ElecNet (Aust) Pty Ltd (Trustee) v Commissioner of Taxation

Federal Court of Australia|2015-05-13|Before: Ms P, Davies J

The applicant's appeal be allowed. The matter to be remitted to the respondent for further consideration in accordance with these reasons, as contemplated by the Orders made 26 November 2014. The respondent pay the applicant's costs, to be taxed unless agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 660 of 2014

BETWEEN: ELECNET (AUST) PTY LTD (AS TRUSTEE FOR THE ELECTRICAL INDUSTRY SEVERANCE SCHEME) (ACN 080 344 458)

JUDGE: DAVIES J DATE: 13 MAY 2015 PLACE: MELBOURNE

introduction 1 ElecNet (Aust) Pty Ltd ("ElecNet") is the trustee of the Electrical Industry Severance Scheme ("the EISS"). The EISS provides benefits to "workers" (as defined) who leave or change their employment in circumstances set out in the Consolidated Deed of Trust Electrical Industry Severance Scheme ("the Deed"). In December 2012, ElecNet applied to the respondent ("the Commissioner") for a private ruling that ElecNet is a "unit trust" that is a "public unit trust" and a "public trading trust" for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 ("the 1936 Act"). The Commissioner ruled that the EISS is not a "unit trust" for Division 6C purposes, thereby making it unnecessary for the Commissioner to rule on whether the EISS is also a "public unit trust" and a "public trading trust" for Division 6C purposes. This is an appeal by ElecNet against the Commissioner's objection decision disallowing ElecNet's objection against the private ruling.

division 6c of part iii the 1936 act 2 Division 6C applies to public unit trusts that operate as trading trusts - that is where the business activities of the public unit trust go beyond investment in land for rental purposes, and investment or trading in loans, securities, shares and other specified financial instruments ("eligible investment business"): see s 102 The Division contains specific rules governing the tax treatment of such trusts and, in broad compass, treats these types of trusts similarly to companies for tax purposes: the net income of a public trading trust is taxable in the hands of the trustee at the corporate rate and distributions to the unitholders are treated for tax purposes as if they were dividends paid by a company. 3 "Unit trusts that are public trading trusts" are trusts that meet the requirements of s 102R. Those requirements include that the trust be a "unit trust" that is both a "public unit trust" and a "trading trust" in relation to the relevant year of income: s 102R(1)(a)(i) and (ii) and (b)(i) and (ii). 4 Section 102P prescribes that a "unit trust that is a public unit trust" for the purposes of Division 6C, if (but subject to the succeeding provisions of the section, none of which are presently relevant): (a) any of the units in the unit trust were listed for quotation in the official list of a stock exchange in Australia or elsewhere; (b) any of the units in the unit trust were offered to the public; or (c) the units in the unit trust were held by not fewer than 50 persons. 5 Section 102N(1) prescribes that "a unit trust is a trading trust" for the purposes of Division 6C if, relevantly: … the trustee: (a) carried on a trading business; or (b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. 6 A "trading business" is any business that does not consist wholly of an "eligible investment business": see definitions of "trading business" and "eligible investment business" in s 102M. 7 The expression "unit trust" is not defined, however s 102M provides that in Division 6C "unless the contrary intention appears": "prescribed trust estate" means a trust estate that is, or has been, a public trading trust in relation to any year of income. "unit", in relation to a prescribed trust estate, includes a beneficial interest, howsoever described, in any of the income or property of the trust estate. "property" includes a chose in action and also includes any estate, interest, right or power, whether at law or in equity, in or over property. "unitholder" in relation to a prescribed trust estate, means the holder of a unit or units in the prescribed trust estate. "unit trust dividend " means: (a) any distribution made by the trustee of a prescribed trust estate, whether in money or in other property, to a unitholder; and (b) any amount credited by the trustee of a prescribed trust estate to a unitholder as a unitholder; but does not include: (c) money paid or credited, or property distributed, by the trustee of a prescribed trust estate to the extent to which the money or property is attributable to profits arising during a year of income in relation to which the prescribed trust estate was not a public trading trust; or (d) money paid or credited, or property distributed, by the trustee of a prescribed trust estate in respect of the cancellation, extinguishment or redemption of a unit to the extent to which: (i) the money paid or credited or the property distributed represents money paid to, or property transferred to, the trustee for the purpose of the creation or issue of that unit; and (ii) the amount of the money paid or credited or the value of the property distributed, as the case may be, does not exceed the amount of the money paid to the trustee, or the value, at the time of transfer, of the property transferred to the trustee, for the purpose of the creation or issue of that unit. 8 The operative provisions in Division 6C are ss 102S and 102T. Section 102S provides that: The trustee of a unit trust that is a public trading trust in relation to a relevant year of income shall be assessed and is liable to pay tax on the net income of the public trading trust of the relevant year of income at the rate declared by the Parliament for the purposes of the section. The rate of tax declared by s 25 of the Income Tax Rates Act 1986 (Cth) is 30%. 9 Section 102T modifies specified provisions in the 1936 Act and the Income Tax Assessment Act 1997 (Cth) (collectively "the ITA Acts") in relation to the imposition, assessment and collection of tax in respect of the net income of a public trading trust and the income or assessable income of a unitholder in a "prescribed trust estate". Relevantly, by virtue of ss 102T(11), (12), (14) and (19), s 44 of the 1936 Act is modified to include "unit trust dividends" in the assessable income of a "unitholder" on the same basis that company dividends are assessed to shareholders.

