ADMINISTRATIVE APPEALS TRIBUNAL

Case [2000] AATA 263

Re Webb and Federal Commissioner of Taxation

Shead JA

23 February, 4 April 2000 - Sydney

Shead JA. The applicant was a trustee during the income tax year ended 30 June 1998 (1998 tax year). The Commissioner of Taxation (the respondent) disallowed an objection by the applicant for an amount of $5935 for the reason that the applicant as trustee was assessable under s 98(4) of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936). The applicant objected to that decision which is the matter for review by this tribunal.

2 The applicant attended the hearing but did not give evidence. He was represented by Mr Lau of L Lau & Co. Mr Mow, of the Australian Taxation Office (the ATO), represented the respondent. The tribunal had the documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) in evidence, numbered T1 to T5 comprising folios 1 to 21. The following exhibits were also tendered to the tribunal:

Exhibit 1: Agreed Statement of Facts dated 21 February 2000;

Exhibit 2: Deed of Settlement between Lek Tiew Kee as the Settlor and Stephen Neville Webb as the Trustee dated 2 February 1979 (the trust deed).

3 As set out in Exhibit 1, the facts were as follows:

(a) the trust was settled with property of $50, on 2 February 1979 by the trust deed between Lek Tiew Kee as the settlor and Stephen Neville Webb as the trustee; and

(b) the trust is discretionary and known as "The Webb Family Trust" as described in the trust deed; and

(d) Marielen P Magabilen is a non-resident beneficiary; and

(e) in October 1997 the trustee acquired 3620 Telstra shares, a publicly listed Australian corporation; and

(f) the trustee held those shares subject to the trust deed; and

(g) the 3620 shares acquired, comprised less than 10% of the issued capital of the Telstra corporation; and

(h) in February 1998, the trustee sold the shares which resulted in a net capital gain of $5935; and

(i) the trustee exercised his discretion on 11 June 1998 and made distributions to the following discretionary beneficiaries; and

(i) Shellaedge Proprietary Limited; and

(ii) Marielen P Magabilen; and

(iii) Annabelle Webb; and

(iv) Nicole Webb; and

(j) the amount of the distribution to Marielen P Magabilen was the sum of $15,255, including $5935 being the amount of the net capital gain derived from the sale of the Telstra shares.

4 The relevant clauses of the trust deed (exhibit 2) provided as follows:

…
2.01 The settlor hereby declares and directs that the trustee shall and the trustee hereby declares that it will hold the settled property upon the trusts and subject to the powers and provisions in this deed contained.

2.02

(a) The trustee until the vesting date shall stand possessed of the trust fund upon trust to distribute and pay the whole or any part of the income derived from it from fiscal year to fiscal year to such one or more of the beneficiaries who are then living or existing exclusive of the other or others of them and/or to such charitable purposes in such proportions and shares as the trustee in its absolute discretion may from fiscal year to fiscal year determine, which determination shall be irrevocable with respect to the fiscal year to which it relates to the intent that any beneficiary in whose favour such determination is made shall be absolutely entitled and permanently entitled to the share of income allocated to him pursuant to such determination.

…

4.01 The trustee in addition to all powers vested in trustees by law shall have and may exercise the following powers:
(k) to determine whether any sums disbursed or received be considered as capital or income or partly as one and partly as the other and whether out of capital or income any expenses losses or outgoings ought to or shall be borne or paid.

…

5 On 27 May 1999 the 1998 tax year notice of assessment issued to the applicant stated the taxable income was $5935 as a capital gain and included the additional information:

The beneficiary has been deemed to be a non-resident of Australia for income tax purposes - no tax-free threshold is available to non-residents.

If your residency status has changed, please read the information on residency in TaxPack.

Credit is available to the beneficiary for tax paid in accordance with subsubsection 98A(2) of the ITAA 1936. (T3, folio 10.)

Applicant's submissions

6 The applicant's objection to the notice of assessment, and the submission at the hearing was as follows:

5. Income in the hands of a presently entitled beneficiary retains the same character as that income had in the hands of the Trustee. Hence, any part of the net income of the trust estate that represented a capital gain to the trust should retain its character as a capital gain in the hands of Marielen P Magibilen, the non-resident beneficiary presently entitled. Consequently Marielen P Maibilen [sic] is deemed to have disposed of the relevant assets resulting in the derivation of capital gain. (T4, folios 11-12.)

