Commissioner of Taxation of the Commonwealth of Australia v Thomas; Martin Andrew Pty Ltd; Thomas Nominees Pty Ltd; Thomas [2018] HCATrans 63 (11 April 2018)

Last Updated: 13 April 2018

[2018] HCATrans 063

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Brisbane No B60 of 2017

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

MARTIN ANDREW THOMAS

Respondent

Office of the Registry
Brisbane No B61 of 2017

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

MARTIN ANDREW PTY LTD ACN 063 993 055

Respondent

Office of the Registry
Brisbane No B62 of 2017

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

THOMAS NOMINEES PTY LTD ACN 010 049 788

Respondent

Office of the Registry
Brisbane No B63 of 2017

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

MARTIN ANDREW THOMAS

Respondent

KIEFEL CJ
BELL J
GAGELER J
KEANE J
NETTLE J
GORDON J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 11 APRIL 2018, AT 10.16 AM

(Continued from 10/4/18)

Copyright in the High Court of Australia

___________________

KIEFEL CJ: Yes, Mr Gleeson.

MR GLEESON: Thank you, your Honours. These are our submissions in reply. The first topic concerns the orders of - - -

KIEFEL CJ: Are you going to give us a summary of what is left in play?

MR GLEESON: Yes.

KIEFEL CJ: Some of us, speaking for myself, are a little confused.

MR GLEESON: Yes. I will do that at the outset, your Honours.

KIEFEL CJ: Thank you.

MR GLEESON: B62 and 63 will be dismissed, so there are no questions concerning the 2009 year at all, and no questions concerning penalty. So they are gone. What is left is in B60, the 2006 to 2008 years for Martin Thomas, and in B61, the 2008 year for MAPL. The legal issues are the same for both of those appeals. If the issues are decided in B60, B61 follows.

In respect to those legal issues, just identifying them in terms, the first issue is whether, under Executor Trustee, paragraph 1(b)(iii) of the declaration of Justice Applegarth, in any way bound the Commissioner or the Federal Court. The answer to that is no, because, as was accepted yesterday, Justice Applegarth was asked to accept bifurcation as the correct construction of Division 207 and as a construction which drove all of his conclusions. It is now conceded that bifurcation is wrong under Division 207. One cannot divorce paragraph 1(b)(iii) from the entirety of the declaration or the reasons. So, your Honours, we see that as the first issue, which is broadly the Executor Trustee issue, and it simply hinges on the matters I have just mentioned. That is all I want to say on that first issue in reply.

The second issue, which I will put as a potential issue, is the construction of Division 207 and the issue is whether anything which Justice Pagone said between paragraphs 10 to 16 requires qualification by the Court and we submit it does not. It correctly identified how the division works. When I say it is a potential issue it is only potential in the sense that Mr Harrison placed a lot of emphasis on the word “notional” and he said, without going the full distance, that Justice Pagone did not fully appreciate the notional nature of the process that is involved under 207. We submit there was no error in that area.

But the reason I say it is potential, your Honours, is because there is a hint, and perhaps it is only a hint in Mr Harrison’s submissions, particularly at lines 2315 to 2325 - in answer to your Honour Justice Gageler’s question about a notional distribution there is a hint that Mr Harrison is in fact trying to hold on to the tax returns even though he has conceded bifurcation as an error. What he said in answer to your Honour was this:

the proper way of doing that would have been to say, “We distribute the income in such and such a way to the various beneficiaries but we notionally distribute, pursuant to the relevant sections, the franked dividends that went to make up the income in some other way -

Your Honour Justice Keane asked a question shortly after that about the same topic.

Now, Mr Harrison seems to be saying that the net income resolution can do the job it is intended to do under section 97 in the first instance of establishing the present entitlements to the income, including the franked distributions, but under Division 207 you can do a different inconsistent notional exercise where you notionally allocate the franked distributions in some other fashion. That seems to be trying to achieve the tax returns but having conceded that franking credits are not a separate species of income.

Now, if that is what is being put that seems to be a pure construction question of Division 207. Can you, because of the notional nature of the process, produce an inconsistent result with the actual distribution under section 97? Our answer to that question is no.