The eiss 10 The ruling request detailed the following background information about the EISS: EISS was established in February 1988 in order to provide portability and security of termination and redundancy benefits to workers in the electrical contracting industry… The sponsors of EISS are the Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia ("ETU") and the National Electrical Contractors Association ("NECA"). For completeness … EISS is prescribed by a Regulation to be an Approved Work Entitlement Fund (as defined in the Fringe Benefits Tax Assessment Act 1986). … Broadly, the scheme under which the EISS operates involves employers within the relevant industry becoming members of EISS. The employer members are required to make weekly contributions to EISS in respect of their workers pursuant to obligations under industrial agreements or awards. EISS credits those contributions to an account in the name of each of the relevant workers. At such time as a worker's employment is terminated, EISS is, subject to the class of worker, generally required to make a severance or redundancy payment to the worker. EISS has an excess of 1000 active members (i.e. employers who are currently making contributions to EISS). Furthermore, there are a number of inactive members, being employers who have contributed to EISS but are not currently making contributions. In addition, there are approximately 31,000 worker accounts held in EISS. 11 A copy of the trust deed for the EISS was attached to the ruling request.

the issues 12 The appeal against the objection decision raised two substantive issues. One issue is the meaning of "unit trust" in the context of Division 6C. The other issue is whether workers have "a beneficial interest in any property" of the trust estate within the statutory definition of "unit" in s 102M. It is accepted by ElecNet that workers do not have any beneficial interest in the income of the trust.

the PARTIES' submissions 13 ElecNet's case relies on the definition of "unit" to give content and meaning to the expression "unit trust" as it is used in Division 6C. ElecNet contended that it is sufficient to constitute a "unit trust" for Division 6C purposes that persons hold beneficial interests in the income or property of the trust, whether or not that beneficial interest is described as a "unit" under the terms of the trust deed. It was argued that the definition of a "unit" makes clear that the beneficial interest of any person under the trust deed need not be described as a "unit" in the trust instrument nor, contrary to the Commissioner's contention, be a beneficial interest in the whole of the income and property of the trust. ElecNet argued that neither the definition of "unit" in s 102M nor the test for qualifying as a "public unit trust" in s 102P require the unitholders collectively to have a beneficial interest in the whole of the income or capital of the trust. 14 ElecNet contended that the EISS is a "unit trust", submitting that the entitlements held by workers under the terms of the EISS constitute a "beneficial interest in property of the trust" because: (1) the contributions are held on trust for the workers in respect of whom they are made; (2) the terms of the EISS give each worker a discrete interest in the trust fund to the extent of his or her entitlement to severance payments paid out of the contributions made by members in accordance with clause 4; and (3) the interest of each worker therefore falls within the statutory description of "unit" in s 102M as constituting a "beneficial interest … in the property of the trust". It was submitted further that the EISS is a "public unit trust" within the terms of s 102P because the "units" in the EISS are held by not fewer than 50 persons and in 2014 there were approximately 31,000 workers' accounts. 15 The Commissioner advanced three principal reasons in support of his contention that the EISS is not a unit trust for the purposes of Division 6C. First, he submitted that the term "unit trust" is not ascertained by the statutory meaning of "unit" in s 102M but describes the common notion or understanding of the term "unit trust". The Commissioner contended that the common notion or understanding of the term "unit trust" is an express trust in which the beneficial entitlements of the objects of the trust are divided by the terms of the trust into discrete parcels of rights (generally described as units), each of which reflects proportionately, or represents an aliquot share of, the net value of the property of the trust as a whole, that is, an interest in all the property. It was contended that the concept of unitisation whereby units reflect proportionately, or represent an aliquot share of, the property of the trust "is of the very essence of what is a unit trust". The following further features were also said to be significant considerations: (1) that unit trusts are used as collective investment structures for investors; (2) unitholders subscribe money in exchange for units or certificates; (3) unitholders may have a fixed entitlement to share in income and/or property of the trust; and (4) on dissolution any surplus is distributed to unitholders. It was submitted that in the case of the EISS, the terms of the Deed do not confer rights that entitle the workers (or for that matter the National Electrical Contractor's Association ("the NECA") or the Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing And Allied Services Union of Australia ("the ETU")) to proportionate shares of the property of the trust as a whole: that is, the interests in the trust property are not "unitised". Rather, it was submitted, workers only have the contingent right to receive an amount of money in the future on the happening of a prescribed severance event, which "bear[s] no necessary relationship to the value of the scheme's property as a whole". Secondly, it was submitted that unit trusts are used for collective investment purposes, rather than for the purposes of benefaction. Here, it was said, the EISS was established for the beneficial purpose of providing employment related benefits such as redundancy and is not the kind of investment structure with which the legislature was concerned when Division 6C was enacted. Thirdly, it was submitted that it would not be consistent with the policy of the legislation to treat the EISS as a unit trust given its essentially benevolent function. 16 The Commissioner alternatively argued that if, contrary to his principal submission, it is relevant to inquire into whether the workers' entitlements come within the definition of "unit" in s 102M, the definition of "unit" in s 102M does not assist Electnet, by reason, that workers' contingent entitlements to payments are not "beneficial interests in the property" of the trust.

