Decision Impact Statement

Greenhatch v. Commissioner of Taxation of the Commonwealth of Australia


Court Citation(s):
High Court:
[2013] HCATrans 104
Federal Court:
[2012] FCAFC 84
203 FCR 134
2012 ATC 20-322
88 ATR 560

Venue: Federal Court
Venue Reference No: High Court: M65 of 2012; Full Federal Court: VID 843 of 2011
Judge Name: High Court: Keane and Crennan JJ ; Full Federal Court: Edmonds, Greenwood & Robertson JJ
Judgment date: High Court: 10 May 2013; Full Federal Court: 7 June 2012
Appeals on foot: No
Decision Outcome: Taxpayer's application for special leave to appeal the decision of the Full Federal Court was refused with costs

Impacted Advice

Relevant Rulings/Determinations:
  • Not Applicable

Subject References:
Income tax
Personal superannuation contributions
Personal superannuation contributions - deductions
rebates & offsets
Trust income
Present entitlement
Trust beneficiaries
Trust distributions
Trusts

Exclamation The ATO has reviewed the impact of this decision including any precedential documents and Law Administration Practice Statements.

Précis

Outlines the ATO's response to the taxpayer's unsuccessful application for leave to appeal to the High Court in respect of the tax character of the share of the net income of a trust included in the taxpayer's assessable income.

Brief summary of facts

In the 2008 income year, the Elke Trust ('Trust') made a capital gain of $450,635, half of which was included in the income of the Trust (which totalled $600,260). The balance of the capital gain (the discount component) formed part of trust capital.

The taxpayer was presently entitled to 50% of the entire capital gain (both income and capital component). This entitlement therefore included an entitlement to $112,658.75 of the income of the Trust - an 18.7683% share. Accordingly, the taxpayer was assessed on an 18.7683% share of the tax net income of the Trust.

If the share of the net (taxable) income of the Trust assessed to the taxpayer was entirely attributable to a capital gain, less than 10% of the taxpayer's assessable income in the 2008 income year would have been from salary and wages and he would have been entitled to a deduction for a $98,000 personal contribution made to a complying superannuation fund. However, the Commissioner disallowed this deduction on the basis that only about18.77% of the capital gain was included in the share of the Trust's net (taxable) income assessed to the taxpayer and that therefore more than 10% of his assessable income was from salary and wages.

The taxpayer's objection to the income tax assessment for the 2008 income year was disallowed in full.

The Administrative Appeals Tribunal (2011) ATC 10-191 allowed the taxpayer's objection and set aside the Commissioner's objection decision.

The Full Federal Court unanimously allowed the Commissioner's subsequent appeal and set aside the Tribunal's decision.

The taxpayer applied for special leave to the High Court, which was refused with costs on the basis that there were insufficient reasons to doubt the correctness of the Full Court's decision and that the matter raised no question of public importance.

Issues decided by the court

The substantive issue in this case concerned whether the taxpayer satisfied the 'maximum earnings as employee' condition in section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997) (the '10% test') such that he was entitled to claim a deduction of $98,000 under section 290-150 of the ITAA 1997 for a personal contribution made to his self managed superannuation fund during the 2008 income year.

However, whether this condition was met turned on how much of the taxpayer's share of the net income of the Trust for the 2008 income year assessed to him under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) was attributable to the trust's capital gain within the meaning of section 115-215 of the ITAA 1997 (as it then applied). In particular, whether the condition was met turned on whether the part so attributable was to be calculated by reference to:

the character of the amount of income to which the taxpayer had been made presently entitled per the trustee resolution for trust purposes - the taxpayer's view; or
the percentage (18.7683%) used to determine the taxpayer's share of the net income included in his assessable income under section 97 of the ITAA 1936 (i.e. the share of the distributable income of the trust to which the taxpayer was presently entitled expressed as a percentage of the total distributable income) - the Commissioner's view.

That is, while the case ultimately concerned the tax recognition of a contribution to a superannuation fund, whether a deduction for the contribution was allowable raised squarely the question of the effect for tax purposes of the streaming pursuant to the deed of amounts through a trust by reference to character (specifically, the streaming of capital gains).

Having regard to the fact that the only income of the Trust to which the taxpayer had been made presently entitled by the trustee consisted solely of half of that part of the Trust's capital gain included in Trust income, the Tribunal held that the whole of the share of the net income of the Trust on which the taxpayer was assessed was attributable to the trust capital gain. The Tribunal concluded that the 10% test was passed and the taxpayer was therefore entitled to a deduction for his superannuation contribution.

