consideration
39 The question for determination is whether s 855-10 of the 1997 Act has any operation in the calculation of the amounts required to be calculated under ss 115-215 and 115-220 in sub-div 115-C. Section 855-10(1) requires a capital gain "from a CGT event" to be disregarded if:
(a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and
(b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.
40 A "foreign trust for CGT purposes" means a trust that is not a "resident trust for CGT purposes" (s 995-1 1997 Act). A trust that is not a unit trust is a "resident trust for CGT purposes" for an income year if a trustee is an Australian resident or the central management and control of the trust is in Australia (s 995-1 1997 Act).
41 In both matters, the relevant CGT event was the disposal by each trustee, in their capacity as trustee, of property that was not taxable Australian property. In each matter, there was a capital gain from the CGT event and the trustee distributed the capital gain from the disposal of the non-taxable Australian property to a foreign beneficiary of the trust. Had each of the foreign beneficiaries made the gain directly, rather than as a result of the distribution to them of the capital gain, the capital gain would have been disregarded by the operation of s 855-10. The capital gain would also have been disregarded by operation of s 855-40 if it was a gain that the foreign resident beneficiaries had made through their interest in a fixed trust. So too, the appellants contended, s 855-10 applies to capital gains made by a discretionary trust where capital gains are streamed to a foreign beneficiary. The appellants argued that the text, context and legislative history of both sub-div 115-C and s 855-10 all support a construction of the provisions as a cohesive statutory scheme that does not bring to tax in Australia capital gains of a trust estate from the disposal of non-taxable Australian property when distributed to foreign resident beneficiaries.
42 The appellants identified two possible places where s 855-10 may operate within sub-div 115-C:
(a) in determining whether the threshold requirement in s 115-210 to apply sub-div 115-C is met; and
(b) in working out the amount of a beneficiary's attributed gain under s 115-225(1)(a) for the purposes of s 115-215(3).
43 The appellants contended that Thawley J, at [40(1)] of the Greensill judgment, held, and was wrong to hold, that s 855-10 has operation in working out whether the trust estate has a net capital gain to which the rules in sub-div 115-C would apply. It was submitted that s 855-10 cannot apply to disregard the capital gains of a trust estate in computing the trust estate's net income under s 95 of the 1936 Act because the ability to disregard a capital gain under s 855-10 depends on the taxpayer - "you" - being the trustee of a foreign trust or a foreign beneficiary; and because of the two hypotheses on which the s 95 net income of a trust is to be calculated: ie that the trust estate is the taxpayer and a resident. These contentions misread par [40]. His Honour said at [40(1)]:
First, for Subdiv 115-C to apply to the [Peter Greensill Family Trust] at all, the [Peter Greensill Family Trust] must have a net capital gain, which requires that it have capital gains that are not disregarded: s 115-210(1). The opening words of s 115-220(2) refer to "each capital gain of the trust estate", in this case being a reference to each capital gain of the [Peter Greensill Family Trust]. Section 855-10(1) does not apply to disregard the capital gains of a resident trust estate.
In our view, fairly considered, His Honour was not saying, as submitted by Mr Robertson QC, that s 855-10 had no application to trust estates, nor that s 855-10 overrides the residency hypothesis in the s 95 definition of "trust income", as submitted by Ms Seiden. In our view, all that His Honour was saying (and correctly with respect) was that s 855-10 did not apply to a capital gain made by the trustee of a resident trust estate and, it followed, the threshold requirement for sub-div 115-C to apply in that case was satisfied. Relevantly, there was no dispute in either matter that the trust is a resident trust estate (as defined in div 6 and for CGT purposes) nor that the threshold requirement for sub-div 115-C to apply was satisfied.
44 In support of the contention that s 855-10 has operation in working out the amount of a beneficiary's attributed gain under s 115-225(1)(a) (for the purposes of s 115-215(3)), Ms Seiden SC argued that the capital gain which s 115-215(3) treats the beneficiary as having is a "capital gain" in the defined sense. It was submitted further that a capital gain in the defined sense can only be made if a CGT event happens as described in div 104 of the 1997 Act (see s 102-20 which provides that "you can make a capital gain… if and only if a CGT event happens"), however the CGT event does not have to happen to the beneficiary. Reliance was placed on "Note 3" to s 102-20 which provides that:
You may make a capital gain or capital loss as a result of a CGT event happening to another entity: see subsections 115-215(3) …
Thus, it was argued, s 115-215(3) treats the capital gain made by the trust estate as a capital gain made by the beneficiary for the purpose of the beneficiary calculating their net capital gain under div 102. It was submitted that "importantly", a CGT event does not happen to a taxpayer but to a CGT asset and the capital gain is what "you" - ie the taxpayer - have. It was argued that sub-div 115-C ensures that, in the case of a taxpayer who is beneficiary of a trust estate, the capital gain is made by that taxpayer: in the language of s 115-215(3) - "as if you had". It was submitted that by focusing on what the "you" is referring to in both div 102 and sub-div 115-C (i.e., the making (or having) of the capital gain and not the happening of the CGT event), a harmonious operation between div 102 and sub-div 115-C is achieved and ensures that the capital gains of the trust estate are treated as those of the beneficiary. On this construction, the capital gain that the beneficiary is treated as having by s 115-215(3) falls within s 855-10(1) by reason that the beneficiary is a foreign resident and the capital gain is made from a CGT event in relation to non-taxable Australian property.
