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08 Sep 11 Trust distribution "special income" of super fund but contrary view "reasonably arguable" - Allen

The Full Federal Court (Keane CJ, Greenwood and Middleton JJ) has dismissed in part the taxpayer's appeal from the decision of Collier J in Allen (Trustee), in the matter of Allen’s Asphalt Staff Superannuation Fund v Commissioner of Taxation [2010] FCA 1276.

Collier J held that a distribution (the Distribution) received by the trustees of a superannuation fund (the Fund) from a fixed trust (the Fixed Trust), constituted "special income" in the hands of the Fund for the purposes of the former s 273(7) ITAA 1936, notwithstanding that the Fund held a fixed entitlement to 100% of the income of the Fixed Trust. This finding had the significant financial consequence of the income being taxed at the rate of 47% rather than 15%.

The source of the funds comprising the Distribution from the Fixed Trust was a distribution of a capital gain to the trustee of the Fixed Trust by the trustee of another trust of which the Fixed Trust was a discretionary beneficiary. Specifically, Collier J held that the term "income derived" in s 273(7) included amounts of ordinary and statutory income and was not restricted to ordinary income. The Full Court agreed and dismissed the taxpayer's appeal on this issue.

However, the Full Court allowed the taxpayer's appeal on the question of penalty. Collier J had held that the position taken in the taxpayers’ return was "not reasonably arguable", thus upholding the imposition of the penalty by the Commissioner.

Their Honours said they preferred the approach of the Full Court in Cameron Brae Pty Ltd v FCT [2007] FCAFC 135; (2007) 161 FCR 468 at [70], rather than the approach of Hill J in Walstern Pty Ltd v FCT [2003] FCA 1428; (2003) 138 FCR 1.

Their Honours said, at para 75:

"In Cameron Brae...Stone and Perram JJ concluded that, even though they considered that the correct view was 'clear', the question was 'open to debate in the sense of being arguable'. The approach taken by Stone and Perram JJ in Cameron Brae, with which we respectfully agree, is somewhat less strict than that suggested by Hill J in Walstern. On the approach in Cameron Brae, while a Court may come to a clear view on a question of statutory construction adverse to a taxpayer, that view is not decisive against the conclusion that the taxpayer’s position was reasonably arguable."

Their Honours continued, at paras 78-79:

"In this case, as in Cameron Brae, the questions of statutory construction on which the case turns were free from authority squarely covering the point. And as our reasons on the substantive issues show, the taxpayers’ position was debatable. There is another consideration which is relevant here.

It should, we think, be borne in mind is that the legislature itself considered that the taxpayers’ position was sufficiently arguable to warrant the replacement of s 273(7) of the ITAA 1936 by subdivision 295H of the ITAA 1997. That the legislature considered it prudent to shore up the Commissioner’s position in this way gives the Commissioner’s insistence that the outcome of the present case was clear beyond rational argument a somewhat pharisaical quality."

Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118 (Full Federal Court; Keane CJ, Greenwood and Middleton JJ; 7 September 2011).


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