On 24.4.23, the ATO issued a ‘Decision Impact Statement‘ on the effect of the Full Federal Court case of CofT v Guardian AIT Pty Ltd atf Australian Investment Trust [2023] FCAFC 3. This appeal was watched closely, as it involved the ‘Trust Stripping’ anti-avoidance provision” s100A of the ITAA36, which is rarely litigated. At first instance the Commissioner failed in his bid to apply s100A (see related TT article), and and Part IVA. The Commissioner appealed and lost on the s100A point (based on findings of fact, at first instance), but won on Part IVA in only the 2013 year. Part IVA disallows the relevant ‘tax benefits’ to which it applies. This Part IVA conclusion, was of interest, too, as it was the first time the Full Federal Court had to apply Part IVA, as it now is, after it was widened, on 15 Nov 2012.



The Guardian case

The facts and law , leading up to the Court cases, is as follows.

  • Guardian (Trustee) was trustee of the Australian Investment Trust (the Trust). The Trust owned all the shares in AIT Corporate Services Pty Ltd (Trustee Subco), which was a beneficiary of the Trust. The central character: Mr Springer, was also a beneficiary of the Trust, and he was not an Australian Tax Resident, for the relevant years. Mr Springer controlled all of the Trustee, the Trust and Trustee Subco.
  • What the Commissioner called the ‘2012 Scheme’, comprised the Trust distributing its 2012 income to Trustee Subco, leaving that sum, as an ‘unpaid present entitlement’ (UPE). Trustee Subco, then, called for payment of enough of the UPE, to pay its 30% corporate income tax, on that 2012 trust income. It then declared a dividend, in favour of the Trust (its sole shareholder), equal to the remaining balance of the UPE. Trustee Subco franked this dividend and paid it to the Trust, by way of ‘offset’, against the remaining UPE amount, which the Trust, owed Trustee Subco. In the 2013 year, the Trust distributed its dividend income, as franked dividend, to the non-resident Mr Springer. There was a 2013 Scheme, which simply involved the Trust loaning the UPE to the Trust, on Div 7A compliant commercial terms (principal and benchmark interest loans over 7 years, under s107 of the ITAA36).
  • Initially it is difficult to see what the tax benefit is, in paying a 30% franked dividend to a non-resident, which is (because it is franked) not subject to ‘dividend withholding tax’ (which would ordinarily be at 30%, of the dividend amount, but he WHT is often only 15%, under any applicable double tax treaty. However, the Commissioner said that, if Trust had not distributed its income, to Trustee Subco, it would have distributed it to Mr Springer, who would have been liable to ‘top-up tax’, on the whole of Trust’s 2012 income (because taxation of non-resident beneficiaries, on Trust income, works differently to dividend withholding tax).
  • The Commissioner, therefore, issued assessments in relation to both the 2012 and 2013 Schemes, on the basis both s100A applied, and Part IVA applied – so he had both avenues covered, should one fail (and collecting on only one, if they both applied). Both assessment types were in respect of the Trust’s income (2012 for the 2012 Scheme and 2013, in respect of the  2013 Scheme).
    • The Commissioner issued the s100A assessments, to the Trustee, under s99A of the ITAA36 (which imposes tax, at maximum rates, on the trustee of a trust, where no beneficiary is presently entitled to the trust’s income that year). When s100A applies, it deems the beneficiary to have never been ‘presently entitled’ to that trust income (hence assessing the trustee under s99A). Section 100A applies, if, broadly, the beneficiary’s present entitlement ‘arose out of’ a ‘reimbursement agreement’ (viz: the trustee getting some other benefit, back, which compensates it for having distributed the income, to that beneficiary). In this case, the allegation was that, at the time the Trustee distributed its income, to Trustee Subco, there was an understanding that the Trustee would get the money back again, as franked dividend.There is an exception, to the operation of s100A, which was of interest. It was that s100A does not apply, where the relevant Agreement is ‘entered into in the course of ordinary family or commercial dealing‘.
    • The Part IVA assessments were issued to Mr Stringer, disallowing the tax benefit referred to above, by assessing him, in 2012, to the whole of Trust’s income (and disregarding any assessments relating to the dividend loop). He did the same thing again, the next year, for the 2013 Scheme.

At first instance, Logan J decided that neither the s100A assessments, nor the Part IVA Assessments were correct.

