Greenhatch v Commissioner of Taxation of the Commonwealth of Australia [2013] HCATrans 104 (10 May 2013)

Last Updated: 16 May 2013

[2013] HCATrans 104

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M65 of 2012

B e t w e e n -

KEVIN GREENHATCH

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

CRENNAN J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 MAY 2013, AT 11.40 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC: If your Honours please, I appear with my friend, MR M.Y. BEARMAN, for the applicant. (instructed by Harwood Andrews Lawyers)

MR S.H. STEWARD, SC: If your Honours please, I appear with my learned friend, MS M.L. BAKER, for the respondent. (instructed by Australian Taxation Office)

CRENNAN J: Yes, Mr Slater.

MR SLATER: Your Honours, the question we advance as the special leave question in this application is whether income which has a particular character and particular financial consequences and is received by trustees retains that character and consequences when that income is distributed by the trustees to a specific beneficiary and other trust income is distributed to other beneficiaries. So that if, for example, the trustee receives some interest income, some dividend income, some exempt income and some capital gains and distributes each class of such income to different beneficiaries, do the character and fiscal consequences of each class flow through to the recipients, or is it the case, as the respondent would have it, that those characters and consequences are spread indiscriminately among all beneficiaries?

Your Honours, the facts in this application are straightforward and were agreed between the parties in the Tribunal. There was a trust known as the Elke Trust which had ordinary trust income of some $378,000, and a capital gain of some $450,000, only half of which was a net capital gain included in net income as defined in section 95 of the Act. The Elke Trust distributed all its ordinary income to another beneficiary, and distributed all the capital gain, made up of the net capital gain and the balance of the capital gain as corpus, to the applicant and his wife equally. One amount included in the applicant’s gross assessable income was therefore half of the net capital gain derived by the Elke Trust.

Your Honours, the Act in section 115-215 also includes in a beneficiary’s assessable income an amount of notional capital gain which is attributable to - and those are the critical words - attributable to the trustee’s capital gain offset by a matching deduction. The purpose of that is to allow the use of capital losses of the beneficiary to offset the capital gain. In this case the applicant’s entitlement to a deduction for a superannuation contribution, which was the deduction disallowed by the assessment, depended on the amount of his gross assessable income, not the amount of his net income after deduction of the matching Division 115 deduction. So it depended upon the apportionment calculation required by the words “attributable to”.

Your Honours, the applicant’s case is that the amount assessable to the applicant under section 97 is wholly attributable to the trust gain, that is to the capital gain made by the Elke Trust, because all of that gain and nothing else was distributed to the applicant and his wife. So in the applicant’s submission, section 115-215 included in his assessable income an additional notional capital gain equal to the part of his section 97 income that is attributable to the trust gain, being the gain made by the Elke Trust.

That part, in the applicant’s submission, was all of his section 97 income, and so his gross assessable income was sufficiently increased to entitle him to the superannuation deduction. Your Honours, the respondent’s case in contrast is that the amount assessable to the applicant under section 97 is only partly, not wholly, attributable to the trust gain distributed to him.

CRENNAN J: As a proportionate share.

MR SLATER: Yes, your Honour, and that in consequence it is mostly attributable to what was not distributed to him, the ordinary income which was wholly distributed to another beneficiary. That submission, and I speak perhaps on behalf of my friend and no doubt he will correct me if I go wrong, but that submission is based on the proposition that “attributable to” does not allow regard to what happened in trust law as between the trustee and the beneficiary. It is confined to a mechanical calculation – proportion allocation as your Honour put it to me – of the amount assessable under section 97, the ratio of that amount to the section 95 net income of the trustee, and the application of that ratio to the trustee’s capital gain.

Your Honours, the Tribunal accepted the argument which was put by the applicant. The Full Court adopted the respondent’s analysis, and your Honours will see that at pages 39 to 40 of the application book. I will not take your Honours to read this to your Honours, but it is at paragraphs 29 and 35 to 37.

CRENNAN J: Yes.

MR SLATER: In our submission, in accepting that analysis, the Full Court fell into error, and the error rests principally on a misreading of what was decided by this Court in Bamford v Commissioner of Taxation.

CRENNAN J: What about the starting point of the Full Court? They commenced really with consideration of section 97 and once they had considered the proportionality method under section 97, they took the view that it was difficult to apply the word part section 115-215(3)(b) in a non-proportional way. Are you challenging their starting point?

