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24 Jan 11 Continuity of trust maintained despite changes and losses allowed - Clark

The Full Federal Court has, by majority (Edmonds and Gordon JJ, Dowsett J dissenting) dismissed the Commissioner's appeal against the decision of Greenwood J, who had held that a trust (the CU Trust) was entitled to offset capital losses of $2,492,653.50 incurred in the 1993 income year against capital profits of $1,932,006 derived in the 2001 income year, despite a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between those two income years.

The Commissioner argued that these changes meant that there was a lack of continuity in the trust estate as required by ITAA 1936 and ITAA 1997 (that is, a "resettlement"), and as required by the High Court decision in FCT v Commercial Nominees of Australia Ltd [2001] HCA 33; (2001) 75 ALJR 1172. Edmonds and Gordon JJ said, at para 87:

"We cannot accept the Commissioner’s contention. When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question. In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum."

In dissent, Dowsett J said at para 45, referring to the fact that after incurring the losses, the trust's liabilities exceeded its assets:

"Changes in the ownership of units were clearly contemplated by the trust deed. Changes in the terms of the trust were also contemplated, as was augmentation of the fund. But where a trust has been effectively deprived of all assets and re-endowed, I see no way in which it can be said that the original trust estate has continued."

All three judges dismissed the Commissioner's appeal against the finding by Greenwood J that the losses had been incurred.

FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon JJ; 21 January 2011).


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