THOMAS NOMINEES PTY LTD v THOMAS & ORS

Judges:
Applegarth J

Court:
Supreme Court of Queensland, Brisbane

MEDIA NEUTRAL CITATION: [2010] QSC 417

Judgment date: 11 November 2010

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Applegarth J

Introduction

1. The applicant, a trustee, applies pursuant to s 96 of the Trusts Act 1973 (Qld) for directions as to the proper construction of a trust deed and resolutions purporting to distribute net income comprising, amongst other things, dividends and franking credits, to two beneficiaries. The beneficiaries are the first respondent, Martin Andrew Thomas, and the second respondent, Martin Andrew Pty Ltd.

2. In each of the relevant income tax years, the applicant, as trustee of the Thomas Investment Trust ("the Trust"), resolved to distribute all the trust income to these beneficiaries with the intent that no income was to be left in the trust undistributed. In each of these years the Trust received franked dividends, and prior to making resolutions about distributions to beneficiaries, the trustee's sole director, Mr Thomas, and the trust's accountant, Ms Abbott, would arrive at a preferred distribution of franking credits and the rest of the net income of the trust for the relevant year. According to Ms Abbott, the proposed distributions were intended to ensure that all the taxable income of the trust (described also as "the s 95 net income"), and all the franking credits, were "distributed and allocated among the beneficiaries so that (i) that income became the beneficiaries' assessable income under s 97, (ii) the beneficiaries could utilize the franking credits distributed to them, (iii) there was no amount for which the trustee was liable to tax under s 99A and (iv) there were no wasted franking credits being wasted by being left with the trustee".

3. Ms Abbott would submit draft distribution resolutions for Mr Thomas' approval. After discussions between them the draft resolutions would be adopted, or amended and adopted. The resolutions were intended to reflect the trustee's intention which was to ensure that it distributed income and franking credits in a way that would not attract more income tax than was necessary.

4. In each of the relevant tax years, being the income tax years 30 June 2005 to 30 June 2008, Ms Abbott prepared two distribution resolutions. One concerned the distribution of the net income (which was not understood to include, and was not intended to include franking credits). The other concerned the distribution of the franking credits (which Ms Abbott and Mr Thomas understood had to be allocated by the trustee among the beneficiaries presently entitled to the net income). The resolutions could have been in one document, but they were recorded in two documents.

5. The evidence concerning the intention of the trustee is clear. Mr Thomas' intention as the sole director of the trustee was to ensure that every year the Trust had "all its income cleaned out and distributed to particular beneficiaries leaving no income sitting there in the Trust undistributed". Before the end of each financial year, he was aware of the amount of the dividends received by the trustee and the amount of franking credits available for the trustee to distribute. He was aware of his own personal taxation circumstances. His intention in the case of the two distribution resolutions for each year was to "make sure that I got the franking credits because that was by far the greatest benefit from the Trust for me personally where I was in a personal loss position due to my option trading activities". Mr Thomas had no intention, in executing the resolution that did not deal with franking credits, to deal with franking credits. His intention in respect of that resolution was solely to deal with the other net income of the Trust. In short, the intention was that one resolution dealt with franking credits, and the other resolution dealt with the other net income of the Trust. The intention of the Trustee is clear, as is the purpose of allocating franking credits and other net income in the way recorded in the resolutions.

6. Ms Abbott understands from her discussions with the Australian Taxation Office ("ATO") that it suggests that under the resolutions the franking credits were intended to be allocated in accordance with the resolution to distribute net income, not the other resolution to distribute franking credits. The ATO's suggestion does not accord with the trustee's intention in making the resolutions. It does not reflect Mr Thomas' instructions to Ms Abbott in preparing the resolutions. It does not accord with the terms of the resolutions which, when read together, clearly indicate that a separate, specific resolution relates to the distribution of franking credits.

7. Given the uncertainty injected by the ATO's suggestion about how the resolutions are to be interpreted, the trustee seeks directions from the Court as to their proper construction.

8. The applicant and the respondents have acted on the basis that the resolutions in fact and law did what the trustee intended them to do, that is to say, confer entitlements to the franking credits as set out in the resolutions, so as to confer on Mr Thomas the amount of franking credits set out in the resolutions. Mr Thomas has in fact received substantial payments from the Commissioner of Taxation in respect of the franking credits distributed to him.

