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ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD v DFC of T

Judges:
Cooper J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2002] FCA 1274

Judgment date: 17 October 2002

Cooper J

Background to the application

1. The applicant (``the Trustee'') is the trustee of the Electricity Supply Industry Superannuation Fund (Qld) (``ESI Super'').

2. On 14 January 1999, the Trustee applied under s 14ZAF of the Taxation Administration Act 1953 (Cth) (the ``TAA'') for a private ruling in relation to an arrangement in respect of the income years 1997, 1998 and 1999. On 15 December 2000, the Trustee applied for a ruling in relation to the same arrangement in respect of the income year 2000.

3. Section 14ZAF of the TAA provides:

``A person may apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement.''

4. An ``arrangement'' is defined in s 14ZAAA of the TAA to include a scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking.

5. The arrangement in respect of which the ruling was sought was described in an opinion of counsel dated 14 January 1999 under the heading ``Full Description of Facts'', which was attached to and formed part of, the application dated 14 January 1999.

6. The Trustee put six questions to be answered by way of ruling. Only five of those questions are relevant to the present proceedings. Those questions were:

  • (a) Does s 177EA of the Income Tax Assessment Act 1936 (Cth) (the ``ITAA'') apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution, or a specified part of a distribution, made by the Queensland Investment Corporation Investment Trust (``the QT'') to ESI Super in the 1997 year of income?
  • (b) Does s 177EA of the ITAA apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution, or a specified part of a distribution, made by the trustee of the QT to ESI Super in the 1998 year of income?
  • (c) If the trustee of the QT exercises its powers of allocation pursuant to clause 15.2 of the deed to allocate more income that is attributable to franked dividends for the 1999 year of income to ESI Super than would be attributed to it if the power were not exercised, will s 177EA of the ITAA apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution, or a specified part of a distribution, made by the trustee of the QT to ESI Super in the 1999 year of income?
  • (d) If the trustee of the QT exercises its powers of allocation pursuant to clause 15.2 of the deed to allocate more income that is attributable to franked dividends for the 1999 year of income to ESI Super than would be attributed to it if the power were not exercised, will s 177EA of the ITAA apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution, or a specified part of a distribution, made by the

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    trustee of the QT to ESI Super in the 2000 year of income?
  • (e) If the answers to any of the above questions is ``yes'', will the Commissioner determine that no franking credit benefit arises only in respect of that part of a franked distribution that exceeds a notional pro rata franked distribution based on ESI Super's unit holding [interest in the QT]?

7. The Commissioner answered each of the questions ``yes''.

8. The Trustee lodged a notice of objection against the private ruling on 29 March 2001. The objection was disallowed by the respondent on 31 August 2001. The Trustee filed an appeal to this Court against the disallowance as an appealable objection decision for the purposes of s 14ZZ of the TAA. The relief claimed by the Trustee is to have the decision of the respondent waived or set aside and for the objections as lodged to be allowed in full.

The arrangement for the purposes of s 14ZAF of the TAA

9. The QT, under its then name of the Queensland Treasury Corporation Investment Trust, was settled by Trust Deed made on and dated 30 June 1989 (``the Deed''). The Commencement Date of the Trust as defined in clause 1.1 of the Deed, was 1 July 1988. The original trustee was the Queensland Treasury Corporation, a body corporate established under the Queensland Treasury Corporation Act 1988 (Qld).

10. On 1 July 1991, the original trustee was replaced by the Queensland Investment Corporation (``QIC''), a body corporate established under the Queensland Investment Corporation Act 1991 (Qld), as trustee.

11. The recitals to the Deed provided:

``WHEREAS

A. The Trustee has invested moneys for and on behalf of the Founding Members and the Additional Members as trustee for them from the Commencement Date and the various dates specified in the Second Schedule respectively which moneys, with the consent of each of the Existing Members have been pooled and mixed with the moneys of other Existing Members for investment by the Trustee in accordance with the QTC Act as one single fund for the benefit of the Existing Members pro rata having regard to the moneys contributed by each from time to time;

B. It is intended by this Deed to record the establishment of a trust on the Commencement Date to be known as the `QUEENSLAND TREASURY CORPOR- ATION INVESTMENT TRUST' (or by such other name as may be determined in accordance with the terms of this Deed) and the terms upon which that trust shall be administered for the benefit of the Members from the date of this Deed;

C. From time to time after the Commencement Date further cash has been vested in the Trustee by the Existing Members and the Trustee has accepted and held the same upon the same trusts and subject to the same terms and conditions as moneys previously vested by the Existing Members in the Trustee;

D. The Trustee and the Existing Members have agreed that the Trust Fund is to be held on the terms and conditions set out in this Deed as from the date of this Deed and that as between themselves the Trust Fund will be deemed to have been so held from the Commencement Date and that any other terms upon which the Trust Fund was previously held shall be varied accordingly with the intent that the benefits and obligations of this Deed may enure not only to the Trustee and the Existing Members but also to the extent provided in this Deed to every Member subject to and upon the provisions of this Deed;

E. From time to time after the date of this Deed further cash may be vested in or lodged with the Trustee who shall accept the same to be held upon the same trusts and subject to the same terms and conditions as the Trust Fund is now held.''

12. A ``Member'' was defined to mean ``the person for the time being registered under the provisions of this Deed as a member of the Trust, and includes persons jointly so registered and the Existing Members.''

