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05 May 10 Decision Impact Statement - Forrest

The ATO has published a Decision Impact Statement in relation to the Full Federal Court decision in Forrest v FCT [2010] FCAFC 6; 2010 ATC 20-163. The case concerned the deductibility of interest on money borrowed to acquire units in a hybrid trust, and the assessability, as an eligible termination payment, of a payment made to a charity on the resignation of the taxpayer from his employment.

It was accepted that the trust was discretionary as to capital distributions. However, one of the issues for decision was whether the trust was fixed or discretionary in respect of income. The Commissioner argued that it was because the trust deed contained a clause (clause 12) which conferred on the trustee a power to determine whether amounts received or disbursed were on income account or capital account. The Commissioner's arguments in this respect were rejected by the Full Federal Court. As the Decision Impact Statement states:

"In the opinion of the Court, the power conferred by clause 12 of the deed could not be exercised by the trustee wrongly to classify a receipt as a capital gain, when the receipt was, in truth, income. The clause is not an unlimited power to be exercised in the trustee's unconfined discretion. In the Court's judgment, the terms of the deed demonstrate the settlor's and trustee's objective intention that the income other than capital gains was to be held on a fixed trust for the Unit Holders and capital gains were to be held on a discretionary trust."

In relation to the Court's finding, the Decision Impact Statement states:

"The ATO accepts the finding of the Court that, having regard to the settlor's objective intention ascertained from all the provisions of the deed, the clause which appeared to confer upon the trustee an unfettered discretion to determine whether a receipt was capital or income was in fact no more than an administrative power to honestly classify receipts according to law.

Relevantly, the Court was of the view that the settlor's intention of creating a fixed trust of income other than capital gains would have been defeated if the power had been construed as a discretionary power of re-characterisation. There may be other cases in which such a power would not be inconsistent with the settlor's objective intention."

This issue is very important having regard to the use of a similar but not identical clause in the trust deed the subject of the Bamford decision.

The Commissioner states that he also accepts the other findings of the Court.


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