The Trust Deed 17 The question for determination is whether the terms of the EISS support the characterisation of the EISS as a "unit trust" for Division 6C purposes. In order to answer that question it is first necessary to identify the nature of the interests in the trust fund of the EISS.

The provisions of the deed 18 Recital A records that the ETU and NECA agreed to establish the EISS to provide benefits to "workers" (as defined) who leave or change their employment in the circumstances set out in the Deed. The benefits are paid out of contributions made by "members" of the EISS. The "members" of the EISS are employers operating in the electrical, electronic and communications contracting industry (see definition of "Industry" in clause 1) which are admitted to the scheme by ElecNet (as the trustee). 19 Once admitted as a member, the employer must make contributions to the EISS in respect of each of its workers "of such amount, or at such rate and on such basis applicable from time to time" under, or for the purpose of, the applicable industrial agreement in force at the time (currently the ETU Enterprise Agreement) (see definition of "Agreement" in clause 1 and clause 4.1). All contributions made by members under clause 4.1 become part of the trust fund (clause 4.2). Clause 5 sets out how members make contributions to the fund. Under clause 5.2, each contribution by a member in respect of a "worker" must be accompanied by a statement setting out the details of how the contribution has been calculated. If a member fails to make a contribution by the due date, the trustee may charge the member interest (clause 5.5). If the employer does not provide sufficient information identifying the worker in respect of whom the contribution is made, the trustee has certain discretions in dealing with those contributions, including making a refund to the member (clause 5.7). 20 The trustee must establish an account for each worker and credit each contribution paid by an employer to the trustee in respect of a worker to that worker's "worker's account" (as defined) (clauses 6 and 11). The trustee must (at least annually) notify each worker of the balance standing to the credit of the worker in the worker's account (clause 27.5). 21 The trust property of the EISS consists of all the moneys and other assets held by, or on account of, the trustee under the Deed (definition of "trust fund" in clause 1), which includes the contributions made by employers in respect of a worker (clause 4.2). The terms of the EISS require the trustee to maintain the "trust fund" exclusively for making "severance payments" to workers (subject to the provisions of the deed) (clause 11.1) and where a worker becomes entitled to a severance payment, the trustee must deal with that entitlement in accordance with clause 8. "Severance payments" means payments to be made to or in respect of a worker under clause 8 (see definition in clause 1). Such payments are made out of the contributions made in respect of that worker by the employer of that worker less any debits to that worker's accounts made by the trustee as provided by clause 7. 22 Where a worker becomes entitled to a severance payment, the trustee must deal with the worker's entitlement to the amount standing to the credit of that worker in that worker's account as prescribed by clause 8. Clause 8 only applies to a worker who is an "active worker". The term "active worker" is defined in clause 1 to have "the meaning determined by the trustee for the purposes of this Deed". The ruling request did not state whether there is such a determination or include any determination as part of the documents relevant to the ruling request. 23 Clause 8 provides that the trustee must pay a worker, or a person claiming through or under a worker, a severance payment upon the following "severance events": (a) in the case of a "BFR Worker" - (i) the termination of the worker's employment, where the worker was employed by a member of the EISS, by reason of a genuine redundancy; or (ii) the worker's retirement; or (iii) the worker's death; and (b) in the case of a "TER Worker" - (i) the termination of the worker's employment, where the worker was employed by a member of the EISS, for any reason whatsoever; or (ii) the worker's retirement; or (iii) the worker's death. 24 The amount payable is: (a) where the amount standing to the credit of the relevant worker's account at the time of the severance event is less than or equal to the "prescribed amount" (as defined), the amount standing to the credit of the relevant worker's account (clause 8.3(a)); or (b) where the amount standing to the credit of the relevant worker's account at the time of the severance event is greater than the "prescribed amount", the "prescribed amount", plus, where the severance event is the worker's retirement or death, the balance of the amount standing to the credit of the relevant worker's account (clause 8.3(b)(i) and (ii)B). 25 Where the severance event is the termination of the worker's employment, the balance of the amount standing to the credit of the relevant worker's account is only payable: (a) if the worker has remained unemployed for four consecutive weeks after the termination of employment; or (b) if the worker has ceased to be employed in the industry or has been promoted to an above award position and remained in that position for 39 weeks after termination of employment (clause 8.3(b)(ii)A). 26 In the case of a worker whose employment has terminated but who commences employment before the end of the four week period, the balance standing to the credit of the relevant worker's account is to remain in the worker's account until the worker is entitled to another severance payment under the Deed (clause 8.5). 27 In the case of the death of a worker, the amount is payable to or for the benefit of the worker's dependants, legal personal representative or "any other person the trustee determines" (where the trustee cannot find either the worker's dependants or legal personal representative) "to the exclusion of the other or others of them and in such manner and in such proportions, and subject to such conditions, as the trustee determines" (clause 8.7). 28 "Prescribed amount" means: (a) where the Worker is a TER Worker, the sum of $4,000 or such other amount as may be determined by the Trustee from time to time for the purposes of this definition; or (b) where the Worker is a BFR Worker, the tax free amount of a genuine redundancy payment calculated in accordance with sub-section 83-175(3) [sic] of the Income Tax Assessment Act 1997. In other words, the amount payable to a TER worker is $4,000 (subject to the trustee determining it to be another amount) and to a BRF worker, the amount that can be concessionally taxed as a genuine redundancy payment. 29 If no contribution has been made in respect of a worker within the last two years of the worker's membership of the scheme and the trustee is unable to locate the worker, the balance standing to that worker's account is forfeited to the EISS. Such forfeited amounts are to be applied towards the administration expenses of the EISS (clause 12). 30 The income of the trust may be used by the trustee to make investments, pay reasonable administrative expenses of the trust fund, and make other payments that comply with EISS's status as an approved worker entitlement fund under s 58PA of the Fringe Benefits Tax Assessment Act 1986 (Cth) ("FBTAA") (clause 14). Otherwise, the income is to be capitalised. Clause 14.2 gives the trustee the discretion to distribute the capitalised income to NECA and the ETU beneficiaries (in the proportions set out) but the trustee is not required to make a distribution (clauses 14 and 17). NECA and the ETU beneficiaries do not have a fixed entitlement to a distribution of the capitalised income. 31 On termination of the EISS, if there is a surplus from the realisation of assets (after payment of the costs and expenses of the winding up and the debts and liabilities of the trustee) that exceeds the amounts credited to the worker's accounts, the surplus is to be transferred to a reciprocating scheme for each worker in an amount equal to the amount credited to their respective accounts and the balance, if any, paid into the worker's accounts in proportion to the amount credited to their respective accounts. If the remaining moneys are less than the balances in the workers' accounts, the moneys are to be paid out to the workers in proportion to the amount credited to their respective accounts (clause 23).