45 That construction was, with respect, correctly rejected by Thawley and Steward JJ. Thawley J at [41]-[45] reasoned as follows:
As to the first and second matters, the applicant submitted that the reference in s 115-220(2) to "the amount mentioned in subsection 115-225(1) in relation to the beneficiary" means Mr Greensill's capital gain as disregarded by s 855-10 of the [1997 Act].
The statutory language does not permit that conclusion. The "amount of the capital gain" referred to in s 115-225(1)(a) is the capital gain of the trust estate in relation to which the section applies. It is not a reference to any capital gain of the beneficiary. Section 115-225(1)(a), read with the s 102-5 method statement, allows for the trust estate's capital gains to be reduced by its capital losses. This would not be achieved if s 115-225(1)(a) were understood as applying to capital gains and losses taken to have been made by the beneficiary.
The reference to "your share of the capital gain" in s 115-225(1)(b) is a reference, inter alia, to "the amount of the capital gain to which the [beneficiary] is specifically entitled": s 115-227(a).
The result of the calculation required by s 115-225(1) is simply an amount which the statute requires to be calculated. It is not a capital gain capable of being the subject of s 855-10(1).
The amount of "attributable gain" calculated under s 115-225(1) is used for the purposes of each of ss 115-215(3), 115-220(2) and 115-222(2) and (4). Each of those provisions uses the words "for each capital gain of the trust estate" and then refers to the amount mentioned in s 115-225(1). This confirms that "the capital gain" referred to in s 115-225(1)(a) is the capital gain of the trust estate. The function of s 115-225(1) is to apportion the capital gain of the trust estate among the trustee and beneficiaries of the trust estate according to their "share" as determined under s 115-227. That portion is then brought to tax under one of ss 115-215, 115-220 or 115-222 as appropriate.
46 There are other reasons for rejecting the appellants' construction.
47 First, the appellants' construction overlooks the purpose of s 115-215 as expressed in s 115-215(1), namely so 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" against which the beneficiary can apply capital losses and apply the appropriate discount percentage (if any) to the gains. The calculation of "attributable gain" serves the purpose of quantifying the amount of the trust's capital gains, which are then treated as capital gains made by a beneficiary for the purpose of div 102, so that the beneficiary can apply any personal capital losses against capital gains taken to have been made by the beneficiary (Steps 1 and 2) and any discount and concessions to which the beneficiary is entitled (Steps 3 and 4) in working out the beneficiary's net capital gain on which the beneficiary is assessable. There is no warrant to construe s 115-215 beyond the operative terms of the section for which capital gains are treated as the gains of the beneficiary.
48 Secondly, the modification of div 102 by s 115-215(3) is necessary to ensure that div 102 applies to the beneficiary in the manner specified in s 115-215(1). Section 115-215(4A) makes this clear.
49 Thirdly, as a matter of textual analysis, s 115-215(3) requires div 102 to be applied to a beneficiary after the computation of the amount which is to be treated as the beneficiary's capital gain for the limited purposes prescribed by s 115-215(1). That is, div 102 can have no application to the beneficiary except in relation to the amount treated as the beneficiary's capital gain applying the methodology prescribed by s 115-225. That is because the trust estate, not the beneficiary, has made the capital gain and the amount worked out under s 115-225(1)(a) is the amount of the trust's capital gain after applying Steps 1 to 4 of the method statement in s 102-5(1).
50 Fourthly, s 855-10 identifies the capital gain to be disregarded as one that is "from a CGT event". The appellants argued that that Thawley J wrongly held that that the use of the word "from" requires a direct connection between the capital gain and the relevant CGT event and that s 855-10 merely requires that the CGT event "happens" in relation to a CGT asset that is not taxable Australian property. That submission, however, ignores that the expression "CGT event" is defined in s 995-1 to mean any of the CGT events described in div 104. Hence, the threshold question for s 855-10 to operate is whether the relevant capital gain is from a CGT event described in div 104, which is the criterion that founds the application of the section in relation to a foreign beneficiary or the trustee of a foreign trust. The capital gain treated as the beneficiary's capital gain by s 115-215(3) is not, however, a capital gain from a CGT event described in div 104, but a capital gain that the beneficiary is deemed to have made by operation of s 115-215(3). Hence, s 855-10 does not apply on its terms either in the context of sub-div 115-C or in relation to a beneficiary after the capital gain of the trust estate has been attributed to the foreign beneficiary by the application of sub-div 115-C.
