Federal Court of Australia

Peter Greensill Family Co Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCAFC 99

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant is to pay the respondent’s costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The appeals be dismissed.

2.    The appellants are to pay the respondent’s costs.

[Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.]

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    These appeals concern the interaction between div 855 of the Income Tax Assessment Act 1997 (Cth) (1997 Act), sub-div 115-C of the 1997 Act and div 6 and div 6E of the Income Tax Assessment Act 1936 (Cth) (1936 Act). The factual scenarios giving rise to the issues for determination are common to both appeals, namely:

(a)    both the Peter Greensill Family Trust (Greensill Trust) and the Martin Family Trust (Martin Trust) are discretionary trusts;

(b)    the trustees of the trusts are resident in Australia;

(c)    both trustees, in that capacity, sold property that was not “taxable Australian property” for the purposes of div 855 of the 1997 Act;

(d)    in each case, the trustee distributed the capital gain from the disposal of the non-taxable Australian property to a foreign resident beneficiary of the trust;

(e)    in each case, the Commissioner assessed the trustee under s 98 of the 1936 Act, on the basis that s 855-10(1) of the 1997 Act did not apply to disregard the capital gain in calculating the amount assessable to the trustee in relation to the beneficiary pursuant to s 115-220 of the 1997 Act; and

(f)    in the case of the Martin Trust, the Commissioner also assessed the foreign resident beneficiary on the basis that s 855-10(1) of the 1997 Act did not apply to disregard the capital gain in calculating the amount treated as the beneficiary’s capital gain under s 115-215(3) of the 1997 Act.

2    In very brief terms, the appellants, in each of the proceedings below, had contended that the assessments were excessive because s 855-10(1) of the 1997 Act required the gains of the trust estates, from the disposal of non-taxable Australian property, which the trustees distributed to the foreign beneficiaries, was to be disregarded. Section 855-10(1)(a) provides that a capital gain “from a CGT event” is to be disregarded if, relevantly, “you are a foreign resident … just before the CGT event happens” and “the CGT event happens in relation to a CGT asset that is not taxable Australian property”. The courts below rejected that contention both as a matter of construction of s 855-10(1) and also of sub-div 115-C: Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559 (Thawley J) (Greensill judgment) and N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186 (Steward J) (Martin judgment)).

Legislative context

3    The relevant legislative provisions comprise:

(a)    Division 6 of pt III of the 1936 Act which contains the basic rules for taxing trust income;

(b)    Subdivision 115-C of pt 3-1 of the 1997 Act and div 6E of pt III of the 1936 Act which contain specialist liability rules in respect of the taxation of net capital gains of trust estates; and

(c)    Division 855 of pt 4-5 of the 1997 Act which contains certain rules concerning capital gains and foreign residents.

4    In the Greensill judgment, Thawley J at [19]–[38] made the following (largely uncontentious) observations about these provisions:

Div 6 of Pt III of the [1936 Act] contains the core of the regime for taxing trust income. In simple terms, it involves calculating the “net income” of a trust estate as defined in s 95(1) and allocating the liability to tax on that net income among the beneficiaries and the trustee on a proportional basis: Commissioner of Taxation v Bamford (2010) 240 CLR 481 at 507-508. Again in simple terms:

(1)    a beneficiary who is presently entitled to a share of the income of the trust estate, and is not under a legal disability or a non-resident at the end of the income year, is taxed under s 97 on their share of the net income, their shares being in the same proportion as their share of the trust law income;

(2)    if a presently entitled beneficiary is under a legal disability or is a non-resident at the end of the year of income, the trustee is taxed under s 98 on the beneficiary’s share of the net income;

(3)    where there is a share of the income of the trust estate to which no beneficiary is presently entitled, the trustee is taxed under ss 99 or 99A on the relevant share of net income.

It is the second of these circumstances which is directly relevant in this appeal. Section 98 relevantly provides:

98 Liability of trustee

…

(2A)     If:

(a)     a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate:

    (i)     is a non-resident at the end of the year of income; and

(ii)     is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate; and

(iii)     is not a beneficiary to whom section 97A applies in relation to the year of income; and

(iv)     is not a beneficiary to whom subsection 97(3) applies; and

(b)     the trustee of the trust estate is not assessed and is not liable to pay tax under subsection (1) or (2) in respect of any part of that share of the net income of the trust estate;

subsection (3) applies to the trustee in respect of:

(c)     so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(d)     so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

(3)     A trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax:

(a)     if the beneficiary is not a company—in respect of the amount of net income as if it were the income of an individual and were not subject to any deduction; or

(b)     if the beneficiary is a company—in respect of the amount of net income at the rate declared by the Parliament for the purposes of this paragraph.

Note:     If the trust estate’s net income includes a net capital gain, and the beneficiary is a company, Subdivision 115-C of the Income Tax Assessment Act 1997 affects the assessment of the trustee.

Section 98A provides that, where a trustee is assessed as a result of the operation of s 98, the beneficiary is also to be assessed on a share of the net income and the beneficiary receives a credit (and may receive a refund) to the extent that the trustee pays tax on the amount for which it is assessed as a result of the operation of s 98: s 98A(1) and (2). This provision is designed to facilitate collection of tax. The relevant provisions are:

98A Non-resident beneficiaries assessable in respect of certain income

(1)     Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3), the assessable income of the beneficiary who is presently entitled to that share of the income of the trust estate shall include:

(a)     so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(b)     so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

(2)     Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3):

(a)     there shall be deducted from the income tax assessed against the beneficiary the amount (in this subsection referred to as the relevant amount) of the tax paid by the trustee in respect of the beneficiary’s interest in the net income of the trust estate; and

(b)     if the relevant amount is greater than the amount of the income tax assessed against the beneficiary—the Commissioner shall pay to the beneficiary an amount equal to the difference between those 2 amounts.

Note:     See Division 3A of Part IIB of the Taxation Administration Act 1953 for the rules about how the Commissioner must pay the entity. Division 3 of Part IIB allows the Commissioner to apply the amount owing as a credit against tax debts that the entity owes to the Commonwealth.

The net capital gain of a trust estate is included in the assessable income of the trust estate: s 102-5 of the ITAA 1997. It necessarily follows that a net capital gain is included in the calculation of the net income of the trust estate.

Div 6E of Pt III of the ITAA 1936 and Subdivision 115-C of the ITAA 1997

Division 6E

Division 6E of Part III of the ITAA 1936, comprising ss 102UW, 102UX and 102UY, provides for the making of certain assumptions for the limited purpose of determining a beneficiary’s liability under ss 97, 98A or 100 and a trustee’s liability under ss 98, 99 or 99A. Division 6E only applies if the net income of the trust estate exceeds nil and, amongst other things, a capital gain is taken into account in working out the net income of the trust estate: s 102UW(a) and (b)(i).

In summary, the operation of s 102UX, read with s 102UY, is that capital gains are to be disregarded in working out in accordance with Div 6 an amount to be included in the assessable income of a beneficiary of the trust estate or an amount in respect of which a trustee is liable to pay tax under s 98 in respect of the beneficiary. As the note to s 115-215(3) of the ITAA 1997 states, Div 6E “may have the effect of reducing the amount included in your assessable income under Division 6 [of Part III of the ITAA 1936] by an amount related to the capital gain you have under … subsection [115-215(3)]”.

The practical effect of this is that beneficiaries are not assessed under Division 6 in respect of capital gains of a trust estate. Beneficiaries are taxed on capital gains of a trust estate through Subdiv 115-C of the ITAA 1997. Division 6E does not affect a trustee’s liability under Div 6 as affected by the application of Subdiv 115-C.

When Subdiv 115-C applies: s 115-210

Consistently with Div 6E of the ITAA 1936, Subdiv 115-C applies if a trust estate has a net capital gain for an income year taken into account in working out its net income. Section 115-210(1) provides:

115-210 When this Subdivision applies

(1)     This Subdivision applies if a trust estate has a *net capital gain for an income year that is taken into account in working out the trust estate’s net income (as defined in section 95 of the Income Tax Assessment Act 1936) for the income year.

Assessing trustees under s 98 of the ITAA 1936: s 115-220

Section 115-220 addresses the assessment of trustees under s 98 of the ITAA 1936. It provides:

115-220     Assessing trustees under section 98 of the Income Tax Assessment Act 1936

 (1)     This section applies if:

   (a)     you are the trustee of the trust estate; and

(b)     on the assumption that there is a share of the income of the trust to which a beneficiary of the trust is presently entitled, you would be liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary.

(2)     For each *capital gain of the trust estate, increase the amount (the assessable amount) in respect of which you are actually liable to be assessed (and pay tax) under section 98 of the Income Tax Assessment Act 1936 in relation to the trust estate in respect of the beneficiary by:

(a)     unless paragraph (b) applies—the amount mentioned in subsection 115-225(1) in relation to the beneficiary; or

(b)     if the liability is under paragraph 98(3)(b) or subsection 98(4), and the capital gain was reduced under step 3 of the method statement in subsection 102-5(1) (discount capital gains)—twice the amount mentioned in subsection 115-225(1) in relation to the beneficiary.

(3)     To avoid doubt, increase the assessable amount under subsection (2) even if the assessable amount is nil.

Section 115-220(2) requires the calculation of an amount under s 115-225(1), which is then added to that in respect of which the trustee is liable to be assessed under s 98.

Determining the attributable gain: s 115-225

Section 115-225(1) provides:

115-225 Attributable gain

(1)     The amount is the product of:

(a)     the amount of the *capital gain remaining after applying steps 1 to 4 of the method statement in subsection 102-5(1); and

(b)     your *share of the capital gain (see section 115-227), divided by the amount of the capital gain.

The application of the method statement referred to in s 115-225(1)(a) is the application of the method statement in s 102-5(1) by the trust estate. The method statement refers to capital gains and capital losses “you made”, namely those made by the trust. The method statement is:

Working out your net capital gain

Step 1.     Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year.

Note 1:     You choose the order in which you reduce your capital gains. You have a net capital loss for the income year if your capital losses exceed your capital gains: see section 102-10.

Note 2:     Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years.

Step 2.     Apply any previously unapplied *net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step 1 (including any capital gains not reduced under that step because the *capital losses were less than the total of your capital gains).

Note 1:     Section 102-15 explains how to apply net capital losses.

Note 2:     You choose the order in which you reduce the amounts.

Step 3.     Reduce by the *discount percentage each amount of a *discount capital gain remaining after step 2 (if any).

Note:     Only some entities can have discount capital gains, and only if they have capital gains from CGT assets acquired at least a year before making the gains. See Division 115.

Step 4.     If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions.

Note 1:     The basic conditions for getting these concessions are in Subdivision 152-A.

Note 2:     Subdivision 152-C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152-E does not apply to CGT events J5 and J6.

Step 5.     Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year.

The reference to “your share of the capital gain” in s 115-225(1)(b) is, expressly, a reference to s 115-227, which provides:

115-227 Share of a capital gain

An entity that is a beneficiary or the trustee of a trust estate has a share of a *capital gain that is the sum of:

(a)     the amount of the capital gain to which the entity is *specifically entitled; and

(b)     if there is an amount of the capital gain to which no beneficiary of the trust estate is specifically entitled, and to which the trustee is not specifically entitled—that amount multiplied by the entity’s *adjusted Division 6 percentage of the income of the trust estate for the relevant income year.

