 1617
244 ALR 673
Deputy Federal Commissioner of Taxation v Trustees of the Wheat Pool of Western Australia
[1932] HCA 15
48 CLR 5
Deputy Commissioner of Taxation v Richard Walter Pty Ltd
[1995] HCA 23
183 CLR 168
29 ATR 644
95 ATC 4067
Federal Commissioner of Taxation v Bamford
[2010] HCA 10
240 CLR 481
2010 ATC 20-170
75 ATR 1
Federal Commissioner of Taxation v Everett
(1980) 143 CLR 440
10 ATR 608
80 ATC 4076
Harmer v Federal Commissioner of Taxation
(1989) 91 ALR 550
20 ATR 1461
89 ATC 5180
Howey v Federal Commissioner of Taxation
[1930] HCA 45
44 CLR 289
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation
[1971] HCA 80
124 CLR 421
2 ATR 121
71 ATC 4001
Richardson v Federal Commissioner
[1932] HCA 67
48 CLR 192
Other References:
Hannan JP, A Treatise on the Principles of Income Taxation (Law Book Company 1946), pp 185 & 187
Parsons RW, Income Taxation in Australia: Income Deductibility Tax Accounting (Law Book Company 1985) p.29