The High Court has granted the taxpayer special leave to appeal against the Full Federal Court decision in FCT v ElecNet (Aust) Pty Ltd (Trustee)  FCAFC 178.
The Full Federal Court had unanimously allowed the Commissioner’s appeal and held that an “industry severance trust scheme” for electrical workers was not a “unit trust” for the purposes of Div 6C of Pt III of the ITAA 1936 and therefore was not entitled to be taxed as a company. In doing so, the Court essentially found that in terms of the relevant trust deed, the beneficiaries did not have a “beneficial” interest in any of the income or property of the trust, and that their interests in the trust were not, in effect, divided into units or “unitised” as required for the existence of a “unit trust”.
Extract from the Full Federal Court decision
- I have had the benefit of reading the reasons for judgment prepared by Pagone and Edelman JJ in this appeal. For the reasons which follow below, I agree that the appeal should be allowed and, in place of the first and second orders made by the primary Judge on 13 May 2015, that it be ordered that the respondent’s application be dismissed.
- At the heart of the Commissioner’s case in this appeal was the contention that the primary Judge fell into error by making use of the definition of “unit” in s 102M of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) to give content to the meaning of the term “unit trust” as used in Div 6C of Pt III of that Act, most obviously in s 102S. For the reasons which follow, that contention should be accepted.
- Like the definition of “unitholder”, the definition of “unit” in s 102M is limited to the circumstances of “a prescribed trust estate”. That is to say, in a series of provisions dealing with unit trusts, the legislature went to pains to avoid providing a definition of “unit” with broad application. As the primary Judge pointed out, the definition of “unit” is an inclusive one, which means that, in the context of a prescribed trust estate, the word has its ordinary meaning – ie the meaning that it would properly carry in Div 6C unassisted by an interpretation provision – but it also includes the matters set out in the definition. In another context, however, the presence of those matters would not cause a particular state of affairs to be covered by the word.
- A significant consequence of the primary Judge’s view that “the definition of ‘unit’ assists to inform the concept of a unit trust for Division 6C purposes” was the next step in her Honour’s reasoning, namely:
Having regard to the definition of “unit” in s 102M, it is not a complete answer for Division 6C purposes that the trust deed does not formally divide the beneficial interest in the trust fund into units. Nor, in light of the definition of “unit”, must “unitholders” have a proportionate interest in the whole of the income or property of the trust estate.
That is to say, a trust which would, or might, not otherwise be a “unit trust” for the purposes of Div 6C became one because of the definition, whether or not it was a prescribed trust estate. As a matter of grammatical construction, this approach is not, in my respectful view, defensible.
- Relevantly to the present point, BERT Pty Ltd as trustee for the BERT Fund No. 2 v Commissioner of Taxation  AATA 584, of which her Honour was critical, was, in my view, correctly decided.
- There is no indication in the 1936 Act that Div 6C, or that s 102S in particular, uses the term “unit trust” in anything other than its ordinary meaning. Central to that meaning is the requirement that the interests in the trust, whatever other characteristics they might have, be divided into units – or “unitized”. There needs to be an irreducible, discrete, “unit” or, as the Administrative Appeals Tribunal said in BERT, parcel of rights, by reference to which those interests are held, such that every person or entity with an interest in the trust will have one or more such units. It is uncontroversial that the Electrical Industry Severance Scheme does not entail such a trust.