MR SLATER: Yes, your Honour, in that nexus that they brought. Can I put it to your Honour perhaps very slightly differently from the way your Honour has put it to me? What we say is that the decision in Bamford’s Case was concerned only with the quantification of what is assessable to the beneficiary under section 97. It is not concerned with the character of what is assessable. What the Court said was - - -

CRENNAN J: This is your quality argument versus quantity.

MR SLATER: Yes, your Honour. What the Court said in Bamford’s Case was that you, as a matter of trust law, determine what share of the trust law income the beneficiary has and then you determine a proportion from that and you apply that proportion to the section 95 net income. That analysis does not touch upon anything to do with the words “attributable to”. It simply determines the amount which is assessable under section 97. It says nothing as to what we have called the quality of that amount or as to what it is attributable to.

Your Honours can see the error at paragraph 31 of the Full Court’s reasons on page 39 of the application book. Their Honours there say that:

It was common ground that Mr Greenhatch’s assessable income . . . included an amount under s 97 –

The assessable income is the section 97 amount. When they go on in the next sentence to say it is this amount, they are referring to the section 97 amount:

It is this amount that is referred to as the trust amount . . . It was common ground that Mr Greenhatch’s “trust amount” was the sum of $112,340, that is, his share of the net income –

that is the section 97 net income –

of the Elke Trust.

It is in the next sentence that their Honours go astray. They say:

But what he received in the present case –

Now, what he received in the present case was not section 97 net income. What he received was a share of trust income. They go on to say:

was a proportionate share of amounts having no single character.

When they use the word “amounts” there, they are referring back to the words “this amount” in the second line of that paragraph.

CRENNAN J: Well, it all has to be read in the context of paragraph 29 as well, does it not?

MR SLATER: Yes, your Honour. That, again, is concerned with working out the amount of section 97 net income, but working out that proportion, in our submission, does not tell the Court or the taxpayer anything about what the amount is attributable to, it only tells you what the amount was – its quantity, as we have put it, not its quality.

Your Honours, in our submission, that is the fundamental error in the decision of the Full Court, and the reason why the error has an import wide enough to justify intervention by this Court is that the proportional concept of attribution, that is, attribution by numbers and not by character, is inconsistent with the treatment of other classes of trust income flowing through trusts to designated beneficiaries. In our submission, taking the approach taken by the Full Court in this matter produces aberrant results, not only where the trust has other categories of income, but also in relation to the operation of Division 115.

The Acts deal with trust income on the premise that the character of what is derived by the trustee flows through to what is distributed to the beneficiaries. In the written outline, your Honours, we have at page 51 in paragraph 10 given your Honours examples of that, and I will not read them to your Honours but in summary the taxation of non-resident beneficiaries depends on attributing income to a source. It does not sensibly work on a formulaic proportional allocation.

Allocation by ratio was not the intent of these provisions when they were introduced to overcome the decision of this Court led by Sir Garfield Barwick in Union-Fidelity Trustee Company v Federal Commissioner of Taxation. I have not supplied your Honours with a copy of that. It is [1969] HCA 36; (1969) 119 CLR 177. I do not propose to tell your Honours anything about it other than it created a problem in that the Court held that the foreign source income of a trust estate was not taxable until it was distributed to a resident beneficiary and the present form of section 97 was enacted to overcome that difficulty.

The present form of section 97, in our submission, is itself contrary to the premise of the Full Court decision and to the respondent’s argument. Can I take your Honours briefly to section 97? Your Honours will find it at page 97 of the application book at about point 6 on the page. Your Honours will see that it provides that:

where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share –

Now, so much of that share is worked out on the proportional basis fixed by the decision of this Court in Bamford’s Case. Then it goes on to say:

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident –

Now, the word “attributable” is not referring to a calculation of the amount of the share. The work for calculation is done earlier, so much of that share. Attributable refers to something else. It refers to the nature or quality, in this case the source or in this case the period in which it was derived.

CRENNAN J: This all rather suggests that the trust resolution in relation to the income does not matter.

MR SLATER: It does matter, your Honour, because the trust resolution determines who gets what amount out of the income of the trust estate.

CRENNAN J: When I said it does not matter, it does not govern how this will operate. That is to say, the trust resolution for trust purposes does not detract from the proportionate approach here which the Full Court has taken as the starting point, which is why they have construed part in the way they have in the other section that was relevant.

MR SLATER: I am not sure that I am not misunderstanding your Honour’s question but can I endeavour to answer it this way? The trust resolution will determine what part of the income of the trust estate the beneficiary is entitled to. That part is the share of the income of the trust estate and that share is then applied in the opening words of section 97(1)(a)(i) to determine the amount of assessable income.