51 Ms Seiden SC argued if the beneficiary's capital gain in sub-div 115-C is not "from a CGT event", several other provisions are thrown into doubt, being:
(a) section 115-15 - it was submitted that this provision would never have applied to entitle a foreign beneficiary of a resident trust to the CGT discount (as not "from a *CGT event") which appears contrary to Parliament specifically introducing ss 15-110, 115-115 and 115-120 to curtail that discount after 8 May 2012;
(b) section 121-20 - it was said that 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";
(c) section 100-33(1) - it was said a foreign resident beneficiary could not apply a rollover in respect of a capital gain arising under s 115-215, as it would not be "from a *CGT event"; and
(d) section 115-10(d) - it was submitted that the construction might limit the circumstances in which a life insurance company that is a beneficiary of a trust can make discount capital gains, as it would not be "from a *CGT event".
52 Further, it was submitted, some CGT events deem the beneficiary to have made the gain (for example E5, E6, E7). It could not be gainsaid that such gains were "from a *CGT event"; opening up the irrational possibility of differing treatment for different CGT events.
53 These submissions do not assist the appellants for the following reasons:
(a) as to s 115-15, the trust estate's capital gain would be "from a *CGT event" and, if a discount capital gain, the capital gain taken to be made by the foreign beneficiary under s 115-215(3) would also be taken to be a discount capital gain by virtue of s 115-10 and s 115-215(4)(a);
(b) as to s 121-20, the trust estate which makes the capital gain "from a *CGT event" would be responsible for the record keeping;
(c) section 100-33 is not an operative provision but part of a Guide (see ss 100-5; 950-150);
(d) section 115-10(d) only applies to complying superannuation assets, which are necessarily owned directly by the life insurance company: s 320-170; and
(e) CGT events E5, E6, E7 are all div 104 events.
54 There is no lack of harmony with any of these provisions.
55 Fifthly, we agree with Thawley and Steward JJ that s 855-40 reinforces that s 855-10 does not have operation in the context of sub-div 115-C. As Thawley J stated at [63]-[64] of the Greensill judgment, the operation of the section is confined to capital gains that a foreign resident beneficiary makes in respect of the beneficiary's interest in a fixed trust, where the gain "is attributable to a CGT event happening to a CGT asset of a trust". This language is quite different to the language of s 855-10, which requires the capital gain to be "from" a CGT event. His Honour also observed that the note to s 855-40(2) indicates that the provision operates with respect to the capital gain taken to have been made by a beneficiary under s 115-215 of the 1997 Act, whereas s 855-10 does not contain such a note and operates differently. Section 855-10 does not provide for the disregarding of capital gains attributed to the beneficiary of a non-fixed trust under sub-div 115-C. Steward J further observed in the Martin judgment at [82] that the appellants' construction of s 855-10 avoids the limitation of the rule in s 855-40 and, unless there is a clear contrary indication, the Court should not adopt a construction that would leave s 855-40 with little work to do, citing Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 at 382 [71]. If the appellants' construction was accepted, and s 855-10 is construed as applying to deemed capital gains of beneficiaries arising under s 115-215(3), there would be no need for a specific provision in relation to fixed trusts. To these matters, we would also add that the legislative purpose of s 855-40, identified in subsection (1), namely "to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust by foreign residents of *CGT assets that are not *taxable Australian property", is inconsistent with a construction that would apply s 855-10 to capital gains of beneficiaries arising under s 115-215 (or s 115-220) by reason of a CGT event occurring to an asset of a trust estate, and not by the direct ownership of the asset by the beneficiary.
56 Ms Seiden SC argued that the courts below were wrong to construe s 855-10 by reference to s 855-40 without regard to the balance of the provisions of div 855. Ms Seiden SC argued that the effect of the judgments below is that s 855-10 does not apply to foreign resident beneficiaries of discretionary trusts but, she argued, the expression "membership interest" includes an object of a trust (s 960-130(1) item 3) for the purposes of s 855-25, which prescribes when a "membership interest" is an indirect Australian real property interest (and hence taxable Australian property: s 855-15 item 2) and s 855-30, which applies the principal asset test to a "membership interest" to determine whether an entity's underlying value is principally derived from Australian real property. Thus, it was submitted, whether a gain is disregarded by div 855 is predicated on whether the asset is non-taxable Australian property, not on the taxpayer's ownership of the CGT asset. It was submitted that s 855-10 is the general or leading provision within div 855 and there is no need to read down its breadth where a taxpayer does not fall within the reach of the special or subordinate provisions of s 855-40.
57 However, whilst it is relevant for the purposes of s 855-10 to consider whether a foreign resident's "membership interest" as the object of a discretionary trust constitutes taxable Australian property by virtue of s 855-25, s 855-10 applies to the capital gain from a CGT event that "happens in relation to" that membership interest, being the relevant CGT asset for the purposes of the application of s 855-10. Section 115-215 has no application in that context. Likewise, the application of the principal asset test to a discretionary beneficiary's "interest" in a trust is used to determine whether that interest is taxable Australian property or not and again s 115-215 has no application in that context. Accordingly, this argument does not advance the appellants' case.
58 Ms Seiden SC also argued that s 855-40 is "a very fragile base from which to construe s 855-10", contending that "parts of it are internally inconsistent and don't work at all" and that its operation is superfluous anyway. Subsection 855-40(2)(c)(ii) was said to be the provision which does not work.