13 The ``Trust Fund'' was defined in clause 1.1 as follows:

``` Trust Fund ' means all the cash, investments and property for the time being

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held by the Trustee upon the trusts set out in this Deed including, without limitation:
  • (a) the moneys initially vested in the Trustee by the Founding Members pursuant to Clause 2.1;
  • (b) the further moneys lodged with or vested in the Trustee by the Existing Members and held or deemed to be held pursuant to the terms set out in this Deed;
  • (c) the further cash which may be lodged with or vested in the Trustee and held pursuant to the terms set out in this Deed;
  • (d) the investments representing the said moneys and any such cash;
  • (e) the proceeds of the sale, redemption or repayment of any such investments;
  • (f) all additions or accretions which have arisen or may arise from any bonus, premium or other payment or consideration in respect of or in connection with any property forming part of the Trust Fund or from any other source whatsoever;
  • (g) all investments representing the reinvestment in accordance with the provisions of this Deed of any property forming part or arising in respect of the Trust Fund;
  • (h) all income for the time being in the hands of the Trustee; and
  • (i) any amount set aside to any reserve or provision created pursuant to the terms of this Deed;''

14. The Trust Fund was vested in the trustee of the QT upon trust for the members from time to time on and from the commencement date: clause 2.3.

15. Members invested in the QT by cash subscriptions to the Trust Fund pursuant to clauses 2.4 and 2.5, which were credited to the Member's Account created pursuant to clause 3.2. No member was entitled to require the transfer to it of any of the investments comprised in the Trust Fund: clause 2.6, clause 10.2.2.

16. ``Except as may otherwise be expressly agreed'' no member in that capacity had any rights with respect to management or administration of the Trust Fund: clause 2.7.

17. Members' entitlements under the Trust were dealt with in clause 3 of the Deed, which provided:

``3 MEMBER'S ENTITLEMENTS

3.1 Entitlement Determined by Member's Account

The beneficial entitlement of a Member to the Trust Fund shall, subject to the other provisions of this Deed, be measured by the amount from time to time credited to its Member's Account maintained pursuant to this Clause 3 to the effect that each separate dollar (or any remaining part thereof) represents a separate interest in the Trust Fund. Each Existing Member shall be deemed to have had a Member's Account initially in an amount and from the date of becoming a Member as set out in the First or Second Schedule as the case may be.

3.2 Maintenance of Member's Account

The Trustee shall establish and maintain a Member's Account for each Member, to which the Trustee shall credit:

  • (a) amounts subscribed from time to time by that Member pursuant to Clauses 2.4 and 2.5;
  • (b) amounts credited from time to time to that Member by the Trustee pursuant to the terms of this Deed;

and from which the Trustee shall debit amounts paid from time to time (but not including any amounts advanced) to that Member or as he directs pursuant to Clause 15.4 or Clause 19 or otherwise deductible from the Member's Account in accordance with this Deed.''

18. The Deed also provided for the establishment and maintenance of a ``Member's Accrual Account'' in clause 12. The clause provided:

``12. MEMBER'S ACCRUAL ACCOUNT

12.1 Establishment of Account

The Trustee shall establish and maintain a Member's Accrual Account for each Member with respect to each Financial Year as from the date that such Member became a Member or from the date of commencement of the relevant Financial Year as the case may be. The opening balance of each Member's Accrual Account in each Financial Year shall be the amount of that Member's initial subscription in the case of the first Financial Year during which that person is a Member and in other cases, the

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amount of the Member's Account of the relevant Member as at the commencement of the relevant Financial Year.

12.2 Credits to Account

The Trustee shall credit each Member's Accrual Account with any additional subscriptions made by the Member pursuant to Clause 2.5 as made and on a daily basis with the proportion of any increase in the value of the Trust Fund from any source whatsoever equal to the proportion that that Member's Accrual Account bears to the total of all Member's Accrual Accounts on the relevant day as calculated by the Trustee and with the amount of any loan or advance repaid in accordance with Clause 13.4.

12.3 Debits to Account

The Trustee shall debit each Member's Accrual Account with any amount paid to the Member in accordance with Clause 19 (including any amount paid by way of advance under that Clause) together with on a daily basis the proportion of any reduction in the value of the Trust Fund from any source whatsoever equal to the proportion that that Member's Accrual Account bears to the total of all Member's Accrual Accounts on the relevant day as calculated by the Trustee and with the amount of any loan or advance made to the Member in accordance with Clause 13.4.

12.4 No Present Entitlement

No Member shall be entitled whether presently, contingently or otherwise to any amount standing to its credit in its Member's Accrual Account it being acknowledged that such account is kept by the Trustee for the purposes of its internal management of the Trust Fund, of advising Members of the approximate value of their investment in the Trust Fund at any time, of calculating their entitlement to share in increments in the Trust Fund with respect to any Financial Year and to share in the Trust Fund upon a winding up and of calculating the amount of advances that may be made to any Member in accordance with Clause 19 at any time.''

19. The income of the QT was provided for in clause 15 of the Deed, which stated:

``15 INCOME OF THE TRUST

15.1 Trustee to Receive Moneys

Except as elsewhere expressly herein provided, the Trustee shall receive and hold all moneys, rights and property which are payable to or receivable in respect of the Trust Fund.

15.2 Determination of Entitlement

The Trustee shall, on or before the last day of each Financial Year make a determination in accordance with the provisions of this Deed as to the share to which each Member is entitled in:

  • (a) the amounts standing to the credit of each Income Account with respect to the relevant Financial Year;
  • (b) the amounts standing to the credit of each Corpus Account with respect to the relevant Financial Year;
  • (c) at the discretion of the Trustee, the amount or any part thereof, standing to the credit of the Tax Equalisation Reserve Account; and
  • (d) at the discretion of the Trustee, the amounts standing to the credit of any other Account with respect to the relevant Financial Year established pursuant to Clause 11.6.

15.3 Credit Member's Account

Upon a determination made pursuant to Clause 15.2, each Member's Account shall be credited with the amounts to which such Member has become entitled or credited to such Member as a result of such determination.

15.4 Present Entitlement of Members

Each Member shall be presently entitled to any amount credited to its Member's Account as a result of a determination pursuant to Clause 15.2 or as a result of the application of Clause 15.7 and such amount shall be deemed to have been distributed to such Member and such Member shall be deemed to have made additional subscriptions of cash in accordance with Clause 2.5 which have been accepted by the Trustee to the extent of the amount so credited to the Member except to the extent

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that the Member has previously directed the Trustee in writing to pay the amount so credited to the Member in which case the Trustee shall be liable to so pay to the Member the amount so credited immediately but shall have twenty (20) Business Days after the end of the relevant Financial Year to make the payment.

15.5 Allocation of Credits

