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07 Oct 10 Non-resident trustee assessable on income from Australian sources - Leighton

The Federal Court has held that a non-resident trustee was assessable under the former s 98(3) ITAA 1936 on trust income derived by two non-resident corporations from Australian sources, including profits from sales of shares in Australian companies purchased with funds entrusted to the trustee for that purpose by the non-resident corporations.

The taxpayer, an individual non-resident of Australia for income tax purposes, was contracted by two non-resident corporations to engage in share trading in Australia using share trading accounts in the names of the two non-resident corporations with moneys funnelled through a custodian arrangement with an Australian bank held in the individual’s own name. Any surplus funds from the share trading were remitted from the individual's custodian account to Monaco ultimately for distribution to bank accounts of the two non-resident corporations. The two non-resident corporations did not lodge income tax returns in Australia and paid no tax in relation to the share trading.

Former s 98(3), in effect, taxed trustees in respect of the income of the trust estate to which non-resident corporate beneficiaries were entitled.

The court made the following findings.

  1. The non-resident individual was a “trustee” within the meaning of para (b) of the definition of "trustee" in s 6 ITAA 1936, in that he had, and took upon himself, "the administration or control of income affected by [a] ... trust".
  2. The "trust estate" included the shares held and the income earned from the share trading. Put another way, the "trust estate" was synonymous with the trust property - the shares and the income which were under the non-resident individual's direct administration and control. It was that trust property which gave rise to the income derived by the trustee, the trustee having satisfied all of the tests in s 98(3).
  3. The penalties imposed by the Commissioner should not be set aside or remitted.

On the interpretation and function of former s 98(3), the court observed:

"Where all the tests in s 98(3) are satisfied, a trustee will be assessed and liable to pay tax on behalf of the company beneficiary. Nothing more is required. Put another way, if all the tests are not satisfied, the trustee cannot be assessed. If all the tests are satisfied, the trustee is assessed. That is what s 98(3) (as in force during the relevant income years) expressly stated and what Parliament intended. Section 98(3) was one of the stated exceptions to s 96 of the 1936 Act. Moreover, there was no risk of double taxation. That issue was taken care of by s 98A. As the Explanatory Memorandum made clear ... , it was the trustee of a trust estate that was to be assessed and was liable to pay tax in respect of the relevant share of trust income to which a beneficiary who was a non-resident at the end of the year was presently entitled."

Leighton v FCT [2010] FCA 1086 (Federal Court, Gordon J, 6 October 2010).


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