9. If I do not conclude that the resolutions should be construed in accordance with the applicant's submissions, and if I conclude that the trustee failed to ensure that the resolutions gave effect to its intention of passing the franking credit benefits to Mr Thomas and to Martin Andrew Pty Ltd, then the applicant seeks an order for equitable rectification in accordance with the principles applied in
Oates Properties Pty Ltd v Commissioner of State Revenue^[1] [2003] NSWSC 596 , [24] and ff; (2003) 53 ATR 308 . and the authorities discussed by Gzell J in that case.

The proceeding

10. The respondents were present at the hearing, but played no active part in it. The other beneficiaries of the Trust were made aware of the application, sought and obtained independent legal advice in relation to it and support it.

11. Since the application was prompted by a query raised by officers of the ATO, and the application involves consideration of provisions of Commonwealth taxation legislation, the applicant sensibly and properly placed the Commissioner of Taxation on notice of the application. Despite the Commissioner's interest in the proper interpretation of such legislation, by a letter dated 24 September 2010 a senior officer of the ATO informed the applicant's solicitor that he did not believe it was necessary or appropriate for the Commissioner to be a party to the application. The Commissioner was given the opportunity to appear and to contradict, if necessary, any submissions of fact or law made by the applicant, and to generally assist the Court concerning the interpretation of legislation that the ATO administers. The applicant, through its solicitor, indicated to the ATO that if the Commissioner appeared in order to make any submissions concerning the law, the applicant would not seek any costs orders against the Commissioner.

12. Section 96 of the Trusts Act provides:

• " 96 Right of trustee to apply to court for directions
  • (1) Any trustee may apply upon a written statement of facts to the court for directions concerning any property subject to a trust, or respecting the management of administration of that property, or respecting the exercise of any power or discretion vested in the trustee.
  • (2) Every application made under this section shall be served upon, and the hearing thereof may be attended by, all persons interested in the application or such of them as the court thinks expedient."

13. It is unnecessary to address the principles governing applications under s 96 of the Trusts Act 1973 (Qld). They are helpfully summarised in Ford & Lee's Law of Trusts.^[2] Para [17,200]. The proper administration of the Trust is hampered to a significant extent by the uncertainty that arises as a result of the suggestion apparently adopted by the ATO about the construction of the resolutions and their effect in distributing franking credits. In the circumstances that have developed, it is appropriate that the Court exercise the discretion under s 96 of the Act so as to advise the trustee concerning the issue of construction so that, if the issue of construction is not determined in accordance with the applicant's principal contention, the applicant may seek, in the alternative, rectification of the relevant resolutions.

Facts

14. The application was accompanied by a written statement of facts. That statement of facts is supported by affidavits filed and served in the proceeding and that were read at the hearing. I shall outline the relevant facts that give rise to the issue of construction.

15. On 1 February 1979 the Thomas Investment Trust was settled by deed. The deed was amended from time to time. I shall refer to the deed, as amended, as "the Deed".

16. At all material times, including for the income tax years ended 30 June 2005 to 2008 ("the Income Years"), Mr Thomas controlled the trustee and also a company, Martin Andrew Pty Ltd. Mr Thomas as director of the trustee decided what resolutions the trustee would make in accordance with the Deed. The beneficiaries of the Trust included Martin Andrew Pty Ltd and Mr Thomas.

17. At all material times, including for the Income Years, Ms Abbott was the accountant and taxation advisor for Mr Thomas, the Trustee and Martin Andrew Pty Ltd. She liaised regularly and directly with Mr Thomas.

18. In each of the Income Years, the trustee received dividends that were franked in accordance with Div 207 of the Income Tax Assessment Act 1997. The trustee derived other income in each of the Income Years and incurred expenses in deriving that income.

19. Mr Thomas' and Ms Abbott's states of mind in relation to the resolutions the subject of this application, and in particular the taxation outcome that they intended to achieve, are relevant facts. As Bowen LJ stated in
Edgington v Fitzmaurice^[3] (1885) 29 Ch D 459 at 483 . "the state of a man's mind is as much a fact as the state of his digestion".

20. Mr Thomas and Ms Abbott each believed that by reason of the operation of the tax legislation:

• (a) the trustee was required each Income Year to calculate the amount liable to taxation in accordance s 95 of the Income Tax Assessment Act 1936, being assessable income less allowable deductions. This amount is referred to as "the s 95 net income".
• (b) The amount of the dividends and other income was assessable income.
• (c) The amount of the franking credits was assessable income.
• (d) The trustee's expenses were allowable deductions.
• (e) In relation to s 95 net incomes, all of it must be distributed by the trustee among the beneficiaries lest the trustee be liable to tax at the highest marginal tax rate under s 99A of the 1936 Act.
• (f) In relation to franking credits, they can be allocated by the trustee among the beneficiaries and, in that case, two statutory advantages are conferred on the beneficiary to whom a franking credit is allocated:
  • (i) a rebate of tax otherwise payable by that beneficiary, and
  • (ii) in the case of an individual (ie Mr Thomas) but not a company (ie Martin Andrew Pty Ltd), a cash entitlement as against the Commissioner of Taxation in relation to the excess not used for (i).