The parties' submissions on the nature of the interests in the trust fund of the EISS 32 ElecNet did not contend that workers (or for that matter NECA and the ETU) have any beneficial interest in the income of the EISS or in the trust property as a whole. Rather, it was contended, the terms of the EISS give each worker not merely personal rights against the trustee of due administration of the trust but an interest in the trust fund to the extent of his or her entitlement to a severance payment by reason that the contributions, under the terms of the EISS: (a) are paid to satisfy the rights of workers to severance payments under the relevant industrial arrangements (clause 4.1); (b) form part of the trust fund which is to be maintained by the trustee exclusively for making severance payments to each worker (clauses 4.2 and 11.1); (c) are made in respect of each worker to be held for that worker discretely (that is not jointly with any other person) (clause 6.1(a)); (d) are aggregated so that the entitlement of the worker (that is the balance from time to time in his or her worker's account) is readily ascertainable at any time, including termination, and is notified to the worker each year (clause 27.3); and (e) are paid to a worker as a benefit when he or she becomes entitled to a severance payment (as either a BFR worker or a TER worker) on the happening of one of the prescribed severance events (clause 8). Attention was also drawn to clauses 23.4 and 23.5 which provide for the capital, on termination of the EISS, to be paid to a reciprocating scheme for the benefit of each worker if there is a surplus, or proportionately to each worker's account if there is a deficit. ElecNet supported its contention that the entitlements conferred on workers under the terms of the Deed were not merely personal rights but in the nature of beneficial interests in property by reference to Caboche v Ramsay (1993) 119 ALR 215; [1993] FCA 611. 33 In response, the Commissioner contended that the workers' entitlements under the Deed are merely personal rights against the trustee and that the terms of the EISS do not give workers a beneficial interest in the property of the trust for the reason that workers' entitlements under clause 8 are contingent - that is, it was argued, "at most" clause 8 gives workers a right, contingent on the happening of a prescribed severance event, to receive payment of an amount up to the amount standing to the credit of the worker in the worker's account on the happening of the prescribed event. The contingent nature of the workers' entitlements was said to be "confirmed" by the provision for forfeiture of benefits in clause 12 and by clause 7.1(e) which enables the trustee, at its discretion, to debit from the worker's account not just expenses in respect of the worker but also amounts that the trustee determines is "appropriate or equitable" to debit to the worker's account. The workers' contingent entitlements were said "therefore [to] bear no necessary relationship" to the contributions made to the trust in respect of them. It followed, it was argued, that the rights created by the trust deed do not confer any interest in the workers "in" the property of the trust. The Commissioner also pointed to clauses 8.7 and clause 23.4(c)(i) in support of his contention, arguing that it is significant that on the death of a worker, the severance payment does not form part of the deceased's estate and on termination and dissolution of the EISS, the surplus moneys are not transferred to the workers but to a reciprocating scheme for any worker. 34 In oral submissions the Commissioner advanced the further argument that the trustee's right of indemnity in clause 19 meant that the workers do not have a proprietary interest in the trust fund (which includes the moneys standing to their account) because, adopting the words of the High Court in CPT Custodian v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 ("CPT Custodian") at 121: Until satisfaction of rights or reimbursement or exoneration, it was impossible to say what the trust fund in question was.