Assessing presently entitled beneficiaries: s 115-215

Section 115-215 addresses the assessment of presently entitled beneficiaries of trust estates. Subsection 115-215(1) states the purpose of the section. It provides:

115-215 Assessing presently entitled beneficiaries

Purpose

(1)     The purpose of this section is to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s *capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary, so:

(a)     the beneficiary can apply *capital losses against gains; and

(b)     the beneficiary can apply the appropriate *discount percentage (if any) to gains.

The way in which a presently entitled beneficiary is assessed is by a process of deeming or attributing capital gains to the beneficiary. This is done through s 115-215(3), entitled “Extra capital gains”, and requires an amount to be calculated under s 115-225(1). Subsections 115-215(3) to (5) provide:

Extra capital gains

(3)     If you are a beneficiary of the trust estate, for each *capital gain of the trust estate, Division 102 applies to you as if you had:

(a)     if the capital gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction)—a capital gain equal to the amount mentioned in subsection 115-225(1); and

(b)     if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions)—a capital gain equal to twice the amount mentioned in subsection 115-225(1); and

(c)     if the capital gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions)—a capital gain equal to 4 times the amount mentioned in subsection 115-225(1).

Note:     This subsection does not affect the amount (if any) included in your assessable income under Division 6 of Part III of the Income Tax Assessment Act 1936 because of the capital gain of the trust estate. However, Division 6E of that Part may have the effect of reducing the amount included in your assessable income under Division 6 of that Part by an amount related to the capital gain you have under this subsection.

(4)     For each *capital gain of yours mentioned in paragraph (3)(b) or (c):

(a)     if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1)—Division 102 also applies to you as if your capital gain were a *discount capital gain, if you are the kind of entity that can have a discount capital gain; and

(b)     if the relevant trust gain was reduced under Subdivision 152-C—the capital gain remaining after you apply step 3 of the method statement is reduced by 50%.

Note:     This ensures that your share of the trust estate’s net capital gain is taxed as if it were a capital gain you made (assuming you made the same choices about cost bases including indexation as the trustee).

(4A)     To avoid doubt, subsection (3) treats you as having a *capital gain for the purposes of Division 102, despite section 102-20.

Section 118-20 does not reduce extra capital gains

(5)     To avoid doubt, section 118-20 does not reduce a *capital gain that subsection (3) treats you as having for the purpose of applying Division 102.

In summary, subsection 115-215(3) deems a beneficiary to have a capital gain which reflects the capital gain of the trust estate.

Division 855 of the ITAA 1997

Section 855-10(1) provides:

855-10 Disregarding a capital gain or loss from CGT events

(1)     Disregard a *capital gain or *capital loss from a *CGT event if:

(a)     you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and

(b)     the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.

Note:     A capital gain or capital loss from a CGT asset you have used at any time in carrying on a business through a permanent establishment in Australia may be reduced under section 855-35.

Also relevant to the arguments of the parties is s 855-40(1) to (4) which provide:

855-40 Capital gains and losses of foreign residents through fixed trusts

(1)     The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust, by foreign residents of *CGT assets that are not *taxable Australian property.

(2)     A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:

    (a)     you are a foreign resident when you make the gain; and

(b)     the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust) that is:

    (i)     the *fixed trust; or

(ii)     another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust); and

  (c)     either:

(i)     the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or

(ii)     the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.

Note: Section 115-215 treats a portion of a trust’s capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.

(3)     You are not liable to pay tax as a trustee of a *fixed trust in respect of an amount to the extent that the amount gives rise to a *capital gain that is disregarded for a beneficiary under subsection (2).

(4)     To avoid doubt, subsection (3) does not affect the operation of subsection 98A(1) or (3) of the Income Tax Assessment Act 1936 (about taxing beneficiaries who are foreign residents at the end of an income year).

CGT Event E5

Section 104-75 of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust:

104-75 Beneficiary becoming entitled to a trust asset: CGT event E5

(1)     CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Note: Division 128 deals with the effect of death.

(2)     The time of the event is when the beneficiary becomes absolutely entitled to the asset

Trustee makes a capital gain or loss

(3)     The trustee makes a capital gain if the *market value of the asset (at the time of the event) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset’s *reduced cost base.

…

Beneficiary makes a capital gain or loss

(5)     The beneficiary makes a capital gain if the *market value of the asset (at the time of the event) is more than the *cost base of the beneficiary’s interest in the trust capital to the extent it relates to the asset.

The beneficiary makes a capital loss if that market value is less than the *reduced cost base of that beneficiary’s interest in the trust capital to the extent it relates to the asset.

the decisions below

5    After setting out the legislative scheme, Thawley J, at [39]–[40] of the Greensill judgment, summarised the application of divs 6 and 6E of pt III of the 1936 Act and sub-div 115-C and div 855 of the 1997 Act to the facts at hand as follows:

(a)    the trustee of the Greensill Trust made a capital gain in each of the income years in issue which arose because CGT events happened with respect to the trustee’s disposal of shares. The net capital gain of the trust estate from the relevant CGT events was included in the trustee’s assessable income (s 102-5 1997 Act) and in the calculation of its net income;

(b)    section 855-10(1) of the 1997 Act did not apply so as to disregard any of the trust estate’s capital gains. First, the trust was not a foreign resident or a trustee of a foreign trust: s 855-10(1)(a). Secondly, the amount which s 115-220 requires the trustee to be taxed on under s 98 is not a capital gain from a CGT event and cannot fall within s 855-10(1). It is an amount which is calculated by reference to CGT events which occurred in respect of CGT assets of a trust;

(c)    subdivision 115-C applies in relation to the trust estate’s capital gains, because the trust estate had a net capital gain in the relevant income years, which was taken into account in working out the trust estate’s net income: s 115-210(1); div 6E of the 1936 Act. It is not a capital gain under s 855-10(1) which is being added;

(d)    the foreign beneficiary, as a presently entitled beneficiary, is assessed under s 115-215. The purpose of that section “is to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary” so that the beneficiary can apply any available capital losses or discount percentage against those gains: s 115-215(1).;

(e)    the amount of the capital gains that the beneficiary is “treated” by s 115-215 as having is determined by reference to the calculation under s 115-225(1), headed “Attributable gain”; and

(f)    the trustee is assessed under s 98 of the 1936 Act in accordance with s 115-220 of the 1997 Act.

6    At [42]–[49], His Honour elaborated on the operation of sub-div 115-C, holding that:     

(a)    the “amount of the capital gain” referred to in s 115-225(1)(a) is the capital gain of the trust estate in relation to which the section applies. It is not a reference to any capital gain of the beneficiary. His Honour reasoned that s 115-225(1)(a), read with the s 102-5 method statement, allows for the trust estate’s capital gains to be reduced by its capital losses and this would not be achieved if s 115-225(1)(a) were understood as applying to capital gains and losses taken to have been made by the beneficiary;

(b)    the reference to “your share of the capital gain” in s 115-225(1)(b) is a reference, inter alia, to “the amount of the capital gain to which the [beneficiary] is specifically entitled”: s 115-227(a);

(c)    the result of the calculation required by s 115-225(1) is simply an amount which the statute requires to be calculated. It is not a capital gain capable of being the subject of s 855-10(1);

(d)    the amount of “attributable gain” calculated under s 115-225(1) is used for the purposes of each of ss 115-215(3), 115-220(2) and 115-222(2) and (4). Each of those provisions uses the words “for each capital gain of the trust estate” and then refers to the amount mentioned in s 115-225(1). His Honour expressed the view that this confirmed that “the capital gain” referred to in s 115-225(1)(a) is the capital gain of the trust estate and that the function of s 115-225(1) is to apportion the capital gain of the trust estate among the trustee and beneficiaries of the trust estate according to their “share” as determined under s 115-227, which is then brought to tax under one of ss 115-215, 115-220 or 115-222 as appropriate;

(e)    under s 115-215, the beneficiary is deemed to have a capital gain notwithstanding that a CGT event did not happen to an asset of the beneficiary, which is treated by s 115-215(3) as a capital gain of the beneficiary, and is then included in the calculation of the beneficiary’s net capital gain under s 102-5 (s 115-215(4A)), the statutory purpose of which is to allow the beneficiary to apply any capital loss or capital gains discount available to that beneficiary (s 115-215(1));

(f)    the amount of each of the beneficiary’s deemed capital gains under s 115-215(3) is worked out by reference to the amount mentioned in s 115-225(1) which His Honour summarised at [47] as follows:

(1)     First, it is necessary to apply steps 1 to 4 of the s 102-5 method statement to the trust estate’s capital gain. This involves reducing the trust estate’s capital gain by the trust estate’s capital losses and applying any discounts applicable to the trust estate. Section 115-225(1) then requires the beneficiary’s share of that capital gain to be calculated under s 115-227.

(2)    Secondly, if there were reductions when applying the s 102-5 method statement – that is, if paragraph (b) or (c) of s 115-215(3) apply – it is necessary to “gross up” the amount so calculated to reverse out any discounts that were taken into account when applying the s 102-5 method statement for the trust estate.

(g)    finally, His Honour was of the view that in providing for the beneficiary’s deemed capital gains under s 115-215 to be reduced by the beneficiary’s capital losses under s 102-5, the provision is consistent with the regime in div 6 of the 1936 Act, explaining that a beneficiary to whom ss 97 or 98A(1) applies has an amount added to his assessable income, which may then be reduced by his allowable deductions. However, a trustee taxed under s 98 because a presently entitled beneficiary is a non-resident is to be assessed on the relevant share of the net income without any deduction – see: s 98(3). Any discrepancy between the trustee’s and the beneficiary’s tax liability is addressed by the credit and refund to the beneficiary in s 98A(2).

7    At [50]–[60], His Honour addressed s 855-10, holding that the capital gain deemed to have been made by a beneficiary under s 115-215 was not a “capital gain … from a CGT event” within s 855-10. His Honour considered that the word “from” in the phrase “a capital gain or capital loss from a CGT event” in s 855-10 should be understood as requiring a direct connection between the capital gain and the CGT event and was not intended to apply to an amount which is “attributable to a CGT event” which occurred to another person, even where that other person is a trustee. Thus, although Mr Greensill had capital gains attributed to him under sub-div 115-C for the purpose of permitting him to apply any capital losses or discounts available to him, such capital gains were not “from a CGT event” within the language of s 855-10.

8    His Honour also addressed s 855-40 at [62]–[63] by distinguishing the application of that section from s 855-10. His Honour reasoned that the language of s 855-40 is “quite different” to the language of s 855-10 which requires the capital gain to be “from” a CGT event whereas s 855-40 applies to a capital gain “you make in respect of your interest in a fixed trust” where, amongst other matters, the gain “is attributable to a CGT event happening to a CGT asset of a trust”. His Honour referred to the note to s 855-40(2):

Section 115-215 treats a portion of a trust’s capital gain as a capital gain made by a beneficiary…

as indicating that the provision operates with respect to the capital gain taken to have been made by a beneficiary under s 115-215 of the 1997 Act. His Honour stated that s 855-10, which does not contain such a note, operates differently and does not provide for the disregarding of capital gains attributed to the beneficiary of a non-fixed trust under sub-div 115-C.

