GREENHATCH v FC of T

Members:
PE Hack SC DP
FD O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2011] AATA 479

Decision date: 8 July 2011

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PE Hack SC (Deputy President) and FD O'Loughlin (Senior Member)

Introduction

1. In his 2008 income tax return the applicant, Mr Kevin Greenhatch, claimed a deduction of $98,000 for a contribution to a personal superannuation fund. The respondent, the Commissioner of Taxation, disallowed the claim on the basis that more than 10% of Mr Greenhatch's assessable income in the 2008 income year was from salary or wages.

2. Despite the foregoing, these proceedings have little to do with deductions for contributions to superannuation funds. Rather, these proceedings are more concerned with the apportionment of a trust's capital gains amongst the trust's beneficiaries and the taxation treatment of those gains.

Background

3. The facts are agreed. What follows has been taken from the Statement of Agreed Facts dated 17 February 2011 and signed by the representatives of the parties.

4. Mr Greenhatch and his spouse are, for tax purposes, Australian residents. In 1991 a discretionary trust known as the Elke Trust was settled. Mr Greenhatch, his spouse and Homestock Pty Ltd, in its capacity as trustee of the Homestock Trust, were, at material times, general beneficiaries of the Elke Trust. The Light Court Pty Ltd (the Elke Trust trustee) was, at all material times, the trustee of the Elke Trust. Mr Greenhatch was the sole director of the Elke Trust trustee.

5. In 1999 the Greenhatch Superannuation Fund was established by deed. It has been, at all material times, a complying superannuation fund within the meaning of, and for the purposes of, s 45 of the Superannuation Industry (Supervision) Act 1993 (Cth). At all material times Greenhatch Superannuation Pty Ltd, a company of which Mr Greenhatch was a director, has been the trustee of the Greenhatch Superannuation Fund and has acted solely in that capacity.

6. During the 2008 income year the Elke Trust trustee held units in a unit trust called the Merritts Unit Trust and in another unit trust called the Epic Events Unit Trust. During the 2008 income year the Elke Trust trustee disposed of the units in the Epic Events Unit Trust. In the 2008 income year the Elke Trust trustee, as trustee,

• (a) made a capital gain of $450,635.00 on the sale of the units in the Epic Events Unit Trust. By virtue of s 115-100 of the Income Tax Assessment Act 1997(Cth) (the 1997 Act) a discount of 50% applied to this capital gain;
• (b) became presently entitled (within the meaning given to that term in s 97 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) to a share of the income of the Merritts Unit Trust of $378,100.50. An amount of $376,404.00 was included in the net income of the Elke Trust under s 95 of the 1936 Act for the 2008 income year (being its proportionate share of the net income of the Merritts Unit Trust); and,
• (c) incurred operating expenses of $3,158.00.

7. The Elke Trust trustee recorded capital receipts of $450,635.00, income receipts of $375,100.50 and expenses of $3,158.00 in its books of account.

8. On 30 June 2008 the Elke Trust trustee (by Mr Greenhatch as its sole director) exercised its powers of appointment under the trust deed by resolving as follows:

"CAPACITY:

IT IS NOTED that the company is acting in its capacity as trustee for The Elke Trust ('the Trust').

DETERMINATION OF INCOME:

IT IS RESOLVED pursuant to clause 3.1 of the Trust instrument that the Trust's income for the income year ended 30 June 2008 (income year) available for distribution includes all net capital gains and statutory income within the meaning of the Income Assessment Act 1997 (ITAA 1997) and Income Assessment Act 1936 (ITAA 1936) derived by the Trust and excludes all amounts which are expenses for accounting purposes (the trust law income).

