Commissioner of Taxation v Greenhatch

Federal Court of Australia (Full Court)|2012-06-07|Before: Robertson JJ

The applicant's submissions 7 The applicant identified as erroneous the Tribunal's holding that the part of the "trust amount" attributable to the "trust gain" (both subdivision 115-C concepts) was fixed by the resolution of the trustee for the distribution of trust law income to the respondent: see [65] of the reasons of the Tribunal set out above. As a result, the Tribunal decided that the entire amount of the respondent's trust amount of $112,340 was attributable to the Elke Trust's $450,635 trust gain, 50% of which ($225,317.50) was to be distributed in total (as a combination of income and capital distributions) to the respondent for trust law purposes by reason of the trustee's resolutions. 8 In the applicant's submission, determining the process of attribution Parliament had in mind was assisted by a consideration of the statutory purpose. Subdivision 115-C was premised on the proposition of law that what the beneficiary was assessed on under s 97 of the 1936 Act was an item of statutory income for the purposes of s 6-10 of the 1997 Act, whose character as such statutory income bore no necessary juridical relationship with the character of any gains and losses made by the trustee. In particular, the beneficiary could never offset capital losses it might have had against amounts assessed to it under s 97 of the 1936 Act. Parliament perceived this to be inappropriate where a trust made a tax net capital gain. It thus enacted subdivision 115-C of the 1997 Act. 9 The applicant submitted that where a trust estate made a capital gain that was taken into account in calculating the tax net capital gain that was included in its tax net income, and a beneficiary was assessable on a share of that tax net income, the scheme of subdivision 115-C was: to deem the beneficiary instead to have made a capital gain (s 115-215(3)) to be taken into account in working out the tax net capital gain included in their own assessable income; and to provide an offsetting deduction in s 115-215(6) to avoid the double counting of amounts already assessed to the beneficiary under s 97; to the extent (if any) to which the amount assessed under s 97 was "attributable" to the trust estate's capital gain or tax net capital gain respectively. 10 As to statutory purpose, it was submitted first that the subdivision was concerned with calculations made under, and only for the purposes of, the 1997 Act or the 1936 Act; namely the "trust amount" and the "trust gain"; and second the provision created a statutory fiction in part whereby an amount of statutory income assessed under s 97 to a beneficiary was effectively replaced by a capital gain. 11 The "part" of the trust amount assessed to the respondent, attributable to the trust gain made by the Elke Trust, referred to his share of that capital gain determined as a proportion of the overall tax net income of the trust estate. Here, in the 2008 year, the Elke Trust's tax net income was $598,563.50, which included the tax net capital gain of $225,317.50. That net capital gain represented 37.6430% of the tax net income of the Elke Trust in that year ($225,317.50 divided by $598,563.50 multiplied by 100). It followed that 37.6430% of the respondent's trust amount of $112,340 was attributable to the capital gain made by the Elke Trust in the 2008 year (i.e., an annual amount equal to $42,288). That corresponded with an 18.7683% proportionate share of the Elke Trust's tax net capital gain of $225,317.50.

The respondent's submissions 12 The respondent submitted that the applicant's case departed from the ordinary and natural meaning of the language of the legislation and did not result in the application of s 115-215(3)(b) to the facts. 13 The sum of $112,340 was the trust amount, being the amount included in the assessable income of the respondent under s 97(1)(a) of the 1936 Act. Section 115-215(3)(b) was enlivened. The capital gain made by the trustee of the Elke Trust was the trust gain for the purposes of the section. The gain was reduced under step 3 of the method statement in s 102-5(1). On the facts, as the Tribunal found, the whole of the amount of $112,340 that was included in the respondent's assessable income under s 97 of the 1936 Act was attributable to the trust's capital gain. The respondent's present entitlement to a share of the income of the trust estate was comprised solely of the part of the capital gain that was distributed to him as income of the trust. He had no entitlement to any income of the trust that did not constitute the capital gain. Thus, it was submitted, the inclusion of the sum of $112,340 in the assessable income of the respondent under s 97 was due solely to the distribution to him of part of the capital gain. 14 Accordingly, under s 115-215(3)(b) the respondent was taken to have made a capital gain equal to twice the amount included in his assessable income under s 97 of the 1936 Act. The conclusion for which the applicant contended, namely that only 37.6430% of the amount that was included in the respondent's assessable income under s 97 of the 1936 Act was attributable to the trust's capital gain, was arrived at by taking the proportion which the net capital gain bore to the net income of the trust and applying that proportion to the amount included in the respondent's assessable income under s 97 of the 1936 Act. However, the respondent submitted, the applicant's approach did not identify which parts of the amount that was included in the respondent's assessable income under s 97 had a causal connection with the capital gain made by the trust and was not the statutory enquiry required under s 115-215(3). In its ordinary and natural meaning, the word "attributable" referred to a causal link between the subject matters to which it was applied. The applicant's construction of s 115-215(3)(b) gave no operation to the words "(if any)".