59 Section 855-40(2) provides that:
A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:
(a) you are a foreign resident when you make the gain; and
(b) the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust) that is:
(i) the *fixed trust; or
(ii) another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust); and
(c) either:
(i) the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or
(ii) the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.
60 The conditions in subsections (5), (6), (7) and (8) are:
(5) The conditions in subsections (6), (7) and (8) must be satisfied if the relevant *CGT event happens to an interest in a * fixed trust (the first trust) and the interest is *taxable Australian property at the time of the CGT event.
(6) At least 90% (by * market value) of the *CGT assets of:
(a) the first trust; or
(b) a * fixed trust in which the first trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust);
must not be * taxable Australian property at the time of the relevant *CGT event.
(7) If the condition in subsection (6) is not satisfied for the first trust (but is satisfied for a trust covered by paragraph (6)(b)), the condition in subsection (8) must be satisfied for the first trust, and for each other trust in the *chain of trusts between the first trust and the trust that satisfied the condition in subsection (6).
(8) The condition is that, assuming any interest in a *fixed trust in that *chain not to be *taxable Australian property, at least 90% (by *market value) of the *CGT assets of the trust must not be taxable Australian property.
61 Ms Seiden SC submitted that s 855-40(2)(c)(ii) is otiose because s 855-40(2)(c)(i) read with the look through rules is capable of dealing with all CGT assets that occur to downstream assets. Ms Seiden SC further that submitted that s 855-40(2)(c)(ii) can, in any event, never be satisfied because, under s 855-40(2)(c)(ii), whether the membership interest held by the entity in the fixed trust is taxable Australian property depends whether that interest is "an indirect Australian real property interest" (s 855-15). To be "an indirect Australian real property interest", the interest must pass the principal asset test in s 855-30 and, stated broadly, to pass the principal asset test, more than 50% of the value of the underlying assets must be derived from taxable Australian real property. Thus, the argument went, conditions (5) and (6) cannot be satisfied simultaneously because condition (6) is that at least 90% (by market value) of the CGT assets of the fixed trust must not be taxable Australian property at the time of the relevant CGT event. However, both submissions disregard the operation of the section where there is a chain of fixed trusts and condition (6) is not satisfied in the trust in which the interest is held but is satisfied in a trust down the chain. Conditions (7) and (8) apply in that circumstance and those conditions operate assuming that any interest in a fixed trust in that chain not to be taxable Australian property. Accordingly, s 855-40(2)(c)(ii) is capable of operation, albeit a narrow application, and there does not seem to us to be any merit in the claim that the section is either unworkable or unnecessary.
62 The claim that s 855-40 is superfluous was put on the basis that its predecessor provision, s 768-605(2), was included in the legislation out of abundant caution to provide clarity to foreign resident investors in the managed fund industry in respect of their liability to tax on capital gains made on their interests in, or through, fixed trusts. That submission does not find support in the extrinsic material. The former s 768-605, the predecessor provision which was repealed with the enactment of div 855, relevantly provided:
768-605 Effect of capital gain or loss from underlying fixed trust assets
(1) A *capital gain or *capital loss you make from a *CGT event happening to your interest in a *fixed trust is disregarded if:
(a) you are a foreign resident at the time of the CGT event; and
(b) your interest has the *necessary connection with Australia at that time; and
(c) the conditions in section 768-610 are satisfied.
(2) A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:
(a) you are a foreign resident when you make the gain; and
(b) the gain is attributable to a *CGT event happening to a *CGT asset of that trust or of another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of fixed trusts); and
(c) either:
(i) the asset does not have the *necessary connection with Australia at the time of the CGT event; or
(ii) the asset is an interest in a fixed trust and the conditions in section 768-610 are satisfied.
Note: Section 115-215 treats a portion of a trust's capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.
63 Section 768-605 was enacted in 2004. At that time, a non-resident made a capital gain only if a CGT event happened to a CGT asset that had the "necessary connection with Australia" (the former s 136-10 (repealed in 2006)) and the exemption in s 768-605 only applied when the trust estate in which the foreign beneficiary held an interest was a fixed trust and the gain related to an asset that did not have the "necessary connection with Australia". There was no equivalent exemption for capital gains of beneficiaries attributable to CGT events happening for non-fixed trusts. The Explanatory Memorandum, New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) (2004 Explanatory Memorandum) at 1.3 explained that the section was introduced to align the tax treatment of foreign residents investing in fixed trusts more closely with the tax treatment of foreign residents investing directly in assets in Australia. The 2004 Explanatory Memorandum also explained at 1.12 that the policy rationale for the exemption only applying in relation to fixed trusts was as an integrity measure to ensure there was no discretion available to the trustee to provide benefits to parties who were not beneficiaries of the trust. Division 136 and s 768-605 were repealed in 2006, at the time that div 855 was enacted. The Explanatory Memorandum, Tax Laws Amendment (2006 Measures No. 4) Bill 2006 (Cth) (2006 Explanatory Memorandum) at 4.1, 4.12 explained that the new measures narrowed the range of assets on which a foreign resident was liable to Australian CGT to Australian real property (ie "taxable Australian property": s 855-15; 855-20) and the business assets of a foreign resident's permanent establishment, however, as Thawley J observed at [68], the 2006 Explanatory Memorandum said nothing about div 855 changing the taxation of capital gains deemed to be made by foreign resident beneficiaries under s 115-215. It did state at 4.113:
Amendments made by this Bill move a specific treatment for capital gains and capital losses made by foreign residents from interests in, or through interests in, fixed trusts from Subdivision 768-H into Division 855. The general operation of the CGT and foreign resident rules will ensure that a capital gain or a capital loss on an interest in a fixed trust made by a foreign resident is disregarded if that interest is not taxable Australian property. The provisions specifically dealing with the distribution of capital gains to foreign beneficiaries will continue to operate.