Decision on the nature of the interests in the trust fund of the EISS 35 With one qualification, I accept the submission for ElecNet that clause 8 confers on workers an interest of a proprietary nature in the trust fund to the extent of his or her entitlement to severance payments paid out of the contributions made by members in accordance with clause 4, even though the entitlement is a right to a payment in the future conditional upon the happening of a prescribed severance event. The qualification is that clause 8 only applies to "active workers". "Active worker" is defined to have "the meaning determined by the trustee for the purposes of the Deed" (clause 1) but there is no reference at all in the ruling request as to whether such a determination has been made and, if so, what it contained. In this appeal, which can only be based on the material identified in the ruling request (Commissioner of Taxation v McMahon (1997) 79 FCR 127; Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 154), it is therefore simply unknown whether all workers in respect of whom contributions are made are active workers or whether active workers are a sub-class of workers. 36 It is material to the characterisation of the nature of workers' interest under the Deed that the contributions made to the EISS are in respect of termination and redundancy benefits to which workers are entitled under the industrial award that applies to the electrical contracting industry and, under the terms of the EISS, the trustee does not have any discretion in relation to the making of a payment under clause 8 in relation to an active worker upon the happening of a severance event. Under clause 8, upon the happening of a severance event, the trustee "shall pay" to the worker, or a person claiming through the worker, a severance payment calculated in accordance with clause 8.3, that is by reference to the amount standing to the credit of the worker in the worker's account (see also clause 11.3). The amount standing to the credit of the worker in the worker's account is comprised of all contributions made to the EISS in respect of the worker by an employer or employers less debits in accordance with clause 6 and those contributions form part of the trust fund (clause 4.2), which the trustee must maintain "exclusively" for making the severance payments (clause 11.1). There is a forfeiture clause (clause 12) but it operates only if the worker cannot be found after a period of time. 37 In Caboche v Ramsay (1993) 119 ALR 215, Gummow J at 230 characterised rights akin to the rights of active workers under the EISS as "equitable proprietary interests in the fund", albeit the rights did not carry an immediate right to payment and were "conditional in the sense that no benefit might be paid until certain conditions were satisfied". Gummow J's characterisation of such rights as equitable proprietary interests was referred to and applied in by the Full Federal Court in Benson v Cook (2001) 114 FCR 542 which held that the appellant in that case had an interest of an equitable proprietary nature in trust funds, although there was no immediate right to payment. The appeal to the High Court was not on this point: Cook v Benson (2003) 214 CLR 370. 38 The Commissioner argued that Caboche v Ramsay is distinguishable, contending that the fund under consideration in that case had only one member. However, that distinction is not borne out in the reasoning of Gummow J which did not depend upon the fund having only one member. The Commissioner also argued that the deed there under consideration did not appear to have a clause equivalent to clause 27.2(c) which states: A worker is entitled to a severance payment as provided in the Deed but shall not, except as otherwise provided in this Deed: …. (c) be entitled to lodge a caveat claiming an estate or interest in any land or real estate acquired or to be acquired as an investment of the scheme or otherwise. Clause 27.2(c) likewise does not assist the Commissioner. The clause is not at odds with the existence of an interest in the trust fund but merely prevents a worker from lodging a caveat in respect of any caveatable interest. The clause simply means that a worker cannot protect his or her right to receive a severance payment out of the monies standing to the credit of his or her worker's account by lodging a caveat. 39 Moreover, in Caboche v Ramsay, Gummow J considered that a clause in the deed under consideration in that case which was similar to clause 7.1(e) in the EISS did not mean that an equitable proprietary interest did not arise before the happening of entitling events. Gummow J stated at 230: The property forming the fund was settled on the trustees for the benefit of Mr Bond. Upon the constitution of the fund Mr Bond obtained an equitable proprietary interest in the fund, albeit one which did not carry an immediate right to payment. It should be noted that the existence of the power in r 7(2) to deduct amounts from the member accounts to pay expenses of administering the fund does not require any contrary conclusion. Baker v Archer-Shee [1927] UKHL 1; [1927] AC 844, the effect of which so often has been debated, is at least clear authority to that effect. Such a clause does not deny a beneficiary an interest in the trust fund, but simply entitles the trustee to have resort to the trust fund to meet expenses and the like as authorised by the clause. In the present case, the workers' interest of a proprietary nature in the trust fund derives from terms of the EISS under which contributions are made in respect of, and held by the trustee for the benefit of, the workers and which the trustee must credit to the worker's accounts but from which the trustee is also authorised to debit taxes, costs and expenses as provided for in clause 7.1. The effect of clause 7.1(e) is not to deny any interest of a proprietary nature in the trust fund. Rather, the effect of the clause is that such interest is subject to the right of the trustee to debit such amounts. 40 Clauses 8.7 and 23.4(c)(i) similarly are not inconsistent with rights of a proprietary nature in the trust fund held by the workers. Under clause 8.7, on the death of a worker (which is a severance event) the trustee is required to distribute the amount standing to the credit of a worker's account to the worker's dependants or legal personal representative (or any other person the trustee determines if the trustee cannot locate any dependants or legal personal representative). The discretion in the trustee whether to pay to the worker's dependants or legal personal representative does not alter the nature of the rights held by the worker. So too, the requirement that surplus moneys be paid to a reciprocating fund in respect of a worker on termination and dissolution of the EISS underscores the nature of those rights, albeit conditional on the happening of a severance event. 41 CPT Custodian also does not assist the Commissioner's argument. The issue in CPT Custodian was whether unitholders "owned" property held by the unit trust within the meaning of "owner" as defined in s 3 of the Land Tax Act 1958 (Vic) to mean "every person entitled to any land for any estate of freehold in possession". The High Court rejected the Commissioner's argument that the interests of the unitholders under the trust deed gave them beneficial ownership of the property, reasoning that the units were discrete bundles of rights, not a single right of a cumulative nature which gave them ownership jointly or in common in the property. The Court further reasoned that the unitholders' rights were subject to the trustee's right of indemnity which takes priority over the rights of the beneficiaries in respect of the trust assets so that until satisfaction of that right of indemnity, "it was impossible to say what the trust fund in question was" to which the beneficiaries had entitlement, citing Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 246: CPT Custodian at 121. That reasoning is not pertinent in the present case where the statutory question is whether workers have a "beneficial interest in property" of the EISS, not whether the workers have rights of ownership over the assets comprising the trust fund. 42 It follows that I accept the submission for ElecNet that the terms of the EISS deed confer rights in workers of a proprietary, not merely personal, nature in the trust fund to the extent of their respective entitlement, albeit that a worker's interest in the trust fund is contingent upon the happening of a severance event in relation to the worker.

