FEDERAL COURT OF AUSTRALIA

Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559

ORDERS

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    Unless either party applies within 7 days for a different order as to costs, the applicant 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

THAWLEY J:

OVERVIEW

1    The Commissioner assessed the trustee of a non-fixed trust in three income years under s 98 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The trust had made capital gains in each year through its disposal of shares which were not “taxable Australian property” as defined in s 855-15 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). In each year, the trust resolved to distribute 100% of the capital gains from the sale of those shares to Mr Alexander Greensill, a foreign resident. In the last of the years, the trust also transferred certain shares to Mr Greensill in specie.

2    After a review of the tax affairs of the trust, the respondent issued assessments to the trustee under s 98 on the basis that the capital gains distributed to Mr Greensill, being deemed or attributable capital gains of Mr Greensill under Subdiv 115-C of the ITAA 1997, were assessable to the trustee and not disregarded under Div 855 of the ITAA 1997. The trustee objected to these assessments and that objection was disallowed on 19 July 2019. The present proceeding is an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) against the respondent’s objection decision.

3    The applicant trustee’s position was, in summary, that the capital gains distributed to Mr Greensill were capital gains “from a CGT event” which were to be disregarded by operation of s 855-10(1) of the ITAA 1997. It was submitted that Mr Greensill’s “capital gains were from the happening of CGT events to exempt assets”. It followed, so it was said, that there was no amount in respect of Mr Greensill within s 115-220 of the ITAA 1997 upon which the trustee was liable to be assessed under s 98 of the ITAA 1936. The applicant also submitted that CGT event E5 happened in relation to the shares transferred in specie.

4    The respondent’s position was, in summary, that Mr Greensill was deemed to have made capital gains as a result of s 115-215(3) of the ITAA 1997. Those deemed capital gains were not disregarded under s 855-10 of the ITAA 1997 and Mr Greensill was assessable on his net capital gain for each income year, the calculation of which would include those deemed capital gains. The Commissioner also contended that the trustee was liable for the tax that had been assessed to it as trustee regardless of whether s 855-10 applied to disregard the capital gains deemed to have been made by Mr Greensill.

5    For the reasons which follow the appeal must be dismissed.

BACKGROUND FACTS

6    The Peter Greensill Family Trust (PGFT) was established by deed on 21 January 2010 (Trust Deed). The trustee of the PGFT is Peter Greensill Family Co Pty Ltd (PGFC). PGFC was registered in Queensland on 7 January 2010.

7    Alexander Greensill is a beneficiary of the PGFT: cl 1.1 of the Trust Deed. Alexander Greensill is a resident of the United Kingdom and not an Australian resident for the purposes of Australian taxation laws.

8    The operation of the Trust Deed so far as is relevant may be summarised in the following way:

(1)    the trustee stands possessed of the trust fund and income of the trust fund for the benefit of the beneficiaries in accordance with the terms of the Trust Deed: cl 2.1;

(2)    the trustee stands possessed of the income and capital derived by the trustee in any financial year upon trust absolutely for the beneficiaries or any one or more of them to the exclusion of the other and in such shares and proportions as the trustee may in its absolute discretion determine on or before the last day of the financial year: cl 3.1;

(3)    a beneficiary is absolutely and presently entitled to an amount of income or another amount (including the capital component) if the trustee makes a determination in the beneficiary’s favour of such income or capital: cl 3.4;

(4)    the trustee may determine to what extent a receipt or outgoing of the trust fund is income or capital: cl 3.6;

(5)    until the vesting day, the trustee may apply the capital of the trust fund or any part of it for the benefit of any one or more of the beneficiaries either in cash or by in specie distribution of assets of the trust fund and otherwise upon such terms and conditions as the trustee may in its absolute discretion decide: cl 4.2;

(6)    any determination of the trustee pursuant to clauses 3.1, 3.2 or 4.2 is to be recorded in a written minute signed by the trustee: cl 5.1.