The trust resolution may, and in this case did, also determine which part of the income, which silo or fund of the income of the trust estate goes to which beneficiary. Where it does that, it performs two functions. First it fixes the quantum of amount assessable under section 97, that is the opening words of (i), and also it fixes the character or period or source of the income. It fixes what the beneficiary gets is attributable to. In this case, the - - -

CRENNAN J: But it is reconciling it with the trust gain that needs to be addressed, is it not?

MR SLATER: It is not a matter of reconciling, your Honour, it is a matter of attributing. It is not a case of reconciliation. The trust gain is the gain made by the trustee. The gain made by the trustee in this case was a capital gain. The trustee said I give the whole of that capital gain to Mr Greenhatch. There is no difficulty about the amount of the capital gain or the trust gain there. The trust gain is simply the amount which is brought into the assessable income of - the net income of the trust estate and it is part of the trust law income and part of the net income. The trustee allocated, appointed the whole of that trust gain to Mr Greenhatch. That had two consequences: one is it fixed the amount assessable under section 97, and the other is it fixed what Mr Greenhatch’s section 97 income was attributable to, so it performed two functions.

The Full Court made the error of thinking that fixing the amount was all that was relevant. They said there is the amount, that is the share. We worked it out at 18.78-something per cent, and we take that criterion which goes only to the amount of section 97 income and apply it to Division 115, and in doing so, in our submission, their Honours fell into error. They failed to appreciate that section 97 itself, as well as Division 115, is concerned not only with quantification – the issue in Bamford’s Case – but also with allocation or attribution, and it is the attribution point which determines the way in which Division 115 operates, not the quantification point. So when their Honours started off by talking about section 97 as if that governed the outcome under Division 115, they set themselves on the path to the wrong answer.

KEANE J: Section 97(1)(a)(i) is not concerned with attribution to a source, it is concerned with attribution to a period.

MR SLATER: Yes, your Honour, that is a different quality. The point we make is that the Act in various places looks beyond amount to attribution. In section 97(1)(a)(i) - - -

KEANE J: In this context, in 97(1)(a)(i) it is concerned with attribution to arrive at an amount because it is concerned with an amount that is attributable to a period.

MR SLATER: All attributions are ultimately concerned with arriving at amounts because ultimately they all arrive – they all result in the determination of amounts of assessable income and of taxable income.

KEANE J: Section 97(1)(a)(i) is directly concerned with that.

MR SLATER: Yes, your Honour, but it nonetheless requires not just a quantification of share, which is the approach which the Federal Court took, but also an attribution to a period. Can I take your Honours to the other examples and show you how that works?

CRENNAN J: Yes, but the attribution to a period is in relation to the share, there is not this bright line you were suggesting between the notions of quantification and attribution.

MR SLATER: I do not know whether I am suggesting a bright line, your Honour. I am suggesting that there are two questions to be asked: one is what is the amount, and the other is what is its quality, what is it attributable to? In section 97(1)(b) there is a requirement that the amount distributed to the beneficiary be allocated to assessable income and to exempt income. That also depends on attributing the trustee’s derivation of exempt income to a period when a beneficiary is a resident and to the source of the exempt income.

The allocation of non-exempt, non-assessable income in paragraph (c) follows the same path. When one goes to the application of withholding tax, one looks to the attribution of interest dividend and royalties to beneficiaries to whom income, including such amounts, is allocated. Your Honours, I am conscious that I may have run out of time.

CRENNAN J: Do you have something more you wish to say?

MR SLATER: Only this, your Honours - - -

KEANE J: In your usual pithy way.

MR SLATER: I will endeavour to be pithy, your Honour. We say that the Full Court decision is fundamentally wrong for the reasons I have given to your Honours and that it competes with other parts of the Act. The point here, your Honours, is a very concise and precise point on agreed and simple facts. It is a short but subtle point but one, in our submission, of general importance for the reasons we have put in writing.

CRENNAN J: What about the fact that the provision has been repealed, Mr Slater?

MR SLATER: I ran out of time to address that, your Honour, it is really a reply point. I had intended, before your Honour interrogated me, to address it in-chief and try to forestall my friend but I have not got time to do that, your Honour.

CRENNAN J: Very well. Yes, Mr Steward.

MR STEWARD: The Full Court below was required to consider the intended relationship between two very specific statutory concepts. The two concepts as you would have seen on the one hand are the trust amount, and on the other hand a trust gain. The word chosen by Parliament to connect the two was the word “attributable”, a word commonly used in statutes such as this to invoke some form of nexus.

