Peter Grensill Family Co Pty Ltd as Trustee for the Peter Grensill Family Trust v Commissioner of Taxation of the Commonwealth of Australia; Martin v Commissioner of Taxation; N & M Martin Holdings Pty Ltd ATF Martin Family Trust v Commissioner of Taxation [2022] HCATrans 19 (21 February 2022)

Last Updated: 24 February 2022

[2022] HCATrans 019

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S96 of 2021

B e t w e e n -

PETER GREENSILL FAMILY CO PTY LTD AS TRUSTEE FOR THE PETER GREENSILL FAMILY TRUST

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Office of the Registry
Sydney No S97 of 2021

B e t w e e n -

NICHOLAS MARTIN

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
Sydney No S98 of 2021

B e t w e e n -

N & M MARTIN HOLDINGS PTY LTD ATF MARTIN FAMILY TRUST

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Applications for special leave to appeal

GAGELER J
GORDON J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA BY VIDEO CONNECTION TO SYDNEY, MELBOURNE AND BRISBANE

ON MONDAY, 21 FEBRUARY 2022, AT 10.29 AM

Copyright in the High Court of Australia

____________________

GAGELER J: In accordance with the protocol for remote hearings, I will announce the appearances of the parties.

In the first application, MR M.L. ROBERTSON, QC appears with MR G.S. ANTIPAS for the applicant. (instructed by Ernst & Young Law Pty Limited)

In the second and third applications, MS R.L. SEIDEN, SC appears with MS E. BISHOP for the applicant. (instructed by Watson Mangioni Lawyers Pty Limited)

MR M.J. O’MEARA, SC appears for the respondent in all the applications. (instructed by the Australian Government Solicitor)

GAGELER J: The course that the Court proposes to take in these three matters is to hear from the applicants in sequence - Mr Robertson first, then Ms Seiden. The Court will then retire to consider the course it will take. Mr Robertson.

MR ROBERTSON: If the Court pleases, the Full Court’s critical analysis of the essential issue is found at the application book page 84, at paragraph 71. Your Honours, this is the Greensill application book at 84 at about line 44 – and the court said at line 44 or 43:

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 –

That is the section 95 net income 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.

We say that, with respect, the Full Court is wrong there. Now, the second matter that the Full Court goes on to say is the consequences if they are wrong:

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 appellant’s 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 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.

Now, we say that that does not follow. Your Honours, all provisions that are expressed to taxpayers generally, one example is section 102‑5, do not make any reference to territorial criteria. They just state, this is a taxpayer who has to – who has an item of assessable income. These general provisions, and now we have Division 115‑C is one of those general assessing provisions, are always subject to the territorial limitations that are applicable to foreign taxpayers. So, that is the core architecture of the Tax Acts.

To use a cognate example, your Honours may recall that the old Division 6 before 1979 had no territorial criteria in it at all. So, the net income of a trust estate was distributed amongst all the taxpayers and beneficiaries indiscriminately, and yet, of course, the High Court held that that was subject to the territorial limitations for foreign residents in relation to foreign source income.

So, if we are right, and the Full Court is wrong about the residency hypothesis, then all we have are general assessing provisions that allocate between trustees and beneficiaries the entire net capital gain of the trust estate. Section 855‑10 is an imperative jurisdictional provision that then conditions how that allocation is to occur.

So, if we are right, then let us look at the tax position of the trustee as a taxpayer of a foreign trust for CGT purposes, which is the person expressly mentioned in 855‑10. On our construction, Division 115‑C, in its clear and general language, spreads out the net capital gain of the trustee of a foreign trust for CGT purposes if there are no beneficiaries specifically entitled to any part of the net capital gain. So, it is prima facie liable to tax under section 99A on the entire net capital gain of the trust estate.

But because it is one of the taxpayers mentioned in 855‑10, Parliament has directed that, to the extent that the net capital gain comprises non‑taxable Australian – gains from non‑taxable Australian assets, and losses from non‑taxable Australian assets, they must be disregarded in the actual assessment to tax of the trustee taxpayer. So, the court’s observation in the final sentence in 71 is, we say, plainly wrong, because 855‑10 in plain terms would apply to require the non‑TAP gains and losses included in the trust estate’s net capital gain to be disregarded in taxing the trustee as a taxpayer. Now, we say ‑ ‑ ‑

GORDON J: Mr Robertson, can I ask two questions, please?

MR ROBERTSON: Yes, your Honour.