9    In the Martin judgment, Steward J was urged to hold that the Greensill judgment was wrongly decided and should not be followed. His Honour rejected that contention, being “inclined to the view” that it was correctly decided for the reasons given and, like Thawley J, Steward J was of the view that s 855-40 is a specific rule directed to the application of sub-div 115-C to a foreign beneficiary of a fixed trust (see Martin judgment at [79]–[87]).

submissions

10    The appellants argued that the courts below were wrong to hold that s 855-10 has no operation in the rules contained in sub-div 115-C in relation to a foreign beneficiary of a resident discretionary trust estate. In support, they argued that s 855-10 is a jurisdictional rule for the imposition of capital gains tax on a foreign resident taxpayer, namely that the gain be from a CGT event happening in relation to an asset that is taxable Australian property. They argued that s 855-10 does not require that the CGT event happen to the foreign resident nor that the foreign resident be the owner of the CGT asset to which the CGT event happens. They argued that the section merely requires that the gain be from a CGT event that happens in relation to a CGT asset that is not taxable Australian property. They further argued that the operation of s 115-225 (which calculates a taxpayer’s “attributed amount” for the purposes of ss 115-215, 115-220 and 115-222 in sub-div 115-C) is conditioned by (or affected by) s 855-10, if the criteria in s 855-10 are satisfied: ie the beneficiary is a non-resident and the beneficiary’s share of the capital gain of the trust estate is from a CGT event that happened to non-taxable Australian property. In other words, that s 855-10 has operation at the point of calculation of the “attributable gain” under s 115-225(1) to cause the capital gain to be disregarded in working out the amount of the capital gain that the foreign beneficiary is treated as having made under s 115-215(3) or the amounts assessable to the trustee under ss 115-220 and 115-222. Alternatively, they argued, s 855-10 is enlivened in relation to a foreign beneficiary of a resident trust estate at the time of applying div 102 to the foreign beneficiary when working out the beneficiary’s net capital gain pursuant to s 102-5, after the capital gain of the trust estate has been attributed to the foreign beneficiary by the application of sub-div 115-C. Hence, they argued, as in both appeals the beneficiaries were foreign residents just before the relevant CGT events happened in relation to non-taxable Australian property, they were required by s 855-10 to disregard their shares of the capital gains and any consequential attributed capital gains under sub-div 115-C.

11    Mr Robertson QC, senior counsel for Greensill, advanced as his principal submission, however, that where s 855-10(1) applies to disregard the gain, sub-div 115-C is never engaged because sub-div 115-C only applies in respect of a foreign beneficiary’s share of a trust estate’s “Australian” gains. Mr Robertson QC argued that sub-div 115-C, as enacted in 1999, applied, “as it still does”, only to the div 6 assessable income of a taxpayer in order: (1) to convert that part of the beneficiary’s div 6 assessable income attributable to the net capital gains of a trust estate into an assessable capital gain of the beneficiary to allow the beneficiary to offset personal capital losses; and (2) to adjust a taxpayer’s div 6 assessable amount to reverse CGT discounts that applied in calculating the trust’s s 95 income. Mr Robertson QC argued that following the 2011 amendments, this conversion is now effected under div 6E. Mr Robertson QC further argued that as div 6 only assesses foreign beneficiaries (s 98A), trustees in respect of foreign beneficiaries (s 98) and foreign trustees (ss 99, 99A) on so much of their respective shares of s 95 net income as is “attributable to sources in Australia”, a capital gain of a trust estate must have a territorial connection with Australia for a foreign taxpayer’s share of net income attributable to that capital gain to be assessable under div 6. It was submitted that the rules in div 855 which apply to define the territorial connection with Australia for taxing a foreign resident on a capital gain are consistent with and epexegetical to the jurisdictional concept of source, not independent of it. It was further submitted that so much of a foreign taxpayer’s share of net income attributable to non-Australian gains – ie gains from a CGT event happening to non-taxable Australian property – is not a div 6 assessable amount. Thus, the argument went, as the capital gain made by the Greensill Trust included in its s 95 net income was from a CGT event which happened to non-taxable Australian property with no jurisdictional connection with Australia, div 6 did not assess that gain and there was no div 6 assessable amount to convert under sub-div 115-C. It was contended that Thawley J, as a result of “overlooking” sub-div 115-C as enacted and its function to convert a foreign beneficiary’s div 6 assessable amount, “proceeded on the fundamentally incorrect basis” that sub-div 115-C assessed a foreign beneficiary’s share of all gains included in the calculation of the trust estate’s s 95 net income, whether Australian gains or foreign gains, and that s 115-215(3) deemed each share to be an assessable capital gain to be included in the calculation of the foreign beneficiary’s assessable income under s 102-5 of the 1997 Act. Accordingly, the argument continued, Thawley J identified “an illusory issue”, being whether a foreign beneficiary’s deemed s 115-215(3) gain was disregarded by s 855-10 as being “from a CGT event” or by s 855-40 as being “in respect of” the beneficiary’s interest.

12    Putting aside the merits of the argument, there was no justification for the criticisms levelled at Thawley J. It was unfair to submit that His Honour “overlooked” how sub-div 115-C operated before the 2011 amendments and also unfair to submit that His Honour wrongly assumed that sub-div 115-C applied to a foreign taxpayer’s share of all gains making up the s 95 net income of a trust estate. Despite Mr Robertson QC submitting to the contrary, the arguments now put were new. It is not at all apparent from either the written or oral submissions below that it was argued that a gain made from a CGT event happening to non-taxable Australian property was not an “Australian gain” for the purposes of div 6 and would not have been taxable to a foreign beneficiary (or a trustee in relation to the foreign beneficiary) under div 6 and therefore sub-div 115-C, as enacted, was never engaged. Nor does it appear that the argument was put that the 2011 amendments did not substantively alter the operation of sub-div 115-C. If seeds of the argument now put were advanced in the submissions below, they were put in a way that was opaque, lacked clarity and concealed. Moreover, the new argument is not clear from the notice of appeal. Notwithstanding, Mr O’Meara SC, senior counsel for the Commissioner, did not object to the Court dealing with the new argument.

13    The Commissioner’s case, succinctly stated, was that the 2011 amendments did make substantive changes to the operation of sub-div 115-C. It was argued that the taxation of capital gains made by a trust estate is now governed solely by sub-div 115-C as capital gains of trust estate were taken out of the assessing provisions of div 6 of the 1936 Act with the enactment of div 6E of the 1936 Act and the amendments to sub-div 115-C of the 1997 Act in 2011. On the Commissioner’s construction of sub-div 115-C, as it now is, the sub-division applies to a foreign taxpayer even where the only capital gains of the trust estate do not have an Australian source. It was argued that neither div 6 nor div 6E have operation within sub-div 115-C and that neither of those divisions import any source criterion into the assessment of foreign taxpayer in respect of capital gains of a trust estate. In particular, the Commissioner cavilled with Mr Robertson QC’s submission about the operation of div 6E. It was submitted that the operation of that division is limited to modifying the way in which liabilities under ss 97, 98, 98A, 99 or 99A of div 6 are calculated, which the division effects by removing capital gains from div 6 so that capital gains are disregarded in the computation of those liabilities and now taxed exclusively under sub-div 115-C.

14    The Commissioner also contended that:

(a)    the “extra capital gains” of a beneficiary under s 115-215 are not capital gains of the beneficiary “from a CGT event” within the meaning of s 855-10;

(b)    section 855-10 does not apply in working out the “attributable gain” of a foreign beneficiary under s 115-225 for the purposes of s 115-215, as the capital gain to which the method statement is applied in accordance with s 115-225(1)(a) is the capital gain of the trust estate;

(c)    section 855-10 does not apply in working out the amount added by s 115-220 to the div 6 liability of a trustee under s 98 of the 1936 Act in relation to a foreign beneficiary, because the amount added by s 115-220 is not a capital gain;

(d)    likewise s 115-222 operates to add an additional amount to the div 6 amount to which the trustee may be liable under ss 99 or 99A of the 1936 Act – it does not additionally require that div 6 apply to that amount.

15    The Commissioner also strongly cavilled with the proposition that s 855-10 can be viewed as coterminous with the jurisdictional criteria in div 6 in relation to the taxation of foreign beneficiaries (ie to be taxable under div 6, the beneficiary’s share of the net income of the trust estate must be attributable to sources in Australia). The Commissioner further argued that if the question of source be relevant in applying sub-div 115-C (which he contended it is not), it cannot be resolved in favour of the taxpayer simply on the basis that the relevant asset giving rise to the capital gain was non-taxable Australian property.

16    The Commissioner supported his case by reference to the evident purpose of the changes, which was to effect the streaming of capital gains to beneficiaries in a manner that would allow those beneficiaries to offset capital losses against those gains. It was said that the introduction of sub-div 115-C effected a change in approach and it was not to be assumed that the manner in which the capital gains provisions had applied to the income of trust estates under the previous provisions had been carried through into the new statutory scheme.

the statutory scheme

17    The commencing point for the analysis is the statutory scheme for the taxation of the net income of trust estates. The statutory scheme is found in div 6 of pt III of the 1936 Act (which provides for the taxation of trust income and allocation of liability to pay tax on such income); div 6E of the 1936 Act (which removes capital gains from the “net income” of a trust estate); sub-div 115-C of the 1997 Act (which deals with the taxation of capital gains made by a trust estate); and div 102 of the 1997 Act (which contains specialist rules for working out a taxpayer’s capital gain for inclusion in assessable income). What follows traverses many of the aspects of the statutory scheme to which Thawley J drew attention, however the provisions warrant close examination afresh bearing in mind the further (and now primary argument) advanced by Mr Robertson QC.

Division 6 of the 1936 Act

18    The key provision of div 6 of pt III of the 1936 Act is s 96, which provides:

Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.

19    The basic trust taxation rules contained in div 6 involve: (1) the computation of the “net income” of a trust estate as defined in s 95(1); and (2) the allocation of the liability to tax on that net income.

20    The phrase “the net income of the trust estate” in relation to a trust estate as defined in s 95(1) relevantly means:

the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions ….

The “net income” of a trust estate is thus the taxable income of the trust estate calculated on the hypothesis that the trustee is a taxpayer and resident in Australia. The hypothesis of the trustee as a taxpayer requires that the trust estate be treated as if it had legal personality for the purposes of calculating the taxable income of the trust estate and the hypothesis of residency requires all amounts of assessable income to be included in the trust estate’s “net income”, regardless of source. However, source becomes relevant in respect of the allocation of the liability to tax on that net income. If a "net capital gain", as defined in s 995-1(1) of the 1997 Act, is made it is taken into account in computing the net income of the trust estate within the meaning of s 95(1) of the 1936 Act, as part of the assessable income of the trust estate.

21    Relevantly, div 6 distinguishes between a trust estate which is “a resident trust estate” and “a non-resident trust estate” in relation to the relevant year of income: s 95(2), (3). By s 95(2), a trust estate is taken to be a resident trust estate in relation to a year of income if a trustee of the trustee estate was a resident at any time during the income year or the central management and control of the trust estate was in Australia at any time during the year of income. That is, residency of a trust estate for the purposes of div 6 depends on the residency of the trustee. Section 95(3) provides that in div 6, a trust estate that is not a resident trust estate in relation to a year of income is referred to as a non-resident trust estate in relation to that income year.