21. In each of the Income Years, before formal distribution resolutions were made, Ms Abbott and Mr Thomas discussed what distributions should be made, having regard in particular to the amount of s 95 net income and the statutory advantages conferred by the franking credits on those beneficiaries entitled to them under Div 207.^[4] Affidavit Beth Abbott paras 17, 26–41; affidavit Martin Thomas para 55.

22. The two principal taxation factors referred to above - the desirability of distributing all the s 95 net income and the statutory advantages of allocating franking credits among individual and corporate beneficiaries effectively - were known to and informed the discussions between Mr Thomas and Ms Abbott.

23. The overriding factor in Mr Thomas' and Ms Abbott's view was to ensure that the full benefits of the franking credits were obtained, especially that Mr Thomas as an individual beneficiary would be allocated the franking credits to allow him to claim cash from the Commissioner of Taxation. Mr Thomas ordered his affairs based on the anticipated franking credits that he would receive from the Commissioner.

24. Mr Thomas gave Ms Abbott instructions to draft resolutions that would be effective to (i) distribute all of the s 95 net income each year so that the Trustee would not be liable to tax under s 99A and (ii) confer on himself and on Martin Andrew Pty Ltd the maximum advantages related to the franking credits, being (a) to reduce the tax otherwise payable by himself and by Martin Andrew Pty Ltd to nil and (b) to confer on himself the statutory right to cash as against the Commissioner of Taxation in relation to the excess not used in (a).

25. For each of the Income Years Ms Abbott calculated the expected s 95 net income for the year and determined the amount of franking credits available for allocation. The franking credits available for distribution far exceeded the s 95 net income in each Income Year.

26. Ms Abbott then chose to draft dual resolutions for simultaneous execution (rather than one resolution) based on Mr Thomas' wishes. The first resolution purported to deal with the franking credits and other special tax income (namely, a foreign tax credit). In terms, it distributed the vast bulk of the franking credits to Mr Thomas and distributed to Martin Andrew Pty Ltd only so much as was required to pay the tax payable by that company. The second resolution purported to deal with all the trust income that did not relate to franking credits or other special tax income. It distributed a cash amount to Mr Thomas and the balance to Martin Andrew Pty Ltd.

27. For each of the Income Years Mr Thomas as director of the trustee made formal resolutions in the terms as drafted by Ms Abbott, believing that they were effective to achieve his intentions.

28. Ms Abbott prepared the taxation returns for the trustee, Mr Thomas and Martin Andrew Pty Ltd based on her belief that the resolutions were effective.

29. In each of the Income Years Mr Thomas received from the Commissioner of Taxation the intended amounts.

30. The ATO has discussed these resolutions with Ms Abbott. The ATO has advanced the view that the resolution that dealt with net income, and not the resolution that dealt specifically with franking credits, applied to franking credits.

The Deed

31. Clause 4(1) of the Deed empowers the trustee to apply "the income of the Trust Property" in such manner as the trustee, subject only to the provisions contained in the Deed, in the trustee's absolute and uncontrolled discretion shall think fit for the benefit of beneficiaries "equally or unequally and to the exclusion of any one or more of any such beneficiaries as it shall see fit …". Clause 4(1) also contains a default distribution provision of a kind that is common in trust deeds in this country. It provides that if during any year the trustee had not paid or applied the whole of the net income of the Trust Property by the exercise of its discretion, then such remaining net income for that year that had not been so paid or applied will be held by the trustee upon trust to pay or apply the same to and for the benefit of certain identified beneficiaries in equal shares.

32. Trust income and trust expenses may differ from income as it is classified for taxation purposes and expenses that are allowed as deductions from that income. In general terms, by Div 6 (Trust income) of Pt III (Liability to taxation) of the Income Tax Assessment Act 1936, the trustee must calculate three classes of income: exempt income, non-assessable non-exempt income, and net income. The net income is then taxed, either in the hands of the trustee, or in the hands of beneficiaries, or both, depending on how the trustee deals with the income.

