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14 Jul 11 AAT upholds streaming of trust capital gains under Subdiv 115-C - Greenhatch

The AAT has allowed a taxpayer a deduction for a personal contribution to a superannuation fund, on the basis that his assessable income from salary and wages was less than 10% of his total assessable income, as required by s 290-160 ITAA 1997.

The taxpayer's assessable income comprised salary and wages, and distributions from two trusts, one of which was the Elke Trust. The trustee of the Elke Trust had resolved to distribute to the taxpayer 50% of a capital gain derived by the Elke trust. The ordinary income of the Elke trust had been distributed to another entity.

In calculating the net income of the Elke Trust, the amount of the capital gain to which the taxpayer was entitled, being a discount capital gain, was halved (to $112,340). However, when determining what amount was to be included in the taxpayer's assessable income, it was agreed that s 115-215(3)(b) ITAA 1997 applied. Section 115-215(3)(b) provides that a "capital gain equal to twice the part (if any) of the trust amount that is attributable to the trust gain" was to be included in the taxpayer's assessable income.

On this basis, the taxpayer argued that $224,680 was to be included in his assessable income. If this was correct, his income from salary and wages was less than 10% of his total assessable income, and he would be entitled to a deduction for his superannuation contribution.

In contrast, the Commissioner argued that the taxpayer's (s 97 ITAA 1936) "share" or proportion of the income of the Elke Trust (comprising both the capital gain and the other ordinary income) was only some 18.76% of the total, and that, on this basis, the amount attributable to the trust gain for the purposes of s 115-215(3)(b) was only some $42,150 which, when doubled, resulted in some $84,300 being included in the taxpayer's assessable income. If this was correct, the taxpayer's income from salary and wages was greater than 10% of his total assessable income, and he would not be entitled to a deduction for his superannuation contribution.

The Commissioner argued that the so-called "conduit theory" underlying the system of taxing income derived by trustees of trust estates had no application. In support of this submission the Commissioner argued that:
(a) the decision in Charles v FCT [1954] HCA 16 had been discredited or overruled in the decision in CPT Custodian Pty Ltd (previously t/as Sandhurst Nominees (Vic) Ltd) v Commissioner of State Revenue [2005] HCA 53; and
(b) the decision in Tindal v FCT [1946] HCA 26 where a beneficiary of a trust the trustee of which was a partner in a partnership that carried on a business was held not to have derived income from personal exertion is to the effect that the character of income does not travel through a trust.

The Commissioner also relied on the recent High Court decision in FCT v Bamford [2010] HCA 10.

The AAT rejected all the Commissioner's arguments. First, the AAT held that "the High Court did not overrule the decision in Charles and where there is a straightforward trust, or a trust where who is entitled to what is clear, there is no reason to suggest that the significant conclusion in Charles is not applicable as a guiding principle".

Secondly, the AAT distinguished the decision in Tindal on the basis of the wording of the particular legislation there under consideration.

Thirdly, the AAT pointed out that s 115-215(3) uses different words to s 97 and that it followed that "there is no presumption that s 115-215 of the 1997 Act operates on a proportionate share basis in the same way s 97 of the 1936 Act operates". The AAT continued at para 56:

"Further, s 115-215(3) of the 1997 Act uses two particular words: 'if any'. These words would have no operation if the proportionate share approach advocated by the Commissioner is adopted. The Commissioner’s approach to construction of s 115-215(3) would have each beneficiary of a trust who is assessed on a proportion of the s 95 net income of the trust estate under s 97 include the same proportion of the capital gains of the trust in their assessable income. The words 'if any' would be otiose."

The AAT then said at para 57:

"Similarly, s 115-215 of the 1997 Act proceeds on the footing that it is necessary to address each capital gain that is included in the s 95 net income of the trust. This structure to the section, in conjunction with the words ‘if any’ suggests that the section may differentiate between beneficiaries who are entitled to particular parts of particular gains and treat them accordingly."

Accordingly, the AAT held that the taxpayer was entitled to the deduction claimed: Greenhatch and FCT [2011] AATA 479 (AAT, Hack SC DP and O'Loughlin SM, 8 July 2011).

TAXVINE COMMENT: Is this a first? In this case, the Commissioner was arguing that a taxpayer's assessable income was LESS than that returned by the taxpayer and the taxpayer was arguing that it was MORE than that assessed by the Commissioner. What would their respective attitudes have been in the absence of the claim for a deduction? And did we need special legislation to permit streaming?


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