Home
| Databases
| WorldLII
| Search
| Feedback
Federal Court of Australia |
Last Updated: 18 August 2020
FEDERAL COURT OF AUSTRALIA
N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186
File numbers:
|
|
|
|
Judge:
|
|
|
|
Date of judgment:
|
|
|
|
Catchwords:
|
TAXATION – notices of appeal against
appealable objection decisions under s. 14ZZ of the Taxation Administration
Act 1953 (Cth.) – where assessments issued to trustee of
resident discretionary trust and a non-resident discretionary beneficiary of
that trust for
the 2013 and 2014 years of income – where trustee made
capital gains on disposal of shares in each of those years – where
shares
disposed of were not ‘taxable Australian property’ for purposes of
Div. 855 of Income Tax Assessment Act 1997 (Cth.) – where
trustee resolved to distribute to the beneficiary 99.27% and 100% of capital
gains made from sale of those shares
in those respective years – where
trustee assessed in respect of those gains pursuant to s. 115‑220 and
to s. 98 of the Income Tax Assessment Act 1936 (Cth.) – where
beneficiary also assessed in respect of those gains pursuant to s. 115-215(3)
– whether capital gains capable
of being disregarded by beneficiary
pursuant to s. 855 -10 – interaction of Div. 855 with Subdiv. 115-C
– consideration
of Peter Greensill
ADMINISTRATIVE LAW – application for judicial review under s. 39B of the Judiciary Act 1903 (Cth.) and the Administrative Decisions (Judicial Review) Act 1977 (Cth.) – where judicial review sought in respect of decision by the Commissioner not to remit shortfall interest charge under s. 280-160 of Sch. 1 of the Taxation Administration Act 1953 (Cth.) in respect of the beneficiary for the 2014 year of income – whether Commissioner had asked wrong statutory question and had thereby erred at law – whether Commissioner applied test as expressed in s. 8AAG for remission of general interest charge as opposed to test under s. 280-160 for remission of shortfall interest charge |
|
|
Legislation:
|
Income Tax Assessment Act 1997 (Cth.) ss. 102-5, 102-20, 115-200,
115-210, 115-215, 115-220, 115-222, 115-225, 115-227, 115-228, 136-10, Subdiv.
768-H, Div. 770, ss. 855 -1, 855 -5, 855 -10, 855 -15, 855 -25, 855 -40
Judiciary Act 1903 (Cth.) s. 39B
Petroleum Resource Rent Tax Assessment Act 1987 (Cth.)
s. 20
Taxation Administration Act 1953 (Cth.) s. 8AAG, Sch. 1, s.
280-160
Explanatory Memorandum, New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth.) Explanatory Memorandum, Tax Laws Amendment (2006 Measures No 4) Bill 2006 (Cth.) Convention between the Government of Australia and the Government of the
United States of America for the Avoidance of Double Taxation
and the Prevention
of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16, signed
in Sydney on 6 August 1982 Art 22
|
|
|
Cases cited:
|
BHP Billiton Iron Ore Pty Ltd v. National Competition Council [2007] FCAFC 157; (2007)
162 F.C.R. 234
BHP Petroleum (Timor Sea) Pty Ltd & Ors v. Minister for
Resources [1994] FCA 1002; (1994) 49 F.C.R. 155
Burton v. Commissioner of Taxation (2019) 271 F.C.R. 548
Carr v. Western Australia [2007] HCA 47; (2007) 232 C.L.R. 138
Chamberlain v. The Queen [1983] FCA 78; (1983) 72 F.L.R. 1
Colonial First State Investments Ltd v. Federal Commissioner of
Taxation [2011] FCA 16; (2011) 192 F.C.R. 298
Comcare v. Martin [2016] HCA 43; (2016) 258 C.L.R. 467
ConnectEast Management Ltd v. Commissioner of Taxation [2009] FCAFC 22; (2009) 175
F.C.R. 110
Esso Australia Resources Ltd v. Federal Commissioner of Taxation
[1998] FCA 1655; (1998) 83 F.C.R. 511
Federal Commissioner of Taxation v. Greenhatch [2012] FCAFC 84; (2012) 203 F.C.R.
134
Gartside v. Inland Revenue Commissioners [1967] U.K.H.L. 6; [1968]
A.C. 553
Minister for Immigration and Ethnic Affairs v. Wu Shan Liang (1996)
185 C.L.R. 259
Peter Greensill Family Co Pty Ltd (trustee) v. Commissioner of
Taxation [2020] FCA 559
Project Blue Sky Inc v. Australian Broadcasting Authority (1998) 194
C.L.R. 355
Sole Luna Pty Ltd as Trustee for the PA Wade No 2 Settlement Trust v.