In making a determination pursuant to Clause 15.2, the Trustee shall, so far as is practicable in the opinion of the Trustee, allocate the aggregate amounts standing to the credit of all Income Accounts and all Corpus Accounts during the relevant Financial Year among all persons who are Members at the date of such determination on a pro rata basis having regard to the amounts credited to each Members' Accrual Account on each day during the relevant Financial Year up to the date of such determination but the Trustee shall have absolute discretion in determining to what extent which amounts from which Income Accounts and which Corpus Accounts are credited to each Member . (Emphasis added).

15.6 Effect of Maintenance of Accounts

The Income Accounts, Corpus Accounts and Member's Accrual Accounts and any other Accounts to be kept pursuant to this Deed shall not require the maintenance of separate investments of any kind, do not affect the power of the Trustee to invest all assets and income of the Trust Fund as it sees fit in accordance with this Deed and do not create any separate trusts or sub-trusts, in respect of any assets or income of the Trust Fund.

15.7 No Determination

If for any reason the Trustee shall not have made any determination in accordance with Clause 15.2 and 15.5 on or before midnight on the last day of any Financial Year then the Members shall be presently entitled to all Income and Corpus Accounts and to the taxable income of the Trust Fund on a pro rata basis having regard to amounts credited to each Member's Accrual Account on each day during the relevant Financial Year and the excess of each Member's present entitlement to such amounts in aggregate over the amount of its then existing Member's Account shall be credited to the Member's Account. The Trustee shall not be liable to any person for failing to make any determination pursuant to Clause 15.2.

15.8 Notices from Members

The Trustee shall, as far as in its opinion is practicable, exercise its discretion pursuant to Clause 15.2 in conformity with any notice received from time to time from any Member indicating the wishes of that Member as to the extent to which it desires to share in one or more Income Accounts and Corpus Accounts.''

20. The Queensland Electricity Supply Industry Superannuation Board (``QESISB'') was established as a body corporate under s 355 of the Electricity Act 1976 (Qld). The function of the QESISB was to manage and superintend the Queensland Electricity Supply Industry Employees' Superannuation Scheme (``QESIESS'') for the purpose of providing superannuation benefits to persons employed in the electricity supply industry and their dependents. QESISB had a power of investment under s 369 of the Electricity Act 1976 (Qld), which in 1990 provided:

``369 Investments and banking.

(1) The Superannuation Board may invest moneys vested in it in manner approved by the Governor in Council.

(2) An approval by the Governor in Council of the manner in which funds may be invested may be either a continuing approval authorizing the investment of moneys in a particular form of investment or an approval for a specific investment.

...''

21. In March 1990, the Minister for Resource Industries for the State of Queensland, the Honourable Kenneth Vaughan, received a written proposal from the Treasurer and Minister for Regional Development for Queensland, the Honourable Keith de Lacey. The purpose of the proposal was stated to be:

``That the investment of the surplus funds administered by the Queensland Electricity Supply Industry Superannuation Board and the Local Government Superannuation Board be undertaken by the Queensland Treasury Corporation , replacing the existing investment arrangements.''

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Under the heading ``REASONS FOR PROPOSAL'', there appeared, inter alia, the following:

``3. REASONS FOR PROPOSAL

The case for the QTC to assume responsibility for the investment of these funds seems overwhelming.

(i) Reason for Establishment of the QTC

...

(ii) Conflict between the QTC and QESISB/ LGSB in equity investment markets

...

(iii) A Board with specific Investment Skills and Experience

...

(iv) Investment is a specialist function

...

(v) Cost Advantage of QTC

...

(vi) Advantages of Size

...

(vii) Tax Advantages of QTC Investment Trust

  • The QTC invests funds both for Superannuation schemes which are liable to pay tax (e.g. GOSUPER, State Service Super (employee contributions) Police Super, and Parliamentary Contributory Super) and also for organisations which are not liable to pay tax (e.g. Workers' Compensation, State Service Super (employer contributions), and general Government cash balances).
  • This has provided a unique opportunity to legally reduce substantially (and in less than two years eliminate completely) the income tax obligations of the taxpaying Super funds.
  • By placing all the funds in a single Trust the various categories of investment earnings can be 'streamed' to different fund clients in the most tax-effective way. For example, interest earnings which afford no tax shelter are streamed to the non-taxpaying funds whilst dividends carrying imputation credits are attributed to the tax-paying funds.
  • This is a major benefit which could be provided by the QTC to the QESISB and the LGSB and is not otherwise available to them .

(viii) Investment Strategy

...

(ix) Protections and Controls

...

6. SUMMARY/CONCLUSION

The above arguments are considered to be overwhelming.

The QTC is a professionally-managed organisation, supervised by a quality Board with specific proven skills and experience in business and investment. The QESISB and LGSB's are `one man shows', whose Boards do not have business/investment experience. This is an untenable situation for the Queensland Government.

The arguments could be summarised briefly as-

  • (i) the QTC was set up to invest Government and semi-Government superannuation funds. It is a contradiction of this concept to have two Boards investing separately.
  • (ii) There is potential for Companies Code conflicts between the QTC and the other Funds' equity investments.
  • (iii) The `checks and balances' so crucial for semi-Government financial bodies are in place for the QTC but not the QESISB and LGSB. Recent State Bank of Victoria developments highlight the importance of this.
  • (iv) Investment is a complex, sophisticated, specialist function. It needs professional specialists, not an unsupervised `one man band'.
  • (v) Investment by the QTC would involve lower cost, because it does not pay fees to outside managers for equity or fixed interest investments, and provides economies of scale.
  • (vi) QTC property investments are large and high-quality whereas QESISB and LGSB are in only small, lower-quality investments. This is another major advantage of size.

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  • (vii) The QTC provides a major tax advantage because it is able to mix taxed and non-taxed funds and stream the tax benefits for maximum advantage.''

22. On 28 March 1990, the Minister for Resource Industries advised the Treasurer of his agreement with the proposal.

23. On 14 June 1990, the Governor in Council pursuant to s 369 of the Electricity Act 1976 (Qld) made the following approval:

``1. All existing approvals (other than the approval in paragraph 2 below) by the Governor in Council authorising investment of moneys by The Queensland Electricity Supply Industry Superannuation Board (the `QESISB') for The Queensland Electricity Supply Industry Employees' Superannuation Scheme (the `Scheme') or for the Queensland Electricity Supply Industry Employer-Funded Accumulations Super- annuation Fund (the `Fund'), whether such approvals were given as continuing approvals or approvals for specific investments, or related to the Scheme or the Fund or both as the case may be, shall be withdrawn and revoked on and from 1 July 1990.

2. As from the date hereof, each of the QESISS and the members of the QESISB in their capacity as trustees of the Fund is authorised on a continuing basis to invest all moneys vested in, or administered by, the QESISB or the members of the QESISB in their capacity as trustees of the Fund, as the case may be, under the Electricity Act 1976 - 1989 from time to time, whether standing to the credit of the Scheme or the Fund as the case may be, in the Queensland Treasury Corporation Investment Trust created by deed dated 30 June 1989 by becoming a member or members of that Trust and lodging such moneys with the Queensland Treasury Corporation in accordance with that deed.''

