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30 Mar 10 High Court dismisses both appeals in Bamford

The High Court (French CJ, Gummow, Hayne, Heydon and Crennan JJ) has dismissed both the taxpayer's appeal and the Commissioner's appeal from the decision of the Full Federal Court in Bamford v FCT [2009] FCAFC 66 (3 June 2009).

In relation to the Commissioner's appeal, the High Court has held that a capital gain derived by the trustee of a trust could be included in the "income of the trust estate" where those words are first used in s 97(1) ITAA 1936.

At para 36, the Court said:

"36. The very juxtaposition within s 97(1) of the defined expression 'net income of the trust estate' and the undefined expression 'the income of the trust estate' suggests that the latter has a content found in the general law of trusts, upon which Div 6 then operates."

The Court had previously noted, in relation to the general law of trusts, at para 17:

"...Thirdly, the 'rules' which were developed in Chancery regarding apportionment between capital and income of receipts and outgoings and losses largely took the form of presumptions which would yield to provision made in the trust instrument..." [Footnote omitted.]

And, in relation to provisions of the trust deed, the Court quoted with approval, albeit in the context of the taxpayer's appeal, the words of Sundberg J in Zeta Force Pty Ltd v FCT (1998) 84 FCR 70 at 74-75, where his Honour said:

"The words 'income of the trust estate' in the opening part of s 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument."

In so finding, the Court rejected the Commissioner's submission that the words "income of the trust estate" were limited to income according to ordinary concepts.

 The Court noted, at para 10:

"On the second day of the hearing of the appeals the Commissioner made it clear that he accepts that the appeal should be dismissed if 'the income of the trust estate' within the meaning of s 97(1) includes 'statutory income' such as capital gains which are brought in as 'assessable income'."

The Court then said, at para 41:

"Finally, the Commissioner only partially invoked the operation of the 1936 Act to give content to the expression 'income of the trust estate', and would exclude 'statutory income', which is not income according to ordinary concepts. The lack of consistency which this involves tells against the submission."

In dismissing the taxpayer's appeal, the Court endorsed the judgment of Sundberg J in Zeta Force that upheld the proportionate view of the operation of s 97(1). In particular, the Court held that the "share" of the net income of the trust estate that is included in the beneficiary's assessable income under s 97(1) is calculated by reference to the proportionate share of the income of the trust estate (the distributable income) to which the beneficiary is presently entitled. As Sundberg J said:

"The words 'that share' in par (a)(i) [of s 97(1)] refer back to the word 'share' in the expression 'a share of the income of the trust estate', and indicate that the same share is to be applied to an income amount calculated according to a different formula (taxable income as opposed to distributable income). Since the income amount may differ according to which formula is applied, the natural meaning to give to 'share' where it appears for the second time is 'proportion' rather than 'part' or 'portion'."

FCT v Bamford; Bamford v FCT [2010] HCA 10 (High Court; French CJ, Gummow, Hayne, Heydon and Crennan JJ; 30 March 2010).

 


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