Commissioner of Taxation [2019] FCA 1195
SZEEU v. Minister for Immigration and Multicultural and Indigenous
Affairs [2006] FCAFC 2; (2006) 150 F.C.R. 214
Transurban City Link Ltd v. Allan [1999] FCA 1723; (1999) 95 F.C.R. 553
Union-Fidelity Trustee Company of Australia Ltd v. Federal Commissioner
of Taxation [1969] HCA 36; (1969) 119 C.L.R. 177
Woodside Energy Ltd v. Commissioner of Taxation [2009] FCAFC 12; (2009) 174 F.C.R. 91
|
|
|
|
|
Registry:
|
New South Wales
|
|
|
Division:
|
General Division
|
|
|
National Practice Area:
|
Taxation
|
|
|
Category:
|
Catchwords
|
|
|
Number of paragraphs:
|
|
|
|
|
|
Solicitor for the Applicants:
|
Watson Mangioni
|
|
|
Counsel for the Respondent:
|
Mr. M. O’Meara, S.C. with Mr. D. Lewis
|
|
|
Solicitor for the Respondent:
|
Australian Government Solicitor
|
ORDERS
|
NSD 1498 of 2019
NSD 1499 of 2019 |
|
|
||
BETWEEN:
|
NICHOLAS MARTIN
Applicant |
|
AND:
|
COMMISSIONER OF TAXATION
Respondent |
|
DATE OF ORDER:
|
THE COURT ORDERS THAT:
STEWARD J.:
Legislative Provisions
855 ‑10 Disregarding a capital gain or loss from CGT events
(1) Disregard a *capital gain or *capital loss from a *CGT event if:
(a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and
(b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.
Note: A capital gain or capital loss from a CGT asset you have used at any time in carrying on a business through a permanent establishment in Australia may be reduced under section 855 ‑35.
855 ‑40 Capital gains and losses of foreign residents through fixed trusts
(1) The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust, by foreign residents of *CGT assets that are not *taxable Australian property.
(2) A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:
(a) you are a foreign resident when you make the gain; and
(b) the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust) that is:
(i) the *fixed trust; or
(ii) another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust); and
(c) either
(i) the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or
(ii) the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.
Note: Section 115‑215 treats a portion of a trust’s capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.
(3) You are not liable to pay tax as a trustee of a *fixed trust in respect of an amount to the extent that the amount gives rise to a *capital gain that is disregarded for a beneficiary under subsection (2).
(4) To avoid doubt, subsection (3) does not affect the operation of subsection 98A(1) or (3) of the Income Tax Assessment Act 1936 (about taxing beneficiaries who are foreign residents at the end of an income year).
A foreign resident can disregard a capital gain or loss unless the relevant CGT asset is a direct or indirect interest in Australian real property, or relates to a business carried on by the foreign resident through a permanent establishment in Australia.
Special rules apply for individuals who were Australian residents but have become foreign residents (see also Subdivision 104-I) and for foreign resident beneficiaries of fixed trusts.
(1) The objects of this Subdivision are to improve:
(a) Australia’s status as an attractive place for business and investment; and
(b) the integrity of Australia’s capital gains tax base.
(2) This is achieved by:
(a) aligning Australia’s tax laws with international practice; and
(b) ensuring interests in an entity remain subject to Australia’s capital gains tax laws if the entity’s underlying value is principally derived from Australian real property.
The following is a simplified outline of the relationship between this Division, Division 6E and Subdivisions 115-C and 207-B of the Income Tax Assessment Act 1997.
This Division sets out the basic income tax treatment of the net income of the trust estate. Generally:
(a) it has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and
(b) it has the result of assessing the trustee directly on any residual net income; and
(c) as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents or those under a legal disability.
If the trust estate has capital gains ... this basic treatment is modified as described below.
Division 6E modifies the operation of this Division for the purpose of excluding amounts relevant to capital gains ... from the calculations of assessable amounts under sections 97, 98, 99, 99A and 100.
Division 6E does not modify the operation of this Division (or any other provision of this Act) for any other purpose. For example:
(a) it does not modify the operation of this Division for the purposes of applying section 100A; and
(b) it does not modify amounts taxed in the hands of the trustee under [Subdivision 115-C] of the Income Tax Assessment Act 1997.
Subdivision 115-C ... of the Income Tax Assessment Act 1997 provide[s] the corresponding taxation treatment for those capital gains ... Specifically:
(a) Subdivision 115-C of that Act has the effect that an amount corresponding to each of those capital gains is taxed in the hands of the beneficiaries of the trust (as a capital gain) and, if necessary, assessed to the trustee.
This Subdivision sets out rules for dealing with the net income of a trust that has a net capital gain. The rules treat parts of the net income attributable to the trust’s net capital gain as capital gains made by the beneficiary entitled to those parts. This lets the beneficiary reduce those parts by any capital losses and unapplied net capital losses it has.
If the trust’s capital gain was reduced by either the general 50% discount in step 3 of the method statement in subsection 102-5(1) or by the small business 50% reduction in Subdivision 152-C (but not both), then the gain is doubled. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) or the small business 50% reduction.
If the trust’s capital gain was reduced by both the general 50% discount and the small business 50% reduction, then the gain is multiplied by 4. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) and the small business 50% reduction.
Division 6E of Part III of the Income Tax Assessment Act 1936 will exclude amounts from the beneficiary’s assessable income if necessary to prevent it from being taxed twice on the same parts of the trust’s net income.
When this Subdivision applies
(1) This Subdivision applies if a trust estate has a *net capital gain for an income year that is taken into account in working out the trust estate’s net income (as defined in section 95 of the Income Tax Assessment Act 1936) for the income year.
