Applicants' Submissions
47 The applicants do not submit that Thawley J. was "plainly wrong" because he applied the wrong provisions; or because he applied the wrong version of the provisions; or because he overlooked a provision; or because he failed to apply binding precedent; or because of some other glaring error that needs correction. Rather, they attacked his Honour's construction of the word "from" in s. 855-10, largely based on arguments or contentions that they submitted had not been drawn to Thawley J.'s attention.
48 This was summarised in the applicants' written submissions as follows:
(i) Justice Thawley was not directed to various provisions which support the Applicants' construction of s 855-10 and subdiv 115-C and which were relevant to the disposition of the case (Statutory Context issue).
(ii) Nor was Thawley J directed to a Full Federal Court opinion on the effect of s 115-215 for beneficiaries (Authorities issue).
(iii) Further still, the context in which the Residency Hypothesis was inserted into the ITAA36 was not considered; nor was the impact of overriding the Residency Hypothesis, in respect of other classes of taxpayers (such as resident beneficiaries of foreign trusts); and had these issues been addressed would have tended against the construction adopted (Residency Hypothesis issue).
(iv) There was no consideration of how losses in respect of non-TAP assets could be disregarded (Loss issue)
49 The second contention set out above may be dealt with immediately. In Burton v. Commissioner of Taxation (2019) 271 F.C.R. 548, I made the following observation at 571-572 [102]:
It should be noted that at the time the assets were disposed of here, there were and remain complex provisions contained in Pt 3-1 of the 1997 Act that deemed the beneficiary of a trust, in certain circumstances, to be the taxpayer that made the capital gain instead of the trust estate: s 115‑215. The operation of similar predecessor provisions was explained by the Full Federal Court in Federal Commissioner of Taxation v Greenhatch (2012) 203 FCR 134. The parties agreed that those provisions applied to the taxpayer, and that we should proceed on the basis that it was the taxpayer, and not the trust estate, that incurred the various instances of CGT event A1. In other words, the 1997 Act treated Mr Burton as if he, in his personal capacity, sold the Nepa Investment (and the other assets sold). Accordingly, what was ultimately included in his assessable income was not his share of the net income of the trust attributable to that gain pursuant to s 97 of the 1936 Act, but rather, a net capital gain pursuant to s 102-5 of the 1997 Act. The taxpayer did not rely upon this statutory fiction in any way as a reason for contending that he was entitled to the FITO he claimed.
50 The taxpayer, Mr. Burton, was a beneficiary of a resident trust estate that had sold certain securities. He was also the trustee of that trust estate. My statement that Subdiv. 115-C operated to treat the taxpayer in that case as if he had sold the shares in his personal capacity, rather than in his capacity as trustee, was relied upon by the applicants before me as support for the proposition that the extra capital gains assessed here to Mr. Martin were "from" a CGT event as required by s. 855-10. That proposition overstates the importance and nature of what I wrote in Burton. Burton was a case concerning the foreign income tax offset provisions in Div. 770 of the 1997 Act, as well as Art. 22(2) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16, signed in Sydney on 6 August 1982 (the "Convention"). The Court was not in any way concerned with the operation of Subdiv. 115-C or Div. 855. My observations at 571-572 [102] simply reflected an assurance conveyed to the Court by the parties that no issue concerning the operation of Subdiv. 115-C was before the Court, and that to test the issues arising in relation to Div. 770 and under the Convention, the Court could safely ignore the presence of a trust estate.
51 The applicants also submitted that Stone J. in Colonial First State Investments Ltd v. Federal Commissioner of Taxation (2011) 192 F.C.R. 298 expressed the effect of s. 115-215 in similar terms (at 315 [61]):
The Subdivision applies if the trust estate has a net capital gain that is taken into account in calculating the trust's net income for the income year: s 115-210. Consistent with the explanation in the outline above, s 115-215 is intended 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. It applies to the beneficiary of a trust estate whose assessable income includes, inter alia, an amount under s 97(1) of the 1936 Act.
With respect, this paragraph appears to do no more than restate the purpose of s. 115-215 as stated in subs. (1).
