ConnectEast Management Limited v The Commissioner of Taxation [2009] HCATrans 220 (4 September 2009)

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ConnectEast Management Limited v The Commissioner of Taxation [2009] HCATrans 220 (4 September 2009)

Last Updated: 8 September 2009

[2009] HCATrans 220

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M26 of 2009

B e t w e e n -

CONNECTEAST MANAGEMENT LIMITED (AS TRUSTEE FOR THE CONNECTEAST INVESTMENT TRUST 2) (ABN 68 071 292 647) (ACN 071 292 647)

Applicant

and

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 4 SEPTEMBER 2009, AT 9.54 AM

Copyright in the High Court of Australia

MR T.F. BATHURST, QC: May it please the Court, I appear with my learned friends, MR S.H. STEWARD and MS L.A. HESPE, for the applicant. (instructed by Mallesons Stephen Jaques)

MR P.J. HANKS, QC: Your Honours, I appear with MR S.J. SHARPLEY for the respondent. (instructed by the Australian Government Solicitor)

HAYNE J: Yes, Mr Bathurst.

MR BATHURST: We accept that it is unusual for this Court to grant special leave to determine an issue concerning a relatively obscure provision of the Income Tax Assessment Act, particularly when four judges in the court below have come to the same view. However, we do submit the construction placed on the section in the court below is wrong, it renders the section unworkable in significant respects and it is of general importance to the operation of publicly listed trusts which, as the Court is, of course, aware, are a common investment vehicle at the present time or at least in very recent times past.

Can I go directly to section 272-127, which the Court will find extracted in our written submissions at pages 39 to 40 of the application book. The critical provision is subsection (1)(b), which the Court will find at the top of page 40:

each of one or more trusts of a higher level (see subsection (3)) has, directly or indirectly, fixed entitlements to all of the income and capital of the trust –

Then the concluding words of the subsection:

the trust is instead a trust of the same kind (see subsection (2)) as the trust of the highest level - - -

HAYNE J: Can the difference between the parties as to the construction be sufficiently identified as a difference between reading “each has all”, one sign; “one or more has or have between them all”?

MR BATHURST: Effectively, yes.

HAYNE J: Why would one adopt the second reading?

MR BATHURST: We contend you adopt the second reading. The second reading accommodates a situation, in our respectful submission, where one or more trusts of a higher level, directly or indirectly – of a particular higher level, directly or indirectly – hold 100 per cent of the entitlement.

HAYNE J: I understand that, but is that a reading that is consistent with the literal words?

MR BATHURST: We submit that that is consistent with the literal words in this sense – that the word “each” qualifies one or more trusts of a higher level having, directly or indirectly, fixed entitlements. The use of the words “one or more trusts”, in our respectful submission, indicates that one or more trusts can have either a direct or an indirect entitlement. The word “each” provides emphasis in this case, we submit, that for the section to work each of the one or more trusts in question have to be at a particular higher level. That is the way we put the proposition.

HAYNE J: The difficulty I have with that, Mr Bathurst, so that you may see it and grapple with it, is the conjunction of “each”, “has”, “all”, particularly “has” rather than “has or have”. But “each”, “has”, “all” seems to be the footing on which the courts below have proceeded. What is wrong in it is the real question.

MR BATHURST: What we say is wrong with it is two things. It does not give sufficient meaning to one or more trusts of a higher level and, secondly, we say what is wrong with it is that it does not give sufficient meaning to the fact that the section envisages that one or more of those trusts for the higher level can have directly fixed entitlements to all of the income of the trust.

To enable the section to work in relation to direct entitlements in respect of one or more trusts, one has to do, we accept, some violence to the strict grammatical meaning of the words “each” or “has”. We submit that it can only work if one does that and the section, in its terms, is not envisaging what I will call only a vertical ownership as distinct from the possibility of a horizontal ownership. Otherwise, one simply would read the section “any trusts have, directly or indirectly, fixed entitlements to all of the income and capital of the trust”. That is how we put the proposition.

We say that one has to look at it as a composite phrase and the composite phrase is “one or more trusts of a higher level”. That is why we say one looks at a particular level and sees whether each of those trusts, as it were, collectively has, directly or indirectly, a fixed entitlement. With that construction we also submit that the word “has” can be accommodated. One looks at our submission at a group of trusts at a particular level and determines whether that group, “one or more” – to use the words of the section – has a direct or indirect entitlement to 100 per cent ownership.

We accept, as we have to, that the word “trust” singular in the concluding words of the section has to be accommodated, but if we are otherwise correct we say there is no contrary intention for the purpose of section 23(b) of the Acts Interpretation Act and the singular can include the plural. The construction, we say, gives full operation to the section in that it can operate in the case of unlisted very widely held trusts and wholesale widely held trusts.

The Full Court, in the case of the former type of trust, accepted that it could not operate in the case of those trusts, but that it was practically unlikely that it would have any effect. We do not dispute what the Full Court says in that regard, but the Full Court also rejected the proposition that it could not operate in relation to wholesale widely held trusts, saying that it could operate if a wholesale widely held trust was held as to 100 per cent by a listed widely held trust. That, with respect, is an impractical solution. Wholesale widely held trusts were expressly envisaged to be what I will describe as pooled investment schemes. Your Honours can pick that up if you go to page 43, footnote 3, of our submission. We refer to the explanatory memorandum:

Schedule 2F states that “wholesale trusts are a means by which the funds of retail trusts and other investment bodies can be pooled and invested in particular types of investments (e.g. Australian shares, property, etc.)”

It is not a question of anomalies. It is a question, in our respectful submission, of making the section work in relation to those trusts. We submit the construction we put on it makes it work. We accept that the example in the explanatory memorandum referred to by the respondent does not support the construction for which we contend. However, it is the language of the section which is to be construed, not the explanatory memorandum – much less, in our submission, the examples in it.

The decision is important, of course, to the unit holders of these trusts, other staple entities and to listed entities which join together to invest through wholesale widely held trusts – something that the legislature, in our submission, evidently envisaged could occur. For those reasons, we submit that special leave should be granted.

HAYNE J: Just before you sit down, Mr Bathurst. Paragraph 15 of your argument at page 41 of the application book – you refer in paragraph (b) to “one or more” trusts of a higher level indirectly having entitlements to all of the income and capital of a subsidiary trust. Could you explain that proposition to me a little further? My difficulty with it is this. Assume you have one or more trusts of a higher level – that is the case with which we are dealing – so we have trust A and trust B and both of those trusts are at

one of these several levels that one may have. Between them they have entitlements to all of the income and capital, but trust A has part of those entitlements; trust B has residue. In what sense do one or more trusts of a higher level in the example given indirectly have entitlements?

MR BATHURST: In those circumstances, they would not have an interest indirectly. “Indirectly” is contemplating what I described earlier as a vertical arrangement.

HAYNE J: The three generations, the three layers.

MR BATHURST: The three generations.

HAYNE J: Yes. Thank you, Mr Bathurst.

MR BATHURST: If the Court pleases.

HAYNE J: We will not trouble you, Mr Hanks.

We are not persuaded that an appeal to this Court would enjoy sufficient prospects of success to warrant a grant of special leave to appeal. Special leave is accordingly refused with costs.

AT 10.02 AM THE MATTER WAS CONCLUDED