The ATO has issued 2 Decision Impact Statements in response to the outcomes of 2 separate matters decided upon by the Full Federal Court in Howard v FCT [2012] FCAFC 149.
Non-resident trust distributions
The Full Court dismissed the taxpayer’s appeal against a decision that distributions (totalling almost $6.34m) received by the taxpayer (in the 2006 income year) as a beneficiary of a non-resident Jersey trust (the E Trust) were assessable.
- The amounts distributed to the taxpayer were amounts received by the E Trust as a beneficiary of another non-resident Jersey trust, the J Trust.
- The J Trust had received those amounts as part of a share buy-back, which occurred when a Jersey company, E Ltd, purchased its own shares back from the J Trust.
- The High Court refused the taxpayer leave to appeal the matter.
The ATO noted the Full Court held the amounts received by the taxpayer were included in his assessable income under s 99B(1) of the ITAA 1936. This was so because: (1) the amounts met the statutory description of “property of a trust estate … paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income”; and (2) s 99B(2) did not apply to reduce what would otherwise be included in the taxpayer’s assessable income under subsection (1). The ATO said the views expressed by the Full Court concerning its approach to the application of s 99B (applying to a distribution of corpus from a non-resident trust estate), including its approach to para 99B(2)(a), are consistent with the Commissioner’s view regarding the operation of the section. [FJM Note: which is about the exemption for ‘corpus’]
The ATO noted the Court’s approach to the existence of a nominee structure between the E Trust and E Ltd, and in that regard, the ATO referred to its approach to “bare trusts” as expressed in the Decision Impact Statement for Colonial First State Investment Ltd v FCT [2011] FCA 16.
It said amendments to the law to address the position of bare trusts of the type contemplated in the Colonial First State DIS have not to date been legislated. However, it said that “in recognition of the continued prevalence of the practice of essentially ignoring bare trusts for most income tax purposes, and the minimal risk associated with this practice in most instances, the Commissioner proposes to maintain the approach to bare trusts that he has taken in that DIS”. The ATO proposed “to consult with practitioners about the best way to more formally restate this approach.”
The damages issue
The High Court granted the taxpayer leave to appeal the Full Court’s decision to uphold the Commissioner’s appeal against a decision that damages were received by the taxpayer in a fiduciary capacity (meaning that the damages were assessable to the taxpayer). However, the taxpayer was unsuccessful before the High Court in Howard v FCT [2014] HCA 21. The ATO said the issues (and outcomes) in the High Court appeal were:
- Whether the taxpayer received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics, by virture of a fiduciary duty owed to the company as a director? (No).
- If not, whether the taxpayer had assigned the right to receive those damages under a litigation funding agreement, such that the income (damages) was not derived by him beneficially? (No).
- Whether the taxpayer incurred liability in respect of the costs of the proceedings in the Victorian Supreme Court, which should properly have been taken into account in ascertaining the amount of any gain made by the taxpayer and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court? (No).
The ATO said the views expressed by the High Court are consistent with the Commissioner’s view and current practices.
[LTN 156, 14/8/14]