33. Under s 99A of the 1936 Act the trustee is liable to tax at the top marginal rate on the third class - net income - if what can be distributed by the trustee as income under the trust deed is not distributed among the beneficiaries by 30 June. Against that background, the provisions of clause 4 of the Deed are typical of the terms of discretionary trusts that impose a duty upon a trustee each year to consider distributing the trust income, and provide a default mechanism if it does not, with the default mechanism being preferred to the application of s 99A.

34. Clause 4(2) of the Deed empowers the trustee to separately record different categories of income received into the Trust Property, and clause 4(4) authorises a resolution or determination of the trustee by which income of the Trust Property is distributed to "separately deal with the whole or part of the income of a category so that the same or any part thereof may be specifically paid, applied or set aside for the benefit of any one or more of the beneficiaries exclusive of the other or others …". Clause 4(2) is in the following form:

• "4(2) The Trustee may in the books of account and records of the Trust separately record each of the following categories of income received into the Trust property:
  • (a) dividends which under the Income Tax assessment Act 1936 - as amended hereinafter referred to as 'the Act':
    • (i) are fully franked;
    • (ii) are unfranked;
    • (iii) to which a foreign tax credit attaches; or
    • (iv) any other separately identifiable taxation consequence or benefit is attached or arises.
  • (b) income, including capital gains, which under the Act:
    • (i) has an Australian source;
    • (ii) has an ex-Australian source;
    • (iii) has a foreign tax or other credit attached; or
    • (iv) is exempt or otherwise liable not to be taxed;
    • (v) has or gives rise to any other separately identifiable taxation consequence or benefit."

The formatting or the wording of sub-clause 4(2)(a)(iv) is awkward. However, it is reasonably clear that the taxation benefit given by a franking credit is one of the categories of income received into the Trust Property that may be separately recorded in the books of account and records of the Trust, and separately dealt with in a resolution or determination of the trustee by which income is distributed.

35. In short, the Deed empowers the trustee to separately deal with franking credits so that they may be applied for the benefit specifically of any one or more of the beneficiaries. The Deed enables the trustee to stream various categories of income among the beneficiaries so as to result in different taxation outcomes for those beneficiaries. The Deed treats the separately identifiable taxation benefit that is a franking credit as income of the Trust Property that is capable of distribution.

The issue

36. Unless those franking credits are distributed to individual beneficiaries they may be "wasted" if they remain in the hands of the trustee. On the basis of the uncontested facts before me, the relevant resolutions made pursuant to the power conferred by clause 4 of the Deed were intended to distribute all of the income that was capable of distribution, including franking credits. This meant that the default provision did not operate.

37. By reason of trustee expenses, the net income was much less than the (gross) income that comprised franking credits. The 2008 tax year may be used as an example. The s 95 net income was $142,651. This included franking credits of $1,073,619 and other income. In such circumstances, the clear intention of the trustee, as reflected in the intention of its sole director and the advice of Ms Abbott upon which the trustee relied, was to resolve to have franking credits of $1,030,838.70 distributed to him. This was recorded in the separate resolution that addressed imputation credits and foreign tax credits. In addition to the benefit of these franking credits, a separate resolution applied $50 of net income for the benefit of Mr Thomas, whilst the balance of the net income was applied for the benefit of Martin Andrew Pty Ltd, so as to ensure that all of the distributable income was distributed.

38. It seems uncontroversial that the benefit of franking credits may be distributed to beneficiaries who are presently entitled to a trust's distributable income, even if the s 95 net income is less than the amount of the franking credits that are included in assessable income. There is no apparent controversy that a beneficiary may obtain the benefit of franking credits.^[5] See the examples appearing in the Australian Tax Handbook 2010 , example [27,370].

39. Gross dividends do not need to be traced and distributed to a particular beneficiary for the beneficiary to obtain the benefit of franking credits. The Australian Tax Handbook 2010 gives the following example:

"A trustee receives a franked distribution of $3,500 (with $1,500 franking credits attached).

The trust has deduction of $5,500 that relate to the distribution. The trustee derives other assessable income of $5,000. The net income of the trust is $4,500. The trustee has 3 equal beneficiaries to which the $4,500 is distributed.

The franked distribution is taken into account in determining the net income of the trustee and, as such, each beneficiary's share of the franked distribution is $500, even though they did not receive any of the franked distribution because the trustee's deductions exceeded the amount of the franked distribution."