22    The structure for taxation of trust income is found in ss 97, 98, 99 and 99A of the 1936 Act:

(a)    section 97(1)(a) provides that if a beneficiary who is not under a legal disability is “presently entitled” to a share of the “income of the trust estate”, the beneficiary is assessed on so much of “that share” of the “net income of the trust estate” as is attributable to a period when the beneficiary was an Australian resident and so much of “that share” of the “net income of the trust estate” as is attributable to a period when the beneficiary was a foreign resident and “is also attributable to sources in Australia”. The phrase "presently entitled to a share of the income" directs attention to the processes in trust administration by which the share is identified and entitlement established (Commissioner of Taxation v Bamford (2010) 240 CLR at 481; [2010] HCA 10 (Bamford) at [39]) and the word “share” in the expression “a share of the income of the trust estate” is used in the sense of “proportion”; that is, s 97 brings to tax in the hands of the beneficiary the same proportional share of the net income amount of the trust estate as the share of the distributable income to which the beneficiary is presently entitled: Bamford at [43]–[46]. Relevantly for the present purposes, the taxing provisions under s 97 do not depend on the residency of the trust estate. By that section, Australian resident beneficiaries of foreign trust estates are assessable on their proportional share of the trust estate’s net income irrespective of the source of that income;

(b)    section 97 must be read with s 98 in relation to a beneficiary who is under a legal disability or, relevantly, foreign resident beneficiaries. Section 97(2)(b) contains an exception with respect to foreign resident beneficiaries by providing that a reference in s 97 to “income of a trust estate to which a beneficiary is presently entitled shall be read as not including a reference to income of a trust estate” to which a foreign resident beneficiary is presently entitled (subject to s 97(3) which is not relevant for present purposes). In lieu, s 98(2A) has application in the circumstance of a foreign resident beneficiary who is presently entitled to a share of the income of a trust estate. By s 98(2A), the trustee is liable to pay tax on so much of the foreign beneficiary’s proportional share of the “net income” of the trust estate that is “attributable to sources in Australia”. The foreign resident beneficiary is also assessable on their relevant share of the Australian sourced income of the trust estate (s 98A(1)), but can claim a credit for the tax paid by the trustee as a result of the operation of s 98 in respect of the foreign resident beneficiary’s share of the Australian sourced income to which that beneficiary is presently entitled (s 98A(2)). Thus, foreign sourced income to which a foreign resident beneficiary is presently entitled is not subject to tax in Australia, regardless of the “residency” of the trust estate. Section 98(3) provides that a trustee to whom the section applies in respect of an amount of net income is to be assessed on the relevant share of beneficiary of the net income without any deduction;

(c)    “Residency” of the trust estate becomes relevant under s 99 and s 99A. Relevantly, by s 99(3) and s 99A(4), the trustee of a non-resident trust estate is liable to pay tax on the “net income” of the trust estate in respect of which no beneficiary is assessable under s 97, or the trustee under s 98, where such income is “attributable to sources in Australia”. In both cases, the trustee is assessed on the net income as if it were the income of a resident individual and was not subject to any deduction.

23    Thus, relevantly, under the scheme for the taxation of trusts contained in div 6:

(a)    all amounts of assessable income of the trust estate, regardless of source, are to be taken into account in working out the trust estate’s “net income”;

(b)    where a resident beneficiary is presently entitled to a share of the income of the trust estate, that beneficiary is liable to pay tax on that beneficiary’s proportionate share of the “net income of the trust”, irrespective of whether such income has an Australian or foreign source: s 97;

(c)    where a non-resident beneficiary is presently entitled to a share of the income of the trust estate, the trustee (under s 98) and the beneficiary (under s 98A) are taxable on that beneficiary’s proportionate share of the “net income of the trust” having an Australian source;

(d)    the net income of a resident trust estate to which no beneficiary is presently entitled is taxable to the trustee, irrespective of the source of the net income: s 99, s 99A; and

(e)    the net income of a non-resident trust to which no beneficiary is presently entitled is taxable to the trustee only where the “net income” of the trust estate is attributable to Australian sources: s 99(3) and s 99A(4).

Division 102 of the 1997 Act

24    The assessable income of a trust estate includes any “net capital gain” made by the trust estate. The expression “net capital gain” has the meaning given by s 102-5 of the 1997 Act (see s 995-1 of the 1997 Act) and is the amount of a capital gain remaining after applying steps one to four of the method statement in s 102-5(1) of the 1997 Act. Step 1 is to reduce the capital gains made by the taxpayer in an income year by any capital losses that the taxpayer made in the income year. Step 2 is to apply any previously unapplied net losses from earlier years after the reduction of capital gains under Step 1. Where a taxpayer has discounted capital gains, Step 3 is to reduce each amount of a discount capital gain (remaining after Step 2, if any) by the discount percentage. Step 4 is to apply any small business concessions (if applicable). Step 5 is to add up the amounts of capital gains remaining after Step 4. The sum is the taxpayer’s net capital gain for the income year and by s 102-5(1), the taxpayer’s assessable income for that year includes that net capital gain. Whilst not argued by either of the parties, for the purposes of construing the statutory provisions, it is necessary to consider the extent to which the residency hypothesis applies in undertaking these steps. It seems to us that the residency hypothesis for the purposes of the calculation of a trust estate’s s 95 net income has no application in the determination of whether a trust estate has made a net capital gain (calculated in accordance with s 102-5) for inclusion in the trust estate’s assessable income. There are two reasons. First, it is evident from “Note 2” to Step 1 (which states that some provisions of the 1997 Act permit or require a taxpayer to disregard certain capital gains or losses when working out that taxpayer’s net capital gain) that s 855-10 is intended to have operation at Step 1. Secondly, it is not the capital gain which is the assessable income of a taxpayer, but the net capital gain calculated in accordance with s 102-5. On that construction, s 855-10 applies to a foreign trust which has made a gain from non-taxable Australian property in computing whether it has a net capital gain for inclusion in its assessable income to be taken into account in working out its s 95 net income. For clarity, that gain is not is not the deemed capital gain worked out under sub-div 115-C. For the reasons elaborated on later in these reasons, we have rejected the appellants’ construction of s 855-10 and have concluded that the courts below were correct to hold that the deemed capital gain worked out under sub-div 115-C is not a capital gain to which s 855-10 applies.

Division 6E of the 1936 Act

25    The scheme for the taxation of trusts contained in div 6 must be read subject to div 6E of the 1936 Act and sub-div 115-C of the 1997 Act. Division 6E was introduced in 2011 and applies if the assessable income of a trust estate includes a net capital gain (calculated in accordance with the method statement in 102-5 of the 1997 Act) and the net income of the trust estate exceeds nil: s 102UW of the 1936 Act.

26    Where the net income of a trust estate includes a net capital gain in an income year div 6E modifies the operation of div 6 by excluding the net capital gain from the calculation of the assessable amounts under ss 97, 98, 98A, 99, 99A and 100: s 95AAA. Division 6E achieves this by the requirement, prescribed in s 102UX, to make “assumptions” for the purpose of working out, in accordance with div 6, the amount included in the assessable income of a beneficiary under (relevantly) ss 97 or 98A or in respect of which a trustee is liable to tax in respect of a beneficiary under s 98 or which the trustee is liable to pay under ss 99 or 99A. The assumptions are that:

(a)    the income of the trust estate is equal to the “div 6E income” of the trust estate;

(b)    the net income of the trust estate is equal to the “div 6E net income” of the trust estate; and

(c)    the amount of a present entitlement of a beneficiary of a trust estate to the income of the trust estate is equal to the amount of the beneficiary’s “div 6E present entitlement” of the trust estate.

27    The “div 6E income” and “div 6E net income” of a trust estate is the income and net income respectively of the trust estate worked out on the assumption, relevantly, that net capital gains (worked out under s 102-5 of the 1997 Act) that are taken into account in working out the net income of a trust estate were disregarded: s 102UY(2) and (3). By s 102UY(4)(a), a beneficiary has an amount of “div 6E present entitlement to the income of a trust estate” that is equal to the beneficiary’s present entitlement to the income of the trust estate, decreased by each net capital gain taken into account in working out the net income of the trust. In short, the effect of div 6E is to remove the net capital gain from the assessing provisions of div 6. In lieu, there are special rules that apply to bring the net capital gains made by a trust estate to tax. Those rules are contained in sub-div 115-C of the 1997 Act: see 115-210(1) of the 1997 Act. Thawley J was correct at hold at [24] of the Greensill judgment that the operation of s 102UX, read with s 102UY, is that net capital gains are to be disregarded in working out in accordance with div 6 an amount to be included in the assessable income of a beneficiary of a trust estate or an amount in respect of which the a trustee is liable to pay tax under s 98 in respect of the beneficiary. The effect of div 6E is that the source requirements of div 6 do not apply. Instead, the taxability of such net capital gains to the beneficiary or the trustee in relation to the beneficiary is governed exclusively by sub-div 115-C.

Subdivision 115-C

28    Subdivision 115-C was first introduced in 1999, but was amended in 2011 at the same time as the introduction of div 6E. The context for the 2011 amendments and the introduction of div 6E was to address the concern that the streaming of capital gains to specific beneficiaries may not be effective for tax purposes in view of the decision in Bamford as, under the proportionate approach, a beneficiary is assessable on the net income of the trust estate under div 6 in the same proportion as the proportion of distributable income to which the beneficiary is presently entitled, regardless of the character of the trust law amount distributed to the beneficiary: Explanatory Memorandum, Tax Laws Amendment (2011 Measures No. 5) Bill 2011 (Cth) 2.5-2.9 (2011 Explanatory Memorandum). The 2011 Explanatory Memorandum made clear that the primary purpose of the amendments to sub-div 115-C is to ensure that where a trustee has the power to appoint or “stream” capital gains (and/or franked distributions) to specific beneficiaries, the streaming would be effective for tax purposes. This was done by introducing the concept of “specific entitlement” to ensure that a beneficiary's “share” of the trust's capital gains and franked distributions reflects their entitlement under the trust deed: 2011 Explanatory Memorandum, 2.22. The 2011 Explanatory Memorandum also explained that the primary purpose of div 6E is to avoid double taxation on capital gains and franked distributions, by adjusting the amount otherwise included in a beneficiary's assessable income (or assessed to the trustee) under div 6, by effectively ignoring any capital gains and franked distributions of the trust, now brought to tax under sub-div 115-C and 207-B respectively: 2011 Explanatory Memorandum, 2.151-2.153.

29    Section 115-210(1) relevantly states:

This Subdivision applies if a trust estate has a * net capital gain for an income year that is taken into account in working out the trust estate's net income (as defined in section 95 of the Income Tax Assessment Act 1936 ) for the income year.

30    Thus, the condition for the subdivision to apply, is that a trust estate has a “net capital gain” (as defined by s 995-1 of the 1997 Act) for an income year that is taken into account in working out the trust estate’s net income (as defined in s 95 of the 1936 Act) for the income year (s 115-210(1)) and whether the trust estate has a “net capital gain” is to be worked out in accordance with the five steps set out in s 102-5 of the 1997 Act. The particular rules in sub-div 115-C governing the tax treatment of the “net capital gains” of a trust estate are contained in ss 115-215, 115-220 and 115-222.

31    Section 115-215 applies where a beneficiary is made “specifically entitled” to an amount of a capital gain made by a trust estate. “Specific entitlement” is a statutory concept and it is a different concept to present entitlement, upon which div 6 operates. A beneficiary is “specifically entitled” to such gains if the beneficiary receives, or can reasonably be expected to receive, an amount equal to the net financial benefit referable to that capital gain (after the application by the trustee of any losses) to the extent that the application is consistent with the application of capital losses (in accordance with the method statement in s 102-5(1)) and the entitlement is recorded in the accounts or records of the trust no later than 2 months after the end of the income year: s 115-228.

32    The operative provision in s 115-215 is s 115-215(3). The purpose of s 115-215(3) is identified in s 115-215(1) as follows:

Purpose

(1)    The purpose of this section is to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s *capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary, so:

(a)    the beneficiary can apply *capital losses against gains; and

(b)    the beneficiary can apply the appropriate *discount percentage (if any) to gains.