52 In relation to the first contention as set out above at [48], it was also said that Thawley J. had not been taken to certain relevant provisions. In their written submissions, the applicants put the following:
As noted above, his Honour was not taken to the following:
(i) Section 100-20 and s 102-20 are unambiguous: you can make a capital gain or loss only if a CGT event happens;
(ii) Section 115-215(4A) is also unambiguous: to avoid doubt the amount in 115-215(3) is a *capital gain (as defined), therefore characterising the gain in s 115- 215(3) as being from a CGT event;
(iii) The *capital gain worked out under CGT event A1 is the capital proceeds "from the disposal" less the asset's cost base ( s 104-5 item A1 of the table)
(iv) Section 855-10(1) is read consistently with 115-215(4A), Note 3 to s 115-215 and s 100-20 and s 102-20 and the lack of any qualifying words in s 855-10(1) indicates that it makes no difference whether the *capital gain occurred directly or indirectly to the taxpayer.
53 Before me, the applicants accepted that, contrary to para. (ii) above, his Honour was taken to s. 115-215(4A).
54 As to the proposition at para. (i), it was forcibly submitted that whilst a taxpayer may make a capital gain from a CGT event that might happen to another entity, nonetheless every capital gain must, in some way, be the product of such an event. Here, the capital gains assessed to Mr. Martin arose because Holdings had sold shares in Altium Limited, and each sale constituted the happening of CGT event A1. It followed that Mr. Martin's capital gains were "from" those events in the sense required by s. 855-10. That conclusion did not involve any forced or artificial interpretation of the word "from"; rather, it applied the ordinary and natural meaning of that word. In that respect, the applicants referred to the following observation of Beaumont J. in BHP Petroleum (Timor Sea) Pty Ltd & Ors v. Minister for Resources (1994) 49 F.C.R. 155 at 170-171:
In my opinion ... 'from' is intended to have its dictionary meaning, that is to say, to indicate the starting point, source or origin, of an application or request.
55 In that case, the Full Court of this Court was concerned with construing the word "from" as it appears in s. 20(4) of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth.). Section 20 relevantly addresses a taxpayer's ability to apply to the Resources Minister to combine more than one petroleum project for the purposes of that Act.
56 The applicants also relied upon Note 3 to s. 102-20 and upon s. 115-215(4A) for the proposition that, for the purposes of Pt. 3-1 of the 1997 Act (the CGT rules), it makes no difference whether a CGT event happens to you or to another entity; all that matters is that a CGT event had taken place.
57 The applicants also submitted that if Thawley J.'s construction of the phrase "from a CGT event" in Peter Greensill were found to be correct, then the operation of several other provisions in the 1997 Act would be "thrown into doubt". They gave the following examples in their written submissions:
(i) s 115-15 - if Greensill is correct, then no foreign beneficiary of a resident trust was ever entitled to the CGT discount which appears contrary to Parliament specifically introducing s 115-110, s115-115 and s 115-120 to curtail that discount after 8 May 2012;
(ii) s 121-20 - if Greensill is correct then the implication arises that there is no statutory requirement for a beneficiary to keep records of attributable gains under s 115-215 for the reason that they cannot be said to be from a *CGT event. Contrary to the Respondent's submission recorded in Greensill that it would be onerous to require foreign trustees to be expected to keep records, the Applicants contend it would be astounding if they were not so required. Foreign trustees need to keep records for the purpose of s 97, s 99B and to determine what is TAP; in the context of any dispute with the Respondent that might arise for a taxpayer (often many years later given time periods for amendment of assessments), in order to maintain the optimum ability to contest assessments, a taxpayer must keep CGT records indefinitely (despite the more limited time periods in Div 121) and it is not onerous in this day of electronic storage for a taxpayer to keep records; further, in discharging the taxpayer's burden of proof under s 14ZZK or s 14ZZO of the Taxation Administration Act 1953 (Cth), it is no answer to assert that he, she or it complied with CGT record keeping obligations;
(iii) s 768-915(1) - it follows from Greensill that the same application would apply here and temporary resident beneficiaries would not disregard a capital gain or loss attributed to them;
(iv) s 100-33(1) - if Greensill is correct then a resident beneficiary could not apply a rollover in respect of a capital gain arising under s 115-215;
(v) s 152-100 Guide - this would not appear to make any sense if the beneficiaries of a trust which claims the small business concession could not likewise benefit;
58 The applicants' third contention concerned what it described as the "residency hypothesis". This was a reference to the definition of "net income" in relation to a trust estate in s. 95 of the 1936 Act which assumes that the trustee is a resident of Australia for the purpose of calculating the trust estate's total assessable income. I explained the origin of this assumption or "hypothesis" in Sole Luna Pty Ltd as Trustee for the PA Wade No 2 Settlement Trust v. Commissioner of Taxation [2019] FCA 1195. It had been introduced into the definition of "net income" in 1979 to overcome the effect of the High Court's decision in Union-Fidelity Trustee Company of Australia Ltd v. Federal Commissioner of Taxation (1969) 119 C.L.R. 177. At [91]-[92] in Sole Luna, I said:
91. Section 95 was amended in 1979 to overcome an aspect of the decision in Union-Fidelity Trustee Company of Australia Ltd v Federal Commissioner of Taxation (1969) 119 CLR 177. In that case, the High Court decided that the net income of a trust estate for the purposes of Div 6 of Part III of the 1936 Act could not include income from a foreign source. The definition of "net income of a trust estate" in s 95 was at the time relevantly in the following form:
... 'the net income of a trust estate' means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus.