IT IS NOTED that the trust law income includes receipts, gains ordinary income and statutory income of the following types:

Net capital gains

Dividend income

Imputation credits

Non-assessable income

Ordinary income

Other income

DISTRIBUTION OF INCOME:

IT IS RESOLVED pursuant to clause 3.2 of the Trust instrument for the income year to distribute the trust law income to the beneficiaries in the amounts/proportions and with the tax attributes as follows:

Name of beneficiary	Amount/ proportion of trust law income	Type of trust law income & amount/proportion to which each beneficiary is entitled and/or assessable
		Net capital gains	Dividend income	Imputation credits	Non-assessable income	Ordinary income	Other income
Kevin Stanley Greenhatch		50%	-	-	50%	-	-
Christine Mary Greenhatch		50%	-	-	50%	-	-
The Homestock Trust		-	100%	100%	-	100%	100%
TOTAL	100%	100%	100%	100%	100%	100%	100%

IT IS RESOLVED that the above distributed amounts less any amounts which have previously been paid to or applied for the benefit of the beneficiary be credited to the beneficiary in the books of account of the Trust and that those amounts be held on a separate sub trust pursuant to the provisions of the Trust instrument.

IT IS RESOLVED that in respect of the above distributed amounts which have been grossed up under the ITAA 1936 or ITAA 1997 in respect of any attached tax attribute, the beneficiary is to receive distribution of the distributed amount less any amount of that gross up.

DISTRIBUTION OF CAPITAL:

IT IS RESOLVED pursuant to clause 6(a) of the Trust instrument to distribute from the trust fund an amount equal to the difference between the capital gains and the net capital gains within the meaning of the ITAA 1997 made by the Trust in the income year (non-assessable capital gains) to the beneficiaries in the amounts/proportions as follows:

Name of beneficiary	Proportion of capital distribution (non-assessable capital gain)
Kevin Stanley Greenhatch and Mary Christine Greenhatch equally	50%

IT IS RESOLVED pursuant to clause 6(a) of the Trust instrument to distribute from the Trust fund an amount equal to the exempt income of the Trust within the meaning of the ITAA 1997 made by the Trust in the income year to the beneficiaries in the amounts/proportions as follows:

Name of beneficiary	Amount / Proportion of exempt income
Kevin Stanley Greenhatch and Christine Mary Greenhatch equally	100%

ACCUMULATION OF INCOME:

IT IS RESOLVED to accumulate the trust law income not distributed to the beneficiaries by the above resolutions with the same proportionate share of that income of the Trust within the definition of 'net income' in section 95 ITAA 1936 being deemed to have accumulated."

9. The parties agree that the effect of that resolution in equity was that the trustee resolved that:

• (a) that portion of the capital gain that was assessable i.e. 50% of the gain, was to be shared equally between Mr and Mrs Greenhatch as a distribution of income from the Elke trust; and
• (b) that portion of the capital gain that was non-assessable by reason of the capital gain being a discount capital gain i.e. the remaining 50%, was to be shared equally between Mr and Mrs Greenhatch as a distribution of capital from the Elke Trust.

10. The net income of the Elke Trust for the 2008 income year for the purposes of s 95 of the 1936 Act was $598,563.50, calculated as follows:

Net capital gain	$225,317.50
Share of net income of the Merritts Unit Trust	$376,404.00
Less accounting fees and bank charges	($ 3,158.00)
Net income	$598,563.50

11. The Elke Trust trustee recorded nil tax payable on the basis that, by virtue of the 30 June 2008 resolution, the beneficiaries of the Elke Trust were presently entitled to the whole of the net income.

12. During the 2008 income year Mr Greenhatch engaged in work that resulted in him being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth). His salary and wages totalled $26,538.00.

13. In his income tax return for 2008 Mr Greenhatch included in his assessable income:

• (a) $26,538.00 - salary and wages;
• (b) $38,512.00 - his share of the net income of the Axia International (Australia) Unit Trust; and
• (c) $112,658.75 - his share of the net income of the Elke Trust distributed to him in the 2008 income year.

14. The parties now agree that the latter figure was incorrectly calculated and the amount that ought to have been included was the sum of $112,340. The error is of no consequence to these proceedings.

15. In the 2008 income year Mr Greenhatch contributed $98,000.00 to the Greenhatch Superannuation Fund and claimed a deduction for that contribution having provided the required notice to the Commissioner. The Commissioner disallowed the claimed deduction on the grounds that, contrary to the requirements of s 290-160(2) of the 1997 Act, 10% or more of Mr Greenhatch's assessable income in 2008 was from salary and wages. The Commissioner made an assessment on 4 May 2009 on this basis. Mr Greenhatch objected to the assessment. His objection was disallowed on 12 August 2009.

