On 21 December 2021, the Federal Court (Logan J) handed down the decision in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation – which found against the Commissioner of Taxation on both issues, namely, whether anti-avoidance ‘Recoupment’ provisions in s100A of the ITAA36 applied (to impose s99A tax on the trustee, by deeming the beneficiary to not ever have been presently entitled to a share of the Trust’s income) and the the question of whether general anti-avoidance provisions in Part IVA of the ITAA36 applied, to assess an individual, in the alternative (to taxing the trustee). The ‘Catchwords from the decision handed down are set out below.

The Federal Court has concluded that arrangements involving distributions of trust income to a corporate beneficiary, which in turn distributed dividends back to the trust, did not constitute a “reimbursement agreement” for the purposes of s100A of the ITAA 1936 as the arrangements were part of ordinary family or commercial dealings.

The facts were these.

  1. The arrangements in question involved distributions in the 2012, 2013 and 2014 income years of income of a discretionary trust (the AI Trust) to a company (Corporate Beneficiary) specifically incorporated for the purpose of being a beneficiary of the Trust.
  2. The trustee (Guardian) was controlled by Mr Springer, who was also a beneficiary of the Trust and a resident of Vanuatu.
  3. The Corporate Beneficiary was wholly owned by Guardian (which also owned shares in various operating companies.
  4. These transaction happened in the court of Mr Springer’s transition to retirement and was calculated to minimise risk in his retirement (hence the Corporate Beneficiary being a ‘cleanskin’.
  5. The distributions to Corporate Beneficiary (which totalled almost $8m) were not paid resulting in unpaid present entitlements (UPEs).
  6. However, the 2012 and 2013 UPEs were “paid” by Corporate Beneficiary declaring a fully-franked dividend in the amount of the UPE (by both the Trustee and Corporate Beneficiary offsetting the respective entitlements to be paid, with their obligation to pay the same amount).
  7. The 2014 UPE was converted into a Div 7A compliant loan agreement and later repaid.
  8. For 2013 and 2014, the net income of the trust, that was attributable to franked dividends, was set aside and held on trust absolutely for Mr S.
  9. The distributions to the Corporate Beneficiary were assessed under s 97 of the ITAA 1936.

The ATO –

  • considered that the arrangements between Guardian and Mr Springer constituted a “reimbursement agreement” for the purposes of s 100A of the ITAA 1936. The ATO therefore assessed Guardian under s 99A(4A) of the ITAA 1936 on the distributions to the Corporate Beneficiary.
  • In the alternative, the ATO relied on Pt IVA of the ITAA 1936 to assess Mr Springer on the distributions.

The Federal Court (Logan J) found against the Commissioner on the s100A (‘reimbursement agreement’) assessment to the Trustee.

  1. It found that the 2012 “agreement” (or arrangement or understanding) between Guardian and Mr Springer was entered into in the course of “ordinary family or commercial dealing” and was therefore excluded from the definition of “agreement” in s 100A(13). Accordingly, it was not a “reimbursement agreement”. Although the appointment of a “clean skin” company (the Corporate Beneficiary) was part of that agreement, there was no agreement (or arrangement or understanding) that it would pay a dividend to the AI Trust and that the dividend would be distributed to Mr Springer. The arrangements were simply part of Mr Springer’s risk minimisation strategy for his retirement.
  2. Logan J also found that there was no such agreement, arrangement or understanding in 2013 and that the relevant “dealing” between Guardian and Mr Springer was also an ordinary family or commercial dealing.
  3. As regards the 2014 s99A assessment, his Honour said that as no dividend was sourced from a present entitlement of the Corporate Beneficiary, s 100A could not apply.

Logan J also found in favour of Mr Springer, in relation to the Pt IVA assessments. Mr Springer (nor anyone else) did not obtain a ‘tax benefit’ from the arrangements and the arrangements were not entered into for the dominant purpose of obtaining a tax benefit (and thus the general anti-avoidance provisions in Part IVA could not apply).

CATCHWORDS

TAXATION – appeal from taxation decision under Pt IVC of the Taxation Administration Act 1953 (TAA53) – Commissioner made primary income tax assessment against trust – where in primary assessment Commissioner alleges reimbursement agreement pursuant to s 100A of the Income Tax Assessment Act 1936 (ITAA36) – where corporate beneficiary created to receive benefit of trust – whether reimbursement agreement shown – consideration of “entered into in the course of ordinary family or commercial dealing” in s 100A(13) – whether reimbursement agreement can postdate present entitlement – where evidence shows that corporate beneficiary was created as part of longstanding retirement plan of named individual – taxation appeal allowed

TAXATION – appeal from taxation decision under Pt IVC of the Taxation Administration Act 1953 (Cth) – Commissioner made alternative income tax assessment against named individual as principal of trust – where Commissioner alleges scheme pursuant to Pt IVA of the Income Tax Assessment Act 1936 (Cth) – whether conduct constitutes a scheme pursuant to s 177D – whether named individual could have been expected to include amounts in assessable income pursuant to s 177C – taxation appeal allowed

(Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 – 21 December 2021; Logan J)  [LTN 2, 6/1/22]

[Tax Month – December 2021 – Previous 2021] 8.1.22

Category: Tax Month - December 2021

Author: John Morgan

John Morgan is a tax specialist lawyer of more than three decades experience now practicing at the Victorian Bar - w: www.FJMtax.com e: f.john.morgan@vicbar.com.au