Précis
The case deals with the validity of ‘alternative assessments’ – whether ‘tentative’ or not – upholding established law and the Commissioner’s practices. This was in the context of assessing a trust’s income.
Brief summary of facts
The applicant was the trustee of a discretionary trust. Because the Commissioner had insufficient information to determine whether beneficiaries were presently entitled to all of the trust income, for the 2011 to 2014 income years, the Commissioner issued alternative assessments. In respect of each of those years the trustee was assessed under section 99A and section 98 of the Income Tax Assessment Act 1936 (ITAA 1936).
The trustee challenged the validity of the Commissioner’s assessment, under section 39 of the Judiciary Act 1903, on the basis that the assessments were ‘tentative and provisional’ because they imposed two different liabilities on the applicant in its single capacity as trustee of the trust.
Issues decided by the court
The Court ruled that the assessments were valid.
The Court rejected the fundamental premise, of the applicant’s case, which was that the assessments of it were an exercise of power under section 166 of the ITAA 1936 (the general power/requirement to assess taxable income, tax thereon and offset refunds). Because the assessment, of any trust income, does not involve the assessment of ‘taxable income’, as such (within the meaning of section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997), section 166 cannot be engaged – or at least, not directly as the relevant tax law ‘net income’ of the trust, is made up of amounts that would have been assessable income or allowable deductions of the trust, had it been a taxpayer). Rather the Court characterised sections 98 and 99 of the ITAA 1936 as provisions under which a trustee is made liable to pay tax and found that the power to raise assessments under these provisions stems from section 169 of the ITAA 1936 (which requires the Commissioner to assess the particular persons, who are liable to tax – albeit, based on the amounts ‘assessed’ under s166).
Further the Court held that the strictures of ‘one income, one taxpayer, one tax’ are not engaged by the scheme embodied in Division 6 of the ITAA 1936 in respect of the liabilities of a trustee.
The Court also stated that the making of alternative assessments to address two possible factual scenarios did not make the assessments ‘tentative and provisional’. It is the uncertainty with regard to the operation of the trust which the Commissioner hedged by issuing alternative assessments, but the net trust income and amount of income tax payable were clearly specified under each assessment. The ‘primary’ assessments were based on the assumption that beneficiaries were all presently entitled. The ‘alternative’ assessments were protective measures in the event that the original view of how the trust operated proved to be incorrect.
ATO View of Decision
The Court’s decision is consistent with the Commissioner’s view of the law. The Commissioner will continue to issue assessments under sections 98, 99, and 99A of the ITAA 1936 as appropriate, in accordance with the position in PS LA 2006/7.
Implications for impacted advice or guidance
None.
[Whitby Land Company Pty Ltd (Trustee) v. Deputy Commissioner of Taxation [2017] FCA 28 – Federal Court (NSD 54 of 2016), Jagot J; 30 January 2017)
[ATO website – Decision Impact Statement; FJM; LTN 240, 14/12/17; Tax Month Dec 2017]