The Australian Taxation Office (ATO) position for several years has been that section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997) does not disregard a capital gain distributed to a foreign resident beneficiary of an Australian discretionary trust. In 2019 the ATO set out that position in the form of Draft Taxation Determination TD 2019/D6 that we discussed here.

The ATO says in TD 2019/D6 that a foreign beneficiary presently (or specifically) entitled to a capital gain made by an Australian discretionary trust on an asset that is not taxable Australian property (non-TAP) is assessable on the capital gain even though that would not occur if the foreign resident made the gain directly, or through a fixed trust, rather than through a discretionary trust.

The Federal Court in Peter Greensill Family Co Pty Ltd (trustee) v FCT (Greensill) in a decision handed down on 28 April 2020 considered an Australian discretionary trust that in the income years ended 30 June 2015 2016, and 2017 distributed 100% of its non-TAP capital gains to a foreign resident (Mr Greensill). Thawley J held that Mr Greensill could not disregard the capital gains under section 855-10.

The applicant’s position was, in summary, that the capital gains distributed to Mr Greensill were capital gains “from a CGT event” that he could disregard by operation of section 855-10. In summary, section 855-10 says that you can disregard a capital gain (or capital loss) from a capital gains tax (CGT) event if:

you are a foreign resident or a foreign trust for CGT purposes just before the CGT event happens; and
the CGT event happens in relation to an asset that is not-TAP.

The ATO position was, in summary, that Mr Greensill was deemed to have made capital gains as a result of section 115-215 of the ITAA 1997. Those deemed capital gains were not disregarded under section 855-10 and Mr Greensill was assessable on his net capital gain for each income year.

Greensill considered the interaction of trust taxation rules in Division 6 and Subdivision 6E of the Income Tax Assessment Act 1936, Subdivision 115-C of the CGT rules in the ITAA 1997, and Division 855 of the ITAA 1997 about capital gains and foreign residents. Subdivision 6E was legislated, and Subdivision 115-C changed, in 2011 following the High Court decision in FCT v Bamford [2010] HCA 10.

Greensill is a case about statutory interpretation. Thawley J, in finding for the ATO, set out the legislative provisions and applied tenets of statutory interpretation set out by the High Court in FCT v Consolidated Media Holdings (2012) 250 CLR 503:

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.

Thawley J also made the following comments:

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.

Some commentators (including us) have written the taxation of non-TAP capital gains distributed by Australian discretionary trusts is “unintended” and arose following the legislative changes in 2011 citing the Explanatory Memorandum introducing those changes “The government is aware that due to the short timeframe involved in developing these amendments, there may be scope for unintended consequences.” However, the ATO had expressed similar views in Interpretative Decision 2007/60 to those in TD 2019/D6 prior to the 2011 changes to the predecessor provisions.

Conclusion

The decision of Thawley J gives, in effect, judicial authority to the ATO views in TD 2019/D6 unless Thawley J is overturned on appeal.

Whether the taxpayer will appeal to the Full Federal Court is unknown. What is known is that Greensill is (another) case where the statutory text appears to differ to the policy intent and the difficulty in applying the interactions between various parts of the tax legislation.

Watch this space!

For more information please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au

Edward Hennebry
Associate
T +61 3 9611 0113
E ehennebry@sladen.com.au