33    Subsection 115-215(3) achieves that purpose by requiring that div 102 apply to the beneficiary, as if the beneficiary had a capital gain of an amount calculated as follows:

Extra capital gains

(3)      If you are a beneficiary of the trust estate, for each *capital gain of the trust estate, Division 102 applies to you as if you had:

(a)      if the capital gain was not reduced under either step 3 of the method statement in subsection 102-5(1) (discount capital gains) or Subdivision 152-C (small business 50% reduction)—a capital gain equal to the amount mentioned in subsection 115-225(1); and

(b)      if the capital gain was reduced under either step 3 of the method statement or Subdivision 152-C but not both (even if it was further reduced by the other small business concessions)—a capital gain equal to twice the amount mentioned in subsection 115-225(1); and

(c)      if the capital gain was reduced under both step 3 of the method statement and Subdivision 152-C (even if it was further reduced by the other small business concessions)—a capital gain equal to 4 times the amount mentioned in subsection 115-225(1).

Note:      This subsection does not affect the amount (if any) included in your assessable income under Division 6 of Part III of the Income Tax Assessment Act 1936 because of the capital gain of the trust estate. However, Division 6E of that Part may have the effect of reducing the amount included in your assessable income under Division 6 of that Part by an amount related to the capital gain you have under this subsection

34    Thus, s 115-215(3) operates to deem a beneficiary to have made a “capital gain” (in its defined sense, albeit not asterisked: s 2-15(1) of the 1997 Act) in the amount prescribed. This “extra capital gain” is worked out by reference to the “attributable gain” of the beneficiary calculated under s 115-225. The “attributable gain” of the beneficiary is the product of the amount of the capital gain remaining after applying Steps 1 to 4 of the method statement in s 102-5(1) and the beneficiary’s “share” of the capital gain divided by the amount of the capital gain: s 115-225(1). The beneficiary’s “share” of the capital gain is calculated under s 115-227 and is the sum of the amount of the capital gain to which the beneficiary is “specifically entitled” plus, if there is an amount of the capital gain to which no beneficiary is specifically entitled, that amount multiplied by the beneficiary’s “adjusted div 6 percentage” for the relevant year. The “adjusted div 6 percentage”, broadly speaking, is the beneficiary’s share of any capital gain of the trust estate (expressed as a percentage) to which no beneficiary has a specific entitlement: s 115-227 and s 995-1 of the 1997 Act, definition s 95(1) of the 1936 Act. If s 115-215(3)(a) applies, the amount treated as the beneficiary’s “extra capital gain” is that beneficiary’s “attributable gain”, against which the beneficiary may apply personal “capital losses” or relevant discounts to work out their own “net capital gain” included in the beneficiary’s assessable income by s 102-5 of the 1997 Act. If ss 115-215(3)(b) or 115-215(3)(c) apply, the amount calculated under s 115-225 is grossed up to reverse out any discounts and concessions at the trust level.

35    The deeming effected by s 115-215(3) ensures that div 102 is made to apply for the purpose specified in s 115-215(1) in working out if a beneficiary has made a “net capital gain” or a “net capital loss” for an income year on which the beneficiary is assessable by force of sub-div 115-C. The deeming effected by s 115-215(3) is necessary because of s 102-20 (of the 1997 Act), which provides that:

You can make a * capital gain or * capital loss if and only if a * CGT event happens.

No CGT event would have happened to the beneficiary to engage div 102, however the deeming treats the beneficiary as if the beneficiary had made the capital gain for the purposes of div 102. Section 115-215(3) treats the appropriate amount of a capital gains made by the trust estate as an extra capital gain made by the beneficiary, notwithstanding that the CGT event did not happen to the beneficiary but was a capital gain made by the trust estate. Section 115-215(4A) confirms, for the avoidance of doubt, that the subsection treats the beneficiary as having made a capital gain for the purposes of div 102, despite s 102-20. This is also made clear by “Note 3” to s 102-20, which provides that:

You [ie the taxpayer] may make a capital gain or capital loss as a result of a CGT event happening to another entity: see subsections 115-215(3) …

As the result, the beneficiary can apply any capital losses that the beneficiary made and also any applicable discount or concessions against the capital gain.

36    Section 115-220 applies where a beneficiary is specifically entitled to all or part of a capital gain made by the trust estate. The section applies on the assumption that there is a share of the income of the trust estate in respect of which the beneficiary is presently entitled, in respect of which the trustee would be liable to be assessed under s 98. The assumption is necessary because net capital gains of a trust estate are not brought to tax under div 6. Section 115-220(2) provides that unless ss 98(3)(b) or 98(4) applies (which are not applicable here), the amount assessable to the trustee in respect of the capital gain of the trust estate to which the beneficiary is specifically entitled is the amount of the “attributable gain” calculated in accordance with s 115-225(1).

37    Finally, s 115-222 applies where ss 99 or 99A of the 1936 Act applies in relation to the trust estate. For each capital gain of the trust estate, the amount in respect of which the trustee is liable to be assessed is increased: in respect of a trustee assessable under s 99, by the amount of the attributable gain calculated under s 115-225(1); in respect of a trustee assessable under s 99A, the formula prescribed in s 115-222(4), the effect of which is to remove the benefit of any CGT discounts.

38    Section 95AAB and s 95AAC of div 6 of the 1936 Act should also be mentioned in this context. The effect of those sections is that the amount assessed under sub-div 115-C is treated as being included in the beneficiary’s or trustee’s assessable income under div 6, other than for the purposes of the assessment provisions in div 6.

consideration

39    The question for determination is whether s 855-10 of the 1997 Act has any operation in the calculation of the amounts required to be calculated under ss 115-215 and 115-220 in sub-div 115-C. Section 855-10(1) requires a capital gain “from a CGT event” to be disregarded if:

(a)    you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and

(b)    the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.

40    A “foreign trust for CGT purposes" means a trust that is not a “resident trust for CGT purposes” (s 995-1 1997 Act). A trust that is not a unit trust is a “resident trust for CGT purposes” for an income year if a trustee is an Australian resident or the central management and control of the trust is in Australia (s 995-1 1997 Act).

41    In both matters, the relevant CGT event was the disposal by each trustee, in their capacity as trustee, of property that was not taxable Australian property. In each matter, there was a capital gain from the CGT event and the trustee distributed the capital gain from the disposal of the non-taxable Australian property to a foreign beneficiary of the trust. Had each of the foreign beneficiaries made the gain directly, rather than as a result of the distribution to them of the capital gain, the capital gain would have been disregarded by the operation of s 855-10. The capital gain would also have been disregarded by operation of s 855-40 if it was a gain that the foreign resident beneficiaries had made through their interest in a fixed trust. So too, the appellants contended, s 855-10 applies to capital gains made by a discretionary trust where capital gains are streamed to a foreign beneficiary. The appellants argued that the text, context and legislative history of both sub-div 115-C and s 855-10 all support a construction of the provisions as a cohesive statutory scheme that does not bring to tax in Australia capital gains of a trust estate from the disposal of non-taxable Australian property when distributed to foreign resident beneficiaries.

42    The appellants identified two possible places where s 855-10 may operate within sub-div 115-C:

(a)    in determining whether the threshold requirement in s 115-210 to apply sub-div 115-C is met; and

(b)    in working out the amount of a beneficiary’s attributed gain under s 115-225(1)(a) for the purposes of s 115-215(3).

43    The appellants contended that Thawley J, at [40(1)] of the Greensill judgment, held, and was wrong to hold, that s 855-10 has operation in working out whether the trust estate has a net capital gain to which the rules in sub-div 115-C would apply. It was submitted that s 855-10 cannot apply to disregard the capital gains of a trust estate in computing the trust estate’s net income under s 95 of the 1936 Act because the ability to disregard a capital gain under s 855-10 depends on the taxpayer - “you” – being the trustee of a foreign trust or a foreign beneficiary; and because of the two hypotheses on which the s 95 net income of a trust is to be calculated: ie that the trust estate is the taxpayer and a resident. These contentions misread par [40]. His Honour said at [40(1)]:

First, for Subdiv 115-C to apply to the [Peter Greensill Family Trust] at all, the [Peter Greensill Family Trust] must have a net capital gain, which requires that it have capital gains that are not disregarded: s 115-210(1). The opening words of s 115-220(2) refer to “each capital gain of the trust estate”, in this case being a reference to each capital gain of the [Peter Greensill Family Trust]. Section 855-10(1) does not apply to disregard the capital gains of a resident trust estate.

In our view, fairly considered, His Honour was not saying, as submitted by Mr Robertson QC, that s 855-10 had no application to trust estates, nor that s 855-10 overrides the residency hypothesis in the s 95 definition of “trust income”, as submitted by Ms Seiden. In our view, all that His Honour was saying (and correctly with respect) was that s 855-10 did not apply to a capital gain made by the trustee of a resident trust estate and, it followed, the threshold requirement for sub-div 115-C to apply in that case was satisfied. Relevantly, there was no dispute in either matter that the trust is a resident trust estate (as defined in div 6 and for CGT purposes) nor that the threshold requirement for sub-div 115-C to apply was satisfied.

44    In support of the contention that s 855-10 has operation in working out the amount of a beneficiary’s attributed gain under s 115-225(1)(a) (for the purposes of s 115-215(3)), Ms Seiden SC argued that the capital gain which s 115-215(3) treats the beneficiary as having is a “capital gain” in the defined sense. It was submitted further that a capital gain in the defined sense can only be made if a CGT event happens as described in div 104 of the 1997 Act (see s 102-20 which provides that “you can make a capital gain… if and only if a CGT event happens”), however the CGT event does not have to happen to the beneficiary. Reliance was placed on “Note 3” to s 102-20 which provides that:

You may make a capital gain or capital loss as a result of a CGT event happening to another entity: see subsections 115-215(3) …

Thus, it was argued, s 115-215(3) treats the capital gain made by the trust estate as a capital gain made by the beneficiary for the purpose of the beneficiary calculating their net capital gain under div 102. It was submitted that “importantly”, a CGT event does not happen to a taxpayer but to a CGT asset and the capital gain is what “you” – ie the taxpayer – have. It was argued that sub-div 115-C ensures that, in the case of a taxpayer who is beneficiary of a trust estate, the capital gain is made by that taxpayer: in the language of s 115-215(3) – “as if you had”. It was submitted that by focusing on what the “you” is referring to in both div 102 and sub-div 115-C (i.e., the making (or having) of the capital gain and not the happening of the CGT event), a harmonious operation between div 102 and sub-div 115-C is achieved and ensures that the capital gains of the trust estate are treated as those of the beneficiary. On this construction, the capital gain that the beneficiary is treated as having by s 115-215(3) falls within s 855-10(1) by reason that the beneficiary is a foreign resident and the capital gain is made from a CGT event in relation to non-taxable Australian property.

45    That construction was, with respect, correctly rejected by Thawley and Steward JJ. Thawley J at [41]-[45] reasoned as follows:

As to the first and second matters, the applicant submitted that the reference in s 115-220(2) to “the amount mentioned in subsection 115-225(1) in relation to the beneficiary” means Mr Greensill’s capital gain as disregarded by s 855-10 of the [1997 Act].

The statutory language does not permit that conclusion. The “amount of the capital gain” referred to in s 115-225(1)(a) is the capital gain of the trust estate in relation to which the section applies. It is not a reference to any capital gain of the beneficiary. Section 115-225(1)(a), read with the s 102-5 method statement, allows for the trust estate’s capital gains to be reduced by its capital losses. This would not be achieved if s 115-225(1)(a) were understood as applying to capital gains and losses taken to have been made by the beneficiary.

