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18 Jul 11 Decision Impact Statement - Trail Bros

The ATO has issued a Decision Impact Statement in relation to the Full Federal Court's decision in FCT v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94; 2010 ATC 20-198.

The case concerned whether Part IVA ITAA 1936 applied to a scheme to overcome law changes that limited employer deductibility for superannuation contributions for employees to age-based limits.

Initially, the AAT held that the taxpayer had not obtained a tax benefit represented by the amount of the payments that the taxpayer made to a welfare fund on behalf of two of its employees, in lieu of superannuation contributions. On appeal to the Federal Court, Greenwood J found that the taxpayer had obtained a tax benefit in each year but, contrary to the Commissioner's submission, found that the tax benefit was not the total payments made, but only the difference between the total payments made and the superannuation age-based deduction limits for each employee (the differential). His Honour set aside the decision of the AAT and remitted the matter to the AAT.

Both the taxpayer and the Commissioner appealed to the Full Federal Court, which dismissed both appeals. In particular, the Full Federal Court held (at para [35]) that it is the taxpayer who bears the onus to establish they have not obtained a tax benefit in connection with a scheme for the purposes of s 177C of ITAA 1936. The Court also concluded that an element of the scheme may form part of the alternative postulate.

The Decision Impact Statement notes the following in respect of the Full Federal Court's decision:

"The Court concluded that the trial judge was wrong in approaching the question of the identification of the tax benefit obtained by the taxpayer in connection with the scheme by reference to whether under the alternative postulate there was an allowable deduction of the same kind as the deduction allowable under the scheme. The Court concluded (at paras [44] and [66]) that an allowable deduction identified in the alternative postulate need not be of the same kind as the deduction allowable under the scheme. In so doing, the Court arguably did not follow the decision of the differently constituted Full Federal Court in [FCT v. Lenzo [2008] FCAFC 50] . The observations at para [52] could be interpreted as regarding Lenzo as wrongly decided in that respect."

On this basis, the Full Federal Court held that the amount of the tax benefit was the differential.

In relation to the inconsistency with Lenzo, the Decision Impact Statement states:

"While a degree of uncertainty may still exist, it seems clear that the allowable deduction under the alternative postulate must have some reasonable factual basis to support it and that a taxpayer is not at large in pointing to an alternative allowable deduction having no relevance to the impugned scheme (see in particular Edmonds J at para 65)."

The ATO will update PS LA 2005/24: Application of General Anti-Avoidance Rules.


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