Thawley J considered that 4.113, combined with there being no mention of any change to the taxation of capital gains deemed to be made by foreign beneficiaries, indicated that the former exemptions from CGT for foreign residents in relation to fixed trusts in sub-div 768-H were to continue in div 855, but that the existing provisions for the "distribution of capital gains" to foreign beneficiaries would continue to operate as before (Greensill judgment [69]). We agree with Thawley J. The extrinsic material does not suggest that s 855-40 or its predecessor provision, s 768-605(2), were mere "clarity measures" as contended by Ms Seiden SC. To the contrary, the legislative history elucidates that the exemption now encapsulated in s 855-40 was deliberately limited to fixed trusts for integrity reasons.
64 Mr Robertson QC put a slightly different argument. He argued that Thawley and Steward JJ overlooked that the mischief Parliament aimed to cure by the enactment of the former s 768-605 which, he submitted, became redundant with the enactment of s 855-15 in 2006 and so, the argument went, s 855-40 no longer had significant work to do. It was put by Mr Robertson QC in his written submissions that:
… s 768-105 (sic) provided, inter alia, a special exemption for a foreign beneficiary's s 98A assessable share of a trust's net income attributable to Australian gains and losses, which was converted by ss 115-215(3) and (6) into an assessable capital gain. In this regard, the Explanatory Memorandum to the New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) recognised that s 115-215 only applied to identify and convert a foreign beneficiary's s 98A assessable income, being its share of the trust's net capital gain attributable to Australian sources:
[1.29] … Section 115-215 applies to a trust that has a net capital gain for an income year. In respect of a foreign resident beneficiary, section 115-215 effectively applies if the beneficiary is presently entitled to a share of the net income of a trust and that share is attributable to Australian sources [i.e. s 98A [1936 Act]] (emphasis supplied and words in brackets added)
The mischief Parliament aimed to cure in 2004 concerned an interest in an Australian trust which was defined, at that time, as a CGT asset with a "necessary connection with Australia" within former s 136-10 [1997 Act], even if it only represented a beneficial interest in underlying trust assets without a necessary connection with Australia. So whilst the beneficiary would not be assessed under s 98A [1936 Act] when the underlying assets were sold by the trustee, it would be assessed when a CGT event happened to its interest, such as when its interest was redeemed (CGT event C2) or sold (CGT event A1) or when proceeds of the sale of the underlying trust assets were distributed to it (CGT event E4).
This problem was compounded where the foreign investor invested in an Australian trust holding investments in other Australian trusts that invested in a portfolio of assets that did not have the necessary connection with Australia. This gave rise to a chain of interests with the necessary connection with Australia. Thus an intermediate trustee's gain on redemption of an interest in underlying non-Australian assets would itself be an Australian gain included in the trust's net income and assessable to the foreign investor under s 98A [1936 Act]. This would trigger s 115-215(3) despite the foreign investor only actually receiving the benefit of underlying non-Australian gains. So s 768-105 (sic) exempted the otherwise assessable capital gain if the beneficiary's s 98A assessable income was attributable to its investment in a trust that predominantly owned assets that did not have the necessary connection with Australia.
In 2006, this 2004 problem was largely if not wholly solved when Parliament expressly removed the interest of a beneficiary in an Australian trust from the re-enacted definition of "taxable Australian property" in s 855-15 [1997 Act]. The principal exemptions conferred by s 768-105 (sic) became redundant by this broad-ranging amendment and, in particular, no inappropriate s 98A assessable income could be created that would trigger Subdivision 115-C. Thus in 2006 s 855-40 no longer has significant work to do. But in 2004 the position was radically different, a point overlooked in [the Greensill judgment] and in [the Martin judgment].
(emphasis in original)
65 The assertion of the mischief which the enactment of s 768-605 in 2004 "aimed to cure" does not support a conclusion that s 855-40, when enacted in 2006, should not be construed on its terms. The submission does not deal with the express language of s 855-10 and s 855-40. Furthermore, it ignores the express purpose of s 855-40, which is "to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust by foreign residents of *CGT assets that are not *taxable Australian property": s 855-40(1) of the 1997 Act. There is no warrant for construing s 855-10 and s 855-40 other than on their terms.