Your Honours, the reason it is no is if your Honours do have Division 207 that I have been trying to steer clear of the detail of – if your Honours have that in some form, otherwise we have copies to hand up – the two critical provisions that talk about notional allocation are 207-55 and 207-57. Section 207-55 has an object that the amounts of the franked distributions will be allocated notionally amongst the entities who derive benefits from the distributions. Subsection (2) speaks of the share of the franked distribution being “notionally allocated” and that takes you to subsection (3) and to the table. And as Justice Pagone correctly recognised, we go over to item 3 of the table and we go to column 3 which says:

so much of the amount worked out under column 2 -

which is the whole of the franked distributions because there is positive net income:

as is taken into account in working out that share amount -

and that share amount takes you back to the - in the end of column 1, that takes you back to a share amount mentioned in 207-53 and that 207-53, particularly (b), speaks of the share amount being the share of the trust’s net income that is covered by paragraph 97(1)(a).

So in order to get franked distributions notionally allocated to the beneficiaries, something actual has to happen which is there must be a share of the trust’s net income covered by 97(1)(a) and 97(1)(a) is the present entitlement provision and so there must be something done to make the beneficiaries presently entitled to a share of the net income before they could have any chance of getting a notional allocation of franked distributions.

We think it is useful to consider this as a notional allocation but based on an actual act, the actual fact being something happening to trigger section 97(1)(a). The thing that triggers section 97(1)(a) on the present case is the net income resolution at page 904. That is the resolution which establishes the present entitlements of the beneficiaries to the whole of the net income.

It is convenient to think of the resolution at page 904 as having a primary operation and a secondary operation. Its primary operation is under section 97. It establishes the present entitlements and then Division 207 comes on the top of that and says it will have an additional operation which is that it will determine your notional share of the franked distributions. Then, the final step is at 207-57, the share of the franking credits follows the share of the bank distributions.

So, it is 207-57 that ultimately says how much franking credits each beneficiary gets. It is driven by 207-55 which is notional but it is driven by basically section 97 which is actual. For that reason, Mr Harrison’s submission that you can create an inconsistency, you can have actual section 97 distributions including the franked dividends because they are part of the net income but you can create inconsistent notional distributions for the franking credits, is wrong as a matter of construction. Your Honour, that, we think, is the second issue. The third issue is the question of the application of Division 204 to the facts of the case – 207.

On that issue, we think that in the end you have two alternatives posited. There is our alternative that page 904 provides the answer to the application question and that what has happened under 904 is that the exercise has been done under section 97 to ascertain the present entitlements to the whole of the net income in the ratio of $21,600 to the balance. Then Division 207, for the reasons I have given, operates on top of that to notionally allocate the franked distributions and the franked credits in the same proportion. So that is alternative 1.

We apprehend that Mr Harrison’s alternative is that he takes page 902 and he says although that speaks of applying franking credits in particular proportions, it is a clumsy way of saying, “We intend to allocate the whole of the net income for the purpose of sections 95 and 97 in such a way that will produce this result for franking credits,” and that is the Justice Pagone solution.

GORDON J: Does Justice Pagone do that or does he read the two of them together? It may be to the same result but - - -

MR GLEESON: It gives the same result. Your Honour is correct that Justice Pagone says, “I am trying to make sense of two clumsy resolutions,” but in reading them together Justice Pagone recognises the problem that he has eviscerated the language of 904 but does not provide a solution to how, as a matter of construction, you could read them together to that effect.

They seem to be the two alternative arguments on application. I do not think there are any other arguments floating around. The effect of the Justice Pagone argument is not to achieve the tax returns, because it can only work if the lion’s share of the income has gone to Mr Thomas so that he can get the lion’s share of the franking credits.

GAGELER J: Is that the reason for preferring – is that the only reason for preferring your construction?

MR GLEESON: No, it is not the only reason. The first reason for preferring our construction – and I will start with 904 – is that it gives to the resolution, at page 904, its primary operation under section 97 which is a perfectly lawful and capable operation. It does the job of - as establishing the present entitlements as I have said. It then has a secondary effect in terms of franking credits. That produces the result that there is no income left over for page 902 to operate on. So, that is one reason that 902 is ineffective. There is nothing left over.