Assessing presently entitled beneficiaries
Purpose
(1) The purpose of this section is to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s *capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary, so:
(a) the beneficiary can apply *capital losses against gains; and
(b) the beneficiary can apply the appropriate *discount percentage (if any) to gains.
Extra capital gains
(3) If you are a beneficiary of the trust estate, for each *capital gain of the trust estate, Division 102 applies to you as if you had:
(a) if the capital gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction) — a capital gain equal to the amount mentioned in subsection 115-225(1); and
(b) if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) — a capital gain equal to twice the amount mentioned in subsection 115-225(1); and
(c) if the capital gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions) — a capital gain equal to 4 times the amount mentioned in subsection 115-225(1).
Note: This subsection does not affect the amount (if any) included in your assessable income under Division 6 of Part III of the Income Tax Assessment Act 1936 because of the capital gain of the trust estate. However, Division 6E of that Part may have the effect of reducing the amount included in your assessable income under Division 6 of that Part by an amount related to the capital gain you have under this subsection.
(4) For each *capital gain of yours mentioned in paragraph (3)(b) or (c):
(a) if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1) — Division 102 also applies to you as if your capital gain were a *discount capital gain, if you are the kind of entity that can have a discount capital gain; and
(b) if the relevant trust gain was reduced under Subdivision 152-C — the capital gain remaining after you apply step 3 of the method statement is reduced by 50%.
Note: This ensures that your share of the trust estate’s net capital gain is taxed as if it were a capital gain you made (assuming you made the same choices about cost bases including indexation as the trustee).
(4A) To avoid doubt, subsection (3) treats you as having a *capital gain for the purposes of Division 102, despite section 102-20.
Section 118-20 does not reduce extra capital gains
(5) To avoid doubt, section 118-20 does not reduce a *capital gain that subsection (3) treats you as having for the purpose of applying Division 102.
Assessable income includes net capital gain
(1) Your assessable income includes your net capital gain (if any) for the income year. You work out your net capital gain in this way:
Working out your net capital gain
Step 1. Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year.
Note 1: You choose the order in which you reduce your capital gains. You have a net capital loss for the income year if your capital losses exceed your capital gains: see section 102-10.
Note 2: Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years.
Step 2. Apply any previously unapplied *net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step 1 (including any capital gains not reduced under that step because the *capital losses were less than the total of your capital gains).
Note 1: Section 102-15 explains how to apply net capital losses.
Note 2: You choose the order in which you reduce the amounts.
Step 3. Reduce by the *discount percentage each amount of a *discount capital gain remaining after step 2 (if any).
Note: Only some entities can have discount capital gains, and only if they have capital gains from CGT assets acquired at least a year before making the gains. See Division 115.
Step 4. If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions.
Note 1: The basic conditions for getting these concessions are in Subdivision 152-A.
Note 2: Subdivision 152-C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152-E does not apply to CGT events J5 and J6.
Step 5. Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year.
Ways you can make a capital gain or a capital loss
You can make a *capital gain or *capital loss if and only if a *CGT event happens. The gain or loss is made at the time of the event.
Note 1: The full list of CGT events is in section 104-5.
Note 2: The gain or loss may be affected by an exemption, or may be able to be rolled-over. For exemptions generally, see Division 118. For roll-overs, see Divisions 122, 123, 124 and 126.
Note 3: You may make a capital gain or capital loss as a result of a CGT event happening to another entity: see subsections 115-215(3), 170-275(1) and 170-280(3).
Note 4: You cannot make a capital loss from a CGT event that happens to your original interests during a trust restructuring period if you choose a roll-over under Subdivision 124-N.
Note 5: The capital loss may be affected if the CGT asset was owned by a member of a demerger group just before a demerger: see section 125-170.
Note 6: Under subsection 230-310(4) gains and losses are taken to arise from a CGT event in particular circumstances.
Note 7: This section does not apply in relation to the capital gain mentioned in paragraph 294-120(5)(b) of the Income Tax (Transitional Provisions) Act 1997.
Assessing trustees under section 98 of the Income Tax Assessment Act 1936
(1) This section applies if:
(a) you are the trustee of the trust estate; and
(b) on the assumption that there is a share of the income of the trust to which a beneficiary of the trust is presently entitled, you would be liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary.
(2) For each *capital gain of the trust estate, increase the amount (the assessable amount) in respect of which you are actually liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 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; or
(b) if the liability is under paragraph 98(3)(b) or subsection 98(4), and the capital gain was reduced under step 3 of the method statement in subsection 102-5(1) (discount capital gains) — twice the amount mentioned in subsection 115-225(1) in relation to the beneficiary.
(3) To avoid doubt, increase the assessable amount under subsection (2) even if the assessable amount is nil.
Attributable gain
(1) The amount is the product of:
(a) the amount of the *capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1); and
(b) your *share of the capital gain (see section 115-227), divided by the amount of the capital gain.
Share of a capital gain
An entity that is a beneficiary or the trustee of a trust estate has a share of a *capital gain that is the sum of:
(a) the amount of the capital gain to which the entity is *specifically entitled; and
(b) if there is an amount of the capital gain to which no beneficiary of the trust estate is specifically entitled, and to which the trustee is not specifically entitled — that amount multiplied by the entity’s *adjusted Division 6 percentage of the income of the trust estate for the relevant income year.