66 If reference to legislative history bears on the construction of s 855-40, it does not assist the appellants. We agree with Thawley J that s 768-605(1) is comparable to s 855-10(1) in that s 768-605(1) applied to capital gains "you make from a *CGT event" - ie capital gains made under pt 3-1 of the 1997 Act from a CGT event happening to the beneficiary's interest in a fixed trust - and that s 768-605(2) is comparable to s 855-40 in its application to a capital gain of a beneficiary arising, not by direct operation of pt 3-1 of the 1997 Act on a CGT asset of the beneficiary, but by the operation of sub-div 115-C in respect of a CGT event happening to a CGT asset of the estate of the fixed trust. Reference to s 768-605 only seeks to confirm that s 855-40 should be construed on its terms.
67 Additionally, if it be relevant, the former s 160L of the 1936 Act supports the Commissioner's construction of s 855-10. The former s 160L relevantly provided:
(1) Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere or not situated anywhere, that:
(a) immediately before the disposal took place, was owned by:
(i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or
(ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and
(b) was acquired by that person on or after 20 September 1985.
(2) Subject to this section, this Part also applies in respect of every disposal on or after 20 September 1985 of a taxable Australian asset that:
(a) immediately before the disposal took place, was owned by:
(i) a person (not being a person in the capacity of a trustee) who was not a resident of Australia; or
(ii) a person in the capacity of a trustee of a trust estate that was not a resident trust estate or of a unit trust that was not a resident unit trust; and
(b) was acquired by that person on or after 20 September 1985.
68 The former s 160L had a comparable effect to s 855-10, save that the non-residency of a beneficiary of a trust estate was not relevant to s 160L - the relevant tests for s 160L to apply were a resident trust estate which owned the asset (s 160L(1)) and, for a non-resident trust estate, ownership of a taxable Australian asset (s 160L(2)).
69 Both appellants further argued that the construction of s 855-10 accepted by the Courts below (ie that section only applies to capital gains from CGT events happening to assets of the foreign beneficiary or foreign trustee) has the following anomalous and capricious results. First, an Australian resident beneficiary of a foreign trust would not be subject to tax on a capital gain from a CGT event in relation to a CGT asset which is not taxable Australian property, merely on the basis of the residency of that foreign trust. Secondly, a gain made on the happening of a CGT event in relation to an asset which is not taxable Australian property would be disregarded if made by a foreign resident directly or if made by a foreign resident trustee and distributed either to a foreign resident beneficiary or resident beneficiary, but would not be disregarded if made by the trustee of a resident trust estate yet distributed to a foreign resident beneficiary. The appellants argued that a construction that yields capricious or improbable results is to be avoided and should not be accepted. Correlatively, Ms Seiden SC argued that a construction which promotes the objects and purposes of the legislation is to be preferred. Ms Seiden SC argued that the construction advanced by the appellants (ie that s 855-10 does not require the foreign beneficiary to be the owner of the CGT asset to which the CGT event happens) promotes the objects and purposes of div 855. Ms Seiden SC noted that Steward J at [80] of the Martin judgment was of the view that the appellants' construction was likely to enhance "Australia's status as an attractive place for business and investment", being one of the objects of div 855 set out in s 855-5. Another purpose was said to be to strengthen the application of CGT to foreign residents by making certain "interests" in entities (including discretionary trusts) subject to Australian CGT where the assets of those entities consist principally of Australian real property; thus aligning Australia's laws with international practice (see s 855-5(2)(a)). Mr Robertson QC submitted that consistent with this historical analysis, "Parliament wanted to preserve (and extend through interposed entities) Australia's right to impose CGT on [taxable Australian property] and never expressed an intention to raise capital gains from foreign residents in relation to [non-taxable Australian property]". That intention was said to be reflected in the changes introduced by div 855, which focuses solely on the character of the CGT asset and no other criteria, such as the character of the taxpayer or the type of CGT asset.
70 Neither argument is persuasive. First, although anomalous or capricious consequences may be an indication that Parliament did not intend the provision to be read in that way (Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297; [1981] HCA 26, at 321), the identification of possible anomalies or capricious consequences does not mean that the provision should be construed differently: Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 83 FCR 511; [1998] FCA 1655 where Black CJ and Sundberg J stated at 519:
Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the Court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the Parliament.
See also ConnectEast Management Ltd v Federal Commissioner of Taxation (2009) 175 FCR 110; [2009] FCAFC 22 at 119 [41]. As Campbell J cautioned in Ganter v Whalland (2001) 54 NSWLR 122; [2001] NSWSC 1101 at [36], a court is not justified in using an anomaly as a reason for rejecting what otherwise seems the correct construction where on all other tests of construction, it is the correct construction as "[w]ere courts to act otherwise, they would risk taking over the function of making policy choices which properly belongs to the legislature". Secondly, underpinning the appellants' arguments about the proper construction of div 855 is the a priori assumption that Parliament did not intend that foreign residents be taxable on gains from non-taxable Australian property. As the High Court cautioned in Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 248 CLR 378; [2012] HCA 56 at [26], [41], in construing legislation the purpose of legislation must be derived from what the legislation says, not from any assumption about the desired or desirable reach or operation of the provisions: see also Carr v Western Australia (2007) 232 CLR 138; [2007] HCA 47 at 143 [6]. Nothing in the express statement of objects of div 855 in s 855-5 or in the extrinsic material warrants a construction by reference to that a priori assumption, to the disregard of the text of ss 855-10 and 855-40. To the contrary, the contrast between ss 855-10 and 855-40 demonstrates that Parliament specifically directed its attention to when, and in what circumstances, a foreign beneficiary is entitled to an exemption under div 855. Section 855-40(1) makes this clear in the identification of the legislative purpose or the exemption in relation to interests through fixed trusts.
