Commissioner of Taxation v ElecNet

Introduction 7 The essential question in this appeal can be stated simply. Is the Electrical Industry Severance Scheme (the EISS) a "unit trust" for the purposes of Division 6C of the Income Tax Assessment Act 1936 (Cth) (the ITAA)? 8 One difficulty is that there is no general definition in Division 6C of a "unit trust". Division 6C has inclusive definitions of "unit" and "unitholder" but those inclusive definitions are provided only in relation to a "prescribed trust estate". The primary judge relied on those definitions and held that the EISS was a unit trust within the meaning of Division 6C. The appellant, the Commissioner, now appeals from that decision. 9 On this appeal the submissions of both the Commissioner and the trustee of the EISS, Elecnet, were wide ranging. Both parties proffered a single definition of a unit trust for the purposes of Division 6C. These attempts to formulate a single, universal definition of a unit trust for the purposes of Division 6C should not be accepted. Rather, the approach of the primary judge should generally be followed with one addition. That approach is to focus on a core, albeit not necessarily determinative, consideration for a unit trust which is that beneficiaries of the trust have an interest in the trust assets in the sense explained later in these reasons. However, the addition to the primary judge's approach is that although this is a core consideration, that interest must still have some fit with the functional notion of a unit. 10 The Commissioner's suggested meaning of "unit trust" was said to be a generally accepted meaning. But it was too narrow. The Commissioner's definition was that a unit trust is a type of fixed trust involving a percentage interest in the trust rights, with no trustee discretionary powers (ts 20-21). The Commissioner acknowledged that this narrow definition was inconsistent with the definition of "unit" in Division 6C. However, he submitted that this definition should be ignored because it was only "in relation to a prescribed trust estate". Even if that submission of a narrow approach to ignoring the definition of "unit" were correct (which it is not), it encounters the obstacle that it is inconsistent with the broader approach to a unit that was taken in the second reading speech to the legislation that introduced Division 6B (upon which Division 6C was based). It is also inconsistent with the broader approach which was taken in the White Paper, from which Division 6C was conceived. And it is inconsistent with the broader approach taken to the meaning of a unit in the United Kingdom and New Zealand legislation to which the White Paper had referred. 11 On the other hand, Elecnet's submission may be too broad and could potentially involve surprising results. Senior counsel for Elecnet submitted that every express trust would be a unit trust except for "pure discretionary trusts" which have no person with any entitlement, and no person entitled in default (ts 56-57). This would contemplate a situation in which the trust would fall within Division 6C based on the existence of a single person entitled to take in default of exercise of a trustee's general discretion to appoint. The definition proposed by Elecnet would also invite consideration of matters unexplored in submissions including the scope of a discretionary trust, a concept which has been described by the High Court as descriptive rather than normative: Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226, 234 [8]. 12 In the absence of focused submissions, based upon concrete facts, it is not appropriate in this case, assuming it to be possible, to attempt to formulate a single, comprehensive definition of "unit trust" for the purposes of Division 6C that applies in every instance. It is also not necessary to attempt to formulate a single test for a unit trust in this case because this appeal can be resolved on the short point that whatever is encompassed within the concept of a unit trust within Division 6C there is a necessity for something which fits a description of "units" within the functional, and descriptive, notion of a unit trust. This includes a focus upon one of the core indicia of a unit, namely a beneficial interest in any of the income or property of the estate. 13 The EISS was not a unit trust because the Workers did not have units in any meaningful sense. As to the income of the EISS trust, the EISS Deed gave the Trustee (Elecnet) a discretion to distribute the income including to the Workers' employers rather than the Workers. As to the capital, the EISS Deed also gave the Trustee discretions as to the Workers to whom the capital of the Trust Fund would be distributed, and as to how much would be distributed. Even an accounting mechanism which recorded payments made to the EISS in respect of particular Workers was subject to adjustment by the Trustee based on its view about what is "appropriate or equitable". Whatever the interests of the beneficiaries may be in the trust, those interests are not unitised. The purpose of Division 6C is to treat particular trusts as if they were companies for tax purposes. That is because some trusts, relevantly those known commonly as unit trusts, have about them features which make it appropriate that they be taxed as if they were companies rather than as the trusts that they are. The single most striking feature making it appropriate to treat "unit trusts" as if they were companies, is that the interests of the beneficiaries (whatever those interests might be) are held through a metaphor of a "unit" which Parliament has treated as analogous to the way that shareholders hold shares. 14 The appeal must be allowed.