Remitting shortfall interest charge
(1) The Commissioner may remit all or a part of an amount of *shortfall interest charge you are liable to pay if the Commissioner considers it fair and reasonable to do so.
(2) Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
(a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and
(b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.
Remission of the charge
(1) The Commissioner may remit all or a part of the charge payable by a person.
(2) However, if a person is liable to pay the charge because an amount remains unpaid after the time by which it is due to be paid, the Commissioner may only remit all or a part of the charge in the circumstances set out in subsection (3), (4) or (5).
(3) The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:
(a) the circumstances that contributed to the delay in payment were not due to, or caused directly or indirectly by, an act or omission of the person; and
(b) the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances.
(4) The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:
(a) the circumstances that contributed to the delay in payment were due to, or caused directly or indirectly by, an act or omission of the person; and
(b) the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances; and
(c) having regard to the nature of those circumstances, it would be fair and reasonable to remit all or a part of the charge.
(5) The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:
(a) there are special circumstances because of which it would be fair and reasonable to remit all or a part of the charge; or
(b) it is otherwise appropriate to do so.
Statement of Agreed Facts
The Martin Family Trust
4. Material terms of the Trust Deed were as follows:
4.1. clause 1.1(d) defined “year” as in effect the financial year ended 30 June;
4.2. clause 2 (prior to its variation by the Deed of Variation) provided to the effect that, until the vesting day, the trustees stood possessed of the income of the trust fund before the end of each year to divide and pay some or all of it among such of the beneficiaries as the trustees determined in their absolute discretion and that the trustees stood possessed of so much of the income of a year that had not been divided and paid at or prior to the end of that year for the beneficiaries in equal shares;
4.3. clause 3 provided to the effect that, in lieu of paying income in cash, the trustees could transfer property of like value from the trust fund to the person entitled to that income;
4.4. clause 6.22 provided to the effect that the trustees had the power to appropriate any portion of the trust fund towards the share of a person entitled under the MFT;
4.5. clauses 10 and 15 conferred on Mr Martin the power to remove and appoint the trustee or trustees of the MFT;
4.6. clause 11 provided to the effect that the trustees were able to amend the terms of the Trust Deed as they saw fit; and
4.7. clause 14 provided that the beneficiaries of the MFT were Nicholas Michael Martin (the Applicant in proceedings 1498 of 2019 and 1499 of 2019) (Mr Martin), Manizheh Martin, their issue both present and future, the parents, brothers, sisters and other blood relatives of Mr Martin and any body corporate in which either of Mr Martin and/or Manizheh Martin severally or together are majority shareholders.
the following is added to Clause 2:-
“For the purposes of this clause and this Deed the word “income” shall include capital gains realised or unrealised) in the value of the assets of the Trust Fund and whether taxable or non-taxable. The Trustees may determine in their discretion to distribute different classes or types of income (e.g. capital gains) to different beneficiaries and to some beneficiaries to the exclusion of others”.
NMMH
Mr Martin
7. Mr Nicholas Martin:
7.1. was at all material times a beneficiary of the MFT;
7.2. on 16 May 2011, departed Australia permanently to live in China.
NMMH’s holding of shares in Altium Ltd
2013 Income Year
11.1. to the extent permitted by the Trust Deed, the income of the MFT for the income year ended 30 June 2013 comprised all those amounts being income for the purposes of the accounting records of the MFT less the expenses and outgoings of the MFT for that income year attributed to those amounts in the accounting records;
11.2. the “net income” of the MFT to be distributed as follows:
11.2.1. the first $18,000 to Jason Martin;
11.2.2. the second $18,000 to Nava Martin;
11.2.3. the “balance of Income” to Nicholas Martin; and
11.3. the income to be paid and applied for the benefit of those beneficiaries be entered into the books of the MFT as having been so distributed and be held on trust by NMMH absolutely on behalf of each beneficiary in accordance with the terms of the Trust Deed.
13.1. a net capital gain of $4,109,312 and an unfranked divided of $826,415;
13.2. net income under s 95(1) of the Income Tax Assessment Act 1936 (ITAA36) of $4,923,776;
13.3. a nil assessable amount under s 98(3) of the ITAA36; and
13.4. that capital gains of $4,079,331 were distributed to Mr Martin and $808,523 of the other income had been distributed to Mr Martin.
2014 Income Year
17.1. to the extent permitted by the Trust Deed, the income of the MFT for the income year ended 30 June 2014 comprised all those amounts being income for the purposes of the accounting records of the MFT less the expenses and outgoings of the MFT for that income year attributed to those amounts in the accounting records;
17.2. the “net income” of the MFT be distributed as follows:
17.2.1. 100% of all “income” to Mr Martin; and
17.3. the income to be paid and applied for the benefit of those beneficiaries be entered into the books of the MFT as having been so distributed and be held on trust by NMMH absolutely on behalf of each beneficiary in accordance with the terms of the Trust Deed.
