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15 Nov 12 Decision Impact Statement - Trustee for MH Ghali Superannuation Fund

The ATO has released a Decision Impact Statement on the decision of the AAT in Re The Trustee for MH Ghali Superannuation Fund and FCT [2012] AATA 527. The case concerned a superannuation fund that received distributions of income from a unit trust. The question before the AAT was whether those distributions were special income under s 273(6) or (7) of the ITAA 1936.

In the ATO’s view, the case concerned the application of the “special income” rules in s 273 of the ITAA 1936. That section has now been replaced by the “non-arm’s length income” rules in s 295-550 of the ITAA 1997. The new section is relevantly in the same terms. Accordingly, while the comments below concern s 273, they are equally applicable to s 295-550.

The Commissioner was successful in this case because the AAT considered that the relevant trust entitlement was acquired, and income derived, through non-arm’s length dealing.

However, the AAT’s reasoning differed from the Commissioner’s on one issue, namely whether the income derived by the Super Fund was by virtue of a fixed entitlement to income. In that regard, there are two aspects of the Tribunal’s reasoning that warrant further comment:

  1. The Tribunal considered that “fixed entitlement” in s 273 takes the meaning provided in s 272-5 in Schedule 2F to the ITAA 1936. This is contrary to, and would be less favourable to taxpayers than, the Commissioner’s existing approach.
  2. Section 272-5 of Schedule 2F provides that if a beneficiary has a vested and indefeasible interest in a share of income of a trust that the trust derives from time to time, the beneficiary has a fixed entitlement to that share of income. The AAT made some observations regarding the nature of that test which are discussed further below. Because of the way the case was argued, the AAT did not have the benefit of submissions on the way in which the test operates including relevant case law.

Because the Commissioner’s objection decision was affirmed, the Commissioner could not appeal and seek to have these issues considered further by the Federal Court.

The Commissioner’s view set out in TR 2006/7 is that a superannuation fund has a fixed entitlement to income “if the entity’s entitlement to the distribution does not depend upon the exercise of the trustee’s or any other person’s discretion.” The Commissioner proposes to adhere to his existing view that the Schedule 2F definition is inapplicable for the purposes of s 273. Although the matter was not considered by the Tribunal, the ATO notes that the Commissioner’s view is that the Schedule 2F definition also does not apply for the purposes of s 295-550: see TR 2006/7 and the minutes to NTLG Superannuation Subcommittee meeting of March 2010.

Unless or until the meaning of fixed entitlement for the purposes of s 273 or s 295-550 is further tested in the courts or the Tribunal, the Commissioner proposes to adhere to his existing view that the Schedule 2F definition is inapplicable for the purposes of s 273 and s 295-550. The Commissioner will continue to apply the view set out in TR 2006/7 that a superannuation fund has a fixed entitlement to income “if the entity’s entitlement to the distribution does not depend upon the exercise of the trustee’s or any other person’s discretion”.


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