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The Full Federal Court (Dowsett, Allsop and Edmonds JJ) has allowed, in part, an appeal by the taxpayer beneficiary of a discretionary trust, whose assessable income was increased as a result of adjustments made to the assessable income of 2 unit trusts of which the trustee of the discretionary trust was sole unitholder.

At first instance, Spender J had held that the trustee of the discretionary trust was presently entitled to the income of both unit trusts. The Full Court agreed in relation to the income of one of the unit trusts, rejecting the taxpayer's argument that the High Court decision in CPT Custodian Pty Limited v Commissioner of State Revenue (2005) 221 ALR 196 led to a contrary conclusion.

However, in relation to the other unit trust, whose terms required the trustee to make a determination as to whether unitholders were to receive a distribution of income (no such determination having been made) but otherwise conferred no entitlement to trust income, the Full Court held that there was no present entitlement as at the end of the relevant year of income. In particular, the fact that the trustee owned 100% of issued units did not, in the light of CPT Custodian, lead to the contrary conclusion. Accordingly, no amount from this unit trust was included in the net income of the discretionary trust, with the consequence that no amount was required to be included in the assessable income of the taxpayer beneficiary. To this extent, therefore, the taxpayer beneficiary's appeal was upheld.

The case was remitted back to Spender J on the question of the correct amount of additional tax payable by the taxpayer beneficiary: Pearson v FCT [2006] FCAFC 111 (Full Federal Court; Dowsett, Allsop and Edmonds JJ; 5 July 2006).

For a copy of the decision, go here

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