7 It was contended that:

(a) Part IIIA of the ITAA 1936 applied only in respect of disposal of assets; and

(b) Part IIIA of the ITAA 1936 also applied to a non-resident in respect of disposal of a taxable Australian asset; and

(c) pursuant to s 160T, a disposal of an asset shall be deemed to have been a disposal of a taxable Australian asset if the conditions in that section were satisfied. Briefly where the asset comprised shares in an Australian public company, the asset shall be deemed to be a taxable Australian asset if it comprised not less than 10% of the issued capital of the company; and

(d) the conditions specified in s 160T had not been satisfied in that 3620 shares in Telstra corporation disposed of during the 1998 year was less than 10% of the issued capital and consequently there was no deemed disposal of a taxable Australian asset.

8 Also, it was noted that over the last 4 or 5 years the applicant's representative had lodged objections in identical fact situations for this and other taxpayers upon the foregoing basis and those objections had been allowed (T4, folios 13 to18).

9 The applicant's representative argued that a doctrine of attribution (also referred to as the "look through" or "conduit theory" approach) applied so that the non-resident beneficiary made the gain on the disposal of the shares. It was also argued that as the non-resident beneficiary did not beneficially hold more than 10% of the issued share capital, the disposal did not qualify as a disposal of a taxable Australian asset pursuant to s 160T and consequently the capital gain was not assessable income of the non-resident beneficiary.

10 It was contended that the argument was supported by paras 13 and 16 of IT 2328 and the examples given in the 1998 Taxpack at questions 10 and 13.

Respondent's submissions

11 The overall effect of the provisions in Div 6 of Pt III was that the non-resident's share of net income of a trust estate was assessed to the trustee under s 98(4). The non-resident is also taxed under s 99A but receives a credit for the tax paid by the trustee. Part IIIA's s 160L(1), together with ss 160ZC and 160ZO(1), had resulted in the capital gain being assessed to the trustee of the trust.

12 The respondent's representative conceded that the several objections referred to in para 8 were wrongly allowed.

Relevant legislation

13 As can be seen from the relevant submissions, the relevant law, notwithstanding the introduction of the Income Tax Assessment Act 1997 (Cth), were substantial portions of the ITAA 1936. In particular Div 6 (ss 95-102) of Pt III which is the basic assessing division in respect of trust income and "Pt IIIA - Capital Gains and Capital Losses", both of which were still in force at the end of the 1998 tax year.

14 The relevant provisions of the ITAA 1936 read as follows:

98(4) Where -
(a) a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate:
(i) is not a company and is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;

(ii) is a non-resident at the end of the year of income; and

(iii) is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; and

(b) the trustee of the trust estate is not assessed and is not liable to pay tax in pursuance of subsection (1) or (2) in respect of any part of that share of the net income of the trust estate,

the trustee of the trust estate shall be assessed and is liable to pay tax in respect of:
(c) 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; and

(d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,

as if it were the income of an individual and were not subject to any deduction.

160L(1) Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere or not situated anywhere, that:
(a) immediately before the disposal took place, was owned by:
(i) a person (not being a person in the capacity of a trustee) who was a resident of Australia; or

(ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and

(b) was acquired by that person on or after 20 September 1985.

160C(1) A reference in this Part to a taxpayer, in relation to an asset that has been disposed of or in relation to a capital gain or listed personal-use asset gain that accrued or a capital loss or a listed personal-use asset loss that was incurred in respect of such an asset, is a reference:
(a) except where paragraph (b) applies - to the person who owned the asset immediately before the disposal took place; or

(b) where the disposal resulted from an act that is, by virtue of subs 160V(1) or s 160W, deemed to be the act of a person other than the person who owned the asset immediately before the disposal took place - to that other person.

160T(1) For the purposes of this Part, a disposal of an asset shall be deemed to have been a disposal of a taxable Australian asset if:
…

(d) the asset comprised a share, or an interest in a share, in a company that, in relation to the year of income of the company in which the disposal took place, was a resident of Australia and was not a private company and at any time during so much of the period of 5 years immediately preceding the disposal as occurred after 19 September 1985:
(i) the taxpayer or an associate of the taxpayer was the beneficial owner of; or

(ii) any associates of the taxpayer, or the taxpayer and any associate or associates of the taxpayer, together were the beneficial owners of;

not less than 10%, by value, of the shares of the company (excluding any shares that carried no right to participate beyond a specified amount in a distribution of either profits or capital);

160Z(1) Subject to this Part, where an asset other than a personal-use asset has been disposed of during the year of income:
(a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income and to have so accrued at the time of the disposal; or

(b) if the reduced cost base to the taxpayer in respect of the asset exceeds the consideration in respect of the disposal - a capital loss equal to the excess (less any amount by which that loss is reduced under subparagraph 245-90(2)(b)(i) of Schedule 2C) shall be deemed for the purposes of this Part to have been incurred by the taxpayer during the year of income and to have been so incurred at the time of the disposal.