The reference to “your share of the capital gain” in s 115-225(1)(b) is a reference, inter alia, to “the amount of the capital gain to which the [beneficiary] is specifically entitled”: s 115-227(a).

The result of the calculation required by s 115-225(1) is simply an amount which the statute requires to be calculated. It is not a capital gain capable of being the subject of s 855-10(1).

The amount of “attributable gain” calculated under s 115-225(1) is used for the purposes of each of ss 115-215(3), 115-220(2) and 115-222(2) and (4). Each of those provisions uses the words “for each capital gain of the trust estate” and then refers to the amount mentioned in s 115-225(1). This confirms that “the capital gain” referred to in s 115-225(1)(a) is the capital gain of the trust estate. The function of s 115-225(1) is to apportion the capital gain of the trust estate among the trustee and beneficiaries of the trust estate according to their “share” as determined under s 115-227. That portion is then brought to tax under one of ss 115-215, 115-220 or 115-222 as appropriate.

46    There are other reasons for rejecting the appellants’ construction.

47    First, the appellants’ construction overlooks the purpose of s 115-215 as expressed in s 115-215(1), namely so that “appropriate amounts of the trust estate’s net income attributable to the trust estate’s *capital gains are treated as a beneficiary’s capital gains” against which the beneficiary can apply capital losses and apply the appropriate discount percentage (if any) to the gains. The calculation of “attributable gain” serves the purpose of quantifying the amount of the trust’s capital gains, which are then treated as capital gains made by a beneficiary for the purpose of div 102, so that the beneficiary can apply any personal capital losses against capital gains taken to have been made by the beneficiary (Steps 1 and 2) and any discount and concessions to which the beneficiary is entitled (Steps 3 and 4) in working out the beneficiary’s net capital gain on which the beneficiary is assessable. There is no warrant to construe s 115-215 beyond the operative terms of the section for which capital gains are treated as the gains of the beneficiary.

48    Secondly, the modification of div 102 by s 115-215(3) is necessary to ensure that div 102 applies to the beneficiary in the manner specified in s 115-215(1). Section 115-215(4A) makes this clear.

49    Thirdly, as a matter of textual analysis, s 115-215(3) requires div 102 to be applied to a beneficiary after the computation of the amount which is to be treated as the beneficiary’s capital gain for the limited purposes prescribed by s 115-215(1). That is, div 102 can have no application to the beneficiary except in relation to the amount treated as the beneficiary’s capital gain applying the methodology prescribed by s 115-225. That is because the trust estate, not the beneficiary, has made the capital gain and the amount worked out under s 115-225(1)(a) is the amount of the trust’s capital gain after applying Steps 1 to 4 of the method statement in s 102-5(1).

50    Fourthly, s 855-10 identifies the capital gain to be disregarded as one that is “from a CGT event”. The appellants argued that that Thawley J wrongly held that that the use of the word “from” requires a direct connection between the capital gain and the relevant CGT event and that s 855-10 merely requires that the CGT event “happens” in relation to a CGT asset that is not taxable Australian property. That submission, however, ignores that the expression “CGT event” is defined in s 995-1 to mean any of the CGT events described in div 104. Hence, the threshold question for s 855-10 to operate is whether the relevant capital gain is from a CGT event described in div 104, which is the criterion that founds the application of the section in relation to a foreign beneficiary or the trustee of a foreign trust. The capital gain treated as the beneficiary’s capital gain by s 115-215(3) is not, however, a capital gain from a CGT event described in div 104, but a capital gain that the beneficiary is deemed to have made by operation of s 115-215(3). Hence, s 855-10 does not apply on its terms either in the context of sub-div 115-C or in relation to a beneficiary after the capital gain of the trust estate has been attributed to the foreign beneficiary by the application of sub-div 115-C.

51    Ms Seiden SC argued if the beneficiary’s capital gain in sub-div 115-C is not “from a CGT event”, several other provisions are thrown into doubt, being:

(a)    section 115-15 – it was submitted that this provision would never have applied to entitle a foreign beneficiary of a resident trust to the CGT discount (as not “from a *CGT event”) which appears contrary to Parliament specifically introducing ss 15-110, 115-115 and 115-120 to curtail that discount after 8 May 2012;

(b)    section 121-20 – it was said that the implication arises that there is no statutory requirement for a beneficiary to keep records of attributable gains under s 115-215 for the reason that they cannot be said to be “from a *CGT event”;

(c)    section 100-33(1) – it was said a foreign resident beneficiary could not apply a rollover in respect of a capital gain arising under s 115-215, as it would not be “from a *CGT event”; and

(d)    section 115-10(d) – it was submitted that the construction might limit the circumstances in which a life insurance company that is a beneficiary of a trust can make discount capital gains, as it would not be “from a *CGT event”.

52    Further, it was submitted, some CGT events deem the beneficiary to have made the gain (for example E5, E6, E7). It could not be gainsaid that such gains were “from a *CGT event”; opening up the irrational possibility of differing treatment for different CGT events.

53    These submissions do not assist the appellants for the following reasons:

(a)    as to s 115-15, the trust estate’s capital gain would be “from a *CGT event” and, if a discount capital gain, the capital gain taken to be made by the foreign beneficiary under s 115-215(3) would also be taken to be a discount capital gain by virtue of s 115-10 and s 115-215(4)(a);

(b)    as to s 121-20, the trust estate which makes the capital gain “from a *CGT event” would be responsible for the record keeping;

(c)    section 100-33 is not an operative provision but part of a Guide (see ss 100-5; 950-150);

(d)    section 115-10(d) only applies to complying superannuation assets, which are necessarily owned directly by the life insurance company: s 320-170; and

(e)    CGT events E5, E6, E7 are all div 104 events.

54    There is no lack of harmony with any of these provisions.

55    Fifthly, we agree with Thawley and Steward JJ that s 855-40 reinforces that s 855-10 does not have operation in the context of sub-div 115-C. As Thawley J stated at [63]-[64] of the Greensill judgment, the operation of the section is confined to capital gains that a foreign resident beneficiary makes in respect of the beneficiary’s interest in a fixed trust, where the gain “is attributable to a CGT event happening to a CGT asset of a trust”. This language is quite different to the language of s 855-10, which requires the capital gain to be “from” a CGT event. His Honour also observed that the note to s 855-40(2) indicates that the provision operates with respect to the capital gain taken to have been made by a beneficiary under s 115-215 of the 1997 Act, whereas s 855-10 does not contain such a note and operates differently. Section 855-10 does not provide for the disregarding of capital gains attributed to the beneficiary of a non-fixed trust under sub-div 115-C. Steward J further observed in the Martin judgment at [82] that the appellants’ construction of s 855-10 avoids the limitation of the rule in s 855-40 and, unless there is a clear contrary indication, the Court should not adopt a construction that would leave s 855-40 with little work to do, citing Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 at 382 [71]. If the appellants’ construction was accepted, and s 855-10 is construed as applying to deemed capital gains of beneficiaries arising under s 115-215(3), there would be no need for a specific provision in relation to fixed trusts. To these matters, we would also add that the legislative purpose of s 855-40, identified in subsection (1), namely “to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust by foreign residents of *CGT assets that are not *taxable Australian property”, is inconsistent with a construction that would apply s 855-10 to capital gains of beneficiaries arising under s 115-215 (or s 115-220) by reason of a CGT event occurring to an asset of a trust estate, and not by the direct ownership of the asset by the beneficiary.

56    Ms Seiden SC argued that the courts below were wrong to construe s 855-10 by reference to s 855-40 without regard to the balance of the provisions of div 855. Ms Seiden SC argued that the effect of the judgments below is that s 855-10 does not apply to foreign resident beneficiaries of discretionary trusts but, she argued, the expression “membership interest” includes an object of a trust (s 960-130(1) item 3) for the purposes of s 855-25, which prescribes when a “membership interest” is an indirect Australian real property interest (and hence taxable Australian property: s 855-15 item 2) and s 855-30, which applies the principal asset test to a “membership interest” to determine whether an entity’s underlying value is principally derived from Australian real property. Thus, it was submitted, whether a gain is disregarded by div 855 is predicated on whether the asset is non-taxable Australian property, not on the taxpayer’s ownership of the CGT asset. It was submitted that s 855-10 is the general or leading provision within div 855 and there is no need to read down its breadth where a taxpayer does not fall within the reach of the special or subordinate provisions of s 855-40.

57    However, whilst it is relevant for the purposes of s 855-10 to consider whether a foreign resident’s “membership interest” as the object of a discretionary trust constitutes taxable Australian property by virtue of s 855-25, s 855-10 applies to the capital gain from a CGT event that “happens in relation to” that membership interest, being the relevant CGT asset for the purposes of the application of s 855-10. Section 115-215 has no application in that context. Likewise, the application of the principal asset test to a discretionary beneficiary’s “interest” in a trust is used to determine whether that interest is taxable Australian property or not and again s 115-215 has no application in that context. Accordingly, this argument does not advance the appellants’ case.

58    Ms Seiden SC also argued that s 855-40 is “a very fragile base from which to construe s 855-10”, contending that “parts of it are internally inconsistent and don’t work at all” and that its operation is superfluous anyway. Subsection 855-40(2)(c)(ii) was said to be the provision which does not work.

59    Section 855-40(2) provides that:

A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:

(a)     you are a foreign resident when you make the gain; and

(b)     the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust) that is:

  (i)     the *fixed trust; or

(ii)     another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust); and

(c)     either:

(i)     the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or

(ii)     the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.

60    The conditions in subsections (5), (6), (7) and (8) are:

(5)     The conditions in subsections (6), (7) and (8) must be satisfied if the relevant *CGT event happens to an interest in a * fixed trust (the first trust) and the interest is *taxable Australian property at the time of the CGT event.

(6)     At least 90% (by * market value) of the *CGT assets of:

  (a)     the first trust; or

(b)     a * fixed trust in which the first trust has an interest (directly, or indirectly through a *chain of trusts, each trust in which is a fixed trust);

must not be * taxable Australian property at the time of the relevant *CGT event.

(7)     If the condition in subsection (6) is not satisfied for the first trust (but is satisfied for a trust covered by paragraph (6)(b)), the condition in subsection (8) must be satisfied for the first trust, and for each other trust in the *chain of trusts between the first trust and the trust that satisfied the condition in subsection (6).

(8)     The condition is that, assuming any interest in a *fixed trust in that *chain not to be *taxable Australian property, at least 90% (by *market value) of the *CGT assets of the trust must not be taxable Australian property.

61    Ms Seiden SC submitted that s 855-40(2)(c)(ii) is otiose because s 855-40(2)(c)(i) read with the look through rules is capable of dealing with all CGT assets that occur to downstream assets. Ms Seiden SC further that submitted that s 855-40(2)(c)(ii) can, in any event, never be satisfied because, under s 855-40(2)(c)(ii), whether the membership interest held by the entity in the fixed trust is taxable Australian property depends whether that interest is “an indirect Australian real property interest” (s 855-15). To be “an indirect Australian real property interest”, the interest must pass the principal asset test in s 855-30 and, stated broadly, to pass the principal asset test, more than 50% of the value of the underlying assets must be derived from taxable Australian real property. Thus, the argument went, conditions (5) and (6) cannot be satisfied simultaneously because condition (6) is that at least 90% (by market value) of the CGT assets of the fixed trust must not be taxable Australian property at the time of the relevant CGT event. However, both submissions disregard the operation of the section where there is a chain of fixed trusts and condition (6) is not satisfied in the trust in which the interest is held but is satisfied in a trust down the chain. Conditions (7) and (8) apply in that circumstance and those conditions operate assuming that any interest in a fixed trust in that chain not to be taxable Australian property. Accordingly, s 855-40(2)(c)(ii) is capable of operation, albeit a narrow application, and there does not seem to us to be any merit in the claim that the section is either unworkable or unnecessary.

