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11 Aug 11 Non-resident trustee not assessable on Australian income - Leighton

The Full Federal Court (Edmonds, Gilmour and Logan JJ) has upheld the taxpayer's appeal from the decision of Gordon J, who had held that a non-resident individual (Leighton) was assessable as a trustee under the former s 98(3) ITAA 1936 on income derived by two non-resident corporations (Salina and Kolton) from Australian sources, including profits from sales of shares in Australian companies purchased with funds provided to Leighton for that purpose by the non-resident corporations.

Each of Salina and Kolton had share trading accounts with a number of Australian sharebrokers. Leighton had authority to provide buy and sell instructions on behalf of Salina and Kolton to the brokers. Shares were purchased with funds deposited by Salina and Kolton in an Australian Westpac bank account in Leighton's name. The shares were held by an Australian bank custodian. The proceeds of sale of shares were deposited in the Westpac bank account in Leighton's name and remitted to Salina and Kolton.

The Commissioner issued assessments to Leighton under the former s 98(3) ITAA 1936, on the basis that Salina and Kolton were non-resident corporate beneficiaries presently entitled to a share of the income of a trust estate, and that Leighton was the trustee of that trust estate. The amount of taxable income in dispute for the 2002 income year was $2,849,734, for the 2003 income year was $2,424,308, and for the 2044 income year was $7,646,906.

The Full Federal Court held that there was no income of a trust estate to which s 98(3) could apply. Their Honours said, at para 18, as follows:

"It was Salina and Kolton which were respectively the parties to the share sale and purchase contracts. It was they who derived the income from the sale of the trading stock represented by shares. They did so without the intervention of any person as trustee, only a broker as agent. Further, the basis of their derivation being accruals, they derived that income irrespective of whether they or a third party such as Mr Leighton received payment on their behalf."

And thus, their Honours said, at para 22:

"The share sale proceeds deposited by the brokers into the Westpac Bank account in Mr Leighton’s name (Agreed Facts, para 15, item 8) did not represent the income of either Salina or Kolton but rather represented the realisation of the income (the receivables) already derived by these companies. Upon being deposited, the proceeds were impressed with a trust in favour of Salina and Kolton, but they did not comprise the income of a trust estate. Rather, those deposited proceeds constituted or augmented a trust estate of which Mr Leighton was trustee. The income of that trust estate was such income, if any, as was later derived from the investment of that trust estate, eg any bank interest on the deposited proceeds."
The taxpayer's appeal was upheld and the matter remitted to the Commissioner: Leighton v FCT [2011] FCAFC 96 (Full Federal Court; Edmonds, Gilmour and Logan JJ; 10 August 2011).


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