9    On 4 November 2011, PGFC as trustee for the PGFT was issued 100 ordinary shares in Greensill Capital Pty Ltd (GCPL) for $0.267 ($0.00267 per share). GCPL is an Australian financial services company which owns Greensill Capital Management Company (UK) Limited, Greensill Capital (UK) Limited and other entities both in Australia and overseas.

10    The following further transactions affected PGFC’s shareholding in its capacity as trustee for the PGFT:

(1)    on 15 December 2011, PGFC was issued a further 275 ordinary shares in GCPL for $0.73425 ($0.00267 per share);

(2)    on 25 May 2012, 15 of the ordinary shares held by PGFC in GCPL were converted to B class shares;

(3)    on 15 February 2013, 50,000,000 non-redeemable preference shares in GCPL were issued to PGFC for $500,000.00 ($0.01 per share);

(4)    on 12 December 2014, 360 ordinary shares in GCPL held by PGFC were split into 360,000 ordinary shares and 15 B class shares in GCPL held by PGFC were split into 15,000 B class shares. The amount paid per ordinary share and per B class share after the share split was $0.00000267;

(5)    on 5 April 2017, 54,444 ordinary shares in GCPL held by PGFC were converted to 54,444 B class shares.

11    During the income year ended 30 June 2015, PGFC disposed of a total of 37,680 ordinary shares in GCPL, which it had acquired for a total of $0.1006056 ($0.00000267 per share), for a total consideration of $13,074,987.25. As a result of these disposals, PGFC made capital gains under CGT event A1 totalling $13,074,628.00.

12    On 30 June 2015, PGFC made the following written resolutions:

(1)    the net income of the trust for the year ended 30 June 2015 will be the net income as determined under section 95 of the ITAA 1936 excluding franking credits and any capital gains; and

(2)    to the extent that the trustee has received and treated any capital gain earned during the year ended 30 June 2015 as capital of the trust and in accordance with clauses 3.8 and 4.3 of the Trust Deed, the trustee resolves that any capital gain related to the sale of shares of GCPL is distributed 100% to Alexander Greensill.

13    During the income year ended 30 June 2016, PGFC disposed of 19,731 ordinary shares and 18,599,999 non-redeemable preference shares in GCPL, which it had acquired for a total of $186,000.04 ($0.00000267 per ordinary share and $0.01 per non-redeemable preference share), for a total consideration of $10,256,680.78. As a result of these disposals, PGFC made capital gains under CGT event A1 totalling $10,070,680.73.

14    On 23 June 2016, PGFC made the following written resolutions:

(1)    the net income of the trust for the year ended 30 June 2016 will be the net income as determined under s 95 of the ITAA 1936 excluding franking credits and any capital gains; and

(2)    to the extent the trust has earnt any capital gain in relation to the sale of a specific capital asset, these gains are to be separately identified and recorded as an accretion to trust capital and the trustee resolves to distribute 100% of any capital gain from GCPL that has been added to the capital of the trust to Alexander Greensill.

15    During the income year ended 30 June 2017, PGFC disposed of 35,220 ordinary shares and 54,444 B class shares in GCPL, which it had acquired for a total of $0.239403 ($0.00000267 per share), for a total consideration of $35,213,910. As a result of these disposals, PGFC made capital gains under CGT event A1 totalling $35,213,910.00.

16    On 5 April 2017, PGFC made the following written resolutions:

(1)    for the period ended 5 April 2017, the income of the PGFT will be the net income as determined under s 95 of the ITAA 1936, excluding franking credits and capital gains that are otherwise included in s 95 income; and

(2)    to the extent the trust has generated any capital gain in relation to the sale of a specific capital asset for the period ending 5 April 2017, these gains are to be separately identified and recorded as an accretion to trust capital and the trustee resolves to distribute 100% of any capital gain from GCPL that has been added to the capital of the trust to Alexander Greensill.

17    On 30 June 2017, PGFC made the following written resolutions:

(1)    the income of the PGFT will be the net income as determined under s 95 of the ITAA 1936 excluding franking credits and capital gains that are otherwise included in s 95 income; and

(2)    to the extent the trust has generated any capital gain in relation to the sale of a specific capital asset, these gains are to be separately identified and recorded as an accretion to trust capital and the trustee resolves to distribute 100% of any capital gain from GCPL that has been added to the capital of the trust to Alexander Greensill.

