The Federal Court has held damages received by a taxpayer were not assessable income as they were held in trust for a company in relation to the 2005 income year.
However, the Court dismissed the taxpayer’s appeal in relation to trust distributions received from a non-resident trust for the 2006 income year, but reduced the shortfall penalty from 75% to 25%.
In 2005, the taxpayer received a share of an award of equitable damages made by the Supreme Court of Victoria. The taxpayer contended that he received the monies awarded to him in his capacity as a director and therefore fiduciary of a company, hence the money was attributable to the company not to him personally. The Commissioner disagreed and issued an amended assessment on the basis that the award of damages was received by the taxpayer beneficially, not as a fiduciary.
In relation to the 2006 year, the taxpayer received distributions as a discretionary beneficiary from a non-resident trust located in Jersey. The taxpayer contended that the distributions were of a capital nature by a non-resident trust and therefore not income for tax law. The Commissioner disagreed and issued amended assessments on the basis that the distributions represented a share of income of the trust to which the taxpayer was presently entitled. The Commissioner also imposed a 75% penalty for intentional disregard of the law.
In a lengthy judgment, the Federal Court rejected the Commissioner’s arguments and held that the taxpayer received his share of the award of equitable damages in the Supreme Court as fiduciary for the company. Hence the amount was not assessable to the taxpayer. Therefore, the Court set aside the Commissioner’s amended assessment in relation to the 2005 income year.
In relation to the 2006 income year, the Court dismissed the taxpayer’s appeal and held the distributions received by the taxpayer from the non-resident trust fell within s 99B of the ITAA 1936. Broadly, it said the result was that the monies received by the taxpayer from the non-resident trust were included in his assessable income under s 97 and s 99B of the ITAA 1936.
The Court was also of the view the shortfall in relation to the 2006 income year resulted “from a failure by the [taxpayer] to take reasonable care to comply with the 1936 Act”. Therefore, it reduced the shortfall penalty from 75% to 25% of the shortfall amount.
(Howard v FCT (No 2) [2011] FCA 1421, Federal Court, Jessup J, 14 December 2011.)
[LTN 1, 4/1]