71 Another contextual argument was that the effect of the Greensill judgment is that s 855-10 operates within the calculation of a trust estate's s 95 net income, overriding the statutory hypothesis that the trustee (and trust estate) is a resident in order to calculate the net income of the trust estate. The Commissioner's response to this argument was that the interaction between s 855-10 and the definition of "net income" in s 95 was a false issue in these appeals, because neither appeal involves a foreign trust. That response was unhelpful because, in our view, whether and how s 855-10 operates within s 115-210 is part of the construction matrix as to how div 855 interacts with sub-div 115-C. At [24] of these reasons, we set out our view that the residency hypothesis does not apply in ascertaining whether a foreign trust estate has a net capital gain for an income year and, thus, in determining whether the precondition in s 115-210 for sub-div 115-C to apply is met in relation to the foreign trust. If this be correct, s 855-10 then has work to do. Otherwise, if the residency hypothesis applies at the point in time of determining whether a foreign trust estate has a net capital gain, s 855-10 has no work to do in relation to a foreign trust estate yet, plainly, that was Parliament's intention. But even if we are wrong about this and the residency hypothesis does apply at the point in time of determining whether a foreign trust estate has a net capital gain, that does not advance the appellants' construction of s 855-10, because all it means is that the precondition for the application of sub-div 115-C will have been met, albeit that the net capital gain of the foreign trust is from a CGT event happening to a CGT asset that is non-taxable Australian property. The operative provisions of sub-div 115-C would then apply to bring that net capital gain to tax.
72 Mr Robertson QC's primary contention that sub-div 115-C does not assess a foreign taxpayer on amounts that would not be div 6 assessable income - which he termed "non-Australian gains" - and that s 855-10 and its predecessors plainly inform what is assessable under div 6 does not withstand scrutiny.
73 First, the contention assumes or asserts that there is no difference between, on the one hand, a CGT asset being taxable Australian property and, on the other, a capital gain from a CGT event that happens to that CGT asset having an Australian source, however they are not coterminous. Division 855 contains a set of rules for determining when a CGT asset is taxable Australian property and, in the case of shares in a company, as is the case here, it depends on the nature and value of the underlying property held by the company, including through interposed entities: ss 855-25, 855-30, 855-32. In contrast, whether a gain has an Australian source depends on a different factual enquiry, which involves a wide variety of factors which may vary from case to case: see Federal Commissioner of Taxation v Resource Capital Fund IV LP (2019) 266 FCR 1; [2019] FCAFC 51 at 19-22 [59]-[66], 68 [230]. Neither Court below made a finding to the effect that the capital gains made by the respective trust estates had a foreign source, nor was any such finding sought. Nor is this Court in a position to resolve that factual question, which, it may be anticipated, would have involved the calling of other evidence below, if the submission had been made.
74 Secondly, the contention is founded on the incorrect premise that the amendments in 2011 did not effect a substantive change to the operation of sub-div 115-C. Mr Robertson QC put substantial store on the fact that prior to the 2011 amendments, sub-div 115-C only applied if a net capital gain was included in the s 95 income of a trust estate and the beneficiary or a trustee in respect of that beneficiary was assessable on a share of that net income under div 6. He also made the point that the residency or non-residency of the trust is irrelevant to the trustee's liability to tax under s 98, in contrast to ss 99 and 99A. The Court was taken to Federal Commissioner of Taxation v Belford (1952) 88 CLR 589; [1952] HCA 73; Federal Commissioner of Taxation v Angus (1961) 105 CLR 489; [1961] HCA 18 and Union-Fidelity Trustee Company of Australia Ltd v Commissioner of Taxation (1969) 119 CLR 177; [1969] HCA 36; in support of the proposition that residency of a trust has nothing to do with its liability under s 98. So much may be accepted. However, it is an erroneous approach to construe sub-div 115-C by reference to the way in which the provisions operated prior to the 2011 amendments. In 2011, the taxation of capital gains of a trust estate was taken out of div 6 by the enactment of div 6E and the operation of s 102UX and consequential amendments were made to sub-div 115-C so that capital gains are now dealt with separately from div 6. As earlier noted at [28], the reason for the amendments was to enable the effective streaming of capital gains to beneficiaries for tax purposes which, in consequence of the High Court's decision in Bamford, the then statutory scheme did not permit (see Commissioner of Taxation v Greenhatch (2012) 203 FCR 134; [2012] FCAFC 84). Significantly, div 6 assessable income is no longer a criterion for sub-div 115-C to have operation. The precondition instead is that the trust estate has a net capital gain taken into account in working out the trust estate's net income: s 115-210. The computation of the amount of the capital gain that the beneficiary is taken to make under s 115-215 depends on the calculation referred to in s 115-225(1) which, in turn, depends on the beneficiary's "share" of the capital gain under s 115-227. Section 115-227 relevantly depends on two matters. One is the amount of the capital gain to which the beneficiary is "specifically entitled" under s 115-228, which has no relationship with div 6. The other is the beneficiary's "adjusted Division 6 percentage", which is defined in s 95 of the 1936 Act but, again, does not depend on inclusion of amounts in the beneficiary's assessable income under div 6.