The special leave question which my learned friend invokes does not capture or concern itself with that specific task of statutory construction, namely, what relationship did Parliament intend between these two things? I might add, and I will come to it in a minute, of course, the section is now repealed and there is a brand new regime dealing with this issue. Now, my learned friend invokes a relationship of causation. He says the trust resolution dictates the answer to the question because he says that what caused Mr Greenhatch to receive the whole amount of his income was the terms of the resolution.

We disagree, and the Full Court disagreed, because that, of course, is not the question which Parliament has asked us to consider. Parliament has not made the relationship one between the amount you receive for trust law purposes and a trust gain. Instead, it has done something different. It has posed a relationship between the trust amount and the trust gain. Now, what is that trust amount?

The trust amount, as you would have seen, is your share of the net income of the trust and the court correctly applied the decision of this Court in Bamford to determine what that amount was. What is that net income of the trust? The net income of the trust is not the same thing at all as the trust income. It is a composite mixture of things comprising capital gains, ordinary income, dividends, rent, et cetera, received by the trust reduced by allowable deductions. The result is a number, and what section 97 and the concept of trust amount does is take your proportionate share of that numeric result.

It is precisely because you get a proportionate share of this numeric result that you do not know whether your share is comprised of bits of trust income, such as dividends, rent, capital gains or what have you. You cannot say because your proportionate share is simply a fixed amount of a mixed or blended sum. In that respect, we respectfully disagree with my learned friend’s criticism of paragraph 31 of the judgment below and, indeed, we say paragraph 31 gets to the nub of it. If you go to paragraph 31 on page 39 of the application book, the final sentence which my friend says is an error is, we say, precisely on point. What was received – and “received” there means received for tax purposes:

in the present case was a proportionate share of amounts having no single character.

Nothing in the terms of the trustee’s resolution can touch upon or affect or deal with that reality. It is simply irrelevant in terms of determining how one is to understand what is assessed to the beneficiary under section 97. The extent of the trustee’s resolution, as this Court recognised in Bamford, is limited to fixing your share. As Justice Sundberg said in Zeta Force which was quoted with approval in Bamford, thereafter the trustee’s resolution is irrelevant.

So we say that the Court below correctly considered the meaning of the word “attributable” in its specific statutory context. It applied the ordinary and natural meaning of the words used and it looked to context to inform the correct result. We accept wholeheartedly that the concept of attribution may mean different things in different Acts and it may mean different things in the same Act, depending upon the statutory context. This Court very recently had regard to the meaning of the word “attributable” in the Unit Trend Services Case; again, same Act, different context, different meaning.

We say that the court correctly below looked at this specific context and came up with the correct meaning – the correct relationship. Then we come to the issue of the fact that the section is now repealed. The new provisions were introduced by Tax Laws Amendment (2011 Measures No. 5) Act – which might connote a parallel universe, I do not know – and the provisions appear at tabs 3 and 4 of the joint book. My learned friend in his summary has sought to contend that they are all a bit similar and, in fact, they are not.

Essentially, these new rules which apply from the 2010 year, what they do is they say that where the net income of the trust estate includes a capital gain, the gain is now taken out of the net income of the trust, altogether, and trustees are now effectively able to stream the gains to beneficiaries for a new section 112-215 by making them – the words are specifically “entitled” to the gain. In other words, what the new legislation does is precisely what the applicant contends for here.

It achieves what they want, and you can see that the language in which the new provisions do that are strikingly different. I ask the Court to go very briefly – I think it is the new provisions are behind tab 4 of the joint book of authorities, and I will try and make this as painless as is possible. One goes firstly to page 34, to section 115-215 and if you go to subsection (3)(b), which is the equivalent to what we were looking at earlier, instead of the word “attributable” we now have the phrase:

capital gain equal to twice the amount mentioned in subsection 115-225(1) –

You then have to go over the page – I will try and make this painless – and you will see that 115-225 says that the amount mentioned relevantly, (1)(b):

your share of the capital gain –

You then go across the page, 115-227 talks about what your share of the capital gain is, and it is relevantly (a):

the amount of the capital gain to which the entity is specifically entitled –

Then 228 at the bottom of the page gives you a formula of how to work out your specific entitlement, and the critical part is at the end of the page:

share of net financial benefit means an amount equal to the financial benefit that, in accordance with the terms of the trust –

So here Parliament invokes the very thing that my learned friend relies upon and says look to the terms of the trust. Then there are three things that you need to look at; what “the beneficiary has received”, (b), by reference to the trustee and it “is referable to the capital gain”, and (c):

is recorded, in its character as referable to the capital gain, in the accounts or records of the trust no later than 2 months after the end of the income year.