LEGISLATIVE CONTEXT

18    There are three aspects of the legislative regime which are significant to resolution of the issues raised in the appeal:

(1)    the regime for taxing trust income where a beneficiary is non-resident at the end of the relevant year of income contained in Div 6 of Pt III of the ITAA 1936;

(2)    certain rules about trusts with net capital gains in Subdiv 115-C of Pt 3-1 of the ITAA 1997 and Div 6E of Pt III of the ITAA 1936; and

(3)    certain rules concerning the capital gains of foreign residents provided for in Div 855 of Pt 4-5 of the ITAA 1997.

Div 6 of Pt III of the ITAA 1936 Act

19    Div 6 of Pt III of the ITAA 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.

20    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.

21    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.

22    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

23    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).

24    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)]”.

25    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

26    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

27    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.

28    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

29    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.

30    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.

31    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

32    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.

33    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.

34    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

35    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.

36    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

37    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.

38    As noted earlier, the applicant contended that CGT event E5 applied in relation to the shares transferred in specie by the PGFT to Mr Greensill.

CONSIDERATION

39    The application of Divs 6 and 6E of Pt III of the ITAA 1936 and Subdiv 115-C and Div 855 of the ITAA 1997 to the present facts is, in summary, as follows:

(1)    The PGFC as trustee of the PGFT made a capital gain in each of the years of income ended 30 June 2015, 30 June 2016 and 30 June 2017. This capital gain arose because CGT events happened with respect to PGFC’s disposal of shares. The net capital gain of the trust estate from the relevant CGT events is included in PGFC’s assessable income (s 102-5 ITAA 1997) and in the calculation of its net income.

(2)    Section 855-10(1) of the ITAA 1997 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 and cannot fall within s 855-10(1). Section 115-220 requires an amount to be added to the assessment of a trustee under s 98, in part to facilitate recovery of tax in the case of non-resident beneficiaries. It is not a capital gain under s 855-10(1) which is being added.

(3)    Subdiv 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 ITAA 1936.

(4)    Mr Greensill, 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).

(5)    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”.

(6)    The trustee is assessed under s 98 of the ITAA 1936 in accordance with s 115-220 of the ITAA 1997.

40    Section 855-10(1) has no relevant application to the present facts. It does not operate to disregard any capital gain in the calculation of the amounts required to be calculated under ss 115-215 and 115-220 in Subdiv 115-C:

(1)    First, for Subdiv 115-C to apply to the PGFT at all, the PGFT 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 PGFT. Section 855-10(1) does not apply to disregard the capital gains of a resident trust estate.

(2)    Secondly, s 855-10(1) does not operate to disregard the amount which is the product of any calculation made under Subdiv 115-C. The amount calculated under s 115-220 is added to the assessment under s 98. It is not a capital gain as such to which s 855-10(1) could apply.

(3)    Thirdly, an amount calculated under s 115-215 is not a capital gain from a CGT event. It is an amount which is calculated by reference to CGT events which occurred in respect of CGT assets of a trust.

41    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 ITAA 1997.

42    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.

43    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).

44    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).

45    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    As to the third matter, 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: s 115-215(4A). The ultimate object of this deeming, and the provision as a whole, is to permit the beneficiary to apply against the deemed capital gain any capital loss or capital gains discount available to that beneficiary: s 115-215(1).

47    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):

(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.

48    The resulting capital gain, treated by s 115-215(3) as a capital gain of the beneficiary, is then included in the calculation of the beneficiary’s net capital gain under s 102-5. As mentioned, the express statutory point of this is to allow the beneficiary to apply his own capital losses and discounts: s 115-215(1). The respondent correctly noted that the “gross up” provisions would not work properly if the capital gain in the trust estate’s hands was disregarded by reason of s 855-10.

49    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 ITAA 1936. 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).