19.1. a net capital gain of $8,878,821 which was made in respect of a capital gain of $17,757,642 from the 2014 Disposals, interest income of $35,122 and an unfranked dividend of $426,077;
19.2. net income under s 95(1) of the ITAA36 of $9,315,389;
19.3. a nil assessable amount under s 98(3) of the ITAA36; and
19.4. that capital gains of $8,878,821 were distributed to Mr Nicholas Martin and $436,568 of the other income had been distributed to Mr Martin and that his “share of income of the trust estate” was $9,315,389.
Assessments and Objections
24. On 10 April 2017, the Respondent issued Mr Martin with:
24.1. a notice of amended assessment in respect of the income year ended 30 June 2013 which stipulated that his taxable income for that year was to be $4,086,460 (2013 Martin Amended Assessment); and
24.2. a notice of amended assessment in respect of the income year ended 30 June 2014 which stipulated that its taxable income for that year was to be $8,886,938 (2014 Martin Amended Assessment).
37. On 23 May 2019:
37.1. Mr Martin objected to the Second 2014 Martin Amended Assessment; and
37.2. NMMH in its capacity as trustee of the MFT objected to the 2014 Trustee Amended Assessment.
39. On 15 August 2019, the Respondent issued new objections decisions:
39.1. to NMMH in its capacity as trustee of the MFT, disallowing its objections for the income year ended 30 June 2013 and the income year ended 30 June 2014; and
39.2. to Mr Martin, disallowing its objections for the income year ended 30 June 2013 and the income year ended 30 June 2014.
(Footnotes omitted.)
Statement of Issues Not in Dispute
Mr Martin
NMMH
NMMH’s holding of shares in Altium Ltd
2013 Income Year
7. This was a discount capital gain within the meaning of ITAA97 s 115-5.
2014 Income Year
9. This was a discount capital gain within the meaning in ITAA97 s 115-5.
The Decision in Peter Greensill
It was common ground that the words “relates to” are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found.
See also: Travelex Ltd v Commissioner of Taxation [2009] FCAFC 133; (2009) 178 FCR 434 at [25] (Mansfield J), [44] (Stone J), [57] (Edmonds J); Travelex Ltd v Commissioner of Taxation [2010] HCA 33; (2010) 241 CLR 510 at [25] (French CJ and Hayne J).
Capital gains made by a beneficiary of a fixed trust might be disregarded under s 855 ‑40. The language employed by that provision provides support for the understanding of s 855 -10(1) earlier referred to. It applies to a capital gain “you make in respect of your interest in a fixed trust” where, amongst other matters, the gain “is attributable to a CGT event happening to a CGT asset of a trust”. This language is quite different to the language of s 855 -10 which requires the capital gain to be “from” a CGT event. The note to s 855 -40(2) indicates that the provision operates with respect to the capital gain taken to have been made by a beneficiary under s 115-215 of the ITAA 1997. Section 855 -10, which does not contain such a note, operates differently. Section 855 ‑10 does not provide for the disregarding of capital gains attributed to the beneficiary of a non-fixed trust under Subdiv 115-C.
Understood in context, s 855 -10(1) indicates that the capital gain to be disregarded is that which is made by an entity immediately as a consequence of the happening of a CGT event; a capital gain which is attributed to a beneficiary, because of a CGT event happening to a CGT asset owned by a trust, was not intended to fall within the phrase “a capital gain ... from a CGT event”. The capital gain deemed to have been made by a beneficiary under s 115-215 of the ITAA 1997 is not a “capital gain ... from a CGT event” within s 855 -10(1).
The explanatory memorandum to the New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) (2004 EM), which inserted s 768-605, stated (emphasis in original [in para. 1.7]):
1.7 Another change is to disregard a capital gain made by a foreign resident in respect of the taxpayer’s interest in a fixed trust if the gain relates to an asset without the necessary connection with Australia. For example, this will apply where the capital gain arises from the disposal by an Australian fixed trust of a portfolio interest in an Australian public company. Again, this is appropriate because a foreign resident would not be assessed on such a gain if the asset were held directly.
...
1.12 These amendments are not confined to foreign residents with interests in widely held unit trusts. The amendments will apply to interests in closely held trusts and trusts that are not unit trusts. This is to ensure the benefits of the measures apply as widely as possible, irrespective of the trust arrangements through which the foreign resident invests. However, the trust in which the foreign resident has invested and all relevant trusts in the chain must meet the definition of ‘fixed trust’ in the Income Tax Assessment Act 1997 (ITAA 1997). This is to ensure that there is no discretion available to the trustee to provide benefits to parties who are not beneficiaries of the trust. This is important to the integrity of the amendments.
(Emphasis added to para. 1.12.)
The passage I have highlighted in the foregoing extrinsic materials strongly supports the existence of a decision made by Parliament to exclude the extension of the concession created by s. 855 -10 to a beneficiary of a trust which, as here, is not a fixed trust.