division 6c 43 The next matter to consider is the meaning of "unit trust" in the context of Division 6C. The question is whether the defined meaning of "unit" informs the meaning of "unit trust" for the purposes of Division 6C (as contended by ElecNet) or whether the defined meaning applies for the purpose of the provisions in 102T in respect of distributions to "unitholders" (as the Commissioner contended). The meaning of the expression "unit trust" for the purposes of Division 6C and whether the meaning is to be ascertained by the definition of "unit" in s 102M is a question of statutory construction to be considered in the context of Division 6C read as a whole and in the wider statutory context of the taxation of trusts under the 1936 Act. That context includes the mischief that Division 6C was intended to remedy: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at 46-47. Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 248 CLR 378 at 389. 44 The Commissioner argued that the defined meaning of "unit" does not bear upon the meaning of "unit trust" but rather "unit trust" has a meaning that is independent of the definition. It was submitted that ElecNet's argument on the meaning of "unit trust" seeks impermissibly to give substantive effect to the definition and "to advance its argument by its own bootstraps", citing in support Kelly v The Queen (2004) 218 CLR 216 at 245. On the meaning of "unit trust", the Commissioner argued that "unit trust" in common usage is a descriptive term for a collective investment structure and, in the context of Division 6C, should bear that meaning. The Commissioner contended that the common usage meaning is consistent with the policy and purpose of Division 6C, which is directed to the use of unit trusts as collective investment structures in lieu of companies, similarly to Division 6B on which Division 6C was modelled. The Commissioner argued that the unit trust provisions in Division 6B were introduced at a time when dividend imputation had not been introduced and companies were seeking to reduce the impact of income tax on shareholders, by transferring property to trusts under which the shareholders in the company would be the beneficiaries. The second reading speech was said to identify the perceived problem in the following terms: The main concern of the government in this regard is to prevent ad hoc erosion of the so-called classical system of company taxation through the use of unit trusts by public companies. Accordingly, the broad thrust of the amendments is to remove the taxation advantage sought by companies from placing income producing property in the hands of unit trusts. This is to be achieved basically by treating unit trusts evolving from the practice as if they were companies for tax purposes. The Commissioner stated that the provisions were effectively expanded in 1985 by the enactment of Division 6C to apply to trading trusts, as opposed to trusts merely holding investments and referred to the second reading speech at the time of the enactment of Division 6C as follows: … although the very significant changes to company tax arrangements ultimately decided on by the Government will reduce the incentive to use trustS, considerable advantages in using the trust form still have remained for tax-exempt bodies investing in large business undertakings. Given the very favourable treatment already given to such bodies that would have been an unacceptable situation. The Government therefore decided, as announced in the Tax Reform Statement of 19 September, that company tax arrangements should be extended to public unit trusts that operate a trade or business. In announcing that decision, it was also indicated that private trusts and public unit trusts of the more traditional kind that do no more than invest in property, equities or securities would not be affected. It was argued that as the legislature at the time was concerned with unit trusts used as investment vehicles and the intention was to reduce the incentive to adopt a trust structure for tax purposes, it would not be consistent with the mischief to which Division 6C is directed, to treat the EISS as a unit trust, given its essentially benevolent function. 45 The starting point is the text of Division 6C. Division 6C does not define the expression "unit trust" but the terms "unit" and "unitholder" are defined. These terms are defined "in relation to" a prescribed trust estate. A "prescribed trust estate" is "a trust estate that is, or has been, a public trading trust in relation to any year of income": s 102M. In other words, a prescribed trust estate is a trust estate that is: (1) a unit trust; (2) a public unit trust; and (3) a public trading trust. In determining the meaning of "unit trust" in the context of Division 6C it is therefore instructive that the definition of "prescribed trust estate" incorporates by reference the term "unit trust". Given this, and the role of the definition of "unit" in the structure of Division 6C, Division 6C must be read as a whole and harmoniously so that whilst the term "unit trust" is itself not defined, its meaning is informed by the definition of "prescribed trust estate" in relation to which "unit" has a defined meaning. 46 A unitholder in relation to a prescribed trust estate is defined as the holder of a unit in that prescribed trust estate and a unit in relation to a prescribed trust estate is defined to include a beneficial interest "howsoever described" in any income or property of the trust estate. The function served by the definitions is to indicate that the references to "unit" and "unitholder" in the context of Division 6C are to be understood in the defined sense: Gibb v Commissioner of Taxation (1966) 118 CLR 628 at 635. 47 The term "prescribed trust estate" is used in s 102T which modifies the operation of the ITA Acts in respect of the net income of a public trading trust and the income or assessable income of a unitholder in a prescribed trust estate. Broadly stated, under s 102T, public trading trusts are taxed as companies and distributions to unitholders are taxed as dividends. "Unit trust dividend" is also a defined term and means (subject to the exceptions in paragraphs (c) and (d) of the definition which are not presently relevant) any distribution made "by a trustee of a prescribed trust estate to a unitholder" or amount credited "by a trustee of a prescribed trust estate to a unitholder as a unitholder". The explanatory memorandum to the Taxation Laws Amendment Bill (No 4) 1985 that introduced Division 6C stated at pp. 78-79 that the expression "prescribed trust estate" is a drafting measure used to identify a trust estate that is a public trading trust (as defined in section 102N) in relation to a year of income, or that has been treated as a public trading trust in relation to an earlier year of income: This will facilitate the treatment, in the hands of unitholders, of distributions of income or profits (termed "unit trust dividends") derived during a year in which a trust estate was a public trading trust, as if those distributions were dividends received from a company. The use of the expression "prescribed trust estate" as a drafting measure to identify a trust estate that is a public trading trust is consistent with the circular definitions in Division 6C by which a "prescribed trust estate" is defined to mean "a trust estate that is, or has been, a public trading trust in relation to any year of income", and a public trading trust means a unit trust that is a public unit trust that carries on a "trading business": ss 102M, 102P, 102N and 102R. 48 In determining the meaning of "unit trust", it is also instructive that "unit" has an inclusive meaning, which indicates that the concept of a unit is intended to extend beyond interests described as "units" in the terms of the trust deed to include beneficial interests "howsoever described" in the income or property of the trust: Sherritt Gordon Mines Ltd v Federal Commissioner of Taxation [1977] VR 342 at 353. Although somewhat curiously worded, the meaning of "unit" is relatively clear on the ordinary meaning of the words. A "unit", in its defined sense, includes a beneficial interest in any income or property of the trust whether or not called a unit by the trust deed: that is "howsoever described". "Howsoever described" must refer to the terms of the trust deed. The explanatory memorandum supports this construction of the text. At p. 79 it is stated that: "Unit" is the expression used to describe a beneficial interest in a prescribed trust estate, however that interest might be described formally. 49 I accept the submission for ElecNet that the definition of "unit" assists to inform the concept of a unit trust for Division 6C purposes. The features identified by the Commissioner as "significant considerations" in characterising a unit trust are features that well may be found in unit trusts but, as stated by the High Court in CPT Custodian at [15], the term "unit trust", like the term "discretionary trust", does not, in the absence of an applicable statutory definition, have a constant fixed normative meaning. In the context of Division 6C, the legislature has provided an inclusive definition of "unit" which describes a unit in a unit trust for the purposes of Division 6C. The evident purpose of the definition of "unit" is to bring within the provisions of Division 6C a trust estate where the beneficial interests in income or property of the trust are held by not fewer than 50 persons (s 102P) (subject to the trust also qualifying as a trading trust under s 102N), whether or not such interests are described as units in the trust deed. Another way of stating the proposition is that the Division applies to trusts in which the beneficial interest in property or income of the trust is widely held, whether those beneficial interests be described as units or the trust described as a unit trust. Having regard to the definition of "unit" in s 102M, it is not a complete answer for Division 6C purposes that the trust deed does not formally divide the beneficial interest in the trust fund into units. Nor, in light of the definition of "unit", must "unitholders" have a proportionate interest in the whole of the income or property of the trust estate. 50 Consideration of the mischief of Division 6C does not lead to any different conclusion. The extrinsic material does not indicate that the legislature was concerned to confine the application of the provisions to trusts used as collective investment vehicles, as distinct from trusts in which the fixed interests to trust property are widely held. Division 6C is an exception to the ordinary rules contained in Division 6 relating to the taxation of trusts and the extrinsic materials indicate that the Division was introduced as an anti-avoidance mechanism to address the increasing use of trusts to avoid company taxation. The clear purpose of Division 6C is to treat widely held unit trusts that carry on trading activities in the same way as companies for taxation purposes and the construction for which ElecNet contends is both harmonious with, and advances, the mischief to which Division 6C is directed. 51 It follows that I disagree with the decision of the Administrative Appeals Tribunal in BERT Pty Ltd as trustee for the BERT Fund No. 2 v Commissioner of Taxation [2013] AATA 584 which I consider to be clearly wrong. In that case, the Tribunal (Logan J and Deputy President Hack SC) held that the initial inquiry is whether there is a unit trust before turning it to the question to whether the unit trust is a public trading trust as defined. The Tribunal reasoned at [22] and [23] as follows: We do not accept the applicant's argument that the statutory definition of "unit" is broad and that accordingly a broad definition of unitholder is warranted. The present case is not like Shell Company of Australia v Commissioner of Stamp Duties (Tas), on which the applicant places reliance. In that case there was a circular definition of terms. Justice Neasey construed the legislation by assuming the valid existence of any interdependent condition when it was necessary to do so in order to construe a definition. That approach is not necessary here because the initial inquiry is whether there was a unit trust. That inquiry is made necessary because s 102S of the ITAA 1936 makes reference to the "trustee of a unit trust that is a public trading trust". The definition of unit does not give an extended meaning in what may be comprehended as a unit trust; it merely makes clear that the unitholder must have a beneficial interest in some of the income or property of the trust estate. In our view the applicant's case fails because the beneficial interests in the Fund were not divided into units, that is, discrete parcels of rights. On the applicant's argument the word "unit" in "unit trust" is unnecessary. [Citations omitted.] The Tribunal did not identify what may be comprehended as a unit trust for the purposes of Division 6C apart from stating that the definition of "unit" makes it clear that the unitholder must have a beneficial interest in some of the income or property of the trust estate. With respect, the error in the reasoning of the Tribunal is in the construction of the definition of "unit". As stated, the definition is an inclusive definition which makes it clear that the concept of a unit trust for Division 6C purposes extends beyond trusts in which the interests are described as units. 52 The Commissioner submitted that the High Court's observation in CPT Custodian that the term "unit trust" does not have a fixed normative meaning must be seen in the context of the issue there under consideration and the submission put to the High Court that a "hallmark" of the unit trust is the conferral of a beneficial interest in the assets of the trust. With respect, that submission cannot be accepted. It is clear from the reasoning that the statement should be accepted on its terms - that is, there is no common understanding or usage of the expression "unit trust". Insofar as support is required for that proposition, as the High Court also stated the term "unit trust" is the subject of much exegesis by commentators. The authorities and learned authors to which the Commissioner referred in the course of his submissions in this case bear that out.