24. As and from 22 June 1990, QESIESS became a member of the QT and subscribed to the Trust Fund to constitute its Member's Account. It thereafter received distributions of income determined under clause 15.2 and calculated and allocated pursuant to clause 15.5.

25. The Electricity Act 1976 (Qld) was repealed by the Electricity Act 1994 (Qld) (``the 1994 Act''), which was relevantly further amended by the Statutory Authorities Superannuation Legislation Amendment Act 1995 (Qld).

26. Part 2 of Chapter 12 of the 1994 Act provided for an approved industry superannuation scheme. Section 279 of the 1994 Act, as amended in 1995, provided for the continuation of the provisions of the Electricity Act 1976 (Qld) until approval of an industry superannuation scheme.

27. Section 280(3) provided:

``(3) The approved industry superannuation scheme is a continuation of QESIESS.''

28. Section 281 of the 1994 Act, as amended in 1995, provided:

``(1) The continuation of QESIESS under section 280 does not affect a person's entitlements accrued under QESIESS.

(2) The assets and liabilities of QESIESS immediately before the approval day continue to be the assets and liabilities of the approved industry superannuation scheme.

(3) To remove doubt, stamp duty is not payable because of the operation of subsection (2) or section 280.

(4) On the approval day, all rights, entitlements and obligations of the Queensland Electricity Supply Industry Superannuation Board (the `Board' ) under contracts and arrangements between it and other persons become the rights, entitlements and obligations of the trustee of the approved industry superannuation scheme.

(5) On the approval day, the Board ceases to exist and its members and the trustees of the Queensland Electricity Supply Industry Employer-funded Accumulations Super- annuation Fund go out of office.

(6) Subsection (5) does not prevent a member or trustee from being appointed as a trustee of the approved industry super- annuation scheme.

(7) This section is a law to which the Acts Interpretation Act 1945, section 20A applies.

(8) This section expires on the approval day.''

29. The Trustee was incorporated as a company limited by guarantee in June 1995.

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30. QESIESS was declared to be an approved industry superannuation scheme and the Trustee was appointed trustee of the approved scheme. Since 1 July 1995, ESI Super, the approved scheme, has continued as a continuation of QESIESS: s 280(3) of the 1994 Act.

31. On approval day, as defined in s 280(1) of the 1994 Act, the rights, entitlements and obligations of the QESISB became the rights, entitlements and obligations of the Trustee: s 281(4) of the 1994 Act.

32. The funds subscribed to the QT prior to the appointment of the Trustee in 1995 remain invested in the QT and subject to the terms of the Deed.

33. On 30 June 1997, the trustee of the QT made a determination pursuant to clause 15.2 of the Deed in respect of thirteen accounts maintained by it pursuant to clause 11 of the Deed. In respect of the Franked Dividend Income Account, it resolved that 9.761 per cent of the fully franked and partly franked dividends standing to the credit of the account be distributed to ESI Super. The percentage rate of entitlement of 9.761 per cent for ESI Super, determined in respect of the franked dividend income, exceeded its pro rata rate of entitlement to the aggregate amounts standing to the credit of all income accounts and corpus accounts during the financial year, calculated in accordance with clause 15.5 of the Deed.

34. On 29 June 1998, ESI Super gave notice to the trustee of the QT in the following terms:

``I refer to our recent discussions regarding the 1997/98 distribution to be undertaken by QICIT and issue this notice to the Trustee in accordance with clause 15.8 of the QICIT Trust Deed.

The Fund's preference for the 1997/98 financial year is to share in the Income and Corpus accounts of QICIT (including the franked dividend income account) to the same extent as has been the practice in prior years .

Your assistance is therefore sought to advise the Trustee of this notice for its consideration in the determination of Electricity Supply Industry Superannuation Fund's entitlement to amounts standing to the credit of the Income and Corpus accounts of QICIT in respect of the 1997/98 distribution.''

(Emphasis added)

35. On 30 June 1998, the trustee of the QT made a determination pursuant to clause 15.2 of the Deed. In respect of the Franked Dividend Income Account it resolved that 7.011 per cent of the fully franked and partly franked dividends standing to the credit of the account be distributed to ESI Super. Again, the percentage rate of entitlement for ESI Super determined in respect of the franked dividend income exceeded its pro rata entitlement to the aggregate amounts standing to the credit of all income accounts and corpus accounts during the financial year calculated in accordance with clause 15.5 of the Deed.

36. On 25 June 1999, ESI Super gave notice to the trustee of the QT in the following terms:

``I refer to our recent discussions regarding the 1998/99 distribution to be undertaken by QICIT and issue this notice to the Trustee in accordance with clause 15.8 of the QICIT Trust Deed.

The Fund's preference for the 1998/99 financial year is to share in the Income and Corpus accounts of QICIT (including the franked dividend income account) to the same extent as has been the practice in prior years, except that I ask you to take into consideration that the Fund has net capital losses carried forward of $6,014,155 .

Your assistance is therefore sought to advise the Trustee of this notice for its consideration in the determination of Electricity Supply Industry Superannuation Fund's entitlement to amounts standing to the credit of the Income and Corpus accounts of QICIT in respect of the 1998/99 distribution.''

(Emphasis added)

Part IVA of the ITAA

37. Section 177EA is an anti-avoidance provision in Part IVA of the ITAA which deals with schemes to reduce income tax. The section is directed to franking credit trading and franking credit streaming schemes, where one of the purposes is to obtain a franking credit benefit. The section only applies where the elements specified in s 177EA(3) exist. That subsection provides:

``177EA(3) This section applies if:

  • (a) there is a scheme for a disposition of shares, or an interest in shares, in a company; and

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  • (b) a frankable dividend has been paid, or is payable or expected to be payable, in respect of the shares or a distribution has been paid, or is payable or expected to be payable, in respect of the interest, as the case may be; and
  • (c) the dividend or distribution was, or is expected to be, franked; and
  • (d) except for this section, a person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, franking credit benefits as a result of the dividend or distribution; and
  • (e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit.''

38. For the purpose of s 177EA(3) there are a number of statutory definitions which are relevant. They are:

``160APA ...

`trust amount' , in relation to a trust estate, means:

  • (a) a share of the net income of the trust estate that is included in the assessable income of a beneficiary under section 97, 98A or 100;
  • (b) a share of the net income of the trust estate in respect of which the trustee is liable to be assessed under section 98; or
  • (c) the net income, or a part of the net income, of the trust estate in respect of which the trustee is liable to be assessed under section 99 or 99A;
  • ...

177A(1) ...

`scheme' means:

  • (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  • (b) any scheme, plan, proposal, action, course of action or course of conduct;
  • ...

177EA(13) Meaning of interest in shares. A person has an interest in shares if:

  • (a) the person has any legal or equitable interest in the shares; or
  • (b) the person is a partner in a partnership and:
    • (i) the assets of the partnership include, or will include, the shares; or
    • (ii) the partnership derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares; or
  • (c) the person is a beneficiary of a trust (including a potential beneficiary of a discretionary trust) and:
    • (i) the shares form, or will form, part of the trust estate; or
    • (ii) the trust derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares.

177EA(14) Meaning of scheme for a disposition. A scheme for a disposition of shares or an interest in shares includes, but is not limited to, a scheme that involves any of the following:

  • (a) issuing the shares or creating the interest;
  • (b) entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the shares or interest;
  • (c) creating, varying or revoking a trust in relation to the shares or interest;
  • (d) creating, altering or extinguishing a right, power or liability attaching to, or otherwise relating to, the shares or interest;
  • (e) substantially altering any of the risks of loss, or opportunities for profit or gain, involved in holding or owning the shares or having the interest;
  • (f) the shares or interest beginning to be included, or ceasing to be included, in any of the insurance funds of a life assurance company.

177EA(15) Meaning of distribution. A distribution in respect of an interest in shares is made if a partnership amount

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within the meaning of Part IIIAA, or a trust amount within the meaning of that Part, is included in, or is allowable as a deduction from, a person's assessable income.

...

177EA(19) Meaning of relevant circumstances of scheme. The relevant circumstances of a scheme include the following:

  • (a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding shares, or having interests in shares, in the company that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any shares, or interests in shares, in the company);
  • (b) whether the relevant taxpayer would, in the year of income in which the dividend is paid or the distribution is made, derive a greater benefit from franking credits than other persons who hold shares, or have interests in shares, in the company;
  • (c) if the scheme involves the payment of a franked dividend - whether, apart from the scheme, the company would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked dividend to another person referred to in paragraph (b);
  • (d) if the scheme involves the making of a franked distribution - whether, apart from the scheme, a franked distribution would have been made to another person referred to in paragraph (b);
  • (da) if the scheme involves the issue of a non-share equity interest to which section 160APAAAA applies - whether the company has issued, or is likely to issue, equity interests in the company:
    • (i) that are similar, from a commercial point of view, to the non- share equity interest; and
    • (ii) dividends in respect of which are frankable;
  • (e) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the franking credit benefits to be received by the relevant taxpayer;
  • (f) whether a deduction is allowable or a capital loss is incurred in connection with the paying of a dividend or the making of a distribution under the scheme;
  • (g) whether a dividend paid or a distribution made under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest;
  • (h) the period for which the relevant taxpayer held shares, or had an interest in shares, in the company;
  • (i) any of the matters referred to in subparagraphs 177D(b)(i) to (viii).''

39. Sub-paragraphs 177D(b)(i) to (viii) referred to in paragraph 177EA(19)(i) provide:

  • ``(i) the manner in which the scheme was entered into or carried out;
  • (ii) the form and substance of the scheme;
  • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
  • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
  • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
  • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
  • (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

    ATC 4900

  • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
  • ...''

40. Part IVA of the ITAA is to be construed and applied according to its terms, not under the influence of ``muffled echoes of old arguments concerning other legislation'':
FC of T v Spotless Services Limited & Anor 96 ATC 5201 at 5205; (1996) 186 CLR 404 at 414.

41. On the facts disclosed by the Trustee in its application for a private ruling and on the additional materials supplied to the respondent, the question was whether, under the arrangement disclosed, the Trustee had received, or would receive, a franking credit benefit to which s 177EA applied and thus was, or would be, liable to a determination being made by the respondent under s 177EA(5)(b) of the ITAA. That would only occur if the objective criteria specified in s 177EA(3) are met: Spotless Services Ltd at ATC 5204-5205; CLR 413;
FC of T v Peabody 94 ATC 4663 at 4670; (1993-1994) 181 CLR 359 at 382.

42. I turn now to the criteria contained in s 177EA(3) of the ITAA.

Submissions

43. The Trustee submits that:

  • (i) The QT was established at least one year before the QESIESS became a member, the members of the QT have changed over the relevant years of income and have different tax profiles.
  • (ii) It was not contemplated at the time of the establishment of the QT that the QESIESS would acquire an interest in the QT.
  • (iii) The QT was established to provide a balanced portfolio investment vehicle to manage various superannuation and other funds held by the Queensland Government and its authorities to meet long term obligations. It did not hold shares at the time it was created.
  • (iv) The Trustee, through its predecessor QESISB, was compelled in 1990 by Order of the Governor in Council to transfer the bulk of its assets to the QT, including its own equity portfolio.
  • (v) The acquisition of a membership interest by QESIESS in the QT was not part of a scheme for the disposition of shares or an interest in shares within the meaning of s 177EA of the ITAA because it occurred after the creation of the QT.
  • (vi) QESIESS/ESI Super acquired its interests in the QT for their market price.
  • (vii) ESI Super is, and at all times was, at arm's length from the other members and the trustee of the QT.
  • (viii) There was no plan or arrangement, whether formal or informal, at the time QESIESS acquired membership in the QT in 1990 or thereafter, between the trustee of the QT and the trustee of QESIESS/ESI Super, that QESIESS/ESI Super would have distributed to it franked dividends. QESIESS/ESI Super, having regard to clause 15 of the Deed, did not become a member of the QT expecting, or reasonably expecting, to receive a disproportionate allocation of dividend income and, thus, franking credits;
  • (ix) ESI Super's rights under the QT are exactly the same as the rights of the other members.
  • (x) ESI Super has no greater or lesser entitlement to a distribution of franked dividends than any other member of the QT.
  • (xi) ESI Super does not forego any other entitlements if it is allocated franked dividend income, and provides no consideration to any person in that regard.
  • (xii) The notification of ESI Super in its letters of 29 June 1998 and 25 June 1999 to the trustee of the QT was no more than the expression of a ``preference'' which had no force in any legal or informal sense; in any event it was not followed by the trustee of the QT.
  • (xiii) The acquisition by ESI Super of any interest in a share, as defined, was one where the interest is held at risk in the ordinary way without more, and thus not sufficient to attract the operation of s 177EA. If ESI Super did not receive an allocation of franked dividend income by the trustee of the QT, it is likely that another superannuation fund would receive such an allocation, ie there is no potential wastage of franking credits if an allocation is not made to ESI Super.
  • (xiv) No distribution has been paid to ESI Super in respect of the interest in shares.

    ATC 4901

    Rather, a distribution in cash in respect of ESI Super's membership interest in the QT has been made equal to ESI Super's proportionate interest, having regard to the amounts credited to each Members' Accrual Account.
  • (xv) No deduction or capital loss is incurred by ESI Super or any other party in connection with the making of a distribution; all transactions are carried out in a commercial manner; the form and the substance of the transactions are the same; the division of income into various classes under the QT Deed is in accordance with the general law.