40. The issue in this matter is whether the franking credits which formed part of the Trust Property in each relevant year were distributed to the beneficiaries in accordance with the resolutions that recorded them being applied, being resolutions that dealt specifically with the franking credits. The issue is whether the resolution that was intended to distribute franking credits was effective to pass them to the beneficiary recorded in the resolution that dealt with franking credits, or whether, as the ATO apparently suggests, franking credits were allocated in accordance with the other resolution. The ATO's suggestion is at odds with the terms of the resolutions which were executed contemporaneously, and does not accord with the clear intent of the trustee. That said, I apprehend that the essential issue in respect of which the trustee seeks direction pursuant to s 96 of the Trusts Act is whether the Deed permits a differential allocation of franking credits so as to achieve the outcome intended by the trustee's resolutions. If it does not, the trustee seeks rectification of the resolutions.

The applicant's submissions

41. The applicant submits that an answer to the question of whether a differential allocation is permitted, such that the dual resolutions were effective to distribute the franking credits as intended, is to be found in an example given in s 207-35 and in the general law. It submits that under Div 207 franking credits are allocated to those beneficiaries to whom the trustee (or the relevant trust deed) specifically allocates them.

42. A convenient starting point against which to consider the example contained in s 207-35 is s 207-20 which provides:

"207-20 General rule - gross up and tax offset

• (1) If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity's assessable income in relation to the distribution under any other provision of this Act.
• (2) The receiving entity is entitled to a tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution."

Reliance is placed upon what was said by Brennan J in
American Dairy Queen (Qld) Pty Ltd v Blue Rio Pty Ltd,^[6] (1981) 147 CLR 677 , 686 . in respect of an interest created under the Land Act 1962 (Qld):

"By adopting the terminology of leasehold interests, the Parliament must be taken to have intended that the interests of a lessee, transferee, mortgagee or sub-lessee are those of a lessee, transferee, mortgagee or sublessee at common law, modified by the relevant provisions of the Act. The incidents of those interests are the incidents of corresponding interests at common law modified by the relevant provisions of the Act."

Adopting the same approach to interpretation, the applicant submits that by providing for franking credits to be included as assessable income, the Parliament has given franking credits the normal attributes of income, except as modified by relevant provisions of the Act. These include the capacity to be dealt with by resolution of the trustee of a trust in the same way that other income can be dealt with.

43. The applicant further relies upon s 207-35(3) as a provision allowing for allocation:

"207-35 Gross-up - distribution made to, or flows indirectly through, a partnership or trustee

Additional amount of assessable income

…

Allocation of the additional amount of assessable income

• (3) Despite any provisions in Divisions … 6 of Part III of the [1936 Act], if:
  • (a) a * franked distribution is made, … to … the trustee of a trust in an income year; and
  • (b) the assessable income of the … trust for that year includes an amount (the franking credit amount ) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and
  • (c) the distribution flows indirectly to an entity that is … a beneficiary or that trustee of the trust; and
  • (d) the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution;

then, the entity's assessable income for that year also includes so much of the *franking credit amount as is equal to its *share of the *franking credit on the distribution.

Example: A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust's assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year.

There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust's income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.

The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207-55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P's assessable income also includes the full amount of the franking credit (as P's share of the franking credit on the distribution is $30 under section 207-57). Q's share of the net income therefore does not include any of the franking credit." (emphasis added)

44. Although s 97 of the 1936 Act takes a proportionate approach to the distribution of net income, s 207-35 is expressed to be an exception to Div 6. In this regard, the example recognizes that a trust deed can deal differentially with franked distributions so as to direct the benefit of the franking credit amounts to one beneficiary to the exclusion of others, or in different proportions among the beneficiaries. The applicant submits that it follows that the settlor may give the trustee a discretion to deal with the franked distributions in the same way.^[7] Queensland Trustees Limited v Commissioner of Stamp Duties (1952) 88 CLR 54 .

45. The example in s 207-35 indicates that the franking credits need not follow the shares of net income included in each beneficiary's assessable income on a pari passu basis. That is, if the trustee is able, in a discretionary trust (as in this case), to distribute franked dividend income to one beneficiary and other income to another beneficiary, the franking credits follow the income that is attributable to the franked dividends because that is where the benefit of the franked distribution received by the trustee is conferred. Further, it is unnecessary for the s 95 net income to exceed the franking credits included in assessable income for those credits to pass through to the beneficiaries.