do workers have a beneficial interest in any property of the eiss? 53 The final issue is whether the interests of workers may properly be described as "beneficial interests in any property" of the EISS. The expression "beneficial interest" has no precise meaning. As an ordinary word, "beneficial" is usually employed in trust law as a cognate of "beneficiary" (Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592) and the word "interest" is "capable of having many meanings" (Gartside v Inland Revenue Commissioners [1968] AC 553 at 602). In Commissioner of State Revenue v Serana Pty Ltd [2008] WASCA 82, the Western Australia Court of Appeal stated at [135] that the word "beneficial", in the context of a beneficial interest in property, ordinarily denotes a proprietary interest held for the benefit of another or others. In Elliot v Department of Education, Employment and Work Place Relations (2008) 249 ALR 182; [2008] FCA 1293 at [25], Kenny J observed that the expression "beneficial interest" falls to be interpreted principally by reference to the statutory context in which it is used and any guidance that the general law can provide. In the statutory context of Division 6C, it is noted that the beneficial interest need only be a beneficial interest "in any" of the income or property of the trust estate. Moreover, for this purpose, the term "property" is given a broad definition to include a chose in action and "any estate, interest, right or power, whether at law or in equity, in or over property": see definition of "property", s 102M. 54 It is unnecessary to give any definitive meaning to the expression "beneficial interest" in Division 6C for present purposes because, in the present case, as the analysis of the Deed shows, the trust fund (ie the "property" of the trust") is held for the benefit of the persons in respect of whom the contributions are made by the employers and each worker has a discrete proprietary interest in the contributions paid in respect of them into the trust fund and standing to their worker's account, although not a present right to immediate payment. The proprietary nature of their interests is sufficient to give rise to "beneficial interests in any property of the trust estate" within the meaning of "unit" in s 102M.

