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The Full Federal Court (Jessup, Jagot and Robertson JJ) has held that a borrowing by the trustee of a family trust to make a capital distribution was not a liability related to the assets of the trust for the purposes of the maximum net asset value test in s152-15 ITAA 1997 (as amplified by s 152-20(1)(a)), even though, by borrowing, the trustee preserved and retained the assets of the trust that would otherwise have had to be sold.

In so doing, the Full Federal Court upheld the Commissioner's appeal from the decision of Gordon J in Bell v FCT [2012] FCA 1042 (19 September 2012).

The Full Federal Court said, at para 41, as follows:

"The error into which the primary judge fell, in our respectful view, was to regard the Trust’s purpose – that of preserving its existing assets – as dispositive of the question arising under s 152-20. In a situation in which the trustee of the Trust had resolved to make a distribution of capital, his decision to borrow funds rather than to use the existing resources of the Trust gave rise to a relation between the liability arising from the borrowing and the borrowed funds in the hands of the Trust. But, that purpose having been effected by disposing of the cash which represented the borrowing, there was not, in our view, a relevant ongoing relation between the liability and the generality of the assets of the Trust for no other reason than that the decision to borrow was made in the alternative to using existing resources. This conclusion, and the analysis on which it is based, is not affected by characterising the thinking of the trustee as one involving the protection or maintenance of the existing CGT assets of the Trust."

Bell v FCT [2013] FCAFC 32 (Full Federal Court; Jessup, Jagot and Robertson JJ; 22 March 2013).


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