44. The respondent submits that the scheme is one for the disposition of an interest in a share which comprises the following steps:

  • (a) the establishment of the QT on the terms of the Deed, in particular Recital A, clauses 3.1, 11.7, 15.2, 15.5 and 15.8 and its acquisition of shares as assets of the QT;
  • (b) the acquisition by the Trustee of QESIESS/ESI Super of units [membership interests under clause 3.1 of the Deed] in the QT in the knowledge that:
    • (i) the assets of the QT included shares in public companies;
    • (ii) the specified provisions of the Deed permitted franked dividend streaming to be made to taxpaying entities such as ESI Super, while streaming income carrying no tax credits to non-tax paying entities; and
  • (c) the implementation of that scheme of disposition on an annual basis by the Trustee, on behalf of ESI Super, giving notice to the trustee of the QT pursuant to clause 15.8 of the Deed.

45. The respondent further submits that each of the other requirements of s 177EA(3) is made out either by concession in the advice of counsel which formed part of the application for a ruling, or on the materials before the respondent.

Was there a scheme for the disposition of shares, or an interest in shares in a company?: s 177EA(3)(a)

46. The concept of a scheme, as defined in s 177A(1), is one of the widest application. It is not a concept that of necessity requires parties to it, as it may be a unilateral one: s 177A(3). Nor is it one which requires an enforceable agreement between all of the parties to it. Informal arrangements and understandings, whether or not enforceable by legal proceedings, are sufficient provided they exist as an objective fact and that there be an expectation by the party or parties to it that the scheme, plan, proposal, action, course of action or course of conduct will be carried into effect.

47. A scheme for the purposes of s 177A(1) is not something which is limited to a particular point in time and to particular persons or participants at that point in time. Giving effect to a scheme over a period of time, during which the participants may change from time to time, is a course of action or conduct, which itself is a scheme within the definition in s 177A(1).

48. The respondent, in my view, was correct in its identification of a scheme for the disposition of an interest in a share involving the steps particularised in paragraph [41] above. The statement concerning the acquisition by the Trustee of ESI Super of ``units'' in QT is to be understood to mean the acquisition of interests in the Trust Fund of the QT as determined by clause 3.1 of the Deed. I agree with the respondent that the scheme was intended to operate over time and involve the annual distribution of income earned in a financial year by streaming the income to members, including the streaming of franking credit benefits, on the basis of the member being best able to utilise the income streamed to it in a tax effective way.

49. It is clear, as an objective fact, that the QT was established as a means to manage the various superannuation and other funds held by the Queensland Government and its authorities, and as part of that objective to use a trust structure to enable various categories of investment earnings to be ``streamed'' to different beneficiaries in the most tax-effective way. One of the means provided for under the Deed to achieve this purpose was the earning of franked dividend income by the QT to be placed in an account styled the Franked Dividend Income Account (clause 11.7.1) and thence to be distributed from that account by determination of entitlement of the members by the trustee of the QT under clauses 15.2 and 15.5 of the Deed.

50. Provision was made for the future admission, at the discretion of the trustee of the QT, of new members who applied by an application in the form of the Fifth Schedule to

ATC 4902

the Deed, which application was accompanied by cash funds for subscription to the Trust Fund. The proposal put by the Treasurer in March 1990 was that QESIESS avail itself of the benefits offered by investing superannuation funds in the QT, including the ability to receive investment earnings streamed in a tax effective way, eg ``dividends carrying imputed credits'', which benefit was not otherwise available to it, by becoming a member of the QT and subject to the provisions of the Deed. That proposal was agreed in by the Minister for Resource Industries having responsibility for administration of the Electricity Act 1976 (Qld) and carried into effect by order of the Governor in Council and by QESIESS applying for membership of the QT.

51. When QESIESS became a member of the QT:

  • (a) there was a disposition to it of interests in the Trust Fund measured in accordance with clause 3.1 of the Deed. To the extent that the Trust Fund included shares in companies, there was a disposition of an interest in those shares to QESIESS: clause 3.1, s 177EA(13)(a) and (14)(a). The fact that QESIESS could not call for the transfer to it of any particular share having regard to the terms of the Trust, does not mean that it did not thereby acquire an equitable interest in that share;
  • (b) it became a beneficiary of the QT and the acquisition thereafter of a share by the QT, which formed part of the Trust estate, operated as the disposition of an interest in that share to QESIESS/ESI Super: clause 3.1, s 177EA(13)(c)(i) and (14)(b).

52. It bears remembering that:

  • (a) ESI Super was the continuation of QESIESS: s 280(3) of the 1994 Act as amended in 1995.
  • (b) The interests in the Trust Fund were not static. The interests in shares varied from time to time, depending upon the mix of investments in the Trust Fund and the identity of the companies, the shares of which were held at any one time. Membership of the QT ensured that changes in ownership of shares held by the trustee of the QT in any income year translated into changes in the interest in those shares held by each member.
  • (c) It was not necessary for the purposes of s 177EA(3), that QESIESS agreed with the trustee of the QT that the discretion in clause 15.5 of the Deed be exercised in a particular way with respect to the distribution of dividends from the Franked Dividend Income Account for there to be a ``scheme'', as defined, or a scheme for a disposition of shares, or an interest in shares, in a company.
  • (d) Save as to one limitation, a member could control the exercise of the discretion of the trustee of the QT under clause 15.2 by indicating to the trustee its wishes as to the extent to which it desired to share in one or more specified income account. Subject only to the trustee of the QT holding the opinion that it was practical to do so, the trustee was obliged to exercise the discretion under clauses 15.2 and 15.5 in conformity with the wish expressed by the member: clause 15.8.
  • (e) In each year after it became a member of the QT, QESIESS/ESI Super received dividends from the Franked Dividend Income Account pursuant to determinations made under clauses 15.2 and 15.5.
  • (f) The letters of 29 June 1998 and 25 June 1999 were notifications given by ESI Super pursuant to its right to do so under clause 15.8 of the Deed. The trustee of the QT was obliged to act in conformity with it if it was of the opinion that it was practical to do so. The giving of the notices was an attempt by the Trustee to stream to itself the dividends from the Franked Dividend Income Account in an amount greater than its pro rata entitlement to the aggregate income in all accounts of the QT for that year to obtain a franking credit benefit greater than it would obtain on a pro rata distribution of the account on the basis of the amounts credited to each Members' Accrual Account. The exercise by the Trustee of its right to give a notice under clause 15.8 was the exercise by it of one feature of the scheme which QESIESS/ESI Super acquired upon becoming a member of the QT, and retained thereafter as an incident of membership. The materials before the respondent do not disclose that the trustee of the QT did not fully comply with the notice given by the Trustee on 29 June 1998, as the Trustee contends. The reasonable inference is that the trustee of the QT exercised its discretion

    ATC 4903