The second reason 902 is ineffective is, on its proper construction, it is based on bifurcation. It is based upon an evident assumption – I can treat the franking credits as something directly to be applied in particular fashions completely independent of the net income. To that extent it is based on an impossibility under the law. So, your Honour, that is the issues of application which we think is the third issue.

The fourth issue logically is rectification. That has two problems. Firstly, the one raised by Justice Edelman of procedurally the instrument could not be rectified in these proceedings to produce an inconsistent result with the extant order between many of the same parties in the Queensland proceedings.

KIEFEL CJ: I thought Mr Harrison conceded that.

MR GLEESON: He conceded that and that is a sufficient answer to rectification – a complete answer to rectification. The reason rectification would fail on the merits, in any event, is that your Honours are aware that there is some debate – I think unresolved by this Court – as to the generosity with which rectification can be awarded. The old-fashioned view was, if you intended to include particular words in a document and it contained those words, you cannot be heard to say “But I thought that by putting those words in, I would achieve a particular legal consequence and it turns out I have not”.

A more generous view which emerged particularly in the New South Wales Court of Appeal in a case that is on the respondent’s authorities, Carlenka, is that there may be some circumstances in which you can bring the document into line with the ultimate intention even though the parties will thereby be departing from the particular words they chose.

EDELMAN J: These are very large questions.

MR GLEESON: They do not need to be answered because of the procedural point which is the complete answer and I am identifying them as large questions and not asking you to decide them. The present case on the merits would go even further than those very large questions because what is clear on the evidence here is that there was a composite intention which was to minimise Mr Thomas’ marginal average tax rate and to maximise Mr Thomas’ franking credits. More than that, it was a composite intention formed on an assumption that bifurcation was available under the Tax Act.

Now, even if one said that was the settled intention up until the date of the making of these resolutions, no form of rectification can be propounded which brings the instruments into accord with that settled intention because it is incapable of achievement in law. So, it is beyond even the generous view of rectification.

What Mr Harrison was really suggesting was change the form of the instruments, not to accord to our composite intention, but to a lesser intention hypothetically that we might have formed had we understood the law. That, on no view of rectification, has been permitted to date. Your Honours, that is rectification.

The fifth issue is the estoppel issue and that has been dealt with in the discussion yesterday and I do not say anything about that. The sixth issue was the so-called procedural fairness issue which I think now has largely evaporated. That turned into a plea to be allowed to have a remitter to call fresh evidence about the way in which distributions were made in fact during the course of the 2006 to 2008 years.

It is not the subject of a cross-appeal. No grounds have been made out for leave to cross-appeal and on no basis would the court permit these proceedings to be reopened to run what is essentially a different case and in no sense can the taxpayers’ failure to run that case be attributed to the legal position which Justice Greenwood took on the onus question. So, your Honours would dismiss the procedural fairness ground. Then the final question is the form of orders, assuming the appeal were successful. I think that attempts to answer your Honour the Chief Justice’s question.

KIEFEL CJ: Yes, thank you, Mr Gleeson.

MR GLEESON: So the only matters that I then want to add beyond that are these. The first is that you should have been handed up yesterday the statement of facts in the judicial advice proceedings. We would only observe that that statement, including paragraph 15, confirms in spades that it was bifurcation being urged on Justice Applegarth and that it was the tax returns being sought to be upheld. One sees that from paragraph 17. The proposition was that the franking credits, as a separate species of income, could be distributed under the franking credits resolution in different proportions to the net income distributed under the other resolution.

Your Honours, the second additional matter concerns an aspect of the construction of Division 207. It is consistent with what I have put but, for completeness, could I ask your Honours to go back to section 207-55, to the table, item 3. It is a construction observation about the words in column 3:

taken into account in working out that share amount –

What the Commissioner contends – and that is not a further defined term – is that the taking into account raises a factual question which depends on the particular case. One way they could be taken into account, which is not the present case, is if the franked distributions were expressly streamed. That is as per the example given at 207-35 where the franked distributions are treated as a separate category of income and are allocated to one beneficiary, P, and the rest of the income is allocated to another. So that is one way you can do the taking into account in working out the share amount.