Reasons

15 The issue was whether the applicant was assessable to the amount of $5935 being the amount of the net capital gain derived from the sale of the Telstra shares and included in the distribution to Marielen P Magabilen, the non-resident beneficiary. It must therefore be determined whether the capital gain from the sale of the shares was included in the "net income of the trust" as the argument of the respondent contended or whether, as the applicant argued, the non-resident beneficiary made the gain on the disposal of the shares.

16 In the 1998 tax year, the applicant in his capacity as trustee made distributions amongst discretionary beneficiaries. At the beginning of the proceedings, it had been agreed that the amount of the distribution to Marielen P Magabilen was the sum of $15,255, including $5935 being the amount of the net capital gain derived from the sale of the shares.

17 The applicant in the capacity of trustee was the legal owner of the shares. The shares were not owned by the beneficiary. Gartside and Another v IRC [1968] AC 553 and Re Weir's Settlement; MacPherson and Another v IRC [1971] Ch 145 are authority for the proposition that beneficiaries of a discretionary trust do not have any interest either individually or collectively in the property or income of the trust. The tribunal finds the trustee owned the shares.

18 Section 160L(1)(a)(ii) provides that Pt IIIA applies in respect of every disposal on or after 20 September 1985 of an asset that immediately before the disposal took place was owned by "(ii) a person in the capacity of a trustee of a resident trust estate or of a resident unit trust;". The tribunal finds that the taxpayer for the purposes of Pt IIIA was the trustee.

19 In relation to the applicant's argument concerning s 160T, the tribunal noted the respondent's analysis at T2, folios 6 to 8, and, in particular the contention that:

Although the ATO has ruled that a net capital gain retains its character as a capital gain in the hands of a beneficiary, it is not a logical progression to conclude that it has the character of a capital gain as if the relevant asset were disposed of by the beneficiary. Furthermore, (the) argument of applying, in effect, a "look through" approach completely ignores the requirements of Div 6 … .

The tribunal considers that s 160T is relevant to the taxation of a non-resident taxpayer under the capital gains tax provisions. In this case, the non-resident beneficiary was not the relevant taxpayer who derived the capital gain.

20 On the sale of the shares, the trustee's gain was within the scope of Pt IIIA pursuant to s 160L(1), together with ss 160ZC and 160ZO(1). That capital gain from the sale of the shares was included in the net income of the trust pursuant to s 95. Section 95 so far as is relevant provides:

"net income", in relation to a trust estate, means 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 …

21 The observations of Sundberg J in Zeta Force Pty Ltd v FCT (1998) 84 FCR 70 at 74-5; 39 ATR 277 at 282; 98 ATC 4681 at 4686 in relation to s 97(1) that:

The words "income of the trust estate" in the opening of part of s 97(1) refer to distributable income, that is to say income ascertainable by the trustee according to appropriate accounting principles and the trust instrument. That the words have this meaning is confirmed by the use of elsewhere in Div 6 of contrasting expression "net income of the trust estate". The beneficiary's "share" is his share of the distributable income.

Having identified the share of the distributable income to which the beneficiary is presently entitled, s 97(1) requires one to ascertain "that share of the net income of the trust estate". That share is included in the beneficiary's ascertainable income. The expression "net income of the trust estate" in para (a)(i) has the meaning given it by s 95(1) - taxable income as opposed to distributable income.

seemed applicable to those words in s 98 since s 98 employs the same contrasting words.

22 Having regard to the foregoing and the terms of cl 20.02(a) of the trust deed, it followed that the trustee's resolution was to distribute income of the trust to the beneficiary. No technical points were taken on the validity of the distribution. Accordingly, there is an amount that is legally available for distribution such that a beneficiary may demand payment of it from the trustee and so the tribunal finds that Marielen P Magibilen was "presently entitled" to the income of the discretionary trust at the end of the relevant income year. Marielen P Magibilen was a non-resident beneficiary. That being so, the relevant terms of s 98(4) was satisfied. There was a beneficiary of a trust estate who was presently entitled, that beneficiary was a non-resident at the end of the relevant year and none of the other disqualifying conditions in s 98(4) applied. Accordingly, the trustee of the trust estate is prima facie liable to pay tax in respect of net income of the trust estate attributable to Australian sources in the manner laid down by s 98(4).

23 It follows from the foregoing reasons, that the objection decision under review is affirmed.