The words "and were a resident" did not appear in this version of the definition of "net income of a trust estate". Kitto J observed at 187 that the hypothetical taxpayer contemplated by the definition of "net income of a trust estate" did not include anything which would make that taxpayer a resident of Australia. His Honour said:
In the light of the definition of "taxpayer" the expression "calculated under this Act as if the trustee were a taxpayer in respect of that income" may be expanded to read "calculated under this Act as if the trustee were a person deriving that income". But the "as if" shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by "a person" must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him a "resident" within the definition of that word in s. 6 (1). Unless a person is a "resident" of Australia he is by definition a "non-resident". Accordingly, by limiting the meaning of "the net income of a trust estate", for the purposes of (inter alia) s. 99, to the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except concessional allowances, s. 95 excludes from gross income all income which s. 25 (1) brings into assessable income in the case only of a taxpayer who is a resident (i.e., income from sources outside Australia), and, as consistency requires, excludes from the allowable deductions to be subtracted from the gross income which remains included in the assessable income those deductions which are allowable only in the case of such a taxpayer.
Barwick CJ reached the same conclusion. His Honour said at 181:
Income for the relevant purposes of the Act falls into one of two categories - that which is derived from an Australian source and that which is not derived from an Australian source. The scheme of the Act is to bring to tax both kinds of income where the taxpayer deriving it is a resident of Australia but to bring to tax only income of the former kind where the taxpayer is not a resident of Australia. It is therefore clear to my mind that if nothing is known as to the residence of a taxpayer the only income which can certainly be said to be assessable income is the income derived by the taxpayer from an Australian source. Unless it is known that he is a resident, it cannot be said that any other income is to be included in his assessable income.
See also Menzies J at 190.
92. By the Income Tax Assessment Amendment Act 1979 (Cth) (the "1979 Act"), a new version of the definition, now simply called "net income", was substituted for the old. The new definition inserted the words "and were a resident" to the content of the hypothetical taxpayer. The Explanatory Memorandum which accompanied the 1979 Act (Income Tax Assessment Amendment Bill (No.5) 1978 (Cth)) made it clear that Parliament was of the view that the taxable income of a resident trust estate should include income from all sources. The Explanatory Memorandum stated as follows at 16:
In broad terms, the amendments to be made by these clauses are designed to ensure that resident beneficiaries are subject to Australian tax under the trust estate provision both on income from Australian sources and, subject to relief from double taxation where it is also taxed in the country of source, on income from foreign sources, while non-resident beneficiaries are taxed only on income from Australian sources. To achieve these results, the net income of a trust estate is to be calculated as if the trustee were a resident taxpayer. The assumption that the trustee is a resident will have the effect of bringing into the calculation of net income, assessable income from foreign sources and deductions related to that foreign source income.
The new definition in s 95 was described as follows at 21:
The term "net income" is to be defined as meaning, in relation to a trust estate, the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less all allowable deductions other than those deductions that are excluded from consideration by the present definition of "the net income of a trust estate" ...
59 The relevance of this residency hypothesis to the construction of s. 855-10 was not entirely clear to me. It would appear to be anchored in the proposition that, if I were to follow Peter Greensill, certain anomalous outcomes would arise. Principally, it was submitted that a resident beneficiary of a non-resident trust that had made non-T.A.P. capital gains would "escape liability" in respect of those gains until the trustee had distributed the gain to that beneficiary.
60 The applicants' fourth contention as set out above at [48], called the "losses issue", was that the "corollary to overriding the Residency Hypothesis is that a foreign beneficiary of a resident trust will not disregard any non-TAP capital losses."