GORDON J: These provisions were inserted as a response to this Court’s decision in Bamford, were they not?

MR ROBERTSON: That is exactly right, your Honour.

GORDON J: The explanatory memorandum, which accompanies these provisions, highlighted that the amounts on which a beneficiary is to be assessed do not always match the amounts – and has set up a regime in order to address that issue?

MR ROBERTSON: Yes, your Honour. That was their primary purpose as the EM states.

GORDON J: If you deal with the trustees first, you have Division 6E, which in effect provides that capital gains are to be disregarded for the purposes of working out the amounts in respect to which the trustee is liable under section 98 - I think it ‑ ‑ ‑

MR ROBERTSON: It is 99 ‑ ‑ ‑

GORDON J: Then you have section 115-220 which increases the amount on which the trustee is liable to be assessed and pay tax by the amount calculated under section 115-225.

MR ROBERTSON: Yes, your Honour.

GORDON J: Then you get to this critical provision which is 855-10, which says you do not.....to disregard the amounts where the trustee is an Australian resident. It only applies, as I understand it, if you are a foreign resident or the trustee of a foreign trust. We are not in that category, are we?

MR ROBERTSON: Your Honour, the applicant – being the Peter Greensill Family Trust – is not a foreign resident, nor is it the trustee of a foreign trust seeking two purposes – you are correct.

GORDON J: Thank you.

MR ROBERTSON: Your Honour, can I take you to one of the sections your Honour has mentioned – which is 115-220. Subdivision 115‑C is found at AB 115. Your Honours, 115-220 is the section your Honour mentioned at AB 117. Now, it applies if:

(a) you are the trustee of the trust estate -

Sorry, your Honours, I think I might have ‑ ‑ ‑

GAGELER J: Mr Robertson, while you are finding the reasons you want to take us to – you began by directing our attention to paragraph 71 of the Full Court’s judgment, which describes the argument there addressed as:

Another contextual argument –

Do we take it that that is now your principal argument in the application?

MR ROBERTSON: At 71?

GAGELER J: You chose to begin your submissions by taking us to a passage ‑ ‑ ‑

MR ROBERTSON: Yes.

GAGELER J: Is that now the way in which you present the weight of your argument.....grant special leave?

MR ROBERTSON: Yes. The way we present the weight of the argument is that 855‑10 is an imperative jurisdictional provision which conditions the general assessing provisions that arise for the time being in relation to capital gains. Now, the machinery provisions may change from time to time, and they were changed in 2011, but in 2011, 855‑10 was not changed and 855‑10 directs that whichever machinery by which a capital gain from a non‑taxable Australian property finds its way in the assessment of a foreign resident or the trustee of a foreign trust for CGT purposes, then that foreign gain must be disregarded by 855‑10.

It then becomes a matter of where in the machinery provisions the foreign gains and losses are disregarded, and we say that they are disregarded at the point in time of finding out what amount should be attributed to the relevant foreign taxpayer, which is 115‑225.

GAGELER J: If you put the weight of your argument on 855‑10, you need to engage with 855‑15. How do you do that in the circumstances of the present case?

MR ROBERTSON: Section 855‑15 is the definition of “taxable Australian property” - I will just go to - and the assets that we are talking about on the facts of this case, your Honour, are not taxable Australian property. Shares in Australian companies are not taxable Australian property. They used to be, but in 2006 the CGT regime was amended and the class of properties that were subject to tax in the hands of foreign residents was substantially reduced and limited, really, to only Australian real estate interests and other narrow categories. Now, the effect of the Full Court’s construction is that Australian resident taxpayers are only taxed on those categories as well.

EDELMAN J: Mr Robertson, do you say that the effect of the Full Court’s construction is to treat differently those foreign residents who are beneficiaries of a fixed trust from those foreign residents who are beneficiaries or objects of a discretionary trust?

MR ROBERTSON: That is one consequence, your Honour, but ‑ ‑ ‑

EDELMAN J: Why was that consequence not the intention of the amendments?

MR ROBERTSON: The 2011 amendments?

EDELMAN J: Yes.

MR ROBERTSON: Well, that is what we say is the assumption that the Full Court picks up from the 2011 amendments, and it is an a priori assumption which, as we know from a number of cases, I think Chief Justice Griffith said it very well, that it is very dangerous and fallacious to commence with an a priori assumption.

