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12 Jun 12 Commissioner's appeal on former CGT “streaming” provisions upheld - Greenhatch

The Full Federal Court (Edmonds, Greenwood and Robertson JJ) has upheld the Commissioner's appeal from the decision of the AAT (Deputy President P E Hack SC and Senior Member F D O'Loughlin) in Greenhatch and FCT [2011] AATA 479 (8 July 2011).

The case involved the interpretation of some of the provisions of Subdiv 115-C ITAA 1997 which have now been replaced, with effect from 1 July 210, by the new trust streaming provisions.

The question for decision in this case was whether the taxpayer (Mr Greenhatch) was entitled to a deduction for a personal contribution that he made 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.

Mr Greenhatch’s assessable income comprised salary and wages, and distributions from two trusts, one of which was the Elke Trust. In the relevant year, the Elke Trust made a discount capital gain of some $450,635 and derived other income of approximately $371,942.50. The net income of the Elke Trust, calculated in accordance with s 95 ITAA 1936, was $598,563.50 after deduction of expenses. This was also its income for trust law purposes.

The trustee of the Elke Trust resolved to distribute to Mr Greenhatch 50% of the capital gain derived by the Elke trust (half as income and half as capital). The other 50% was distributed to Mrs Greenhatch. The other income of the Elke trust was distributed to another entity.

It was common ground that Mr Greenhatch's share of the s 95 net income of the Elke Trust for the relevant year was $112,340 ("the trust amount").

Former s 115-215(3)(b) provided that for each capital gain of a trust estate (the trust gain) which had been reduced under either step 3 of the method statement in s 102-5(1) (discount capital gain) or Subdiv 152-C (small business 50% reduction) but not both, Division 102 applied to a beneficiary whose assessable income included an amount (the “trust amount”) under s 97(1)(a) ITAA 1936, as if the beneficiary had a capital gain “equal to twice the part (if any) of the beneficiary’s trust amount  that is attributable to the trust gain”.

The question for decision, therefore, was what part of Mr Greenhatch's trust amount of $112,340 was "attributable" to the trust's capital gain.

Mr Greenhatch argued that the whole of the trust amount of $112,340 was attributable to the trust gain and, accordingly, s 115-215(3)(b) applied to include twice this amount ($224,680) in his assessable income under Div 102.

If Mr Greenhatch’s argument was correct, Mr Greenhatch’s 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 under s 290-160 ITAA 1997.

In contrast, the Commissioner argued that “that part...of the trust amount that is attributable to the trust gain” for the purposes of the former s 115-215(3)(b) is to be determined by reference to the proportionate share of the income of the Elke Trust (comprising both the capital gain and the other  income) that was used to calculate Mr Greenhatch’s share of the net income of the Elke Trust. Mr Greenhatch’s proportionate share ($112,340) was approximately 18.76% of the total income of the Elke Trust ($598,563.50). On this basis, only 18.76% of the net capital gain, or $42,288, was included in Mr Greenhatch's assessable income under Div 102.

If the Commissioner's argument was correct, Mr Greenhatch would not be entitled to a deduction for his superannuation contribution, as his assessable income from salary and wages was not less than 10% of his total assessable income.

In rejecting the Commissioner's arguments at first instance, 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 Full Federal Court disagreed. The Court accepted the Commissioner's argument on the basis of the "proportionate view" of s 97 that was approved in FCT v Bamford [2010] HCA 10. The Full Federal Court said, at paras 31 and 36:

"31. It was common ground that Mr Greenhatch’s assessable income for the income year included an amount under s 97(1)(a) of the 1936 Act. It is this amount that is referred to as the trust amount in s 115-215(2)(b)(i). It was common ground that Mr Greenhatch’s 'trust amount' was the sum of $112,340, that is, his share of the net income of the Elke Trust. But what he received in the present case was a proportionate share of amounts having no single character...

36. In our opinion, once the share/proportionality method under s 97 is used to give the trust amount, it is difficult to apply 'part' in s 115-215(3)(b) as a non-proportional concept. If the trust amount is calculated as a proportion and “attributable” is given its ordinary meaning, then reconciling the trust amount with the trust gain itself involves a proportional concept. There is no warrant in the deeming provisions of s 115-215(3) or in their language for going behind the proportionate share. Consistently with the approach of Sundberg J in [Zeta Force Pty Ltd v FCT (1998) 84 FCR 70] once the trust law distribution gave the share, it should not be used to determine, in a causative sense, the components of the s 97(1)(a) assessable income."

The Commissioner's appeal was allowed and the decision of the AAT set aside: FCT v Greenhatch [2012] FCAFC 84 (Full Federal Court; Edmonds, Greenwood and Robertson JJ, 7 June 2012).

 


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