62    The claim that s 855-40 is superfluous was put on the basis that its predecessor provision, s 768-605(2), was included in the legislation out of abundant caution to provide clarity to foreign resident investors in the managed fund industry in respect of their liability to tax on capital gains made on their interests in, or through, fixed trusts. That submission does not find support in the extrinsic material. The former s 768-605, the predecessor provision which was repealed with the enactment of div 855, relevantly provided:

768-605 Effect of capital gain or loss from underlying fixed trust assets

(1)     A *capital gain or *capital loss you make from a *CGT event happening to your interest in a *fixed trust is disregarded if:

  (a)     you are a foreign resident at the time of the CGT event; and

(b)     your interest has the *necessary connection with Australia at that time; and

  (c)     the conditions in section 768-610 are satisfied.

(2)     A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:

  (a)     you are a foreign resident when you make the gain; and

(b)     the gain is attributable to a *CGT event happening to a *CGT asset of that trust or of another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of fixed trusts); and

  (c)     either:

(i)     the asset does not have the *necessary connection with Australia at the time of the CGT event; or

(ii)     the asset is an interest in a fixed trust and the conditions in section 768-610 are satisfied.

Note: Section 115-215 treats a portion of a trust’s capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.

63    Section 768-605 was enacted in 2004. At that time, a non-resident made a capital gain only if a CGT event happened to a CGT asset that had the “necessary connection with Australia” (the former s 136-10 (repealed in 2006)) and the exemption in s 768-605 only applied when the trust estate in which the foreign beneficiary held an interest was a fixed trust and the gain related to an asset that did not have the “necessary connection with Australia”. There was no equivalent exemption for capital gains of beneficiaries attributable to CGT events happening for non-fixed trusts. The Explanatory Memorandum, New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) (2004 Explanatory Memorandum) at 1.3 explained that the section was introduced to align the tax treatment of foreign residents investing in fixed trusts more closely with the tax treatment of foreign residents investing directly in assets in Australia. The 2004 Explanatory Memorandum also explained at 1.12 that the policy rationale for the exemption only applying in relation to fixed trusts was as an integrity measure to ensure there was no discretion available to the trustee to provide benefits to parties who were not beneficiaries of the trust. Division 136 and s 768-605 were repealed in 2006, at the time that div 855 was enacted. The Explanatory Memorandum, Tax Laws Amendment (2006 Measures No. 4) Bill 2006 (Cth) (2006 Explanatory Memorandum) at 4.1, 4.12 explained that the new measures narrowed the range of assets on which a foreign resident was liable to Australian CGT to Australian real property (ie “taxable Australian property”: s 855-15; 855-20) and the business assets of a foreign resident’s permanent establishment, however, as Thawley J observed at [68], the 2006 Explanatory Memorandum said nothing about div 855 changing the taxation of capital gains deemed to be made by foreign resident beneficiaries under s 115-215. It did state at 4.113:

Amendments made by this Bill move a specific treatment for capital gains and capital losses made by foreign residents from interests in, or through interests in, fixed trusts from Subdivision 768-H into Division 855. The general operation of the CGT and foreign resident rules will ensure that a capital gain or a capital loss on an interest in a fixed trust made by a foreign resident is disregarded if that interest is not taxable Australian property. The provisions specifically dealing with the distribution of capital gains to foreign beneficiaries will continue to operate.

Thawley J considered that 4.113, combined with there being no mention of any change to the taxation of capital gains deemed to be made by foreign beneficiaries, indicated that the former exemptions from CGT for foreign residents in relation to fixed trusts in sub-div 768-H were to continue in div 855, but that the existing provisions for the “distribution of capital gains” to foreign beneficiaries would continue to operate as before (Greensill judgment [69]). We agree with Thawley J. The extrinsic material does not suggest that s 855-40 or its predecessor provision, s 768-605(2), were mere “clarity measures” as contended by Ms Seiden SC. To the contrary, the legislative history elucidates that the exemption now encapsulated in s 855-40 was deliberately limited to fixed trusts for integrity reasons.

64    Mr Robertson QC put a slightly different argument. He argued that Thawley and Steward JJ overlooked that the mischief Parliament aimed to cure by the enactment of the former s 768-605 which, he submitted, became redundant with the enactment of s 855-15 in 2006 and so, the argument went, s 855-40 no longer had significant work to do. It was put by Mr Robertson QC in his written submissions that:

… s 768-105 (sic) provided, inter alia, a special exemption for a foreign beneficiary’s s 98A assessable share of a trust’s net income attributable to Australian gains and losses, which was converted by ss 115-215(3) and (6) into an assessable capital gain. In this regard, the Explanatory Memorandum to the New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) recognised that s 115-215 only applied to identify and convert a foreign beneficiary’s s 98A assessable income, being its share of the trust’s net capital gain attributable to Australian sources:

[1.29] … Section 115-215 applies to a trust that has a net capital gain for an income year. In respect of a foreign resident beneficiary, section 115-215 effectively applies if the beneficiary is presently entitled to a share of the net income of a trust and that share is attributable to Australian sources [i.e. s 98A [1936 Act]] (emphasis supplied and words in brackets added)

The mischief Parliament aimed to cure in 2004 concerned an interest in an Australian trust which was defined, at that time, as a CGT asset with a “necessary connection with Australia” within former s 136-10 [1997 Act], even if it only represented a beneficial interest in underlying trust assets without a necessary connection with Australia. So whilst the beneficiary would not be assessed under s 98A [1936 Act] when the underlying assets were sold by the trustee, it would be assessed when a CGT event happened to its interest, such as when its interest was redeemed (CGT event C2) or sold (CGT event A1) or when proceeds of the sale of the underlying trust assets were distributed to it (CGT event E4).

This problem was compounded where the foreign investor invested in an Australian trust holding investments in other Australian trusts that invested in a portfolio of assets that did not have the necessary connection with Australia. This gave rise to a chain of interests with the necessary connection with Australia. Thus an intermediate trustee’s gain on redemption of an interest in underlying non-Australian assets would itself be an Australian gain included in the trust’s net income and assessable to the foreign investor under s 98A [1936 Act]. This would trigger s 115-215(3) despite the foreign investor only actually receiving the benefit of underlying non-Australian gains. So s 768-105 (sic) exempted the otherwise assessable capital gain if the beneficiary’s s 98A assessable income was attributable to its investment in a trust that predominantly owned assets that did not have the necessary connection with Australia.

In 2006, this 2004 problem was largely if not wholly solved when Parliament expressly removed the interest of a beneficiary in an Australian trust from the re-enacted definition of “taxable Australian property” in s 855-15 [1997 Act]. The principal exemptions conferred by s 768-105 (sic) became redundant by this broad-ranging amendment and, in particular, no inappropriate s 98A assessable income could be created that would trigger Subdivision 115-C. Thus in 2006 s 855-40 no longer has significant work to do. But in 2004 the position was radically different, a point overlooked in [the Greensill judgment] and in [the Martin judgment].

(emphasis in original)

65    The assertion of the mischief which the enactment of s 768-605 in 2004 “aimed to cure” does not support a conclusion that s 855-40, when enacted in 2006, should not be construed on its terms. The submission does not deal with the express language of s 855-10 and s 855-40. Furthermore, it ignores the express purpose of s 855-40, which is “to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust by foreign residents of *CGT assets that are not *taxable Australian property”: s 855-40(1) of the 1997 Act. There is no warrant for construing s 855-10 and s 855-40 other than on their terms.

66    If reference to legislative history bears on the construction of s 855-40, it does not assist the appellants. We agree with Thawley J that s 768-605(1) is comparable to s 855-10(1) in that s 768-605(1) applied to capital gains “you make from a *CGT event” – ie capital gains made under pt 3-1 of the 1997 Act from a CGT event happening to the beneficiary’s interest in a fixed trust - and that s 768-605(2) is comparable to s 855-40 in its application to a capital gain of a beneficiary arising, not by direct operation of pt 3-1 of the 1997 Act on a CGT asset of the beneficiary, but by the operation of sub-div 115-C in respect of a CGT event happening to a CGT asset of the estate of the fixed trust. Reference to s 768-605 only seeks to confirm that s 855-40 should be construed on its terms.

67    Additionally, if it be relevant, the former s 160L of the 1936 Act supports the Commissioner’s construction of s 855-10. The former s 160L relevantly provided:

(1)    Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset, whether situated in Australia or elsewhere or not situated anywhere, that:

(a)    immediately before the disposal took place, was owned by:

(i)    a person (not being a person in the capacity of a trustee) who was a resident of Australia; or

(ii)    a person in the capacity of a trustee of a resident trust estate or of a resident unit trust; and

(b)    was acquired by that person on or after 20 September 1985.

(2)    Subject to this section, this Part also applies in respect of every disposal on or after 20 September 1985 of a taxable Australian asset that:

  (a)    immediately before the disposal took place, was owned by:

(i)    a person (not being a person in the capacity of a trustee) who was not a resident of Australia; or

(ii)    a person in the capacity of a trustee of a trust estate that was not a resident trust estate or of a unit trust that was not a resident unit trust; and

(b)    was acquired by that person on or after 20 September 1985.

68    The former s 160L had a comparable effect to s 855-10, save that the non-residency of a beneficiary of a trust estate was not relevant to s 160L – the relevant tests for s 160L to apply were a resident trust estate which owned the asset (s 160L(1)) and, for a non-resident trust estate, ownership of a taxable Australian asset (s 160L(2)).

69    Both appellants further argued that the construction of s 855-10 accepted by the Courts below (ie that section only applies to capital gains from CGT events happening to assets of the foreign beneficiary or foreign trustee) has the following anomalous and capricious results. First, an Australian resident beneficiary of a foreign trust would not be subject to tax on a capital gain from a CGT event in relation to a CGT asset which is not taxable Australian property, merely on the basis of the residency of that foreign trust. Secondly, a gain made on the happening of a CGT event in relation to an asset which is not taxable Australian property would be disregarded if made by a foreign resident directly or if made by a foreign resident trustee and distributed either to a foreign resident beneficiary or resident beneficiary, but would not be disregarded if made by the trustee of a resident trust estate yet distributed to a foreign resident beneficiary. The appellants argued that a construction that yields capricious or improbable results is to be avoided and should not be accepted. Correlatively, Ms Seiden SC argued that a construction which promotes the objects and purposes of the legislation is to be preferred. Ms Seiden SC argued that the construction advanced by the appellants (ie that s 855-10 does not require the foreign beneficiary to be the owner of the CGT asset to which the CGT event happens) promotes the objects and purposes of div 855. Ms Seiden SC noted that Steward J at [80] of the Martin judgment was of the view that the appellants’ construction was likely to enhance “Australia’s status as an attractive place for business and investment”, being one of the objects of div 855 set out in s 855-5. Another purpose was said to be to strengthen the application of CGT to foreign residents by making certain “interests” in entities (including discretionary trusts) subject to Australian CGT where the assets of those entities consist principally of Australian real property; thus aligning Australia’s laws with international practice (see s 855-5(2)(a)). Mr Robertson QC submitted that consistent with this historical analysis, “Parliament wanted to preserve (and extend through interposed entities) Australia’s right to impose CGT on [taxable Australian property] and never expressed an intention to raise capital gains from foreign residents in relation to [non-taxable Australian property]”. That intention was said to be reflected in the changes introduced by div 855, which focuses solely on the character of the CGT asset and no other criteria, such as the character of the taxpayer or the type of CGT asset.