So that the very general policy question that my learned friend invokes, to what extent can beneficiaries be seen to have received income which shares the same character as that which is received by the trustee is dealt with now by a very comprehensive and exhaustive set of provisions. Finally, could I then address very briefly my learned friend’s submission that the other provisions of the Act permit him to obtain special leave? These differing and complex rules that he relies upon do not, in our respectful submission, follow one theme or one premise or one underlying idea.

Each of them do different things to address different problems, whether they be the taxation of non-residents, the imposition of withholding tax, determining entitlements to foreign tax credits or the distribution of imputation benefits. In each case, Parliament either uses different statutory language, or if it uses similar statutory language it is of an entirely specific and different context. So, to take one example, my learned friend relies upon the imputation provisions. They expressly require you to look at the

trust deed to determine to what extent would an imputation benefit received by a trustee be able to be streamed to a beneficiary.

We do not have that language here and we have to live with the language that Parliament has used and focus upon that and really, with respect, nothing else. For those reasons, we respectfully submit, this special leave should be refused.

CRENNAN J: Yes, Mr Slater.

MR SLATER: Your Honours, what my friend’s submissions show is that the point is short, subtle and important.

KEANE J: The subtlety has been addressed, has it not, in the new legislation?

MR SLATER: To this extent, your Honour. In the material that my friend took your Honours to, when one gets down to the end of it at the top of page 38 immediately before tab 5 of the additional materials, section 115-228(1), the definition of “share of net financial benefit” paragraph (b), it all turns on what is referable to the capital gain, and that involves the idea of being able to follow the character through the trust to the beneficiary.

If one applies the Full Court’s reasoning, one simply applies a proportionate approach because that, the Full Court said, is what was done in Bamford’s Case, that is what this Court has held and we are bound by it and that is the way it must be done. If that is right, then all this legislation ultimately makes no difference. If that is wrong, then this legislation works as it was supposed to. So we say that the amending legislation does not cure the problem created by the decision of the Full Court in this matter.

Your Honours, as to the remaining provisions of the Act, it is true that they appear in different parts of the Act and that it has been said that the same words or the same concept in different parts do not necessarily mean the same thing. When one looks at the way the Act works, and we have given your Honours an example of this in paragraphs 14 and 15 of our written outline at page 53 of the application book, if the Full Court is right then there is a glaring conflict between the way that the capital gains provisions work and the way the imputation provisions work.

For the capital gains tax provisions, an amount is attributable to the capital gain and it is given to a beneficiary who does not actually get any part of the capital gain, so that beneficiary gets the benefit of Division 115, notwithstanding that the capital gain was not passed to him. Whereas the imputation provisions do follow the income through the trust to the

beneficiaries and in consequence the Act, on the Full Court’s interpretation, creates an immediate conflict, an irrational attribution.

In our respectful submission, that cannot be right, and that error, in our submission, requires correction. It is a short point, it took an hour and a half in each of the Tribunal and the Full Court, it would take no more than half a day in this Court and we respectfully submit it merits correction.

CRENNAN J: The Court will adjourn briefly.

AT 12.16 PM SHORT ADJOURNMENT

UPON RESUMING AT 12.19 PM:

CRENNAN J: This application concerns the construction of provisions of the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth) relating to the distribution of capital gains received by a trust among the beneficiaries of that trust. For the 2008 income year, the applicant contributed to his superannuation fund and claimed a tax deduction for that contribution, because less than 10 per cent of his income for that year was derived from salary and wages. That argument was based on a calculation of the amount of taxable income he received as beneficiary of a discretionary trust.

The Commissioner of Taxation disallowed the applicant’s claimed deduction and the applicant objected to that decision. On 12 August 2009, the applicant’s objection was disallowed. The applicant applied to the Administrative Appeals Tribunal for review of the Commissioner’s decision.

The Administrative Appeals Tribunal upheld the applicant’s objection and found that he was entitled to a deduction for his superannuation contribution. On appeal by the Commissioner, the Full Court of the Federal Court of Australia (Edmonds, Greenwood and Robertson JJ) unanimously found that the applicant’s income from salary and wages during the 2008 income year exceeded 10 per cent of his overall income, based on a different calculation of income he received as beneficiary of the trust.

There are insufficient reasons to doubt the correctness of the Full Court’s decision, based on the construction, in accordance with well-settled principles, of provisions which have now been repealed. This matter raises no question of public importance. Special leave to appeal is accordingly refused with costs.

AT 12.20 PM THE MATTER WAS CONCLUDED