16. Thereafter Mr Greenhatch sought a review of the objection decision in the Tribunal.

The legislation

17. The present proceedings make relevant, to some extent, four groups of legislative provisions:

• (a) those relating to the deduction of personal contributions to superannuation funds (Subdivision 290-C of the 1997 Act);
• (b) those dealing with the liability to taxation of trust income, in particular s 95 and 97 of the 1936 Act;
• (c) those for calculating the net capital gain to be included in assessable income, namely s 102-5 of the 1997 Act; and
• (d) those that affect the taxation outcomes for beneficiaries of trusts who receive, or who are entitled to receive, particular kinds of income including subdivision 115-C of the 1997 Act dealing with amounts representing capital gains.

18. Whilst ultimately the issue between the parties concerns the proper construction of s 115-215 of the 1997 Act some reference is necessary to the other provisions in order to understand the context in which the issue of construction arises and to note what is not in issue between the parties.

19. The general rule in s 290-150 of the 1997 Act allows a deduction for contributions made to a superannuation fund provided the conditions specified in s 290-155, 290-160, 290-165 and 290-170 are satisfied. The fund to which the contributions were made was a complying superannuation fund for the 2008 year and thus s 290-155 is satisfied. Mr Greenhatch satisfied the age-related conditions in s 290-165 and the notice provisions in s 290-170 were satisfied.

20. The issue arises in relation to s 290-160 of the 1997 Act. That section applies if the individual, in the income year in question, engaged in activities that resulted in the individual being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act (Cth) 1992. It is common ground that these matters are satisfied. That being so s 290-160(2) of the 1997 Act provided:^[1] It has since been amended with application to income years starting on or after 1 July 2009.

• "(2) To deduct the contribution, less than 10% of the total of the following must be attributable to the activities:
  • (a) your assessable income for the income year;
  • (b) your reportable fringe benefits total for the income year."

21. Mr Greenhatch had no reportable fringe benefits for the income year.

22. In the 2008 income year Mr Greenhatch's assessable income included $26,538.00 from salary and wages. This sum, he says, comprises less than 10% of his assessable income so that, by operation of s 290-160(2) of the 1997 Act he may deduct his superannuation contributions of $98,000.00. The Commissioner, who accepts that otherwise the conditions of deductibility are satisfied, contends to the contrary; Mr Greenhatch's total assessable income was $219,678.00 and thus, it is said, the salary and wages component of assessable income exceeded 10%.

23. By virtue of s 95 of the 1936 Act the net income of a trust estate is,

"… the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident less all allowable deductions …"

24. In the 2008 income year Mr Greenhatch was a beneficiary of the Elke Trust, he was not under any legal disability and he was then presently entitled to a share of the income of the Elke Trust. Accordingly s 97(1)(a) of the 1936 Act had the effect that his assessable income for that year included,

"(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident …"

25. The decision in
Federal Commissioner of Taxation v Bamford^[2] [2010] HCA 10 ; (2010) 240 CLR 481 , [45] . confirmed that "share" when used in s 97(1)(a)(i) of the 1936 Act means "proportion" rather than "part" or "portion".

26. It is next necessary to consider the general tax treatment of capital gains, dealt with by s 102-5 of the 1997 Act. The effect of that section is that "net capital gain" is included in assessable income. The section stipulates the method of working out net capital gain. It is sufficient to note that the sum determined by reducing capital gains by the amount of capital losses (in that or earlier income years), is then reduced by the application of a "discount percentage". The discount percentage is 50% in the case of a gain made by a trust.^[3] See s 115-100, 1997 Act.

27. Finally, the provisions of Subdivision 115C of the 1997 Act, "Rules about trusts with net capital gains", need be considered. The general operation of the Subdivision is explained in s 115-200 in these terms:

" 115-200 What this Division is about

This Subdivision sets out rules for dealing with the net income of a trust that has a net capital gain. The rules treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts. This lets the beneficiary reduce those parts by any capital losses and unapplied net capital losses it has.