The danger is that the consequence of the Full Court’s construction is in order to achieve an outcome where foreign residents of fixed trusts are not taxed but foreign residents of discretionary trusts are is that Australian residents are not taxed at all. So, the Australian capital gains tax base before 2011 was that Australian residents of discretionary trusts or fixed trusts were taxed on their worldwide capital gains. Australian residents who invested in the Australian stock exchange – listed companies in the Australian stock exchange – had to pay tax on their gains. They had to pay tax on their gains from every asset.

Now, in order to achieve this supposed distinction between fixed trusts and discretionary trusts for foreign residents the necessary construction to achieve that supposed or assumed purpose was to alter this longstanding CGT.....taxation base in Australia. Australian residents are now not taxed at all on their worldwide gains. Foreign residents are taxed on all their worldwide gains.

So, our foreign taxpayer who is minding his own business in Switzerland or in New York and has nothing to do with Australia, apart from the fact that one of the trustees happens to be an Australian resident, is now taxed on his gains on shares and investments in the New York Stock Exchange, on his own personal properties in the United States, on every worldwide asset.

So, in order for the court to achieve the purpose that they considered was Parliament’s intention – being to draw a distinction to foreign residents between fixed trusts and discretionary trusts – they have now completely disrupted the basic CGT structure. That, we say, is a matter of critical importance.

Now, if I can go back to complete the answer to Justice Gordon’s question about 115‑220, if I can take the Court to the proper 115‑220, which was at AB 117. The critical thing about taxation under 98 and 115‑220 is that it is the taxation of a trustee in a representative capacity. It only applies if there is a beneficiary liable to tax, the beneficiary being under a legal disability or being a non‑resident, and it does not require any separate calculation for the trustee. If we go to the words, or the language, at application book 118, what we say at subsection (2):

For each *capital gain of the trust estate, increase the amount . . . in respect of which you are actually liable to be assessed . . . under section 98 . . . in relation to the trust estate in respect of the beneficiary by:

(a) unless paragraph (b) applies – the amount mentioned in subsection 115‑225(1) in relation to the beneficiary –

So, it does not require a separate calculation for the Peter Greensill Family Trust. It picks up the amount that the beneficiary is liable to pay tax on under 115‑215 and so ‑ ‑ ‑

GORDON J: That is not quite right, is it, Mr Robertson? Do you not then have to go to 115‑225 and pick up both amounts in order to determine the trustee’s position?

MR ROBERTSON: In order to determine the trustee’s position, you only have to determine the beneficiary’s position. It is the amount in relation to the beneficiary. That has always been the case with section 98. It only applies if a beneficiary is liable to tax under 98A. So, when we go to – so
what we have to do is work out what is the beneficiary’s amount under 115‑225. That is the only question posed by 115‑220.

We say that if our beneficiary is a foreign resident, and 855‑10 applies, then the foreign resident beneficiary’s amount is nil, and this accords with the regime of 98 - your Honours will remember that 98 and 98A are collection mechanisms where both the beneficiary and the trustee for that beneficiary are taxed on the same amount and then a credit is given for one of the amounts of tax that is paid. There is not double taxation. So, 115‑220 does not require an independent calculation of an amount, and if our beneficiary is not liable because of 855‑10, then that section does not apply.

If the Court pleases, the only further point that I would like to make is that the essential construction that 115‑210 requires the calculation of a new net capital gain for a trust estate does not accord with the plain words of 115‑210. All that section does is pick up the net capital gain that was included in working out the net income of the trust estate under section 95. That is what 115‑210, in turn, said, and significantly, your Honours, the 2011 amendments did not change the language of 115‑210. If the Court pleases.

GAGELER J: Thank you, Mr Robertson. Ms Seiden.

MS SEIDEN: Thank you. Your Honours, the applicants challenge the Full Court’s conclusions that a beneficiary is never given a capital gain from a CGT event, and that 855-10 applies only to trustees of foreign trusts with flow‑on effects to their beneficiaries, irrespective of whether those are residents or non‑residents.

The applicants challenge these conclusions from two different directions. The first is the word “from” is a protean term and takes its meaning from context. Accordingly, if there is reason to doubt the Full Court’s analysis of context, then it is submitted there are reasons to doubt the conclusion. Second, the applicants submit that the applicants’ constructions are open and have the advantages of furthering the objects in 855‑5, which are operative provisions – and security and integrity of the CGT tax base.