70    Neither argument is persuasive. First, although anomalous or capricious consequences may be an indication that Parliament did not intend the provision to be read in that way (Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297; [1981] HCA 26, at 321), the identification of possible anomalies or capricious consequences does not mean that the provision should be construed differently: Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 83 FCR 511; [1998] FCA 1655 where Black CJ and Sundberg J stated at 519:

Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the Court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the Parliament.

See also ConnectEast Management Ltd v Federal Commissioner of Taxation (2009) 175 FCR 110; [2009] FCAFC 22 at 119 [41]. As Campbell J cautioned in Ganter v Whalland (2001) 54 NSWLR 122; [2001] NSWSC 1101 at [36], a court is not justified in using an anomaly as a reason for rejecting what otherwise seems the correct construction where on all other tests of construction, it is the correct construction as “[w]ere courts to act otherwise, they would risk taking over the function of making policy choices which properly belongs to the legislature”. Secondly, underpinning the appellants’ arguments about the proper construction of div 855 is the a priori assumption that Parliament did not intend that foreign residents be taxable on gains from non-taxable Australian property. As the High Court cautioned in Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 248 CLR 378; [2012] HCA 56 at [26], [41], in construing legislation the purpose of legislation must be derived from what the legislation says, not from any assumption about the desired or desirable reach or operation of the provisions: see also Carr v Western Australia (2007) 232 CLR 138; [2007] HCA 47 at 143 [6]. Nothing in the express statement of objects of div 855 in s 855-5 or in the extrinsic material warrants a construction by reference to that a priori assumption, to the disregard of the text of ss 855-10 and 855-40. To the contrary, the contrast between ss 855-10 and 855-40 demonstrates that Parliament specifically directed its attention to when, and in what circumstances, a foreign beneficiary is entitled to an exemption under div 855. Section 855-40(1) makes this clear in the identification of the legislative purpose or the exemption in relation to interests through fixed trusts.

71    Another contextual argument was that the effect of the Greensill judgment is that s 855-10 operates within the calculation of a trust estate’s s 95 net income, overriding the statutory hypothesis that the trustee (and trust estate) is a resident in order to calculate the net income of the trust estate. The Commissioner’s response to this argument was that the interaction between s 855-10 and the definition of “net income” in s 95 was a false issue in these appeals, because neither appeal involves a foreign trust. That response was unhelpful because, in our view, whether and how s 855-10 operates within s 115-210 is part of the construction matrix as to how div 855 interacts with sub-div 115-C. At [24] of these reasons, we set out our view that the residency hypothesis does not apply in ascertaining whether a foreign trust estate has a net capital gain for an income year and, thus, in determining whether the precondition in s 115-210 for sub-div 115-C to apply is met in relation to the foreign trust. If this be correct, s 855-10 then has work to do. Otherwise, if the residency hypothesis applies at the point in time of determining whether a foreign trust estate has a net capital gain, s 855-10 has no work to do in relation to a foreign trust estate yet, plainly, that was Parliament’s intention. But even if we are wrong about this and the residency hypothesis does apply at the point in time of determining whether a foreign trust estate has a net capital gain, that does not advance the appellants’ construction of s 855-10, because all it means is that the precondition for the application of sub-div 115-C will have been met, albeit that the net capital gain of the foreign trust is from a CGT event happening to a CGT asset that is non-taxable Australian property. The operative provisions of sub-div 115-C would then apply to bring that net capital gain to tax.

72    Mr Robertson QC’s primary contention that sub-div 115-C does not assess a foreign taxpayer on amounts that would not be div 6 assessable income – which he termed “non-Australian gains” – and that s 855-10 and its predecessors plainly inform what is assessable under div 6 does not withstand scrutiny.

73    First, the contention assumes or asserts that there is no difference between, on the one hand, a CGT asset being taxable Australian property and, on the other, a capital gain from a CGT event that happens to that CGT asset having an Australian source, however they are not coterminous. Division 855 contains a set of rules for determining when a CGT asset is taxable Australian property and, in the case of shares in a company, as is the case here, it depends on the nature and value of the underlying property held by the company, including through interposed entities: ss 855-25, 855-30, 855-32. In contrast, whether a gain has an Australian source depends on a different factual enquiry, which involves a wide variety of factors which may vary from case to case: see Federal Commissioner of Taxation v Resource Capital Fund IV LP (2019) 266 FCR 1; [2019] FCAFC 51 at 19-22 [59]–[66], 68 [230]. Neither Court below made a finding to the effect that the capital gains made by the respective trust estates had a foreign source, nor was any such finding sought. Nor is this Court in a position to resolve that factual question, which, it may be anticipated, would have involved the calling of other evidence below, if the submission had been made.

74    Secondly, the contention is founded on the incorrect premise that the amendments in 2011 did not effect a substantive change to the operation of sub-div 115-C. Mr Robertson QC put substantial store on the fact that prior to the 2011 amendments, sub-div 115-C only applied if a net capital gain was included in the s 95 income of a trust estate and the beneficiary or a trustee in respect of that beneficiary was assessable on a share of that net income under div 6. He also made the point that the residency or non-residency of the trust is irrelevant to the trustee’s liability to tax under s 98, in contrast to ss 99 and 99A. The Court was taken to Federal Commissioner of Taxation v Belford (1952) 88 CLR 589; [1952] HCA 73; Federal Commissioner of Taxation v Angus (1961) 105 CLR 489; [1961] HCA 18 and Union-Fidelity Trustee Company of Australia Ltd v Commissioner of Taxation (1969) 119 CLR 177; [1969] HCA 36; in support of the proposition that residency of a trust has nothing to do with its liability under s 98. So much may be accepted. However, it is an erroneous approach to construe sub-div 115-C by reference to the way in which the provisions operated prior to the 2011 amendments. In 2011, the taxation of capital gains of a trust estate was taken out of div 6 by the enactment of div 6E and the operation of s 102UX and consequential amendments were made to sub-div 115-C so that capital gains are now dealt with separately from div 6. As earlier noted at [28], the reason for the amendments was to enable the effective streaming of capital gains to beneficiaries for tax purposes which, in consequence of the High Court’s decision in Bamford, the then statutory scheme did not permit (see Commissioner of Taxation v Greenhatch (2012) 203 FCR 134; [2012] FCAFC 84). Significantly, div 6 assessable income is no longer a criterion for sub-div 115-C to have operation. The precondition instead is that the trust estate has a net capital gain taken into account in working out the trust estate’s net income: s 115-210. The computation of the amount of the capital gain that the beneficiary is taken to make under s 115-215 depends on the calculation referred to in s 115-225(1) which, in turn, depends on the beneficiary’s “share” of the capital gain under s 115-227. Section 115-227 relevantly depends on two matters. One is the amount of the capital gain to which the beneficiary is “specifically entitled” under s 115-228, which has no relationship with div 6. The other is the beneficiary’s “adjusted Division 6 percentage”, which is defined in s 95 of the 1936 Act but, again, does not depend on inclusion of amounts in the beneficiary’s assessable income under div 6.

75    Thirdly, Mr Robertson QC submitted that the provisions of sub-div 115-C as enacted in 1999 necessarily inform the correct context for the amendments made in 2011, namely as a conversion and adjustment mechanism of div 6 assessable income. Mr Robertson QC submitted that from 2011 this “conversion” of a foreign beneficiary’s div 6 assessable income into an assessable capital gain under s 115-215(3) is effected by div 6E. He submitted that the “formal change” is that the foreign beneficiary’s div 6 assessable income is recalculated by div 6E to remove the trust’s net capital gain from s 95 net income for this purpose and so ss 115-215(2) and 115-215(6) in sub-div 115-C as enacted were also repealed with the introduction of div 6E, because they were unnecessary. Critically, he submitted, the first step now is to apply div 6 unmodified by div 6E to identify the div 6 assessable amounts to be recalculated to allow for differential streaming among beneficiaries. If the trust’s s 95 net income comprises only foreign income and non-Australian gains, there is no div 6 assessable income and sub-div 115-C is not engaged. If there are “Australian gains”, div 6E then operates to remove the trust’ net capital gain from the s 95 net income and the assessable amounts are recalculated by sub-div 115-C, which by ss 95AAB and 95AAC of the 1936 Act are also treated as div 6 assessable amounts, “stamping it with its Australian source”.

76    It is incorrect, however, to describe sub-div 115-C following the 2011 amendments as a “conversion mechanism for div 6 assessable amounts”. Steward J in the Martin judgment at [13] did describe sub-div 115-C in terms that the subdivision “converts the amount assessable to the beneficiary, which is derived from the capital gains made by the trustee, into another capital gain”, but that description of sub-div 115-C was qualified to be “in very general terms” and “broad terms”. However, contrary to Mr Robertson QC’s submission, div 6E does not operate to “convert” the div 6 assessable income. Instead, as explained, div 6E modifies the operation of div 6 by removing capital gains from the assessing provisions of div 6. More particularly, since the 2011 amendments, working out whether a beneficiary is taken to have made capital gains now occurs solely under sub-div 115-C and does not depend on whether the beneficiary is assessable on the capital gains of the trust estate under div 6. Thus, as part of the amendments in 2011, the then ss 115-215(2) and (6) were repealed, because s 115-215(2) made it a criterion that a beneficiary’s share of the net income of the trust estate had to include an amount attributable to the trust estate’s capital gains (ie be div 6 assessable income) in order to enliven the application of sub-div 115-C to that beneficiary. Nor is it correct that ss 95AAB and 95AAC of the 1936 Act import an Australian source criterion, as those provisions, on their express terms, simply operate to treat the amount assessed under sub-div 115-C as included in the beneficiary’s or trustee’s assessable income under div 6, other than for the purposes of the assessment provisions of div 6 (ie ss 97, 98, 98A, 99 and 99A).

77    Finally, the thesis that Parliament never intended that a foreign beneficiary be brought to tax on non-Australian gains does not warrant a construction of the provisions of sub-div 115-C other than on its terms. It was submitted that it would be extraordinary that Parliament intended sub-div 115-C, as amended now, to apply to tax the foreign resident on non-Australian capital gains “without Parliament having mentioned it specifically”. The short answer to this contention, is that Parliament introduced a new scheme for the taxation of capital gains made by a trust estate to enable streaming of capital gains and did so by taking the taxation of such capital gains out of div 6 completely. That change was significant in that sub-div 115-C now operates exclusively in respect of allocating the tax liability on capital gains of a trust estate and sub-div 115-C is to be construed and applied according to its terms, not by reference to the statutory scheme, which the 2011 amendments replaced.

78    Therefore, in conclusion, Thawley and Steward JJ were correct to hold that s 855-10(1) has no application to the facts of either case. The provision did not apply to the trustees of the respective trusts because both trusts are resident trusts. Likewise, the provision did not apply to the foreign beneficiaries to disregard any capital gain in the calculation of the amount under s 115-215(3) treated as the beneficiary’s capital gain for the purposes of the application of div 102 to the beneficiary, because “the amount mentioned in s 115-225 in relation to the beneficiary” for the purposes of s 115-215(3) and s 115-220 is not a “capital gain … from a CGT event” within the meaning of s 855-10. We would therefore dismiss both appeals with costs.

Associate:

Dated:    10 June 2021