If the trust's capital gain was reduced by either the general 50% discount in step 3 of the method statement in subsection 102-5(1) or by the small business 50% reduction in Subdivision 152-C (but not both), then the gain is doubled. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) or the small business 50% reduction.

If the trust's capital gain was reduced by both the general 50% discount and the small business 50% reduction, then the gain is multiplied by 4. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) and the small business 50% reduction.

The rules also give the beneficiary a deduction if necessary to prevent it from being taxed twice on the same parts of the trust's net income."

28. The Subdivision applies if a trust estate has a net capital gain for an income year that is taken into account in working out the trust estate's net income. It applies to the present case because the net income of the Elke Trust for the 2008 income year included a net capital gain of $225,317.50.

29. The resolution of these proceedings turns upon the proper application of s 115-215 of the 1997 Act. It provides:

"115-215 Assessing presently entitled beneficiaries

Purpose

• (1) The purpose of this section is to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so:
  • (a) the beneficiary can apply capital losses against gains; and
  • (b) the beneficiary can apply the appropriate discount percentage (if any) to gains.

  Application

• (2) This section treats you as having certain extra capital gains, and gives you a deduction, if:
  • (a) you are the beneficiary of the trust estate; and
  • (b) your assessable income for the income year includes an amount (the trust amount ):
    • (i) under paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or
    • (ii) under subsection 98A(1) or (3) of that Act; or
    • (iii) under section 100 of that Act.

  Extra capital gains

• (3) For each capital gain (the trust gain ) of the trust estate, Division 102 applies to you as if you had:
  • (a) if the trust gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction) - a capital gain equal to the part (if any) of the trust amount that is attributable to the trust gain; and
  • (b) if the trust gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions) - a capital gain equal to twice the part (if any) of the trust amount that is attributable to the trust gain; and
  • (c) if the trust gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions) - a capital gain equal to 4 times the part (if any) of the trust amount that is attributable to the trust gain.
• (4) For each capital gain of yours mentioned in paragraph (3)(b) or (c):
  • (a) if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1) - Division 102 also applies to you as if your capital gain were a discount capital gain, if you are the kind of entity that can have a discount capital gain; and
  • (b) if the relevant trust gain was reduced under Subdivision 152-C - the capital gain remaining after you apply step 3 of the method statement is reduced by 50%.
  • Note:    This ensures that your share of the trust estate's net capital gain is taxed as if it were a capital gain you made (assuming you made the same choices about cost bases including indexation as the trustee).
• (4A) To avoid doubt, subsection (3) treats you as having a capital gain for the purposes of Division 102, despite section 102-20.

  Section 118-20 does not reduce extra capital gains

• (5) To avoid doubt, section 118-20 does not reduce a capital gain that subsection (3) treats you as having for the purpose of applying Division 102.

  Deduction

• (6) You can deduct for the income year the part (if any) of the trust amount that is attributable to the trust estate's net capital gain mentioned in subsection 102-5(1).
• Note:    This deduction ensures you are not taxed twice on the part of the trust amount that is attributable to the trust estate's net capital gain."

The parties cases

30. Because:

• (a) the Elke Trust had a capital gain;
• (b) Mr Greenhatch was a beneficiary of the Elke Trust; and
• (c) his assessable income included a share of the net income of the Elke Trust,

s 115-215 of the 1997 Act applied to him. The point of difference between the parties concerns the operation of s 115-215(3)(b) of the 1997 Act, that is, the determination of the amount of:

"…a capital gain equal to twice the part (if any) of the trust amount that is attributable to the trust gain…"

31. It is common ground that Mr Greenhatch's "trust amount" (as that expression is used in s 115-215(2)(b)) is the sum of $112,340.00, that is, his share of the net income of the Elke Trust.

32. Mr Greenhatch contends that "the part … of the trust amount that is attributable to the trust gain" requires a factual enquiry as to whether a beneficiary's assessable income under s 97(1)(a) of the 1936 Act bears a relevant relationship to a capital gain of the trust. Mr Greenhatch says the whole of the trust amount was attributable to the trust gain. That is so, he says, because his entitlement to income of the Elke Trust by virtue of the 30 June 2008 resolution was to half of the amounts being treated as net capital gains of the Elke Trust and to no other amount. Thus the capital gain that is equal to twice the part of the trust amount that is attributable to the trust gain is $224,680.00 ie twice $112,340.00.