Consideration of the applicant's submissions

46. Caution is required in assuming that something that is "income" according to the ordinary meaning of that word, or which is income for the purposes of the administration of a trust, is also income for the purpose of a revenue statute. A revenue statute may adopt, qualify or supplant the meaning of such a term.^[8] Commissioner of Taxation v Bamford (2010) 264 ALR 436 at 440 [17] . However, in making provision for franking credits to be included as assessable income, and for their allocation in accordance with s 207-35, the Parliament seemingly has given to franking credits the usual attributes of income, save as modified by the provisions of the Act.

47. If, however, franking credits are not "income" according to the ordinary meaning of that word then under the terms of the Deed they are a category of income received into the Trust Property because they are a taxation benefit that attaches or arises in respect of fully frank dividends. They are included amongst the categories of income governed by clause 4 of the Deed, and fall to be distributed in accordance with its provisions.

48. I have not had the advantage of submissions from the ATO, despite it being given an opportunity to appear and make submissions in respect of these matters. In the absence of oral or written submissions from the ATO, I have regard to correspondence sent by it to the applicant's solicitors dated 15 September 2010. In that letter a Deputy Commissioner of Taxation wrote:

"… we note that the application refers to a resolution or resolutions that purport to distribute net income that includes, inter alia, franking credits. The Commissioner's view is that there is some uncertainty as to whether franking credits can ever form part of the income of a trust estate for trust law purposes - see the Commissioner's Decision Impact Statement published on 2 June 2010 in relation to the Bamford decision. That uncertainty arises because franking credits are merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach. That is, for example, if the trustee receives a fully franked dividend of $70 with a franking credit of $30 attached to it, only $70 comes into the trust. The $30 franking credit is merely a concept of the income tax regime, taken into account in determining the tax position of the trustee and/or relevant beneficiaries."

49. A contention of this kind made in correspondence is no substitute for submissions to the Court that address the submissions of the applicant. However, without further submissions on behalf of the ATO I have difficulty in accepting that a franking credit is "merely a concept of the income tax regime, taken into account in determining the tax position of the trustee and all relevant beneficiaries." Franking credits may be a creature of income tax legislation, but this does not relegate them to the status of a mere concept. Taxation legislation has given them at least some of the attributes of income. This is apparent in terms of the legislation. Contrary to the position articulated by the ATO, franking credits would appear to be an accretion to the trust fund, and something of substantial value. They are not merely a concept of the income tax regime, they are a benefit. As illustrated in this case, they have attributes of income, illustrated by the fact that individuals such as Mr Thomas are able to "cash in" franking credits. In any event, they confer a financial advantage which fall to be dealt with by the trustee.

Conclusion

50. The resolutions under consideration purported to allocate the franking credits differentially. I am unable to see why the trustee was not empowered to do so. I accept the applicant's argument that the Parliament, by providing as it has for the inclusion of franking credits as assessable income and for the allocation of the assessable income of which they form part, has given franking credits many of the same attributes as other categories of income. Franking credits are a benefit that the Deed authorised the trustee to distribute as part of the income of the Trust. The Deed authorised the trustee to distribute them differentially between beneficiaries.

51. I conclude that the resolutions were effective to distribute the franking credits according to the intent of the trustee, as reflected in the dual resolutions. The franking credits were allocated in accordance with the resolutions that specifically addressed them, and not, as the ATO apparently suggests, by the other resolution that dealt with other categories of net income.

52. Upon the facts stated in exhibit 1 (the Statement of Facts), I conclude that the applicant's resolutions to distribute net income for the income tax years 30 June 2005 to 30 June 2008 were, upon the proper construction of those resolutions and the Deed, effective to distribute franking credits in accordance with the intention of the trustee, namely that franking credits form part of the net income of the Thomas Investment Trust ABN 242 032 557 in each of the tax years, and that franking credits were distributed in accordance with the resolution made each year that specifically addressed franking credits.

Alternative relief

53. If, contrary to the foregoing, I had reached the conclusion that the trustee did not document the resolutions so as to give effect to its intention of passing the franking credit benefits to the respondents, then I would have ordered the resolutions to be rectified so that they reflected the Trustee's intention in making them.

54. The requirements for equitable rectification in circumstances such as these, and the relevant authorities, are set out in the judgment of Gzell J in Oates Properties Pty Ltd v Chief Commissioner of State Revenue.^[9] Supra. However, in the light of my acceptance of the applicant's principal submission concerning the issue of construction it is unnecessary to order the alternative relief sought in the application.

55. I will hear from the applicant concerning the form of orders to be made.