50    It is true that Mr Greensill had capital gains attributed to him under Subdiv 115-C for the purpose of permitting him to apply any capital losses or discounts available to him. However, that is not a “capital gain … from a CGT event” within the meaning of s 855-10(1).

51    The meaning of a connecting word such as “from” depends on the context in which the word is used: Associated Beauty Aids Pty Ltd v Commissioner of Taxation (1965) 113 CLR 662 at 668 (Barwick CJ); Joye v Beach Petroleum NL (1996) 67 FCR 275 at 285. When used as a term to indicate a connection between two matters, “from” has been interpreted as meaning that there must be a causal connection between the matters: Deal v Father Pius Kodakkathanath (2016) 258 CLR 281 at 297, citing Pizzino v Finance Brokers (WA) Pty Ltd (1982) 56 ALJR 843 at 845 (Gibbs CJ, Murphy and Wilson JJ), at 846-847 (Brennan and Deane JJ); Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at 165-167 (Gleeson CJ); Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [No 5] (1998) 90 FCR 1 at 6 (Beaumont J); see also: Comcare v Amorebieta (1996) 66 FCR 83 at 95; Amlin Corporate Member Ltd v Austcorp Project No 20 Pty Ltd (2014) 311 ALR 222 at 231. The Oxford English Dictionary defines “from” as referring to an element of causation or derivation, defining “from” as denoting “derivation, source, descent” or “ground, reason, cause, or motive”.

52    Causation plays a role, at the very least as a sine qua non in that there cannot be a capital gain without a CGT event, but causation is not the exclusive criterion by which the statutory question in s 855-10(1), whether a capital gain is “from” a CGT event, is answered. The answer to the question involves an assessment of the degree of connection between the two subject matters for it to be said that one (the capital gain) is “from” the other (a CGT event).

53    The use of the word “from” indicates, in this statutory context, a greater degree of connection between the relevant matters than phrases such as “in relation to” or “in respect of” which have been held to “do no more … than signify the need for there to be some relationship or connection between two subject matters”: Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at 487.

54    In HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at 563, Hill J observed in relation to the phrase “relates” to:

It was common ground that the words “relates to” are wide words signifying some connection between two subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found.

See also: Travelex Ltd v Commissioner of Taxation (2009) 178 FCR 434 at [25] (Mansfield J), [44] (Stone J), [57] (Edmonds J); Travelex Ltd v Commissioner of Taxation (2010) 241 CLR 510 at [25] (French CJ and Hayne J).

55    As is explained next, the statutory context suggests that “from”, when used in s 855-10(1) in the phrase “from a CGT event”, should be understood as requiring a direct connection between the capital gain and the CGT event. It 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. Such an amount is not a capital gain “from” the event – cf: s 855-40(2)(b).

56    The ways in which a capital gain can be made are provided for in s 102-20. That provides:

102-20 Ways you can make a capital gain or a capital loss

You can make a *capital gain or *capital loss if and only if a *CGT event happens. The gain or loss is made at the time of the event.

Note 1:     The full list of CGT events is in section 104-5.

Note 2:     The gain or loss may be affected by an exemption, or may be able to be rolled-over. For exemptions generally, see Division 118. For roll-overs, see Divisions 122, 123, 124 and 126.

Note 3:    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), 170-275(1) and 170-280(3).

Note 4:    You cannot make a capital loss from a CGT event that happens to your original interests during a trust restructuring period if you choose a roll-over under Subdivision 124-N.

Note 5:    The capital loss may be affected if the CGT asset was owned by a member of a demerger group just before a demerger: see section 125-170.

Note 6:    Under subsection 230-310(4) gains and losses are taken to arise from a CGT event in particular circumstances.

Note 7:    This section does not apply in relation to the capital gain mentioned in paragraph 294-120(5)(b) of the Income Tax (Transitional Provisions) Act 1997.