33. On that basis, says Mr Greenhatch, his assessable income attributable to the activities in s 290-160(1) of the 1997 Act, the amount of $26,538.00, was less that 10% of his assessable income of $289,730.00 ie $26,538.00 (salary and wages), plus $224,680.00 (the Elke Trust) plus $38,512.00 (Axia Unit Trust). Thus, it is said, that Mr Greenhatch is entitled to a deduction under s 290-160 of the 1997 Act of the amount of $98,000 contributed to the Greenhatch Superannuation Fund.

34. The Commissioner urges a different approach. He says that "that part…of the trust amount that is attributable to the trust gain" for the purposes of s 115-215(3)(b) of the 1997 Act is to be determined by reference to the proportionate share of the income of the Elke Trust used to calculate Mr Greenhatch's share of the net income of the Elke Trust. Thus, says the Commissioner, 50% of the net capital gain of the Elke Trust ($112,658.75) represents 18.76% of the total income of the Elke Trust and, he says, "a capital gain equal to twice the part…of the trust amount that is attributable to the trust gain" would be in the order of 42,150.00 i.e. 18.76% of $112,340.00 then doubled.

35. If that approach is correct, Mr Greenhatch's assessable income attributable to employment etc. activities will be more than 10% of his assessable income and his claim for a deduction of $98,000.00 under s 290-150(1) of the 1997 Act must fail.

The submissions

36. Mr Greenhatch's contentions emphasised the contrast between a "trust amount" i.e. the amount included in a taxpayer's assessable income under s 97(1)(a) of the 1936 Act, and the "trust gain" i.e. each capital gain of the trust estate. Reference was made to cases such as
Repatriation Commission v Law^[4] (1981) 147 CLR 635, 649 . and
Roncevich v Repatriation Commission^[5] [2005] HCA 40 ; (2005) 222 CLR 115 , 126 at [23] . which considered the meaning of the question of whether an injury has "arisen out of or is attributable to … war service" and concluded that a causative enquiry was required. In Roncevich^[6] Ibid at [27]. , the joint judgement said:

"A caused link alone or a causal connection is capable of satisfying a test of attributability without any qualifications conveyed by such terms as sole, dominant, direct or proximate."

37. Mr Greenhatch submits that given that the only amount of income from the Elke Trust to which he was entitled was part of that trust's net capital gain, all of his "trust amount" is attributable to the trust gain.

38. This construction is said to be consistent with the stated purpose of s 115-215(1) and is consistent with the conclusion of the High Court in Bamford that the income of the trust was to be determined by general law concepts.

39. The Commissioner's construction, Mr Greenhatch says, is contrary to what must now be regarded as the settled construction of s 95 and 97 of the 1936 Act and disregards the operation of trust law having applied it to determine the net income of the trust.

40. The Commissioner submits that Subdivision 115-C of the 1997 Act was premised on the proposition that the amount included in a beneficiary's assessable income under s 97 of the 1936 Act is an item of statutory income for the purposes of s 6-10 of the 1997 Act and that the character of the income bears no juridical relationship with the character of any gains or losses made by a trustee in calculating the net income of the trust estate. Where a trust estate makes a capital gain included in its net income, and a beneficiary is assessed on a share of that net income, the scheme of Subdivision 115-C, says the Commissioner, is

• "(a) to deem the beneficiary, and not the trust, to have made a capital gain: s 115-215(3) of the 1997 Act; and
• (b) to avoid the double counting of corresponding amount assessed to the beneficiary under s 97 of the 1936 Act by providing an offsetting deduction: s 115-215(6) of the 1997 Act;"

by reference to the extent to which the amount assessed under s 97 of the 1936 Act was "attributable" to the trust's capital gain or net capital gain.

41. Attributable, in this context, it was said meant "belonging to or caused by". The relationship in issue is not between the amount to which a beneficiary is presently entitled for trust law purposes and the capital gain made by the trust estate. It is between the amount assessed under s 97 of the 1936 Act and the capital gain of the trust estate.

