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The ATO has published a Decision Impact Statement in relation to the Full Federal Court decision in FCT v Greenhatch [2012] FCAFC 84; 203 FCR 134; 2012 ATC 20-322.

Special leave to appeal the decision was refused by the High Court in Greenhatch v FCT [2013] HCATrans 104.

The case concerned the tax character of the share of the net income of a trust included in the taxpayer's assessable income. Included in the net income was a capital gain.

The substantive issue in this case concerned whether the taxpayer satisfied the "maximum earnings as employee" condition in s 290-160 of ITAA 1997 (the "10% test") such that he was entitled to claim a deduction of $98,000 under s 290-150 of ITAA 1997 for a personal contribution made to his self managed superannuation fund during the 2008 income year.

However, whether this condition was met turned on how much of the taxpayer's share of the net income of the trust for the 2008 income year assessed to him under s 97 of ITAA 1936 was attributable to the trust's capital gain within the meaning of s 115-215 of the ITAA 1997 (as it then applied and since repealed).

In particular, whether this condition was met turned on whether the part so attributable was to be calculated by reference to:

  • the character of the amount of income to which the taxpayer had been made presently entitled per the trustee resolution for trust purposes (the taxpayer's view); or
  • the percentage used to determine the taxpayer's share of the net income included in his assessable income under s 97 (that is, the share of the distributable income of the trust to which the taxpayer was presently entitled expressed as a percentage of the total distributable income) (the Commissioner's view).

The Full Court held that once the proportionate approach to share in s 97 of ITAA 1936 is applied to determine the amount of the net income of the trust assessed to a beneficiary (being the approach to "share" authoritatively settled by the High Court in FCT v Bamford [2010] HCA 10) it is difficult to use other than a proportional approach to determine the part of that share attributable to a capital gain of the trust for the purposes of Subdivision 115-C of the ITAA 1997. Thus, the Full Court upheld the Commissioner's view.

The Decision Impact Statement states:

"...the Commissioner views the approach of the Full Federal Court as consistent with the proposition that absent any specific rules elsewhere in the Tax Acts, the proportionate share of the net income of a trust that is included in the assessable income of a beneficiary under s 97 of the ITAA 1936 has no character beyond that inherent in the share of the net income as being a proportionate share of all of the net income. In particular, absent specific statutory rules that lead to a different result (such as can now be found in Subdivision 115-C of the ITAA 1997), the character for trust law purposes of the income to which the beneficiary was made presently entitled does not inform the character of the share of the net income assessed to the beneficiary under s 97 of the ITAA 1936 for tax law purposes. Put differently, streaming of amounts for trust law purposes by reference to the character of those amounts will only be effective for tax law purposes where that result is facilitated by specific statutory rules."

The ITAA 1997 now recognises streaming of capital gains under Subdivision 115-C, and the streaming of franked distributions under Subdivision 207-B.

The Decision Impact Statement also states, in relation to the effectiveness of attempts to stream other types of income:

"The Commissioner is intending to provide guidance in the form of public rulings as to his views on the tax effectiveness of streaming of relevant income to non-residents (specifically foreign income, and dividend, interest and royalty income attracting the rules in Division 11A of Part III of the ITAA 1936 and Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 ), and the streaming of income on which foreign tax has been paid.

The Commissioner invites views as to other areas of the tax law on which guidance might usefully be given including the relative priority of the need for guidance with respect to those other areas."


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