57    Note 3 identifies by reference to s 115-215(3) that, although a CGT event has not happened to you, you may still make a capital gain or loss as a result of a CGT event happening to another entity. Note 6 identifies a particular situation in which gains and losses are “taken to arise from a CGT event” (emphasis added), even though those gains and losses do not in fact arise “from” a CGT event. Section 115-215(4A) provides:

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

58    Section 115-215(4A) provides, for the avoidance of doubt, that s 115-215(3) “treats you as having a capital gain for the purposes of Division 102”, even though a CGT event did not happen to you. Section 115-215(4A) does not deem the capital gain or loss “to arise from a CGT event” (emphasis added) in the way Note 6 to s 102-20 records occurs under s 230-310(4).

59    The explanatory memorandum to the Taxation Laws Amendment Bill (No 7) 2000 (Cth), which inserted s 115-215(4A) stated:

6.19     The general rule that a capital gain can only be made if a CGT event happens is modified if a beneficiary is taken to have made an extra capital gain under subsection 115-215(3) of the ITAA 1997. [Schedule 6, item 5, subsection 115-215(4)]

6.20     This subsection effectively excludes the capital gain amount from the share of the net income to which a beneficiary is presently entitled. The beneficiary is taken to have made an extra capital gain, which is a capital gain not made as a result of a CGT event happening to the beneficiary. After offsetting any capital losses against this gain and then applying the appropriate CGT concessions, the balance is included in the beneficiary’s net capital gain for the year.

60    Understood in context, s 855-10(1) indicates that the capital gain to be disregarded is that which is made by an entity immediately as a consequence of the happening of a CGT event; a capital gain which is attributed to a beneficiary, because of a CGT event happening to a CGT asset owned by a trust, was not intended to fall within the phrase “a capital gain … from a CGT event”. The capital gain deemed to have been made by a beneficiary under s 115-215 of the ITAA 1997 is not a “capital gain … from a CGT event” within s 855-10(1).

61    Section 855-10(1) would have applied if Mr Greensill rather than the trust had owned and disposed of the shares, but it does not operate to disregard the capital gains of the trust attributed to Mr Greensill under Subdiv 115-C.

62    Division 855 does allow for the disregarding of capital gains made through a fixed trust. A “fixed trust” is defined in s 995-1(1) as:

fixed trust: a trust is a fixed trust if entities have *fixed entitlements to all of the income and capital of the trust.

63    Capital gains made by a beneficiary of a fixed trust might be disregarded under s 855-40. The language employed by that provision provides support for the understanding of s 855-10(1) earlier referred to. It 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”. This language is quite different to the language of s 855-10 which requires the capital gain to be “from” a CGT event. 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 ITAA 1997. Section 855-10, which does not contain such a note, operates differently. Section 855-10 does not provide for the disregarding of capital gains attributed to the beneficiary of a non-fixed trust under Subdiv 115-C.

64    That Div 855 should be understood, through the process of statutory construction, as having been intended to operate in this way is supported by the legislative history and extrinsic material. The role which legislative history and extrinsic material can take in the task of statutory construction was explained by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at [39] (citations omitted):

“This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text”. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

65    The predecessor to s 855-40 was the former s 768-605 (emphasis added):

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.

66    Subsection 768-605(1) applied to capital gains or losses arising “from” a CGT event happening to an interest in a fixed trust. Its language is comparable to s 855-10(1) which also applies to a capital gain or loss “from” such a CGT event. Subsection 768-605(2) used the wider language comparable to s 855-40. The language covers a deemed capital gain of a beneficiary arising, not by direct operation of Part 3-1 of the ITAA 1997 Act on a CGT asset of the beneficiary, but by the operation of Subdiv 115-C in respect of a CGT event happening to a CGT asset of the estate of the fixed trust.

67    The explanatory memorandum to the New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004 (Cth) (2004 EM), which inserted s 768-605, stated (emphasis in original):

1.7     Another change is to disregard a capital gain made by a foreign resident in respect of the taxpayer’s interest in a fixed trust if the gain relates to an asset without the necessary connection with Australia. For example, this will apply where the capital gain arises from the disposal by an Australian fixed trust of a portfolio interest in an Australian public company. Again, this is appropriate because a foreign resident would not be assessed on such a gain if the asset were held directly.