42. This approach, the Commissioner submits, applies the ordinary and natural meaning of "attributable". It attributes to the beneficiary's trust amount the same proportions of capital gains and other income as exists in relation to the entire net income of the trust estate and allows one to ascertain what part of the assessed trust amount was "caused by" or "belongs to" the making of that capital gain.

43. Mr Greenhatch's approach, the Commissioner submits, is misconceived because s 115-215(3)(b) of the 1997 Act is neither concerned with the actual amount distributed nor with the source of that distribution.

44. Part of the Commissioner's submission is that, at least in a trust law and taxation law overlap setting, what might be called a conduit theory or basis underlying the system of taxing income derived by trustees of trust estates has no application. In support of this submission the Commissioner contends that:

• (a) the decision in
  Charles v Federal Commissioner of Taxation^[7] (1954) 90 CLR 598 Dixon CJ, Kitto and Taylor JJ has been discredited or overruled in the decision in
  CPT Custodian Pty Ltd (previously t/as Sandhurst Nominees (Vic) Ltd) v Commissioner of State Revenue;^[8] (2005) 224 CLR 98 Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ. and
• (b) the decision in
  Tindal v Federal Commissioner of Taxation^[9] (1946) 72 CLR 608 where a beneficiary of a trust the trustee of which was a partner in a partnership that carried on a business was held not to have derived income from personal exertion is to the effect that the character of income does not travel through a trust.

Consideration

45. The question presented in this matter is one of statutory interpretation. It is perhaps trite, but warrants repeating, that:

• (a) it is the words of the statute to which we must give close attention;^[10] Shi v Migration Agents Registration Authority [2008] HCA 31 ; (2008) 235 CLR 286 at [92] ; Northern Territory v Collins [2008] HCA 49 ; (2008) 249 ALR 621 at 625 per Gummow ACJ and Kirby J; Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (2001) 207 CLR 72 at [9] per Gaudron, Gummow, Hayne and Callinan JJ; Combet v Commonwealth of Australia (2005) 224 CLR 494 at [135] per Gummow, Hayne, Callinan and Heydon JJ; Australian Finance Direct Ltd v Director Of Consumer Affairs Victoria (2007) 234 CLR 96 at [34] per Kirby J; Central Bayside General Practice Association Ltd v Commissioner of State Revenue 2006 ATC 4610 ; (2006) 228 CLR 168 at [81] to [84] per Kirby J
• (b) the starting point is the language used to determine legislative intention and those intentions might require consideration of context in which the language is used policies of the provisions or mischief intended to be cured;^[11] Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41 French CJ
• (c) a Court construing a statutory provision must strive to give meaning to every word of the section;^[12] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69] and [71] per McHugh, Gummow, Kirby and Hayne JJ and the cases there cited.
• (d) resort to the odd or anomalous consequences of a particular construction of legislation is to be approached with caution;^[13] ConnectEast Management Ltd v FCT [2009] FCAFC 22 at par [41] per Sundberg, Jessup and Middleton JJ and
• (e) where different wording is used in a statute, it is to be taken that the legislative intent is to denote different things and where the legislature uses the same wording it is to be taken that the legislative intent is to denote the same meaning.^[14] See Prestcold (Central) Ltd v Minister of Labour [1969] 1 WLR 89 (Court of Appeal) at 97 per Lord Diplock; Eureka Funds Management Ltd v Freehills Services Pty Ltd [2008] VSCA 156 ; at [52] per Cavanough AJA with whom Neave and Redlich JJA agreed on this point; Scott v Commercial Hotel Merbein Pty Ltd [1930] VLR 25 at 30 per Irvine CJ; Freeman v Medical Practitioners Board of Victoria [2000] VSC 547 at [28]-[29] per Balmford J; Registrar of Titles (WA) v Franzon (1975) 132 CLR 611 at 618 per Mason J with whom Barwick CJ and Jacobs J agreed.