Turning first to the context. In reaching their conclusions, their Honours accepted that it was necessary to determine where 855 operates within Division 115-C and to consider the interplay with other provisions, in particular section 95. Your Honours have been taken to paragraph 71 of the decision, and that pairs as well with paragraph 24. I do not need to take your Honours back to it but pause to highlight that the reason that their Honours were considering this was to test in a sense section 95 – whether the residency hypothesis there was the analysis.

If I could actually in fact take your Honours back to those provisions – I said I would not, but, if I could. In the Martin application book - - -

GAGELER J: You mean to paragraph 24?

MS SEIDEN: Paragraphs 24 and 71, yes.

GAGELER J: Thank you.

MS SEIDEN: Thank you, your Honour. Paragraph 24 is found at the Martin application book page 86, and, at the very bottom of that page:

It seems to us that the residency hypothesis for the purposes of the calculation of a trust estate’s s 95 net income has no application in the determination of whether or not a trust estate has made a net capital gain . . . for inclusion in the trust estate’s assessable income.

Then, at paragraph 71, which is at Martin application book page 106 – the middle of that paragraph – their Honours identify that at [24], they had:

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 -

Section 115-210, your Honours, is found at application book 71, and the applicants highlight two matters. The first is that 115-210 expressly references section 95 and brings with it – it is submitted – the residency hypothesis. The second point is that it requires one to look back to the calculation that was done of:

net capital gain for an income year -

in working out the trust estate’s net income. It does not identify separately assessable income. It is submitted that it is a provision that looks at a calculation that has already been done for section 95 purposes.

It is open, on the Full Court’s analysis, to read their Honours at paragraphs 24 and 71 to have identified that actually 115‑210 requires a unique calculation of net capital gain, and if, with respect, that is what their Honours found, then it is submitted that that ignores the express reference to section 95 in 115‑210.

On the other hand, it is open also that their Honours were identifying that net capital gain in the calculation of assessable income as an integer in net income, never need abide by the residency hypothesis, and if that is the position, then it is submitted that one ought not be able to sidestep the residency hypothesis in an integer of the net income calculation, and that therefore their Honours’ analysis that the residency hypothesis was not engaged at 115‑210, with respect, was open to doubt.

Flowing from this is that the decision is contrary to – as a result of this, only non‑TAP gains in relation to foreign trusts will ever be disregarded, and that will be the position for both resident beneficiaries and non‑resident beneficiaries. Flowing from this is that the decision is contrary to the core mandate of the tax legislation in section 6‑10 that Australian residents should be taxed on worldwide income.

Under this decision, Australian residents will necessarily escape CGT on non‑TAP assets such as shares on the Australian Stock Exchange held by foreign trustees. That is uncontentious. Depending on whether that Australian resident is still a resident at a time if and when a distribution is paid to or applied for that residency benefit, they may or may not be assessable under section 99B. If they are no longer a resident, 99B will not capture them.

Your Honours, for the reason that their Honours of the Full Court found that this was an effect of the operation of 855‑10 within 115‑210, their Honours must have been saying that this has always been the position. This is for the reason that section 115‑210 was not affected by the 2011 amendments.

GORDON J: Ms Seiden, may I ask you about the interaction between 855‑10 and 115‑215. Do you accept that the attribution in 115‑215, that is, as if you had, is not a CGT event for the purposes of 855‑10, having regard to the definition in 855‑40?

MS SEIDEN: Your Honour, with respect, we say that it is from a CGT event. We say that it could never have existed without the existence of a CGT event, and the CGT event happened to a CGT asset that was held by the trustee, but it nevertheless happened at a time when the foreign beneficiary, when the taxpayer, was not a resident.

So, with respect, we say that the word “from”, as your Honour has put it in 855‑10, is wide enough to capture that circumstance of what happens at 115‑215, your Honour. We say, with respect, because the word “from” must take its meaning from the context it is submitted that there is no, in effect, absolute knockout blow to the proposition that “from” might have a slightly wider meaning than the courts at first instance and the Full Court ascribed to it, and given the consequence ‑ ‑ ‑

EDELMAN J: Ms Seiden, ultimately the point at the very heart of your argument, is that the word “from” needs to be given a very, very broad meaning, contrary to really what has been settled for 10 years.

MS SEIDEN: With respect, your Honour, we would not describe it as a very broad meaning, we would say it is certainly the cause, and given the way that the provisions work the idea is that the beneficiary is given or attributed with that gain, that particular gain, that related to the CGT event that happened to the CGT asset, and particularly if the interaction between 855‑10 and Division 115‑C happens at 115‑225 we say then that is a plainer case than what is being attributed to the beneficiary from a CGT event. Nevertheless, we say that it is open in relation to the 115‑215.

