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18 Mar 08 Part IVA assessments upheld - McCutcheon

The Federal Court (Greenwood J) has dismissed the taxpayers' appeals from the decision of the AAT, in which the taxpayers sought to impugn the validity of certain Part IVA determinations made by the Commissioner.

The Commissioner made 3 determinations under s 177F ITAA 1936. In the first determination, the Commissioner determined that the full amount of the disputed assessable income be included in the assessable income of the trustee of a trust. In the second determination, the Commissioner determined that the full amount of the disputed assessable income be included in the assessable income of one of the beneficiaries of the trust (being the beneficiary entitled to 100% of the trust's income in the year in question). In the third determination, the Commissioner determined that half of the amount of the disputed assessable income be included in the assessable income of another of the beneficiaries of the trust.

The AAT upheld the Commissioner's objection decision in respect of the beneficiary who had half of the amount of the disputed assessable income included in their assessable income. However, the AAT set aside the other objection decision in respect of the beneficiary who had the full amount of the disputed assessable income included in their assessable income and, purporting to stand in the shoes of the Commissioner for the purposes of Part IVA, ordered that the Commissioner issue an assessment that included only half the amount of the disputed assessable income.

Both taxpayers appealed to the Federal Court on a number of grounds. The main ground was that the determinations made by the Commissioner in respect of the two beneficiaries were invalid on the basis that the Commissioner had identified multiple tax benefits in respect of the same income. The Court rejected this on the basis of the relationship between the trustee of the trust on the one hand and the beneficiaries of the trust on the other hand.

An alternative argument put forward by the taxpayers was that the AAT had erred in finding that each taxpayer had obtained a tax benefit. Specifically, the taxpayers argued that there was no evidence before the AAT to support the conclusion that there would have been or might reasonably be expected to have been a distribution by the trustee of the trust to the beneficiaries equally. This argument was also rejected by the Court, which held that there was no error on the AAT's part.

McCutcheon v FCT [2008] FCA 318 (Federal Court, Greenwood J, 12 March 2008).

For a copy of the decision, go here

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