    in conformity with the wish expressed in the notice, to the extent that it was of the opinion that it was necessary or practicable to do so, and thereby discharged the obligation imposed on it by clause 15.8. The preference was stated as:
    • ``The Fund's preference for the 1998/99 financial year is to share in the Income and Corpus accounts of QICIT (including the franked dividend income account) to the same extent as has been the practice in prior years, except that I ask you to take into consideration that the Fund has net capital losses carried forward of $6,014,155.''

53. Whether, and how, the trustee of the QT took into account the net capital losses carried forward to enable ESI Super to share in the income and corpus accounts (including the Franked Dividend Income Accounts `` to the same extent as has been the practice in prior years '') is not known from the materials before the respondent.

54. The criteria in paragraph 177EA(3)(a) was satisfied.

Has a frankable dividend been paid in respect of the shares or a distribution paid in respect of the interest?: s 177EA(3)(b)

55. The resolution of the trustee of the QT made on 30 June 1997 was:

``5.4 Appropriation of the Franked Dividend Income Account

RESOLVED that, subject to the limitation set out in this Clause 5.4, each and every one of the fully franked and partly franked dividends that may properly stand to the credit of the Franked Dividend Income Account for the year ended 30 June 1997 be distributed as follows:

Member

  • ... 
(vi) Electricity Supply Industry Superannuation
(Queensland) Limited as Trustee for Electricity
Supply Industry Superannuation Scheme (Queensland),
trading as ESI Super                                  9.761%
                                                      ------

...

The limitation imposed by the Trustee is that the amount determined in accordance with the percentage entitlement in this Clause for each member shall not exceed the Member's Distribution Entitlement.''

56. The resolution made on 30 June 1998 was, save as to the income year and the percentage which was stated as 7.011 per cent, in identical terms.

57. The trustee of the QT in each of the 1997 and 1998 years was exercising its power to appropriate dividends from the named account in the exercise of its discretion under clause 15.5. The only limitation it placed on those determinations was that the amount so appropriated not exceed the members' pro rata entitlement to the aggregate income in all accounts, that entitlement being the ``Members' Distribution Entitlement''. Those dividends were franked dividends paid in the year of income in respect of shares held in the Trust Fund in which ESI Super had an interest and the franked dividends were paid on a distribution in respect of the interest ESI Super had in the shares as a beneficiary of the Trust Fund.

58. As appears from the final statement of account for each of the 1997 and 1998 years, the distribution of franked dividends constituted a discrete component of the total taxable income in each year. In 1997 the franked dividends, together with the tax credits applicable to them, gave a taxable income component of $25,691,534.57. In 1998, the distribution of franked dividends of $13,687,160.31 involved tax credits of $6,983,308.75, giving a taxable income component in the form of franked dividends of $20,670,469.06.

59. It was expected that a franked dividend would likewise be paid in respect of the shares held or acquired in 1999 and 2000 in which ESI Super held an interest.

60. The dividend income distributed, or to be distributed to ESI Super in each relevant year, became assessable income under s 97 of the ITAA and subject to the operation of s 160AQW. It does not alter the fact that a frankable dividend has been paid, or is expected to be paid, in respect of the shares or interest in shares forming part of the Trust Fund in which ESI Super has an interest, that the payment also satisfies in part the obligation of the trustee of

ATC 4904

the QT to pay to ESI Super its full Members' Distribution Entitlement under the Deed.

61. The criteria in paragraph 177EA(3)(b) was satisfied.

Was a franked dividend paid?: s 177EA(3)(c)

62. It is agreed by the parties, as was the fact, that the dividends were, or would be, franked in each year of income. Therefore the criteria in paragraph 177EA(3)(c) was satisfied.

But for s 177EA, would ESI Super receive or could it reasonably be expected to receive franking credit benefits as a result of the dividend or distribution?: s 177EA(3)(d)

63. The paragraph requires that except for the operation of s 177EA, the taxpayer would receive or could reasonably be expected to receive, franking credit benefits as a result of the dividend or distribution. A franking credit benefit includes a rebate of tax under s 160AQYA of the ITAA: s 177EA(18)(c).

64. It was a feature of the scheme that members of the QT who were not exempt from the payment of taxation in accordance with the ITAA, would have streamed to them income which carried with it advantages or benefits for taxation purposes which were of no benefit to members who enjoyed tax free status. It was the corollary that income without attached tax benefits would be streamed to tax exempt members.

65. The purpose of the Queensland Government in procuring QESIESS to become a member of the QT, was to enable QESIESS to, amongst other things, take advantage of the streaming of income in a tax effective way. Subject only to issues of practicality and the obligation of the trustee of the QT to treat all members similarly placed equally (see Halsbury's Laws of Australia paragraph 430-4195 and the cases cited there, especially at footnotes 1, 2 and 7), objectively QESIESS could reasonably be expected to have received a distribution of dividends from the Franked Dividend Income Account or the Foreign Income Credit Account as a substantial component of its taxable income, and often in preference to taxable income from, for example, the Interest Income Account and the Unfranked Dividend Income Account. That it occurred is evident from the Statements of Account for the years ended 30 June 1992, 1993, 1994, 1995, 1996 and 1997, which were before the respondent at the time the ruling was made. The only change in 1998 is the introduction of substantial ``Foreign Other Income (No Credits)'' and the part played in that year by the existence of carry forward losses available to ESI Super. It is unclear from the 1990 and 1991 year returns whether or not the franked dividends were appropriated before other income or were the maximum franked dividends available for appropriation to QESIESS in those years.

66. In the relevant years ESI Super did receive, or could reasonably expect to receive, a distribution of dividend income from the Franked Dividend Income Account which gave it an entitlement to a rebate of tax in terms of s 160AQYA of the ITAA, which would be greater than any rebate payable if the franked dividends were distributed to all members of the QT pro rata, having regard to the amounts credited in each Members' Accrual Account. In the 1998 and 1999 years, ESI Super sought to ensure that it received such amounts by giving notice, as it was entitled to do under clause 15.8 of the Deed. The submission of the Trustee that it could have no other reasonable expectation than that it would receive its pro rata share of income in all accounts of the QT, is to ignore the history surrounding the creation of the QT, the circumstances which led to QESIESS/ESI Super becoming a member of the QT, and the conduct of the trustee of the QT as to the type of investments it made in companies which declared franked dividends and the allocation of those dividends to QESIESS/ESI Super from the commencement of its membership in the QT until the years in question. It is also to ignore the contents of the letters of 29 June 1998 and 25 June 1999 which record the occurrence of discussions between ESI Super and the trustee of the QT as to the distribution to be undertaken in each relevant year.

67. The criteria in paragraph 177EA(3)(d) was satisfied.

Can it be concluded that the person or one of the persons who entered or carried the scheme into effect did so for a purpose of enabling ESI Super to obtain a franking credit benefit?: s 177EA(3)(e)

68. Bearing in mind that the definition of ``the relevant circumstances'' in s 177EA(19) is inclusive and deals with numerous circumstances, some of which are not relevant to the present case, I make the following observations as to the relevant circumstances of