So, if the interaction point is on editing 115, we say that it is open. We say that the architecture of 855‑10 really focuses on the CGT event happening to the CGT asset. It does not focus on who owns that asset, so asking who is being taxed in respect of that, and the timing of the residency is what is critical. If I could take the Court to 855‑10, which is at application book 140, in the chapeau to 855‑10(1):

Disregard a *capital gain or *capital loss from a *CGT event if –

Then the conditions are:

(a) you are a foreign resident . . . just before the CGT event happens; and

(b) the CGT event happens in relation to a *CGT asset that is –

non‑TAP. So, the critical thing is whether or not the event has happened in relation to a non‑TAP asset and you, the taxpayer, are a foreign resident just before that time.

GORDON J: So, just to put it simply, you contend that the attribution in 115‑215(3) is to be read as being caught by the phrase “from a CGT event”, notwithstanding it is not a CGT event within the defined term.

MS SEIDEN: We certainly accept the first part of that, your Honour, and with respect to it not being a defined CGT term, we would look back to how it was created in the first place in relation to whichever event triggered it, in this case, (a)(1) disposal, and we would point to that being the relevant CGT event, your Honour. We have the alternative construction as well, that the interplay is at 115‑225, and that raises other issues.

Your Honours, primarily for the reason that it is submitted the applicant’s construction fits within the word “from”, it has the advantages that Australian resident beneficiaries do not escape CGT on non‑TAP assets, and it also ‑ ‑ ‑

EDELMAN J: Ms Seiden, just so I understand – your submission really is that it fits within the word “from” in a “but for” sense. It is in the sense that but for having a head, I would not have been decapitated.

MS SEIDEN: Your Honour, we certainly accept it in the “but for” sense. We put it a little higher than that, on the basis that if the ultimate source is the CGT event happening to the asset, and that that is the focus at 855‑10, so we get some extra structure behind our argument, we attempt to, your Honour, from the architecture of 855‑10.

We say that if one – and at first instance, Justice Steward, as his Honour was then sitting as the trial judge, identified that our arguments, at least on a text‑based approach, and focusing on 855‑10, had merit and had the advantage of enhancing the objects, whereas the position that we are left in now is the two objects of Division 855 to enhance Australia’s attractiveness for investment and to secure, improve the integrity of the CGT base.

Neither of those objects are furthered by, with respect, by the Full Court’s decision, and those objects, your Honours, are operative provisions. It is submitted they are not aspirational, they are part of the context. We are left with a situation where a foreign resident is now taxed on a Swiss chalet held by an Australian, that had originally been held by an Australian resident. That is not an – that is an uncontentious outcome. It is also uncontentious that that would not have been the position pre‑2011. So that is a change that has been brought by the 2011 amendments.

Such a change was not heralded by any of the extrinsic materials, no fanfare, it was brought in without a whisper. We say that is something that points to a possible – points possibly to error. Couple that to the possibility that the word “from” encompasses the way in which the applicants would use it, coupled to the integrity of the tax system, it is submitted that, for all of those reasons, this matter would be a suitable vehicle for your Honours’ consideration.

In the Martin matters we have an assessment for both the trustee and beneficiary, so there is no question that the foreign beneficiary as a taxpayer is a foreign resident, so all of the potential issues that arise are fully capable of being engaged with.

Justice Steward, of course, identified the problem of 855‑40 and that is a textual hurdle that the applicants must ultimately grapple with. There are a few matters that ‑ we say that it is a special rule for fixed trusts. That is identified in the guide, which is at 855‑1, which says that there are general rules, which it is submitted at 855‑10 is such a general rule, and 855‑40 is a special rule, we say, it is submitted that it says nothing about overriding the position for other types of trusts.

At the very least, it has the work to do of giving security, confidence, to the managed fund industry and it is submitted it is too fragile a base from which to undermine entirely the applicant’s submission. Your Honours, those are the applicant’s submissions.

GAGELER J: Thank you, Ms Seiden. As I indicated earlier, the Court will take this opportunity to retire to consider its position.

AT 11.09 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.13 AM:

GAGELER J: Mr O’Meara, we do not need to hear from you.

We are not persuaded that the judgment of the Full Court of the Federal Court was arguably affected by error. Special leave to appeal will be refused in each of the three matters with costs.

The Court will now adjourn.

AT 11.14 AM THE MATTERS WERE CONCLUDED