Decision impact statement

Pearson v Commissioner of Taxation

Court Citation(s):
[2006] FCAFC 111
2006 ATC 4352
64 ATR 109
(2006) 232 ALR 55

Venue: Federal Court of Australia
Venue Reference No: QUD 345; 346; 347 of 2005
Judge Name: Allsop, Dowsett, Edmonds
Judgment date: 5 July 2006
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Income tax
trust income
whether beneficiary presently entitled
where immediate beneficiary is the trustee of another trust estate
self-executing provisions
contrast with provisions which are not self-executing
relevance of rule in Saunders v Vautier
where additional tax imposed on ultimate beneficiary
remission thereof

Brief summary of facts

1. This matter is a decision of the full Federal Court, on appeal from the decision of the Federal Court reported as [2005] FCA 250.

2. The Appellant (Janette A Pearson) was one of two primary beneficiaries of the Jancy Trust and was entitled to receive distributions of income from the Jancy Trust in the years of income ended 30 June 1992 to 30 June 1994 inclusive.

3. Jancy Pty Ltd as trustee for the Jancy Trust (the Jancy Trust), was the holder of 100 "B" class Income Units in the Corplan Financial Network Unit Trust which entitled the Jancy Trust to the whole of the net income of the Corplan Financial Network Unit Trust ('CFNUT') in the years of income ended 30 June 1992 to 1994 inclusive.

4. The Jancy Trust was also the sole beneficiary of the Corplan Financial Group Unit Trust ('CFGUT') in the years of income ended 30 June 1992 to 1994 inclusive.

5. The Appellant, as a beneficiary of the Jancy Trust, was entitled to receive distributions of income from the Jancy Trust (and, via the Jancy Trust, from both CFNUT and CFGUT).

6. For each of the relevant years, a valid resolution by the trustee of the Jancy Trust was in place to distribute a share of the income of the Jancy Trust to the Appellant.

7. A valid resolution by the trustee was in place to distribute a share of income to CFNUT to the Jancy Trust in the year ended 30 June 1992.

8. No resolution was made in respect of the year ended 30 June 1992 by the trustee for CFGUT as that trust originally disclosed a loss for that year.

9. No resolutions by the trustee were made for the years of income ended 30 June 1993 and 30 June 1994 for CFNUT as that trust originally disclosed a loss for each of those years.

10. As a result of audits, the s 95 net income of each of CFGUT and CFNUT were increased with a consequential increase in the s 95 net income of the Jancy Trust for each of the relevant years of income and a consequential increase in the assessable income of the appellant of each of the relevant years of income. The audit also resulted in increases in the s 95 net income of the Jancy Trust of each of the relevant years of income independent of the adjustments to the net income of the CFGUT and the CFNUT.

11. The Appellant appealed the Federal Court's decision with regards to the liability to include, in her income, distributions from CFGUT and CFNUT via the Jancy Trust as well as the issue of whether additional tax should have been remitted.

Issues decided by the court or tribunal

The full Federal Court found that the Jancy Trust (and, thereby, the Appellant) was presently entitled to the income of the CFNUT for the 1992, 1993 and 1994 income years and the net income of that trust was to be included in the net income of the Jancy Trust for distribution to the Appellant.

The court had regard to the provisions of the CFNUT trust deed in holding that Jancy was presently entitled to the whole of the net income of the CFNUT for the relevant years of income. The court found that Jancy's interest in the net income of the CFNUT was, vested in interest and possession, as Jancy had a present legal right to demand and receive payment of that net income. The court found for example that the deed makes it clear that if, for some reason, the quantum of the net income which is paid or applied does not extend to the whole of the net income of the relevant accounting period, cl 34(6) makes Jancy absolutely entitled to the difference. The court held that none of the observations from CPT Custodian relied on by the appellant for a contrary result affect this conclusion. [16]

The court found that the Jancy Trust was not presently entitled to a distribution from CFGUT for the 1992 income tax year. Therefore, the amount in question was not to be included in the net income of the Jancy Trust for that year for the purposes of section 95 of ITAA 1936. The consequence of this is that the amount in question was not to be included in the assessable income of the Appellant for that year.

The court restated established principles from cases such as Harmer & Ors. "A beneficiary is 'presently entitled' to a share of the income of the trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment." [14]

The rule in Saunders v Vautier had no application to the present case [12]. The question of whether a trust could be brought to an end in reliance on the rule in Saunders v Vautier ultimately depends upon the terms of the constituent document and the circumstances of the particular case [26].

The full Federal Court considered that the Federal Court had not adequately addressed the issue of whether additional tax should have been remitted and accordingly remitted this matter back to the primary judge, Spender J, for decision.

Implications of the Decision

The effect, if any, on our current understanding of the interaction of Division 6 with the principles articulated in CPT Custodian, Halloran, Buckle, and other recent cases, is not settled and may be sufficiently important to seek further judicial clarification on in the appropriate case. This present case itself was found, after consideration, not to be a suitable vehicle for special leave to consider those issues.

The decision was one that relied heavily on the particular facts of the case as found by the court, so that a decision of the High Court would not necessarily settle principles of general application. The case turned, in part, on the construction of the terms of the particular trust instrument. Also, there was a critical factual issue that mitigated against seeking to have the case considered by the High Court. That is the question of whether there was in fact any trust law income for CFGUT in the 1992 year of income [19-22]. The trustee had not resolved to distribute the net income, which, having regard to the trust deed, was fatal to a conclusion that Jancy was presently entitled such income.

Furthermore, the particular questions of law that might need to be answered on appeal were not fully dealt with by the Federal Court. The decision of the full Court does not itself articulate principles of general application.

It would therefore not have been appropriate to seek special leave in the matter if the decision merely turned on the proper construction of the particular instrument of trust, as appears to have been the case.

Administrative Treatment

Implications on current Public Rulings & Determinations

None directly affected by the decision.

Implications on Law Administration Practice Statements

None directly in issue.

Legislative References:
Income Tax Assessment Act 1936 (Cth) (ITAA 1936)
95

Case References:
Federal Commissioner of Taxation v Whiting
(1943) 68 CLR 199

CPT Custodian Pty Limited (previously trading as Sandhurst Nominees (Vic) Ltd) v Commissioner of State Revenue
(2005) 221 ALR 196
(2005) 2005 ATC 4925
(2005) 60 ATR 371

Chief Commr of Stamp Duties (NSW) v Buckle & Ors
192 CLR 226
(1998) 98 ATC 4097
(1998) 37 ATR 393

Halloran v Minister Administering National Parks and Wildlife Act 1974
[2006] HCA 3
(2006) 2006 ATC 4135
(2006) 61 ATR 550

Harmer & Ors v Commissioner of Taxation
(1991) 173 CLR 264
(1991) 91 ATC 5000
(1991) 22 ATR 726

Taylor v Federal Commissioner of Taxation
(1970) 119 CLR 444

Totledge Pty Ltd v Federal Commissioner of Taxation
(1980) 31 ALR 657
(1980) 80 ATC 4432
(1980) 11 ATR 181

Federal Commissioner of Taxation v Totledge Pty Ltd
(1982) 60 FLR 149
(1982) 82 ATC 4168
(1982) 12 ATR 830