61 In respect of the third and fourth contentions, it was said that Thawley J. had not been told about the anomalous consequences as contended for by the applicants.
62 Much time was also spent in the applicants' written and oral submissions about how s. 855-10 was to intersect with Subdiv. 115-C. The parties disagreed about this issue. In summary form, the applicants contended that it was the relevant beneficiary who applied steps 1 to 4 of s. 102-5 for the purposes of s. 115-225, and that if s. 855-10 were applicable, it would apply at step 1. Thus, in their written submissions at para. 33(ii), the applicants state as follows:
The s 115-225(1) amount for each capital gain of the trust estate (the "attributable gain") is equal to the amount of each capital gain after applying steps 1 to 4 of the s 102-5(1) method statement multiplied by Mr Martin's share of each capital gain (pursuant to s 115-227) divided by the amount of each capital gain.
Pausing there, reading s 115-225(1) as part of s 115-215(3), s 115-215(3) in effect, reads as follows: if you are a beneficiary of a trust estate, for each *capital gain of the trust estate, Division 102 applies to you as if you had a *capital gain equal to the amount (or twice or 4 times the amount) of the capital gain remaining after applying steps 1 to 4 of the method statement multiplied by your share of the net income.
Accordingly, the question that arises here is - who is applying the method statement for the purposes of s 115-225? The Applicants contend that taking into account 115-215(3) and (4A), it must be Mr Martin. In other words, Mr Martin applies the method statement in respect of the trust estate's capital gains, starting from the position that he and not the Trustee had each one of the *capital gains of the trust estate. The "you" in step 1 of the method statement is the beneficiary; albeit in respect of the trust estate's *capital gains because he is treated by s 115-215(3) as if he had the gain. His foreign residency is now relevant. He then applies Steps 1 to 4 of the method statement, as directed by s 115-225(1)(a); disregarding at Step 1, non-TAP *capital gains and non-TAP *capital losses, as directed by s 855-10.
It is highlighted that the Applicants' construction in this regard is at odds with Greensill at [30], [40],[42] and [47(1)].
(Footnotes omitted.)
63 The Commissioner disagreed with the foregoing. In his view, the entity applying steps 1 to 4 of s. 102-5 for the purposes of s. 115-225 was the applicable trustee. He contended that if a non-resident beneficiary were to make capital gains arising from an application of s. 115-215(3) that were to be disregarded (which, he said, was possible in the case of a fixed trust where s. 855-40 is engaged), that beneficiary would apply Div. 855 after the operation of each of ss. 115-215, 115-225 and 115-227 had determined the amount of the beneficiary's extra capital gain. It was my impression that this methodology was what the applicants described as their "alternative approach."
64 For my part, this issue did not seem to make a great deal of difference to the applicants' case. Nor did the operation of Subdiv. 115-C seem to be directly relevant to the correct construction of s. 855-10 and its use of the word "from". As I understood it, the applicants' case turned upon whether it could be said that the extra capital gain, which by operation of s. 115-215(3), Mr. Martin had obtained, could be said to have been "from a CGT event" as required by s. 855-10. With great respect, the answer to that question did not to me seem to turn upon how a taxpayer should apply ss. 115-225 and 115-227. It may otherwise be accepted that the interaction of Subdiv. 115-C and Div. 855 may be of possible relevance to the assessments issued to Holdings. This is explained below.
65 The applicants also disagreed with the proposition that s. 855-40 was a specific, and exhaustive rule, addressing the position of non-resident beneficiaries of resident trusts that make capital gains from the disposal of T.A.P. assets. They submitted that having regard to the legislative history, which they contend had not been explained to Thawley J., s. 855-40 was "an historical curiosity with little field of operation." The applicants contended that prior to the introduction of the predecessor to s. 855-40 (former Subdiv. 768-H), the funds management industry needed relief because, at that time the 1997 Act taxed as a capital gain the sale by a non-resident beneficiary of her or his interest in a resident fixed trust even though such a trust mostly owned non-T.A.P. assets. New Subdiv. 768-H provided this relief. But it also provided express relief where a capital gain arising from the sale of a non-T.A.P. asset by a resident fixed trust had flowed through to a non-resident beneficiary and that beneficiary had thereby obtained an extra capital gain by reason of Subdiv. 115-C. In both cases the relief was limited to "fixed trusts". The applicants asserted that this second form of relief was not needed because the predecessor to Div. 855 (former Div. 136 of Pt. 3-1 of the 1997 Act) already permitted a capital gain of this kind to be disregarded, just like present s. 855-10. It was suggested that the second type of relief may have been introduced to overcome the Commissioner's then practice to tax these types of capital gains, based upon what the applicants said was a similar misapprehension of the former law to the misapprehension now relied upon by the Commissioner in relation to Div. 855. In any event, the applicants accepted that, on their construction of s. 855-10, s. 855-40 was left with little work to do.
