A taxpayer has suffered a double defeat in the Full Federal Court – firstly, the Commissioner’s appeal against a decision that damages were received by the taxpayer in a fiduciary capacity was upheld, with the result that the damages were assessable to the taxpayer; and, secondly, his appeal against a decision that distributions from a non-resident trust were assessable was dismissed.
The damages issue
The taxpayer entered into a joint venture with a number of other people to acquire and lease a golf course. The taxpayer and 2 of the other joint venturers were directors of a company (DL), which intended to become an equity participant in the project. The project did not proceed and damages were awarded against 2 of the joint venturers (who were not directors of DL) for the loss of a business opportunity.
At first instance, the Federal Court held that, because of the taxpayer’s fiduciary duties as a director of DL, he received his share of the damages on behalf of DL and therefore that share was assessable income of DL (see Howard v FCT (No 2) [2011] FCA 1421).
The Full Court, however, held that the rejection of DL as an equity participant (by the 2 joint venturers who were ordered to pay the damages) meant that the taxpayer was not in breach of his fiduciary duty to DL as a director and the damages were awarded to him in his personal capacity.
The taxpayer achieved one small victory when the Full Court ordered that no administrative penalty should be imposed.
Non-resident trust distributions
The taxpayer received distributions from a Jersey-based trust. The Full Court upheld the first instance decision that the distributions were assessable.
Although the distributions were part of the corpus of the non-resident trust, they were caught by s 99B of the ITAA 1936 as the amounts in question would have been assessable if derived by a resident taxpayer. This was because the distributions represented the proceeds of an off-market share buy-back, which would have been deemed (by s 159GZZZP of the ITAA 1936) to be assessable dividends (under s 44 of the ITAA 1936).
(Howard v FCT [2012] FCAFC 149, Full Federal Court, Middleton, Perram and Dodds-Streeton JJ, 26 October 2012.)
[LTN 209, 29/10]