Federal Commissioner of Taxation v Thomas; Federal Commissioner of Taxation v Martin Andrew Pty Ltd; Federal Commissioner of Taxation v Thomas Nominees Pty Ltd; Federal Commissioner of Taxation v Thomas

• Jurisdiction: Australia Federal only
• Judge: Kiefel CJ,Bell,Keane,Nettle,Gordon,Edelman JJ.,Gageler J.
• Judgment Date: 08 August 2018
• Neutral Citation: [2018] HCA 31
• Docket Number: B60/2017, B61/2017, B62/2017 & B63/2017
• Court: High Court
• Date: 08 August 2018

[2018] HCA 31

HIGH COURT OF AUSTRALIA

Kiefel CJ, Bell, Gageler, Keane, Nettle, Gordon AND Edelman JJ

B60/2017, B61/2017, B62/2017 & B63/2017

Matter No B60/2017

The Commissioner of Taxation of the Commonwealth of Australia

Appellant

and

Martin Andrew Thomas

Respondent

Matter No B61/2017

The Commissioner of Taxation of the Commonwealth of Australia

Appellant

and

Martin Andrew Pty Ltd

Respondent

Matter No B62/2017

The Commissioner of Taxation of the Commonwealth of Australia

Appellant

and

Thomas Nominees Pty Ltd

Respondent

Matter No B63/2017

The Commissioner of Taxation of the Commonwealth of Australia

Appellant

and

Martin Andrew Thomas

Respondent

Representation

J T Gleeson SC and P A Looney QC with J A Watson and C M Pierce for the appellants (instructed by Australian Government Solicitor)

F L Harrison QC and M L Robertson QC for the respondents (instructed by Hopgood Ganim Lawyers)

S P Donaghue QC, Solicitor-General of the Commonwealth with K E Foley and R A Minson for the Attorney-General of the Commonwealth, intervening in B60/2017 and B61/2017 (instructed by Australian Government Solicitor)

P J Dunning QC, Solicitor-General of the State of Queensland with D E F Chesterman for the Attorney-General of the State of Queensland, intervening in B60/2017 and B61/2017 (instructed by Crown Solicitor (Qld))

Income Tax Assessment Act 1936 (Cth), ss 95, 97.

Income Tax Assessment Act 1997 (Cth), Div 207.

Taxation Administration Act 1953 (Cth), Pt IVC.

Trusts Act 1973 (Q), s 96.

Taxation — Division 207 in Pt 3 — 6 of Income Tax Assessment Act 1997 (Cth) — Where trustee passed resolutions purporting to distribute franking credits to beneficiaries of trust separately from and in different proportions to income comprising franked distributions — Where directions made by Supreme Court of Queensland pursuant to s 96 of Trusts Act 1973 (Q) concerning the resolutions — Whether directions determined against Commissioner of Taxation the application of Div 207.

Words and phrases — “deemed assessment”, “determine conclusively”, “directions”, “franked distribution”, “franking credit”, “imputation credit”, “income tax return”, “judicial advice”, “notice of amended assessment”, “notionally allocated”, “streaming”, “tax offset”.

1 Kiefel CJ, Bell, Keane, Nettle, Gordon AND Edelman JJ. These appeals, arising out of proceedings in the Federal Court of Australia under Pt IVC of the Taxation Administration Act 1953 (Cth) (“the TAA”), concern the receipt of distributions that had been franked within the meaning of Div 207 in Pt 3–6 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”).

2 In the 2006 to 2008 years of income 1, the trustee of the Thomas Investment Trust (“the Trust”), Thomas Nominees Pty Ltd (“the Trustee”), received franked distributions within the meaning of Div 207 of the 1997 Act. In each of those years, the Trustee passed two relevantly identical resolutions, described respectively as the “Net Income Resolution” and the “Franking Credit Resolution”. Those resolutions sought to distribute, or stream, the franking credits between beneficiaries of the Trust separately from, and in different proportions to, the income comprising the franked distributions. In these appeals, the assumption which underpinned the resolutions – that franking credits could be distributed separately from, and in different proportions to, the income comprising the franked distributions – was referred to as the “Bifurcation Assumption”.

3 The income tax returns for the Trustee and the beneficiaries of the Trust were prepared, and lodged with the Commissioner, on the basis that the Bifurcation Assumption was legally effective under Div 207. Then, in 2010, the Trustee made an application to the Supreme Court of Queensland under s 96 of the Trusts Act 1973 (Q) for, and successfully obtained, “directions” that the Trustee, by those resolutions, could give, and had given, effect to the Bifurcation Assumption (“the State Proceedings”) 2.