  • His Honour overturned the s100A assessments, on the basis that, on the evidence, there was no s100A(13) ‘agreement’ (viz: no ‘agreement, arrangement or understanding’) and thus, no ‘reimbursement agreement’. The idea of paying a dividend back, to the Trust, had not arisen, by the time that Subco, became ‘presently entitled’ to the Trust’s income [83]. Further, His Honour held that merely incorporating Trustee Subco, and the Trust distributing its income, to this new beneficiary, would fall within the exception, for ‘ordinary family or commercial dealings’ [84].
  •  He overturned the Part IVA assessments on a series of bases. He accepted that there was a ‘scheme’ (as the definition is so broad). However, he found that Mr Springer did not have the alleged ‘tax benefit’ because the ‘counter factual’ was not compelling (that is to say, that in the absence of the Scheme, to distribute its income to Subco, it could not be ‘reasonably expected’ that the Trust would have distributed its income to Mr Springer). This was because it would result in the non-resident Mr Springer, paying maximum rates of tax, rather than the 30% corporate rate applicable to Trustee Subco.  Further, His Honour found that the relevant ‘dominant purpose’ of the Scheme, was not obtaining any ‘tax benefit’, as his objective was to insulate himself, in retirement, from risks coming from winding up trading entities. At first instance, neither party submitted that the new Nov 2012 s177CB was relevant (but this was to change on appeal).

The Full Federal Court:

  • The Full Court rejected the s100A assessments issued to the Trustee of the Trust (because s100A didn’t apply to deem Subco to have never been ‘presently entitled’ to the Trust’s 2012 or 2013 income). It did not apply, for the same reasons that the Court, at first instance, rejected it – namely, that there was no s100(13) ‘agreement, arrangement or understanding’ that the Trust would get the dividend back, other than a general idea they’d do as advised.
  • The Full Court upheld the 2013 Part IVA assessment, to Mr Springer, and rejected a Part IVA based assessment, in the earlier 2012 year, where the idea of Subco, paying the franked dividend back to the Trust had not arisen (initially, Subco was to be the vehicle with the assets to invest). Before this Court, the Commissioner focussed on the 2012 and 2013 Schemes, where the Trust got a dividend back again, and distributed it to Mr Springer (and relied, also, on the new s177CB, which only commenced to operate in the latter 2013 Year). The Full Court held that there was a ‘tax benefit’, in both the 2012 & 2013, because it was reasonable to conclude, that absent the distribution to Subco, the Trust would have distributed to Mr Springer. This is because he had rejected the idea of investing the funds, in Subco, and there was no-one else the Trust would have distributed to [170-171]. For the 2013 year, this conclusion was reinforced by the new s177CB, which meant that Mr Springer could not rely on, the extra tax, that would arise, had the Trust distributed its income to Mr Springer (that is, as a basis for saying that, it was not reasonable to expect that this alternate postulate, would have occurred [174]. However, the 2012 Part IVA assessment fell over, because it could not be said that the dominant purpose of the Scheme, was to get the ‘tax benefit’. This was because circumstances were evolving and so was the Scheme. When Subco’s present entitlement was created, the intention was for the Trust to pay the income distributed to Subco, for it to invest. There was no thought of the subsequent dividend back step in the Scheme or it’s on-distribution to Mr Springer. This extension of the Scheme, was in response to the Commissioner’s developing views about whether he would treat ‘Unpaid Present Entitlements’ as Div 7A ‘loans’ (which he did, under PS LA 2010/4). By then, Mr Springer had rejected the idea of investing in an entity, where he didn’t control the bank account, and so a dividend back to the Trust, and the on-distribution to Mr Springer, was the way they devised, to get the funds to Mr Springer and limit tax to Subco’s 30% rate. The dividend paid in 2013, which anchored the other parts of the Part IVA analysis, only achieved its ‘tax benefit’ significance, in hindsight, which was not enough [222]. But the analysis was different, for the 2013 year Scheme, when the whole Scheme had been resolved, and was repeated [223].

‘Impact’ of this case on the Commissioner’s guidance and practices

In a Decision Impact Statement issued on Mon 24.4.2023, the ATO focuses on s 100A. One month prior to the Full Federal Court’s decision, the ATO finalised its long-awaited guidance on s 100A with the release of Ruling TR 2022/4 and the companion product PCG 2022/2. The ATO says it will only need to make “minor updates to TR 2022/4 to reflect aspects of the Court’s decision”, including in relation to the adoption of plans or recommendations from advisers. The ATO now accepts that a mere “general practice” of following advice will be insufficient but that “the requisite authorisation may exist in other cases where the evidence establishes that the relevant parties have agreed in advance to follow an adviser’s plans or recommendations”.

Unsurprisingly, the ATO says that the Full Federal Court’s decision on s 100A “largely turned on the particular facts of this case”. (A similar observation is not made in relation to Pt IVA.)

The ATO also plans to update PS LA 2005/24 on Pt IVA to reflect the Court’s views that, in identifying an alternative postulate for post-15 November 2012 schemes, particular regard must be had to the substance of the scheme and its result or consequence, while the income tax result of the alternative postulate must be disregarded.

COMMENTS on the DIS are due by 19 May 2023.



[Tax Month – April 2023, last month] 29.4.23