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31 Oct 12 Taxpayer assessable on compensation and trust amounts - Howard

The Full Federal Court (Middleton, Perram and Dodds-Streeton JJ) has, on appeal from the decision of Jessup J in Howard v FCT (No 2) [2011] FCA 1421 (14 December 2011), found the taxpayer derived two amounts of income in successive income years.

However, a penalty imposed by the Commissioner on the basis that the taxpayer acted with intentional disregard of the law in relation to the first amount was set aside, with no penalty imposed by the Full Federal Court (the Court). The trial judge's finding that a penalty should be imposed in relation to the second amount on the basis that the taxpayer failed to take reasonable care was affirmed by the Court.

In relation to the first amount the Court held that an amount received by the taxpayer as compensation was beneficially derived by him notwithstanding that he accounted for the amount to a company of which he was a director. The Court held that the amount had not been received by the taxpayer as trustee, and that the applicable principle was that expressed in Booth v FCT [1987] HCA 61; (1987) 164 CLR 159 at 167 (per Mason CJ).

The Court held that the taxpayer had not acted with intentional disregard of the law in relation to the first amount and, on the basis that the Commissioner had not argued for any alternative penalty, no penalty should be imposed.

In relation to the second amount, the taxpayer had received a distribution of $6,339,733 from the Esparto Trust, a resident of the Isle of Jersey. The Commissioner assessed the taxpayer on the amount under s 99B ITAA 1936. The taxpayer argued that it was not assessable, being a distribution of corpus of the trust estate - see s 99B(2)(a).

The Esparto Trust had received the amount from another trust, the Juris Trust, also a resident of the Isle of Jersey. The Juris Trust had in turn received the amount from a company, Esparto Ltd, another resident of the Isle of Jersey. The amount was paid by Esparto Ltd pursuant to a buy-back of its shares.

The Court held that if both the Esparto Trust and the Juris Trust were regarded as residents of Australia, as required by the excepting words in s 99B(2)(a), the combined operation of s 159GZZZP and s 44(1) was that the amount received first by the Juris Trust and then by the Esparto Trust would have represented assessable dividend income in their respective hands. On this basis, s 99B applied to bring the amount to tax in the taxpayer's hands.

The Court held that a penalty based on a lack of reasonable care, as found by the trial judge was appropriate, and dismissed the Commissioner's appeal that the original penalty of 75% of the shortfall should be upheld.

Howard v FCT [2012] FCAFC 149 (Full Federal Court; Middleton, Perram and Dodds-Streeton JJ; 26 October 2012).

 


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