75 Thirdly, Mr Robertson QC submitted that the provisions of sub-div 115-C as enacted in 1999 necessarily inform the correct context for the amendments made in 2011, namely as a conversion and adjustment mechanism of div 6 assessable income. Mr Robertson QC submitted that from 2011 this "conversion" of a foreign beneficiary's div 6 assessable income into an assessable capital gain under s 115-215(3) is effected by div 6E. He submitted that the "formal change" is that the foreign beneficiary's div 6 assessable income is recalculated by div 6E to remove the trust's net capital gain from s 95 net income for this purpose and so ss 115-215(2) and 115-215(6) in sub-div 115-C as enacted were also repealed with the introduction of div 6E, because they were unnecessary. Critically, he submitted, the first step now is to apply div 6 unmodified by div 6E to identify the div 6 assessable amounts to be recalculated to allow for differential streaming among beneficiaries. If the trust's s 95 net income comprises only foreign income and non-Australian gains, there is no div 6 assessable income and sub-div 115-C is not engaged. If there are "Australian gains", div 6E then operates to remove the trust' net capital gain from the s 95 net income and the assessable amounts are recalculated by sub-div 115-C, which by ss 95AAB and 95AAC of the 1936 Act are also treated as div 6 assessable amounts, "stamping it with its Australian source".
76 It is incorrect, however, to describe sub-div 115-C following the 2011 amendments as a "conversion mechanism for div 6 assessable amounts". Steward J in the Martin judgment at [13] did describe sub-div 115-C in terms that the subdivision "converts the amount assessable to the beneficiary, which is derived from the capital gains made by the trustee, into another capital gain", but that description of sub-div 115-C was qualified to be "in very general terms" and "broad terms". However, contrary to Mr Robertson QC's submission, div 6E does not operate to "convert" the div 6 assessable income. Instead, as explained, div 6E modifies the operation of div 6 by removing capital gains from the assessing provisions of div 6. More particularly, since the 2011 amendments, working out whether a beneficiary is taken to have made capital gains now occurs solely under sub-div 115-C and does not depend on whether the beneficiary is assessable on the capital gains of the trust estate under div 6. Thus, as part of the amendments in 2011, the then ss 115-215(2) and (6) were repealed, because s 115-215(2) made it a criterion that a beneficiary's share of the net income of the trust estate had to include an amount attributable to the trust estate's capital gains (ie be div 6 assessable income) in order to enliven the application of sub-div 115-C to that beneficiary. Nor is it correct that ss 95AAB and 95AAC of the 1936 Act import an Australian source criterion, as those provisions, on their express terms, simply operate to treat the amount assessed under sub-div 115-C as included in the beneficiary's or trustee's assessable income under div 6, other than for the purposes of the assessment provisions of div 6 (ie ss 97, 98, 98A, 99 and 99A).
77 Finally, the thesis that Parliament never intended that a foreign beneficiary be brought to tax on non-Australian gains does not warrant a construction of the provisions of sub-div 115-C other than on its terms. It was submitted that it would be extraordinary that Parliament intended sub-div 115-C, as amended now, to apply to tax the foreign resident on non-Australian capital gains "without Parliament having mentioned it specifically". The short answer to this contention, is that Parliament introduced a new scheme for the taxation of capital gains made by a trust estate to enable streaming of capital gains and did so by taking the taxation of such capital gains out of div 6 completely. That change was significant in that sub-div 115-C now operates exclusively in respect of allocating the tax liability on capital gains of a trust estate and sub-div 115-C is to be construed and applied according to its terms, not by reference to the statutory scheme, which the 2011 amendments replaced.
78 Therefore, in conclusion, Thawley and Steward JJ were correct to hold that s 855-10(1) has no application to the facts of either case. The provision did not apply to the trustees of the respective trusts because both trusts are resident trusts. Likewise, the provision did not apply to the foreign beneficiaries to disregard any capital gain in the calculation of the amount under s 115-215(3) treated as the beneficiary's capital gain for the purposes of the application of div 102 to the beneficiary, because "the amount mentioned in s 115-225 in relation to the beneficiary" for the purposes of s 115-215(3) and s 115-220 is not a "capital gain … from a CGT event" within the meaning of s 855-10. We would therefore dismiss both appeals with costs.
I certify that the preceding seventy-eight (78) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Davies, Moshinsky and Colvin.