But the Commissioner accepts that there could be other ways of doing the taking into account and another way as per this case is where a taxpayer treats the whole of the net income as an agglomerate and, as per page 904, simply apportions it between beneficiaries. What happens there is that although the trustee has not explicitly dealt with the franked distributions they are taken into account in the same proportion as the overall net income. So the $21,600 to the balance becomes the proportion derived from a resolution which has treated income as an agglomerate but it gives you the proportions for the franked distributions.

I mention that only because that explains the only area where Justice Greenwood went wrong on these issues at paragraph 520. When he said the taxpayer failed on the onus, he was making a proposition that he could not see that the trustee had done something sufficiently explicit to show how the taking into account was being done. He seemed to contemplate that you needed to expressly have a resolution referring to the franked distributions. The Commissioner accepts the broader view that you actually can do it in other ways, including as per page 904.

GORDON J: Can I ask whether that also explains the concession that is reported by Justice Pagone at page 1826?

MR GLEESON: Yes.

GORDON J: It seemed to be in broader terms.

MR GLEESON: The concession - - -

GORDON J: That is the concession by the Commissioner.

MR GLEESON: Yes. The Commissioner’s concession had these elements to it. They were not all unpacked – perhaps they should have been. That was the first element to it, that you can do it through something like page 904 and you do not need something as explicit as the example at 207-35. That was one element to it.

Another element to it was that you can stream franked distributions and so you can treat them separately from other income if you wish. It did not happen here, but you could do that. If you stream the franked distributions you can in turn allocate them disproportionately between different beneficiaries. Again, it did not happen precisely in that way here, but that was part of the concession.

The final part of the concession, which was not spelt out, was that the only possible way the taxpayer could have achieved the tax returns was by doing some fancy footwork with the expenses, and that was taking up that other clause in the trust deed and somehow trying to disproportionately allocate the expenses. That did not happen and therefore it was not necessary to explore whether arithmetically you could get to the result in the tax returns. It is enough to say that these taxpayers never chose to do anything with expenses other than to treat them as another agglomerate which was applied against an agglomerate of income.

NETTLE J: Fancy footwork with the expenses to get the taxable income down to the $20,000, as it were?

MR GLEESON: Yes.

NETTLE J: But still get the full whack of franked distribution credits?

MR GLEESON: Yes. So you would start by devising a section 97 resolution which put the lion’s share of the net income into the hands of Mr Thomas. You would then say that has an additional helpful benefit under Division 207. So he has now got the lion’s share of the franking credits, but, in doing that, you would have a separate expenses resolution to try and say the majority of the expenses have to be allocated against franked distributions and not against the other separate sources of income in the trust. You would be streaming the franked distributions away from the other income, and then you would be disproportionately applying the expenses and then, in a happy world, the arithmetic might or might not get you closer to the tax returns.

NETTLE J: That is permissible, is it?

MR GLEESON: I have to say it struck me as extremely odd, your Honour.

GORDON J: So, just so that I understand that answer to Justice Nettle, which was the reason why I asked about the concession, is it the Commissioner’s position that that is conceded that that is possible? You said it was the third element of the concession.

MR GLEESON: I was trying to be careful about what I was saying. I think what I have said is that it may be possible through that disproportionate allocation of expenses to achieve that result. That is not this case - - -

EDELMAN J: But, at the very least, you would need a resolution to do that.

MR GLEESON: At a minimum, you would need a resolution and you would have to see how that resolution intersected with the streaming that was occurring and whether you had, in fact, successfully managed to put the dividends down one river and then put enough of the expenses down that river and how it all played out. So, if your Honours press me, I could give a more unequivocal concession on instructions but I would prefer just to leave it as a possibility which may be open for exploration.

GAGELER J: Mr Gleeson, the concession as recorded in the judgment, says that it was consistent with the Commissioner’s public rulings. Is there something in a particular public ruling that would make this all a little clearer?