The legislation 15 The immediately relevant provisions of the 1936 Act were in the following terms. 16 Section 97 provided that, subject to Division 6D (which concerned certain closely held trusts): (1) … where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a) the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and (b) the exempt income of the beneficiary shall include: (i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and (c) the non-assessable non-exempt income of the beneficiary shall include: (i) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. Note: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 also affects the assessment of the beneficiary. (2) A reference in this section to income of a trust estate to which a beneficiary is presently entitled shall be read as not including a reference to income of a trust estate: (a) to which a beneficiary is deemed to be presently entitled by virtue of the operation of subsection 95A(2) where the beneficiary: (i) is a natural person; (ii) is a resident at the end of the year of income; (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and (iv) is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; or (b) to which a beneficiary is presently entitled where the beneficiary: (i) is a non-resident at the end of the year of income; (ii) is not a beneficiary to whom subsection (3) of this section or subsection 97A(1) or (1A) applies in relation to the year of income; and (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate. (our emphasis) 17 Section 95 defined net income in relation to a trust estate to mean, so far as presently relevant, the total assessable income of the trust estate calculated under that Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions. 18 Turning to subdivision 115-C of the 1997 Act, the relevant provisions were as follows: 115-200 What this Division is about This Subdivision sets out rules for dealing with the net income of a trust that has a net capital gain. The rules treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts. This lets the beneficiary reduce those parts by any capital losses and unapplied net capital losses it has. If the trust's capital gain was reduced by either the general 50% discount in step 3 of the method statement in subsection 102-5(1) or by the small business 50% reduction in Subdivision 152-C (but not both), then the gain is doubled. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) or the small business 50% reduction. If the trust's capital gain was reduced by both the general 50% discount and the small business 50% reduction, then the gain is multiplied by 4. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) and the small business 50% reduction. The rules also give the beneficiary a deduction if necessary to prevent it from being taxed twice on the same parts of the trust's net income.