4 In this Court, the Trustee and two beneficiaries of the Trust – Mr Martin Thomas (“Mr Thomas”) and Martin Andrew Pty Ltd (“MAPL”) (collectively, “the taxpayers”) – accepted that the Bifurcation Assumption was legally ineffective under Div 207 in Pt 3–6 of the 1997 Act.

5 The principal issue in this Court was whether, in the Pt IVC proceedings, the Full Court of the Federal Court was correct in holding that it was bound by the decision in Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (SA)3 to conclude that the “directions” 4 (in the form of declarations) given by the Supreme Court of Queensland determined conclusively, against the Commissioner, the application of Div 207 to those franked distributions – in other words, that the “directions” determined the rights of the beneficiaries against the Trustee in such a way that Div 207 would operate consistently with the Bifurcation Assumption. The Commissioner submitted that the Full Court of the Federal Court was in error in holding that the Court was so bound. That submission should be accepted.

6 If neither the Federal Court in the Pt IVC proceedings, nor the Commissioner, were bound by the “directions” of the Supreme Court of Queensland (and they were not), then the next issue concerned the proper construction of the resolutions and the application of Div 207 to those resolutions. Having abandoned reliance on the Bifurcation Assumption, in this Court the taxpayers sought to uphold an alternative construction of the resolutions adopted by the Full Court of the Federal Court – one in which franked distributions were “notionally allocated” to match the purported, and separate, distribution of the franking credits. As will be explained, the Commissioner's submission that this alternative construction of the resolutions was flawed should be accepted.

7 By notices of contention, the taxpayers sought to raise three further issues – estoppel by convention, rectification of the resolutions and a denial of procedural fairness. Each of those grounds should be dismissed.

8 The Commissioner's appeals in relation to the 2006 to 2008 income years should be allowed.

Division 207 in Pt 3.6

9 The Bifurcation Assumption involves the notion that franking credits are discrete items of income that may be dealt with or disposed of as if they were property under the general law. That notion is contrary to the proper

understanding of Pt 3.6. Franking credits are a creature of its provisions; their existence and significance depend on those provisions.

10 Part 3.6 of the 1997 Act creates an imputation system which sets out the effects of receiving a “franked distribution”. The Part creates a distinction between franked distributions and franking credits, the latter being “on” 5 or attached to the franked distribution. Under the Part, when a corporate tax entity 6 distributes profits on which income tax has already been paid, the corporate tax entity may impute credits for that tax by “franking” the relevant distribution 7.

11 As a general rule 8, a member of a corporate tax entity will be taxed on the full amount of the franked distribution and the attached franking credits but will be entitled to an imputation credit, a tax offset, equal to the franking credit on the distribution included in that member's assessable income for the tax already paid by the corporate tax entity 9.

12 That general rule is modified where the distribution is made to a trustee 10. In that situation, subdiv 207-B creates a system 11 which notionally allocates the franking credits in the same proportions as the beneficiaries' share in the franked distributions. This is the significance of the statutory reference to “notional allocation”. That reference is not, as the taxpayers' argument would have it, an indication that a trustee may effect such an allocation of franking credits as it may choose in order to achieve an effect inconsistent with the provisions of Div 207.

13 The beneficiaries' share in the franked distributions, in turn, depends on how the beneficiaries share in the income of the trust under s 97 of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) 12. Subdivision 207-B ensures that the beneficiary of the trust income receives the benefit of the franked distribution to the extent that the franked distribution is received through a trust.

14 The system comprises four steps: first, where a franked distribution is made or flows indirectly to a trustee, the assessable income of the trust for that year includes the amount of franking credits on the distribution 13; second, it is necessary to identify whether any of the franked distribution flows indirectly to a beneficiary of the trust 14; third, if any of the franked distribution flows indirectly to a beneficiary of the trust, it is necessary to identify if the beneficiary has assessable income attributable to all or a part of the franked distribution 15; and, fourth, if so, the beneficiary's assessable income will include a franking credit amount equal to its share of the franking credit on the franked distribution 16.

15 In respect of the fourth step, s 207–55 seeks to ensure that the amount of a franked distribution made to a trustee is allocated notionally amongst the beneficiaries who derive benefits from that distribution and that the allocation corresponds with the way in which those benefits were derived. Its sub-sections provide the mechanisms to achieve that objective. Section 207–55(2) provides that the amount notionally allocated, described as a share of the franked distribution, does not have to be received by the beneficiary. The table in s 207–55(3) provides the method for determining the share amount – relevantly, the beneficiary's share of the trust's net income for the relevant income year 17, usually calculated as a percentage...