The Tax Laws Amendment (2006 Measures No 4) Act 2006 (Cth), repealed Div 136 and Subdiv 768-H and enacted Division 855 . The explanatory memorandum to the Tax Laws Amendment (2006 Measures No 4) Bill 2006 (Cth) (2006 EM) explained the new concept of “taxable Australian property”. The 2006 EM said nothing about Div 855 changing the taxation of capital gains deemed to be made by foreign resident beneficiaries under s 115-215. It did state at [4.113]:
Amendments made by this Bill move a specific treatment for capital gains and capital losses made by foreign residents from interests in, or through interests in, fixed trusts from Subdivision 768-H into Division 855 . The general operation of the CGT and foreign resident rules will ensure that a capital gain or a capital loss on an interest in a fixed trust made by a foreign resident is disregarded if that interest is not taxable Australian property. The provisions specifically dealing with the distribution of capital gains to foreign beneficiaries will continue to operate.
This approach falls foul of the caution expressed in Certain Lloyd’s Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378 at [26] that a danger to be avoided in construing a statute is making an a priori assumption about a statute’s purpose and construing the statute to coincide with the assumption. The correct process is the inverse: the purpose is to be derived from what the legislation says, not from an assumption about the desired or desirable operation of the provisions. The policy objective asserted by the applicant is not to be found in the legislative history identified above and nor is it supported by the terms of former s 160L of the ITAA 1936 or the capital gains tax regime when it was introduced.
Meaning of “Plainly Wrong”
The proper approach enunciated in Chamberlain and Transurban is that, normally, a previous Full Court decision will be followed unless the later Full Court is convinced or persuaded of the error in the previous decision which would be perpetuated in doing otherwise. If it is a question upon which minds simply differ, both views being open, it would mean that the later court would not be convinced of the earlier court’s error. Beyond these considerations, it is undesirable to formulate exhaustive criteria as to when a later Full Court should or should not depart from an earlier Full Court decision. It will depend upon the nature of the controversy, the strength of the arguments and the particular circumstances, including the degree to which the later court is persuaded of the error of the earlier court.
It is clear from Chamberlain and Transurban that the question is not whether the error is obvious or patent, that is whether the error appears obvious or plain to see on the face of the judgment. Rather, the use of words such as “plainly” or “clearly” as qualifying the word “wrong” (see Transurban at [29]) is merely another way of expressing what both Chamberlain and Transurban convey: the need for being convinced or persuaded of the earlier Full Court’s error.
Applicants’ Submissions
(i) Justice Thawley was not directed to various provisions which support the Applicants’ construction of s 855 -10 and subdiv 115-C and which were relevant to the disposition of the case (Statutory Context issue).
(ii) Nor was Thawley J directed to a Full Federal Court opinion on the effect of s 115-215 for beneficiaries (Authorities issue).
(iii) Further still, the context in which the Residency Hypothesis was inserted into the ITAA36 was not considered; nor was the impact of overriding the Residency Hypothesis, in respect of other classes of taxpayers (such as resident beneficiaries of foreign trusts); and had these issues been addressed would have tended against the construction adopted (Residency Hypothesis issue).
(iv) There was no consideration of how losses in respect of non-TAP assets could be disregarded (Loss issue)
It should be noted that at the time the assets were disposed of here, there were and remain complex provisions contained in Pt 3-1 of the 1997 Act that deemed the beneficiary of a trust, in certain circumstances, to be the taxpayer that made the capital gain instead of the trust estate: s 115‑215. The operation of similar predecessor provisions was explained by the Full Federal Court in Federal Commissioner of Taxation v Greenhatch [2012] FCAFC 84; (2012) 203 FCR 134. The parties agreed that those provisions applied to the taxpayer, and that we should proceed on the basis that it was the taxpayer, and not the trust estate, that incurred the various instances of CGT event A1. In other words, the 1997 Act treated Mr Burton as if he, in his personal capacity, sold the Nepa Investment (and the other assets sold). Accordingly, what was ultimately included in his assessable income was not his share of the net income of the trust attributable to that gain pursuant to s 97 of the 1936 Act, but rather, a net capital gain pursuant to s 102-5 of the 1997 Act. The taxpayer did not rely upon this statutory fiction in any way as a reason for contending that he was entitled to the FITO he claimed.
The Subdivision applies if the trust estate has a net capital gain that is taken into account in calculating the trust’s net income for the income year: s 115-210. Consistent with the explanation in the outline above, s 115-215 is intended to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary. It applies to the beneficiary of a trust estate whose assessable income includes, inter alia, an amount under s 97(1) of the 1936 Act.
With respect, this paragraph appears to do no more than restate the purpose of s. 115-215 as stated in subs. (1).
As noted above, his Honour was not taken to the following:
(i) Section 100-20 and s 102-20 are unambiguous: you can make a capital gain or loss only if a CGT event happens;
(ii) Section 115-215(4A) is also unambiguous: to avoid doubt the amount in 115‑215(3) is a *capital gain (as defined), therefore characterising the gain in s 115- 215(3) as being from a CGT event;
(iii) The *capital gain worked out under CGT event A1 is the capital proceeds “from the disposal” less the asset’s cost base ( s 104-5 item A1 of the table)
(iv) Section 855 -10(1) is read consistently with 115-215(4A), Note 3 to s 115-215 and s 100-20 and s 102-20 and the lack of any qualifying words in s 855 -10(1) indicates that it makes no difference whether the *capital gain occurred directly or indirectly to the taxpayer.
In my opinion ... ‘from’ is intended to have its dictionary meaning, that is to say, to indicate the starting point, source or origin, of an application or request.