Operative provisions 115-210 When this Subdivision applies (1) This Subdivision applies if a trust estate has a *net capital gain for an income year that is taken into account in working out the trust estate's net income (as defined in section 95 of the Income Tax Assessment Act 1936) for the income year. (2) If the trust estate has a beneficiary that is a *complying superannuation entity that is a trust, this Subdivision applies in relation to the complying superannuation entity as a beneficiary but not as a trust estate. This Subdivision does not apply otherwise to a complying superannuation entity that is a trust. 115-215 Assessing presently entitled beneficiaries Purpose (1) The purpose of this section is to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate'scapital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so: (a) the beneficiary can apply *capital losses against gains; and (b) the beneficiary can apply the appropriate *discount percentage (if any) to gains. Application (2) This section treats you as having certain extra *capital gains, and gives you a deduction, if: (a) you are the beneficiary of the trust estate; and (b) your assessable income for the income year includes an amount (the trust amount): (i) under paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or (ii) under subsection 98A(1) or (3) of that Act; or (iii) under section 100 of that Act; or (iv) under section 99F of that Act. Extra capital gains (3) For each *capital gain (the trust gain) of the trust estate, Division 102 applies to you as if you had: (a) if the trust gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (*discount capital gains) or Subdivision 152-C (small business 50% reduction) - a capital gain equal to the part (if any) of the trust amount that is attributable to the trust gain; and (b) if the trust gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - a capital gain equal to twice the part (if any) of the trust amount that is attributable to the trust gain; and (c) if the trust gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions) - a capital gain equal to 4 times the part (if any) of the trust amount that is attributable to the trust gain. (4) For each *capital gain of yours mentioned in paragraph (3)(b) or (c): (a) if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1) - Division 102 also applies to you as if your capital gain were a *discount capital gain, if you are the kind of entity that can have a discount capital gain; and (b) if the relevant trust gain was reduced under Subdivision 152-C - the capital gain remaining after you apply step 3 of the method statement is reduced by 50%. Note: This ensures that your share of the trust estate's net capital gain is taxed as if it were a capital gain you made (assuming you made the same choices about cost bases including indexation as the trustee). (4A) To avoid doubt, subsection (3) treats you as having a *capital gain for the purposes of Division 102, despite section 102-20. Section 118-20 does not reduce extra capital gains (5) To avoid doubt, section 118-20 does not reduce a *capital gain that subsection (3) treats you as having for the purpose of applying Division 102. Deduction (6) You can deduct for the income year the part (if any) of the trust amount that is attributable to the trust estate's *net capital gain mentioned in subsection 102-5(1). Note: This deduction ensures you are not taxed twice on the part of the trust amount that is attributable to the trust estate's net capital gain. 19 As set out above, by s 115-210(1) the subdivision applied if a trust estate had a *net capital gain for the income year that was taken into account in working out the trust estate's net income (as defined in s 95 of the 1936 Act) for the income year. 20 Section 102-5 of the 1997 Act set out how to work out the *net capital gain. The section provided: 102-5 Assessable income includes net capital gain (1) Your assessable income includes your net capital gain (if any) for the income year. You work out your net capital gain in this way: Working out your net capital gain Step 1. Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year. Note 1: You choose the order in which you reduce your capital gains. You have a net capital loss for the income year if your capital losses exceed your capital gains: see section 102-10. Note 2: Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years. Step 2. Apply any previously unapplied *net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step1 (including any capital gains not reduced under that step because the *capital losses were less than the total of your capital gains). Note 1: Section 102-15 explains how to apply net capital losses. Note 2: You choose the order in which you reduce the amounts. Step 3. Reduce by the *discount percentage each amount of a *discount capital gain remaining after step 2 (if any). Note: Only some entities can have discount capital gains, and only if they have capital gains from CGT assets acquired at least a year before making the gains. See Division 115. Step 4. If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions. Note 1: The basic conditions for getting these concessions are in Subdivision 152-A. Note 2: Subdivision 152-C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152-E does not apply to CGT events J5 and J6. Step 5. Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year. Note: For exceptions and modifications to these rules: see section 102-30. 21 It was common ground that the Elke Trust had a net capital gain as defined for the income year that was taken into account in working out the trust estate's net income as so defined for the income year. 22 As we have set out, s 115-215(1) of the 1997 Act stated the purpose of s 115-215 was to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's *capital gains were treated as a beneficiary's capital gains when assessing the beneficiary, so: (a) the beneficiary could apply *capital losses against gains; and (b) the beneficiary could apply the appropriate *discount percentage (if any) to gains. 23 A capital loss was defined in s 995-1 of the 1997 Act as being, for each *CGT event, worked out in the way described in that event. The same section defined discount percentage to have the meaning given by subdivision 115-B, relevantly 50%. 24 Again as we have set out, s 115-215(2) of the 1997 Act treated a beneficiary of a trust estate as having certain extra *capital gains and gave that beneficiary a deduction if the beneficiary's assessable income for the income year included an amount, relevantly, under s 97(1)(a) of the 1936 Act. It was not suggested that the other instances where s 115-215(2) treated the beneficiary as having certain extra *capital gains and gave the beneficiary a deduction were relevant.