conclusion 55 Accordingly, it follows that the EISS is a unit trust for the purposes of Division 6C. ElecNet also contended that the Court should hold that ElecNet is a public unit trust for the purposes of Division 6C within the meaning of s 102P but there is a critical fact missing in the ruling request, namely the determination made by the trustee as to the persons who are "active workers" for the purposes of Clause 8. Without that fact, it is not possible to reach a conclusion as to whether the requirements of s 102P(c) are met.

admissibility of the etu enterprise agreement 56 In the course of argument, senior counsel for ElecNet sought to refer to provisions in the ETU Enterprise Agreement and objection was made by counsel on behalf of the Commissioner to the admissibility of the document into evidence on the ground that it did not form part of the material on which the ruling request was sought. I reserved on the question of admissibility stating I would deal with it in my reasons for decisions. As it turned out, ElecNet's argument ultimately did not depend on any provisions in that agreement but in case it may be necessary I would rule that the ETU Enterprise Agreement was not admissible for the reasons advanced by counsel on behalf of the Commissioner. 57 The ETU Enterprise Agreement was not provided with the ruling request and the provisions in that document to which senior counsel for ElecNet sought to refer were neither identified nor mentioned as forming part of the arrangement on which the ruling was sought. Nor did the Commissioner have regard to that document, or any particular terms of the document, as part of the arrangement on which his ruling was given. Senior counsel contended that the reference to the agreement in the Deed was, nonetheless, sufficient to incorporate its terms as part of the "arrangement", but I disagree. The mere reference to the document in a document that was provided with the ruling request was insufficient to identify its provisions as forming part of the arrangement and there was nothing in the ruling request to indicate the intention to rely on specific provisions of that agreement as constituting part of the facts and circumstances on which the ruling was to be given. As in this appeal, the Court can only have regard to the facts and circumstances constituting the arrangement upon which the ruling was given (Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 154), the Agreement could not be tendered into evidence in support of ElecNet's case.

orders 58 The parties are directed to provide minutes of orders giving effect to these reasons within seven days. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

Land Tax Act 1958(Vic)s 3

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