ATC 4905

the scheme without addressing each paragraph of the definition separately, but with them clearly in mind.

69. There is no doubt that the QT was established as a long term investment trust for various superannuation and other funds held by the Queensland Government and its authorities. There is likewise no doubt that a purpose of the Trust was to maximise the net after tax returns to its members on funds subscribed by the members to the Trust Fund. The funds subscribed by members were at commercial risk to the extent that the members relied upon the trustee of the QT as fund manager to preserve and grow the Trust Fund avoiding capital loss. Having regard to the nature of the members of the QT and their investment objectives, investment of funds with the QT by members was a medium to long term one. Any interests in shares in a company acquired by members, including ESI Super, by virtue of membership of the QT was totally dependant upon the size and make-up of the shareholding portfolio in the Trust Fund at any point in time.

70. There is also no doubt that the QT was conducted according to ordinary commercial practice in accordance with the general law and that the trustee of the QT was subject to the usual duties and obligations of a trustee in the administration of the Trust in accordance with the terms of the Deed. One of the strategies open to the trustee of the QT was to retain in the Franked Dividend Income Account franked dividends received by it from companies whose shares formed part of the Trust Fund, and to stream those dividends to members who would thereby obtain a tax benefit. Because some members were exempt from income tax and would not benefit from receiving a distribution from the Franked Dividend Income Account, that income was habitually distributed to those members who would benefit in their net after tax position from such a distribution. Assuming that all such members were treated equally, each of those members who received a distribution of franked dividends received a greater distribution from that fund than if their pro rata rates of distribution to all income accounts were applied to the franked dividend distribution. However, as between all members, they were treated equally by the trustee of the QT and each received its pro rata entitlement calculated in accordance with clause 15.5, irrespective of which income account the distribution in fact came from. So much appears from the minutes recording the determinations made by the trustee of the QT for 1997 and 1998.

71. The purpose of the trustee of the QT was to stream franked dividends to those members liable to pay income tax to the exclusion of those members which were exempt from tax, and, the decision taken by the Governor in Council that QESIESS would become a member of the QT had as a purpose that the QESIESS should benefit from the streaming of such franked dividends. Other than that certain members of the QT received benefits under the ITAA which flowed to them from receiving franked dividends which other members did not receive, the actions of the trustee of the QT and the operation of the scheme had no fiscal consequences under the ITAA. That situation changed with the introduction of s 177EA which applied to dividends paid at or after 7.30 pm by legal time in the Australian Capital Territory on 13 May 1997.

72. Objectively, the Trustee of QESIESS from the time it became a member of the QT, knew that QESIESS was receiving its distributions from the QT substantially from the Franked Dividend Income Account and, save for 1989 - 1990, not from other accounts maintained by the trustee of the QT which carried no tax benefits, and that, in consequence, it became entitled to tax rebates under s 160AQYA of the ITAA. That is, objectively it knew that the QT was being managed in such a way that its net after tax position in respect of income distributions from the QT was better than it would have been if it received only a pro rata distribution of the franked dividends. It also knew that for so long as it was practicable to do so, the trustee of the QT would continue managing the QT on that basis. In those circumstances, it objectively had an expectation that it, and other members similarly placed, would receive a disproportionate distribution of franked dividends to other members whose position was such that they would receive no tax benefit from a distribution of franked dividends.

73. From the time the Trustee became the trustee of QESIESS/ESI Super, objectively nothing changed in either the manner in which the trustee of the QT administered the Trust Fund and made distributions of franked dividends, or the expectation of the Trustee that

ATC 4906

the QT would continue to be so managed. The letters written by ESI Super to the QT in 1998 and 1999 confirm the Trustee's knowledge of the scheme, its expectation that the scheme would operate to the benefit of ESI Super in the relevant tax years, and its knowledge of the right to select by notice under clause 15.8, the account from which its income would be paid if the trustee of the QT believed it was practical to do so.

74. The material before the respondent is objectively inconsistent with the bulk of the submissions put forward by the Trustee which seek to limit the scheme to the time of its creation and to distance the Trustee and ESI Super from any active, knowledgeable or wilful participation in it. In particular, the letters written in 1998 and 1999 reveal that the Trustee, on behalf of ESI Super, involved itself in discussions with the trustee of the QT in each year in question and issued the notice under clause 15.8 of the Deed consequent upon those discussions. Further, the preference was to share in income and corpus accounts ``to the same extent as has been the practice in prior years''. A review of the documents relating to the practice in prior years discloses that it received distributions of franked dividends from the Franked Dividend Income Account at rates in excess of that which would have applied if ESI Super received income from each income account maintained by the trustee of the QT at the pro rata rate calculated in accordance with clause 15.5 of the Deed.

75. The fact the trustee of the QT and the Trustee on behalf of ESI Super, as parties to the scheme, made investment and trust management decisions on a proper commercial basis, for a proper commercial purpose and to achieve the long term commercial objectives of the QT and ESI Super, does not mean that they, or either of them, did not also have, as a not incidental purpose, a purpose that in carrying into effect the scheme ESI Super would obtain a franking credit benefit: Spotless Services Ltd at ATC 5206; CLR 415-416.

76. On the material which was before the respondent, and in the relevant circumstances of the scheme, for the purposes of subparagraph 177EA(3)(e) of the ITAA it would be concluded objectively that:

  • (a) the trustee of the QT in the relevant years of income did, and would, in carrying into effect the scheme, declare pursuant to clause 15.2 of the Deed dividends from the Franked Dividend Income Account to ESI Super for a purpose, which was not an incidental purpose, of enabling ESI Super to obtain a franking credit benefit;
  • (b) the Trustee, in giving notice to the trustee of the QT pursuant to clause 15.8 of the Deed in the financial years 1998 and 1999, did so in carrying out a part of the scheme for a purpose, which was not an incidental purpose, of enabling ESI Super to obtain a franking credit benefit.

77. ESI Super did not merely acquire an interest in shares without more when it became and remained a member of the QT. Its acquisition was not a bare acquisition of shares or an interest in shares within the meaning of s 177EA(4). Accordingly, the requirements of s 177EA(3)(e) were made out.

Outcome of application and orders

78. It was open to the respondent to make the private rulings which it did, based on the application of s 177EA of the ITAA to the arrangement disclosed by ESI Super in the application dated 14 January 1999 and in the additional materials supplied to the respondent by it.

79. The application is dismissed.

THE COURT ORDERS THAT:

1. The application is dismissed.


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