46. We add nothing to the bank of knowledge in this field by observing that there are difficulties in applying various income tax law provisions to income and capital gains derived by trustees and that whatever approach is adopted an anomalous outcome can arise if the same approach is adopted in different fact settings.^[15] The most recent and authoritative observation was in Bamford [2010] HCA 10; (2010) 240 CLR 481, [17] Accordingly the rule concerning the caution needed when resort is had to anomalous consequences of a particular construction is particularly apposite in the present setting.

47. Much, if not all, of the Commissioner's case turns on his rejection of any underlying conduit theory and his interpretation of the implications of the decision in Bamford.

48. The Commissioner's contention that the conduit theory has no role to play is based on foundations with which we do not agree. Accordingly, those foundations do not support the conclusions he seeks to draw.

49. The decision in Charles concerned a unit trust and at least in part was based on a decision concerning a more straightforward trust where the terms of the trust left little, if any, doubt as to who was entitled to what. What was said in CPT Custodian was that the conclusion in Charles that:

"…the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made."^[16] (1954) 90 CLR 598 at 609 Dixon CJ, Kitto and Taylor JJ

was significant and that the authority referred to in support of that conclusion might not carry the same weight today. In CPT Custodian the High Court did not overrule the decision in Charles and where there is a straightforward trust, or a trust where who is entitled to what is clear, there is no reason to suggest that the significant conclusion in Charles is not applicable as a guiding principle.

50. The decision in Tindal concerned a statutory definition of "income from personal exertion" in s 6 of the 1936 Act. That definition included the phrase "carried on by the taxpayer" after the phrase "proceeds of any business" and the first mentioned phrase shaped, if not determined, the outcome as the taxpayer did not carry on any business; the trustees of the trust of which she was a beneficiary did.^[17] (1946) 72 CLR 608 at 629–630 per Dixon J and p 633 per Williams J

51. What the decision in Bamford does make clear is that the scheme of the income tax system in the context of income derived by trustees is to examine the actual entitlements of beneficiaries of trusts in accordance with trust law principles and then to fix an income tax burden, with or without particular concessions for defined circumstances, because of that entitlement. The calculation of the burden, or of the concession, may or may not be set by reference to the quantum of the entitlement recognised by reference to trust law principles. In the case of the taxable amounts that arise by operation of s 97 of the 1936 Act the calculation of the burden is made by reference to what might be called a fictitious amount - net income determined under s 95 of the 1936 Act. The proportion of the latter amount which is used to determine taxation burdens may differ from the amount of a beneficiary's entitlements for trust law purposes and the taxation burden so calculated may be seen as anomalous in some situations but that is the scheme of that part of the taxing system and the anomalies have been recognised.

52. The decision in Bamford did not:

• (a) deal with any aspect of the system of taxing income and capital gains derived by trustees beyond the interplay between sections 95 and 97 of the 1936 Act;
• (b) consider the operation of various other provisions of the taxation system which focus on beneficiaries of trusts and taxation burdens or concessions that arise is respect of particular types of income to which they are entitled; or
• (c) discredit the earlier decision of the High Court in Charles.

53. Our task is to determine whether the conclusion reached by the High Court in endorsing what was said by Sundberg J in
Zeta Force Pty Ltd v Commissioner of Taxation^[18] 98 ATC 4681 ; (1998) 84 FCR 70 at 74–75 has a bearing on the operation of s 115-215 of the 1997 Act.

54. The purposes of s 115-215 of the 1997 Act as expressed in s 115-215(1) do not throw any light on the resolution of the competing constructions. The words used in s 115-215(2) and (3), in our view, do. These provisions operate when three conditions are satisfied: first that "you" are a beneficiary of a trust estate, second that "you" have an amount included in assessable income which is a proportion of the net income of the trust estate and, lastly, that the trust estate has capital gains included in its s 95 (of the 1936 Act) net income.

55. While s 97 of the 1936 Act and its interface with the concept of net income as defined in s 95 speaks in terms of shares, s 115-215 of the 1997 Act does not. Subsection 115-215(3) speaks in terms of parts of trust amounts: "… a capital gain equal to the part (if any) of the trust amount that is attributable to the trust gain …" is included in the beneficiary's assessable income under division 102. Different words can be taken to have different meanings. It follows therefore that there is no presumption that s 115-215 of the 1997 Act operates on a proportionate share basis in the same way s 97 of the 1936 Act operates.