66 In this context, like the taxpayer in Peter Greensill, the applicants contended that the Commissioner's construction of s. 855-10 led to entirely capricious outcomes. It was accepted that had Mr. Martin directly owned and then sold the Altium shares, his capital gains would have been disregarded under Div. 855. As the applicants submitted at para. 20 of their written reply:
Section 855-40 manifests no intelligible policy which would explain the anomaly that must follow from the construction advanced by the Respondent. On his construction, a gain made on the happening of a CGT event to an asset which is not TAP would be disregarded if made by a non-resident directly, or if made by a non-resident trustee and distributed to a non-resident or resident beneficiary, but would not be disregarded if made by a resident trustee and distributed to a non-resident beneficiary. Such an outcome is capricious and is not to be reached by adopting a construction which departs from the plain words of the section and can only be supported by a presumption which is liable to be displaced by the legislative text.
67 Before me, Ms. Seiden, Senior Counsel for the applicants, elaborated upon the foregoing arguments. When asked to identify the error in the reasons in Peter Greensill which would justify the characterisation of that decision as "plainly wrong", she contended that it was not open to read s. 855-10 as requiring the relevant capital gain to have been from a CGT event which had happened to the taxpayer seeking to rely upon the provision to disregard that capital gain. She argued that Thawley J. had impermissibly added words to the language of s. 855-10 in the following way:
(1) Disregard a *capital gain or *capital loss from a *CGT event that happens to you if:
68 However, the words "that happens to you" simply do not appear in the provision and should not, it was said, be implied into it so as to confine the field of application of s. 855-10 in this way. Equivalent words appear expressly in other parts of Pt. 3-1 of the Act, indicating, it was said, that Parliament had made a conscious choice not to include them in s. 855-10. In the written submissions of the applicants the following examples of this were given:
104-35 Creating contractual or other rights: CGT event D1
(1) CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.
………
Exceptions
(5) CGT event D1 does not happen if:
………
(b) the right requires you to do something that is another *CGT event that happens to you; or …….
104-155 Receipt for event relating to a CGT asset: CGT event H2
(1) CGT event H2 happens if:
(a) an act, transaction or event occurs in relation to a *CGT asset that you own; and
(b) the act, transaction or event does not result in an adjustment being made to the asset's *cost base or *reduced cost base.
………
Exceptions
(5) CGT event H2 does not happen if:
………
(b) the act, transaction or event requires you to do something that is another *CGT event that happens to you; or
124-1100 Guide
There is a roll-over if a CGT event happens to you because of something occurring in relation to one or water entitlements for the event to happen to you.
(Emphasis added by the applicants.)
69 I was otherwise urged to find that there was nothing ambiguous about the language found in s. 855-10(1). A capital gain cannot be made without the happening of a CGT event. This had occurred here with the sale of the Altium shares and the corresponding happening of A1 CGT events. Mr. Martin's capital gains came "from" those events. The fact, it was said, that the applicable CGT events might have happened to another entity was of no moment. Note 3 to s. 102-20 confirms that a taxpayer can make a capital gain from a CGT event that has happened to another entity. This central point of the applicants' case was also, it was submitted, confirmed by the definition of a capital gain in s. 995-1 to the 1997 Act which is in the following form:
capital gain: for each *CGT event a capital gain is worked out in the way described in that event.
70 Finally, the applicants also relied upon the fact that one possible explanation for the presence of the phrase "from a CGT event" in s. 855-10(1) may be discernible from the language used in former Div. 136 of Pt. 3-1 (the predecessor CGT provisions). Former s. 136-10 of the 1997 Act was in this form:
You make a *capital gain or *capital loss from a *CGT event set out in this table only if the thing referred to in the relevant row of the table has the *necessary connection with Australia.
71 A table of CGT events then followed this provision. On one view, the phrase "from a CGT event" may simply derive from its original use in former s. 136-10 to incorporate this table.