MR GLEESON: I will just find out, your Honours.

GORDON J: I thought that the relevant ruling had been withdrawn.

MR GLEESON: The answer is the relevant ruling has been withdrawn but, secondly, it only ever dealt with the streaming concept. It did not commit the Commissioner to any position on what you can do with expenses. So, if I can leave that rest on the level I have identified that as a possible extra element but not committed to its precise efficacy in circumstances where there is no expenses resolution. Your Honours, that was the second additional matter.

Justice Gordon asked some questions yesterday. The answers were these – that at paragraph 50 of our submissions, those numbers were incorrect and the correct numbers should have been these – $71,523 for Mr Thomas and $2,573,593 for MAPL – which gets back to the right proportions. Your Honour also asked a question about whether the resolutions were operating in respect to net income of the trust or section 95 net income and your Honour pointed to some differences between the Commissioner’s submissions in the FCA and what we have put here. We rely upon the submissions we have put here.

The explanation for those earlier calculations was that they were based upon an earlier understanding of the trust income. What happened was that Justice Greenwood, at paragraph 530, made a finding that trust income was distributed in the same percentages as the section 95 income. There were no findings as to the total amount of trust income as such. Subsequently, the Commissioner – and, perhaps, both parties – used the section 95 net income as a proxy for the trust income pursuant to section 97.

GORDON J: So, it is peculiar to this case?

MR GLEESON: It is peculiar to this case.

GORDON J: I see.

MR GLEESON: Our understanding is that the resolution at 904, on its construction, is operating directly on trust income and ordinarily would have a flow-on effect for section 95 net income but in the present case they have merged because of the particular way the parties behaved. And that notion of using the section 95 income as a proxy for the trust net income is what underlies the aide-mémoire that we handed up yesterday showing the calculations.

The next separate point was Mr Robertson took you to a document where he said, there is the Commissioner accepting our position. The status of that document, AB 1587, was that it was position paper indicating two alternative positions. The Commissioner issued alternative assessments based on those positions. At the stage of the objection process the Commissioner affirmed his position to the one that we have advanced here.

Your Honours, the only matter that leaves for our part is the final form of the orders. I was hoping that these had all been completely agreed but apparently there is a slight issue so can I just deal with that, your Honours. Your Honours have the document I handed up yesterday which replaced respondent with appellant in paragraphs 3 and 4. The one issue the respondent is concerned about is in paragraph 4. Does the order

sufficiently, explicitly show that when the remitter occurs the proportions will be those which emerged from Justice Greenwood’s judgment.

We think the current order achieves that and we would be content to add the words, “and otherwise in accordance with law”, and we believe that achieves the objective of the respondent in respect to the 2009 year but I understand Mr Harrison wants something more which apparently we cannot agree with.

I think I have now indicated twice on the transcript yesterday and now that the Commissioner has accepted the percentages for the 2009 year which are evident from Justice Greenwood’s judgment and which give the taxpayer the result he wishes. May please the Court.

KIEFEL CJ: Yes, Mr Harrison.

MR HARRISON: In relation to that last matter, your Honour, we are happy with the substitution of orders for reasons of Justice Greenwood and the additional words “and otherwise in accordance with law”.

MR GLEESON: What do you want - are you happy with this one?

MR HARRISON: I have not seen the precise - I am sorry, we would submit that order 4 should be changed to “remitted to the appellant for determination in accordance with the reasons of Justice Greenwood” – I am sorry, “in accordance with the orders of Justice Greenwood and otherwise in accordance with law”.

KIEFEL CJ: Yes, thank you.

MR HARRISON: Your Honour, as I understand it, I am to reply only to the Attorneys, and in respect of those we support the submissions of counsel for the Queensland Attorney. In relation to the submissions by counsel for the Commonwealth Attorney, we have nothing additional to say to what appeared in our written submissions and in our oral submissions.

KIEFEL CJ: The Court reserves its decision in these matters and adjourns to 10:15 tomorrow.

AT 10:45 AM THE MATTER WAS ADJOURNED