The Full Court set aside the decision of the Tribunal. The core of the Full Court's reasoning appears in paragraph 36 of the joint judgment. In that paragraph, the Court observed that once the proportionate approach to share in section 97 of the ITAA 1936 is applied to determine the amount of the net income of the trust assessed to a beneficiary (being the approach to 'share' authoritatively settled by the High Court in Bamford) it is difficult to use other than a proportional approach to determine the part of that share attributable to a capital gain of the trust for the purposes of Subdivision 115-C of the ITAA 1997. The Court observed:


There is no warrant in the deeming provisions of s 115-215(e) or in their language for going behind the proportionate share. Consistently with the approach of Sundberg J in Zeta Force ... once the trust law distribution gave the share, it should not be used to determine, in a causative sense, the components of the s 97(1)(a) assessable income.

ATO view of Decision

As was identified in the Decision Impact Statement published by the Commissioner on 2 June 2010, in relation to the decision of the High Court in Commissioner of Taxation v. Bamford, among the issues that remained uncertain post-Bamford included the question of how statutory flow-through provisions interacted with the general trust taxing provisions in Division 6 of Part III of the ITAA 1936, given that a beneficiary's liability to be assessed on the tax net income of the trust under Division 6 may not correspond with the beneficiary's actual entitlement to income of the trust.

Greenhatch answers that question in relation to one of the parts of the Tax Acts providing for a statutory flow-through of character mechanism, namely Subdivision 115-C of the ITAA 1997 (concerning capital gains made by a trust) as it applied in relation to the 2008 income year.

Subdivision 115-C of the ITAA 1997 was significantly amended in 2011 to facilitate the tax effective streaming of capital gains made by trusts. The amendments made major changes to the basic structure and operation of the Subdivision. As such, the conclusion reached by the Full Federal Court as to the proper construction of Subdivision 115-C of the ITAA 1997 is of significance only in respect of the correct operation of the Subdivision prior to the 2011 amendments taking effect.

More generally however, the Commissioner views the approach of the Full Federal Court as consistent with the proposition that absent any specific rules elsewhere in the Tax Acts, the proportionate share of the net income of a trust that is included in the assessable income of a beneficiary under section 97 of the ITAA 1936 has no character beyond that inherent in the share of the net income as being a proportionate share of all of the net income. In particular, absent specific statutory rules that lead to a different result (such as can now be found in Subdivision 115-C of the ITAA 1997), the character for trust law purposes of the income to which the beneficiary was made presently entitled does not inform the character of the share of the net income assessed to the beneficiary under section 97 of the ITAA 1936 for tax law purposes. Put differently, streaming of amounts for trust law purposes by reference to the character of those amounts will only be effective for tax law purposes where that result is facilitated by specific statutory rules.

In addition to capital gains forming part of the income of a trust, questions as to the tax effectiveness of streaming of amounts for trust law purposes by reference to character arise from time to time in other contexts, for example, in relation to:

-
franked dividend income
-
foreign sourced income streamed to non-residents
-
income streamed to non-residents that is subject to non-resident withholding, and
-
foreign source income on which foreign tax has been paid.

As with Subdivision 115-C of the ITAA 1997, Subdivision 207-B of the ITAA 1997 (concerning franked distributions and trusts) was likewise significantly amended in 2011 with the express intent of facilitating the tax effective streaming of franked distributions through trusts.

The Commissioner is intending to provide guidance in the form of public rulings as to his views on the tax effectiveness of streaming of relevant income to non-residents (specifically foreign income, and dividend, interest and royalty income attracting the rules in Division 11A of Part III of the ITAA 1936 and Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953), and the streaming of income on which foreign tax has been paid.

The Commissioner invites views as to other areas of the tax law on which guidance might usefully be given including the relative priority of the need for guidance with respect to those other areas.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None

Implications on Law Administration Practice Statements

None

Legislative References:
Income Tax Assessment Act 1936 (Cth)
s 95
s 97

Income Tax Assessment Act 1997 (Cth)
s 6-10
s 102-5
s 115-100
s 115-200
s 115-215
s 207-5
s 207-35
s 290-150
s 290-155
s 290-160
s 290-165
s 290-170

Case References:
Federal Commissioner of Taxation v. Bamford
[2010] HCA 10
(2010) 240 CLR 481
75 ATR 1
2010 ATC 20-170

Zeta Force Pty Ltd v. Federal Commissioner of Taxation
(1998) 84 FCR 70
39 ATR 277
98 ATC 4681

Project Blue Sky Inc v. Australian Broadcasting Authority
[1998] HCA 28
(1998) 194 CLR 355

Other References:
ATO Interpretative Decision ATO ID 2009/112