Decision impact statement
Hopkins v Federal Commissioner of Taxation
 AATA 324
2012 ATC 10-249
88 ATR 633
Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/3063; 2010/3064; 2010/3062
Judge Name: Deputy President Hack
Judgment date: 31 May 2012
Appeals on foot: No.
Decision Outcome: Adverse
Impacted AdviceRelevant Rulings/Determinations:
Employee entitlement fund scheme deductions
Net income of the trust
Outlines the ATO's response to this case which concerned the assessment of the net income of a trust.
Brief summary of facts
The applicants were objects of a discretionary trust in respect of whom the trust income could be appointed. The trust deed provided that the trustee was required to exercise its discretion to appoint income by 30 June of each year. It further provided that if the trustee failed to appoint the trust income by that date, the income was taken to have been paid or applied for the benefit of certain beneficiaries (default beneficiaries) in equal shares. The applicants were also within the class of default beneficiaries.
The discretionary trust was a unit holder in a unit trust. In the years ended 30 June 2004 and 2005 the unit trust participated in an Employee Entitlement Fund scheme (EEF). The EEF deductions were disallowed, resulting in an increase in the net income of the unit trust and, in the Commissioner's view, an increase in the net income of the discretionary trust.
The Commissioner issued amended assessments to the applicants, increasing their assessable income by their share of increased net income of the discretionary trust. That share was determined by reference to the 2004 and 2005 income tax returns of the discretionary trust. The returns disclosed that the applicants were the only beneficiaries presently entitled to income of the trust in the 2004 year (other than a person who was subsequently discovered not to be a beneficiary); and the applicant, Ronald Hopkins was the only beneficiary entitled to income of the trust for the 2005 year.
After the amended assessments were affirmed on objection, the applicants applied to the Administrative Appeals Tribunal for a review of the objection decision.
The applicants agreed that the EEF deductions were not allowable, so the only issue in dispute at the hearing was whether any additional amount should be assessed to the applicants in their capacity as beneficiaries of the discretionary trust as a result of the increase in the net income of the unit trust.
The applicants sought a review on a number of grounds, including that:
- the trustee of the discretionary trust had not exercised its discretion to appoint income to the applicants by 30 June,
- the applicants had disclaimed their entitlement to the income of the discretionary trust for the relevant income years, and
- there was no income of the unit trust (and therefore no share of the net income of that trust should be included in the net income of the discretionary trust) - the basis of this argument being that the trust accounts for the unit trust had been prepared incorrectly.
During the course of the hearing the applicants abandoned the disclaimer argument.
Issues decided by the tribunal
The Tribunal found that the trustee of the discretionary trust had not made a valid resolution to distribute the income of the trust by 30 June of the relevant years. [paragraph 51]
As a result, the default distribution clause operated to deem the income of the trust to have been paid or applied for the benefit of 46 default beneficiaries (including the applicants) in equal shares. [paragraphs 52 and 53]
As the applicants were only assessable in the relevant income years on a 1/46 share of the trust's net income, the Tribunal found that the amended assessments were excessive. [paragraph 56] Consequently the Tribunal found it unnecessary to consider the other arguments raised by the parties. [paragraph 56]
ATO view of Decision
The Commissioner agrees that, on the Tribunal's finding of fact, the amended assessments were excessive.
In coming to that conclusion the Tribunal found it unnecessary to consider whether there was income of the unit trust for the relevant years to which the trustee of the discretionary trust was presently entitled (the third ground of review referred to above).
While the question was not decided in the present case, the Commissioner maintains the view that what must be determined in analogous situations is whether the trustee's original calculation of the income of the trust was in accordance with the deed. If the original calculation was in accordance with the deed, the Commissioner does not accept that it is open to a party (not a beneficiary of that trust) to later argue that the trustee should have calculated the trust income in a different manner.
Implications for ATO Precedential documents (Public Rulings & Determinations etc)
Implications for Law Administration Practice Statements
None. Whilst the Commissioner relies on information provided in tax returns to make assessments of tax liability, guidelines setting out the ATO's approach to prosecutions, including in respect of the making of false and misleading statements such as in a tax return, are already set out in ATO prosecution guidelines (CMPI 2007/02/02 to be read in conjunction with PS CM 2007/02 Fraud control and the prosecution process).
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2011 ATC 20-235
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