56. Further, s 115-215(3) of the 1997 Act uses two particular words: "if any". These words would have no operation if the proportionate share approach advocated by the Commissioner is adopted. The Commissioner's approach to construction of s 115-215(3) would have each beneficiary of a trust who is assessed on a proportion of the s 95 net income of the trust estate under s 97 include the same proportion of the capital gains of the trust in their assessable income. The words "if any" would be otiose. If the approach advanced by Mr Greenhatch is adopted, these words operate according to their terms. They would identify those circumstances where particular beneficiaries are entitled to capital gains and other beneficiaries are not and have the section apply to those beneficiaries who are so entitled.

57. Similarly, s 115-215 of the 1997 Act proceeds on the footing that it is necessary to address each capital gain that is included in the s 95 net income of the trust. This structure to the section, in conjunction with the words 'if any' suggests that the section may differentiate between beneficiaries who are entitled to particular parts of particular gains and treat them accordingly.

58. While s 97 of the 1936 Act may take a proportionate approach in determining how tax on the s 95 net income of a trust is to be borne, and in that sense the task of examining the entitlements to the distributable income of a trust may be spent, the wider system of taxing income derived by trustees is not framed in the same terms.

59. The withholding tax sub-system of the income tax system suggests a test that looks through trust estates and fastens upon amounts of a particular character to which beneficiaries of trusts are entitled. The system assumes that the character and/or identity of amounts pass through the trust relationship such that the identity and/or character of amounts in the hands of the trustee are assumed the same in the hands of the beneficiary of the trust. Section 128A(3) of the 1936 Act provides as follows:

"(3) For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he became so entitled."

60. The subsection has two parts: the first identifying particular amounts and the second a deeming operation so that the rest of the withholding tax rules can operate. The concept of present entitlement is used in the first part of the subsection. That must be the same concept as is used in s 97 of the 1936 Act. Further, the statute requires an enquiry to determine if a person is presently entitled to a particular amount that has been included in the net income of the trust estate. It follows that for the purposes of the withholding tax sub-system of the income tax system the intention appears to be that it is necessary to look through the trust to determine the nature of beneficiaries' entitlements. Put another way, the taxation burden on income of beneficiaries of trusts is not determined by reference to a simple proportionate share of the total of the trust estate. The legislation does not use the term share and it is quite apparent that that is not the focus of attention.

61. The dividend imputation sub-system of the income tax system similarly looks to particular amounts that are received by beneficiaries of trusts.

62. Section 207-5 of the 1997 Act provides for tax offsets for imputation credits and, by operation of s 207-5(4), only allows offsets where the frankable distribution has flowed to a beneficiary of a trust indirectly and does not flow indirectly through it to another entity. This section suggests that the focus is the character of particular distributions flowing through trustees to beneficiaries of trusts. This section does not suggest that the identity and character of amounts are lost (or are no longer relevant to the taxing system) once a beneficiary of a trust's share of taxable income is determined.

63. Section 207-35 of the 1997 Act has an aspect that makes the conclusion amounts passing through trusts to beneficiaries thereof carry the character and identity that they had in the hands of the trustee more compelling. That section includes an example that contemplates differential distributions and recognition of those differential distributions in determining the taxation burdens that are imposed on the beneficiaries of the trust.

64. The conclusion that we reach is that s 115-215 of the 1997 Act is a section that the legislature enacted at a time before there was any caution directed to the decision of the High Court in Charles which is consistent with a suite of provisions that identify:

• (a) particular amounts of income or capital gains of trust estates;
• (b) beneficiaries' particular entitlements to those amounts; and
• (c) recognise those amounts in the hands of the beneficiaries with the same character as they had in the hands of the trustee.

65. Where the terms of the trust allow identification of who is entitled to what, in our view the legislature intended that the taxation treatment follow on a differentiated basis among beneficiaries.

66. It follows that in our view Mr Greenhatch should succeed in his application, the objection decision should be set aside and in lieu thereof the objection should be allowed in full.