…

1.12     These amendments are not confined to foreign residents with interests in widely held unit trusts. The amendments will apply to interests in closely held trusts and trusts that are not unit trusts. This is to ensure the benefits of the measures apply as widely as possible, irrespective of the trust arrangements through which the foreign resident invests. However, the trust in which the foreign resident has invested and all relevant trusts in the chain must meet the definition of ‘fixed trust’ in the Income Tax Assessment Act 1997 (ITAA 1997). This is to ensure that there is no discretion available to the trustee to provide benefits to parties who are not beneficiaries of the trust. This is important to the integrity of the amendments.

68    The Tax Laws Amendment (2006 Measures No 4) Act 2006 (Cth), repealed Div 136 and Subdiv 768-H and enacted Division 855. The explanatory memorandum to the Tax Laws Amendment (2006 Measures No 4) Bill 2006 (Cth) (2006 EM) explained the new concept of “taxable Australian property”. The 2006 EM 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.

69    This paragraph, combined with there being no mention of any change to the taxation of capital gains deemed to be made by foreign beneficiaries, indicates that the former exemptions from CGT for foreign residents in relation to fixed trusts in Subdiv 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.

70    Much of the applicant’s argument proceeded upon an assumption that there existed a policy objective of not taxing foreign beneficiaries of resident trusts in respect of CGT events in relation to CGT assets which were not taxable Australian property. The applicant’s process of construction then analysed the statutory provisions through this lens. This approach falls foul of the caution expressed in Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 378 at [26] that a danger to be avoided in construing a statute is making an a priori assumption about a statute’s purpose and construing the statute to coincide with the assumption. The correct process is the inverse: the purpose is to be derived from what the legislation says, not from an assumption about the desired or desirable operation of the provisions. The policy objective asserted by the applicant is not to be found in the legislative history identified above and nor is it supported by the terms of former s 160L of the ITAA 1936 or the capital gains tax regime when it was introduced.

71    The applicant also placed reliance upon the decisions of the High Court in Commissioner of Taxation v Belford (1952) 88 CLR 589 and Commissioner of Taxation v Angus (1961) 105 CLR 489. Both case concerned a resident beneficiary receiving trust distributions to which the beneficiary was entitled from non-resident trusts. Both cases turned primarily on the interpretation of Div 6, which, at the relevant times, did not contain express source or residence criteria. Div 855 expressly deals with issues of residency and that which is taxable Australian property. Neither case is of particular assistance in the proper construction of Div 855 or Subdiv 115-C. Neither case deals with the issue which presently arises.

72    The applicant raised a further argument in relation to the shares transferred in specie. The applicant contended that CGT event E5 happened because the beneficiary became absolutely entitled to those shares, which had been an asset of the trust.

73    As noted earlier, “CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust … as against the trustee”: s 104-75(1). In Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 at [61], Lindgren J concluded that the words “absolutely entitled to the asset as against the trustee”, when used in s 104-55(5) and s 104-60(5), were “intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs”.

74    The parties agreed that, on 5 April 2017, PGFC transferred in specie 54,444 B class shares in GCPL to Mr Greensill in satisfaction of Mr Greensill’s absolute entitlement to those shares.

75    Under s 104-75(5), the Mr Greensill made a capital gain. That capital gain is “from a CGT event” and is disregarded under s 855-10. The applicant’s capital gain is the amount by which the market value of the asset is more than the cost base of the beneficiary’s interest in the trust capital to the extent it relates to the asset.

76    Under s 104-75(3), the trustee also made a capital gain. The trustee’s capital gain is the amount by which the market value of the asset is more than its cost base. The trustee’s capital gain under s 104-75(3) is dealt with under Subdiv 115-C. Under s 115-215(3), the beneficiary is deemed to have a capital gain, or the capital gain is attributed to him, but that is not “from a CGT event”, albeit it is attributable to a CGT event. Section 855-10 does not apply to that capital gain. Under s 115-220(2), the amount by which the trustee is liable to be assessed under s 98 is increased.

CONCLUSION

77    The appeal must be dismissed.

Associate:

Dated:    28 April 2020