Analysis 25 Section 97(1)(a) applied where a beneficiary of a trust estate who was not under any legal disability was presently entitled to a share of the income of the trust estate. The assessable income of the beneficiary included so much of that share of the net income of the trust estate as was attributable to a period when the beneficiary was a resident. Commissioner of Taxation v Bamford (2010) 240 CLR 481 established that "the income of the trust estate" referred to that income according to the general law of trusts and "that share" of the net income of the trust estate referred to the proportion of the net income of the trust estate. 26 In Bamford (above), the High Court, at [45], approved the analysis of Sundberg J in Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 74-75, including the following: The contrast between the expressions "share of the income of the trust estate" and "that share of the net income of the trust estate" shows that the draftsman has sought to relate the concept of present entitlement to distributable income, and not to taxable income, which is, after all, an artificial tax amount. Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate. 27 Applying the legislation in sequence, s 97, where the beneficiary was presently entitled, should first be considered. Here, the assessable income of the beneficiary included the proportion of the net income of the trust estate as was attributable to the period the beneficiary was a resident. The beneficiary was to be taxed on that proportion of the net income of the trust estate. 28 What was included in the net income of the trust estate? Bamford (above) at [32] makes it clear that it is necessary to consider the definition of "assessable income" in s 6(1) of the 1936 Act which in turn refers to that definition in s 995-1(1) of the 1997 Act. In the 1997 Act, that definition in turn refers to ss 6-5, 6-10, 6-15, 17-10 and 17-30 of the 1997 Act. By reference to s 6-10, s 10-5 and s 102-5 of the 1997 Act assessable income includes net capital gain for the income year. 29 Thus the beneficiary was to be taxed on that proportion of the net income, including net capital gain, of the trust estate. In the present case that proportion was 18.7863%. That percentage of the net income of $598,000 is $112,340. Mr Greenhatch's share of the tax net income of the Elke Trust was $112,340. 30 Subdivision 115-C is then used to allow the taxpayer to reduce his liability on his s 97 income. 31 It was common ground that Mr Greenhatch's assessable income for the income year included an amount under s 97(1)(a) of the 1936 Act. It is this amount that is referred to as the trust amount in s 115-215(2)(b)(i). It was common ground that Mr Greenhatch's "trust amount" was the sum of $112,340, that is, his share of the net income of the Elke Trust. But what he received in the present case was a proportionate share of amounts having no single character. 32 The other relevant component is each *capital gain of the trust estate. This is referred to as the trust gain in s 115-215(3). In the present case this was an amount of $450,635.00. 33 Section 115-215(3) is addressed to the beneficiary of the trust estate where the beneficiary's assessable income for the income year included a trust amount. For each *capital gain (trust gain) of the trust estate, relevantly by s 115-215(3)(b), if the trust gain was reduced under step 3 of the method statement in s 102-5(1) (*discount capital gains) Division 102 applied as if the beneficiary had a capital gain equal to twice the part (if any) of the trust amount that was attributable to the trust gain (our emphasis). 34 By s 115-5 a discount capital gain is a *capital gain made by, relevantly, an individual, resulting from a *CGT event happening after 21 September 1999, not having an indexed cost base and where the CGT asset was acquired at least 12 months before the CGT event. 35 The purpose of this section therefore was to have Division 102 applied to the beneficiary and, where the trust gain was reduced by, relevantly, 50%, to deem the beneficiary to have a capital gain equal to twice the part of the trust amount attributable to the trust gain (our emphasis). The trust amount is, as described above, the amount included in that beneficiary's assessable income for the income year under, relevantly, s 97(1)(a). 36 In our opinion, once the share/proportionality method under s 97 is used to give the trust amount, it is difficult to apply "part" in s 115-215(3)(b) as a non-proportional concept. If the trust amount is calculated as a proportion and "attributable" is given its ordinary meaning, then reconciling the trust amount with the trust gain itself involves a proportional concept. There is no warrant in the deeming provisions of s 115-215(3) or in their language for going behind the proportionate share. Consistently with the approach of Sundberg J in Zeta Force (above) 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. 37 This conforms to the purpose of the legislation stated in s 115-215(1) to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's *capital gains are treated as a beneficiary's capital gains when assessing the beneficiary. 38 It is also consistent with the description given immediately before the operative provisions of s 115-210, set out above, that the rules treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts. 39 We see no finding of fact by the Tribunal which stands in the way of this conclusion: as the Tribunal correctly said, the question is one of statutory interpretation. 40 As to the words "if any", the presumption is that they should be given an operation where that is possible: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355. The phrase may have work to do in s 115-215(3)(a) but it may have no work to do in the case of s 115-215(3)(b) and (c). If the phrase does have work to do in those paragraphs it would be against the possibility that a trust amount might not be capable of attribution to a trust gain in respect of ss 98A or 100 (see ss 115-215(2)(b)(ii) and (iii)) where it appears that a beneficiary is not assessed by reference to their proportionate share of the net income. The phrase may therefore have been included in ss 115-215(3)(b) and (c) from an abundance of caution. More importantly the phrase is, in our view, inapt to qualify the relationship between the proportionate share of the artificial tax amount and a capital gain, to which we have referred. 41 We also note that although we were taken to the extrinsic material, the Explanatory Memorandum for the Act introducing subdivision 115-C, we found nothing in it which assisted with the present question.

Conclusion 42 For these reasons the appeal should be allowed and the decision of the Tribunal set aside. The parties agreed there should be no order as to costs. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Edmonds, Greenwood and Robertson.

Income Tax Assessment Act 1997(Cth)ss 6-10, 102-5, 115-200, 115-210, 115-215

The Tribunal's decision 6 The Tribunal expressed its conclusion as follows: [64] The conclusion that we reach is that s 115-215 of the 1997 Act is a section that the legislature enacted at a time before there was any caution directed to the decision of the High Court in Charles [v Commissioner of Taxation (1954) 90 CLR 598] which is consistent with a suite of provisions that identify: (a) particular amounts of income or capital gains of trust estates; (b) beneficiaries' particular entitlements to those amounts; and (c) recognise those amounts in the hands of the beneficiaries with the same character as they had in the hands of the trustee. [65] Where the terms of the trust allow identification of who is entitled to what, in our view the legislature intended that the taxation treatment follow on a differentiated basis among beneficiaries. [66] It follows that in our view Mr Greenhatch should succeed in his application, the objection decision should be set aside and in lieu thereof the objection should be allowed in full. The Tribunal therefore decided to set aside the objection decision and substitute a decision that the applicant's objection decision be allowed in full: see Re Greenhatch and Commissioner of Taxation (2011) 80 ATR 480; [2011] AATA 479.

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