(i) s 115-15 – if Greensill is correct, then no foreign beneficiary of a resident trust was ever entitled to the CGT discount which appears contrary to Parliament specifically introducing s 115-110, s115-115 and s 115-120 to curtail that discount after 8 May 2012;
(ii) s 121-20 – if Greensill is correct then the implication arises that there is no statutory requirement for a beneficiary to keep records of attributable gains under s 115-215 for the reason that they cannot be said to be from a *CGT event. Contrary to the Respondent’s submission recorded in Greensill that it would be onerous to require foreign trustees to be expected to keep records, the Applicants contend it would be astounding if they were not so required. Foreign trustees need to keep records for the purpose of s 97, s 99B and to determine what is TAP; in the context of any dispute with the Respondent that might arise for a taxpayer (often many years later given time periods for amendment of assessments), in order to maintain the optimum ability to contest assessments, a taxpayer must keep CGT records indefinitely (despite the more limited time periods in Div 121) and it is not onerous in this day of electronic storage for a taxpayer to keep records; further, in discharging the taxpayer’s burden of proof under s 14ZZK or s 14ZZO of the Taxation Administration Act 1953 (Cth), it is no answer to assert that he, she or it complied with CGT record keeping obligations;
(iii) s 768-915(1) – it follows from Greensill that the same application would apply here and temporary resident beneficiaries would not disregard a capital gain or loss attributed to them;
(iv) s 100-33(1) – if Greensill is correct then a resident beneficiary could not apply a rollover in respect of a capital gain arising under s 115-215;
(v) s 152-100 Guide – this would not appear to make any sense if the beneficiaries of a trust which claims the small business concession could not likewise benefit;
... ‘the net income of a trust estate’ means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus.
The words “and were a resident” did not appear in this version of the definition of “net income of a trust estate”. Kitto J observed at 187 that the hypothetical taxpayer contemplated by the definition of “net income of a trust estate” did not include anything which would make that taxpayer a resident of Australia. His Honour said:
In the light of the definition of “taxpayer” the expression “calculated under this Act as if the trustee were a taxpayer in respect of that income” may be expanded to read “calculated under this Act as if the trustee were a person deriving that income”. But the “as if” shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by “a person” must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him a “resident” within the definition of that word in s. 6 (1). Unless a person is a “resident” of Australia he is by definition a “non-resident”. Accordingly, by limiting the meaning of “the net income of a trust estate”, for the purposes of (inter alia) s. 99, to the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except concessional allowances, s. 95 excludes from gross income all income which s. 25 (1) brings into assessable income in the case only of a taxpayer who is a resident (i.e., income from sources outside Australia), and, as consistency requires, excludes from the allowable deductions to be subtracted from the gross income which remains included in the assessable income those deductions which are allowable only in the case of such a taxpayer.
Barwick CJ reached the same conclusion. His Honour said at 181:
Income for the relevant purposes of the Act falls into one of two categories – that which is derived from an Australian source and that which is not derived from an Australian source. The scheme of the Act is to bring to tax both kinds of income where the taxpayer deriving it is a resident of Australia but to bring to tax only income of the former kind where the taxpayer is not a resident of Australia. It is therefore clear to my mind that if nothing is known as to the residence of a taxpayer the only income which can certainly be said to be assessable income is the income derived by the taxpayer from an Australian source. Unless it is known that he is a resident, it cannot be said that any other income is to be included in his assessable income.
See also Menzies J at 190.
In broad terms, the amendments to be made by these clauses are designed to ensure that resident beneficiaries are subject to Australian tax under the trust estate provision both on income from Australian sources and, subject to relief from double taxation where it is also taxed in the country of source, on income from foreign sources, while non-resident beneficiaries are taxed only on income from Australian sources. To achieve these results, the net income of a trust estate is to be calculated as if the trustee were a resident taxpayer. The assumption that the trustee is a resident will have the effect of bringing into the calculation of net income, assessable income from foreign sources and deductions related to that foreign source income.
The new definition in s 95 was described as follows at 21:
The term “net income” is to be defined as meaning, in relation to a trust estate, the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less all allowable deductions other than those deductions that are excluded from consideration by the present definition of “the net income of a trust estate” ...
The s 115-225(1) amount for each capital gain of the trust estate (the “attributable gain”) is equal to the amount of each capital gain after applying steps 1 to 4 of the s 102-5(1) method statement multiplied by Mr Martin’s share of each capital gain (pursuant to s 115-227) divided by the amount of each capital gain.
Pausing there, reading s 115-225(1) as part of s 115-215(3), s 115-215(3) in effect, reads as follows: if you are a beneficiary of a trust estate, for each *capital gain of the trust estate, Division 102 applies to you as if you had a *capital gain equal to the amount (or twice or 4 times the amount) of the capital gain remaining after applying steps 1 to 4 of the method statement multiplied by your share of the net income.
