The High Court has granted the Commissioner leave to appeal the decision of the Full Federal Court in Thomas & Anor v CofT [2017] FCAFC 57.
The case involved franking credit streaming and the Full Federal Court had unanimously allowed the taxpayers’ appeals against the August 2015 decision of Greenwood J in Thomas v CofT [2015] FCA 968 and remitted the matter to the Commissioner for re-assessment.
Greenwood J had held that a discretionary trust could not distribute franking credits to an individual beneficiary differently from the manner in which the net income of the trust was resolved to be distributed. In doing so, the Court ruled that franking credits were not net income of the trust and could not be “streamed” independently from the net income of the trust. At the same time, the Court ruled that it was not bound by orders previously obtained by the trustee by way of declaration from the Supreme Court of Queensland (Applegarth J) that franking credits could be allocated differentially from the net income of the trust.
The reason the Full Federal Court reached a different conclusion was that it was bound by the decision of the Queensland Supreme Court as creating the underlying general law rights on which the relevant tax law sits. This is explained further in the related TT Tax Month Article (April 2017), which contains the following passage:
The difference between this decision and the one at first instance
The difference between this decision and the one at first instance was that the Full Federal Court held that it was bound by the Queensland Supreme Court decision, holding that the effect of the resolutions was to treat ‘franking credit off-sets’ as separate property, effectively distributed as set out in the 2nd resolution (despite being distributed in quite different proportions). Pagone J put it his way in his FFC judgement.
- His Honour’s dismissal of the application for rectification is significant because his Honour’s orders did not operate to alter the resolutions made by the trustee. His Honour’s declaration may, however, nonetheless bind the Commissioner (as the Commissioner correctly conceded) to the extent that his Honour’s orders conclusively determined the rights of the beneficiaries and the trustee. In Executor Trustee and Agency Co of South Australia v Deputy Federal Commissioner of Taxes (South Australia) [1939] HCA 35; (1939) 62 CLR 545Latham CJ said at 562-3 …
[Related TT Tax Month article; FJM; LTN 202, 23/10/17; TM Oct 2017]