Accordingly, the question that arises here is – who is applying the method statement for the purposes of s 115-225? The Applicants contend that taking into account 115-215(3) and (4A), it must be Mr Martin. In other words, Mr Martin applies the method statement in respect of the trust estate’s capital gains, starting from the position that he and not the Trustee had each one of the *capital gains of the trust estate. The “you” in step 1 of the method statement is the beneficiary; albeit in respect of the trust estate’s *capital gains because he is treated by s 115-215(3) as if he had the gain. His foreign residency is now relevant. He then applies Steps 1 to 4 of the method statement, as directed by s 115-225(1)(a); disregarding at Step 1, non-TAP *capital gains and non-TAP *capital losses, as directed by s 855 -10.
It is highlighted that the Applicants’ construction in this regard is at odds with Greensill at [30], [40],[42] and [47(1)].
(Footnotes omitted.)
Section 855 -40 manifests no intelligible policy which would explain the anomaly that must follow from the construction advanced by the Respondent. On his construction, a gain made on the happening of a CGT event to an asset which is not TAP would be disregarded if made by a non-resident directly, or if made by a non-resident trustee and distributed to a non-resident or resident beneficiary, but would not be disregarded if made by a resident trustee and distributed to a non-resident beneficiary. Such an outcome is capricious and is not to be reached by adopting a construction which departs from the plain words of the section and can only be supported by a presumption which is liable to be displaced by the legislative text.
(1) Disregard a *capital gain or *capital loss from a *CGT event that happens to you if:
104-35 Creating contractual or other rights: CGT event D1
(1) CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.
.........
Exceptions
(5) CGT event D1 does not happen if:
.........
(b) the right requires you to do something that is another *CGT event that happens to you; or .......
104-155 Receipt for event relating to a CGT asset: CGT event H2
(1) CGT event H2 happens if:
(a) an act, transaction or event occurs in relation to a *CGT asset that you own; and
(b) the act, transaction or event does not result in an adjustment being made to the asset’s *cost base or *reduced cost base.
.........
Exceptions
(5) CGT event H2 does not happen if:
.........
(b) the act, transaction or event requires you to do something that is another *CGT event that happens to you; or
124-1100 Guide
There is a roll-over if a CGT event happens to you because of something occurring in relation to one or water entitlements for the event to happen to you.
(Emphasis added by the applicants.)
capital gain: for each *CGT event a capital gain is worked out in the way described in that event.
You make a *capital gain or *capital loss from a *CGT event set out in this table only if the thing referred to in the relevant row of the table has the *necessary connection with Australia.
Commissioner’s Submissions
(a) section 115-215 generates a capital gain for a beneficiary;
(b) all capital gains are from CGT events;
(c) it follows that Mr. Martin’s capital gains were “from” CGT events within the meaning of s. 855 -10.
(a) in the definition of T.A.P. in s. 855 -15, item 3 of the table in s. 855 -15 refers to a CGT asset “you have used at any time in carrying on a business” through a permanent establishment;
(b) the reference in s. 855 -25, which prescribes when an interest held in an entity is an “indirect Australian real property interest”, to the holding of a membership interest in an entity;
(c) the reference to “direct ownership” and “indirect ownership” in s. 855 -40(1). For convenience, I reproduce that subsection as follows:
The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust, by foreign residents of *CGT assets that are not *taxable Australian property.
(d) the applicants submitted that it was plain that s. 855 -10 deals with “direct” ownership of a CGT asset by a taxpayer and that s. 855 -40 deals with “indirect” ownership in the limited way conferred by that provision. However, the only beneficiaries entitled to “comparable taxation treatment” with a direct owner are those who own assets indirectly “through a fixed trust.”
Causation in a legal context is always purposive. The application of a causal term in a statutory provision is always to be determined by reference to the statutory text construed and applied in its statutory context in a manner which best effects its statutory purpose. It has been said more than once in this Court that it is doubtful whether there is any “common sense” approach to causation which can provide a useful, still less universal, legal norm. Nevertheless, the majority in the Full Court construed the phrase “as a result of” in s 5A(1) as importing a “common sense” notion of causation. That construction, with respect, did not adequately interrogate the statutory text, context and purpose.
(Footnotes omitted.)
Disposition
Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the Court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the Parliament.
See also ConnectEast Management Ltd v. Federal Commissioner of Taxation [2009] FCAFC 22; (2009) 175 F.C.R. 110 at 119 [41].
[I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling.
The Assessments Issued to Holdings
The Remission Decision
The decision was an improper exercise of the power conferred by the enactment in pursuance of which it was purported to be made as the decision maker exercised the discretionary power not in accordance with rule or policy or without regard to the merits; and
There was a breach of the rules of natural justice in connection with the making of the decision in failing to take into account relevant considerations, including for the following reasons:
There was a breach of the rules of natural justice in that the respondent has not treated the applicant with taxpayers in a like situation, in particular by refusing to apply PS LA 2006/8 even though one of the criterion (being the two year time period) was not strictly met.
We have decided that in your situation there are no special circumstances that make it fair and reasonable to reduce the SIC.
...
Full or partial remission of SIC may be warranted where:
...
- There are special circumstances where it would be fair and reasonable to do so.
...
While we acknowledge your statements in your application for remission, we have determined that they are not a basis for any remission of SIC.
Due to the absence of any special circumstance that warrants remission, your request for remission of SIC is therefore refused.
(Footnote omitted and emphasis added.)
Form of Final Relief
Associate:
Dated: 18 August 2020
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/FCA/2020/1186.html