Tax Law Bulletins

Part IVA - Tax Benefits - Tax Avoidance




• Part IVA is one of the most obtrusive provisions of the Income Tax Assessment Act 1936 yet it is also ambiguous and difficult to construe. This is illustrated by a further decision in the Futuris Corporation litigation: Futuris Corporation Ltd v. F.C.T. [2009] A.T.C. 9784. Part IVA provides relevantly (section 177C(1)(a)) that a reference to the obtaining by the taxpayer of a tax benefit is a reference to an amount not being included in his assessable income "where that amount would have been included, or might reasonable be expected to have been included" in his assessable income if the scheme had not been carried out. (In other words, where the scheme in question was intended to prevent the obtaining of an assessable receipt, it must appear that if the scheme had not been carried out the relevant amount would have been derived as assessable income.)

  In this case the taxpayer sought particulars of the transactions the Commissioner says would have occurred (if the scheme had not been entered into) which would have given rise to the relevant assessable income.

  Mansfield J. (at the South Australian registry of the Federal Court) held that the company was not entitled to the particulars that it sought. (Here it must be recalled that South Australian judges are not entirely representative of other judges in the Federal Court, and also that the Federal Court (being an emanation of the Commonwealth) is also often on balance supportive of the Commonwealth at the expense of taxpayers.

  Mansfield J. noted here that the onus of proof was on the taxpayer generally, and he appeared to conclude that this fact detracted from the company's rights to obtain particulars. In this he was however apparently wrong: a number of decisions indicate that taxpayers are entitled to appropriate particulars, wherever the ultimate onus may lie.

  It may be noted also that Mansfield J. held, as a further ground for refusing particulars, that the matter had been set down for a final hearing "in a little over five weeks" and that the shortness of time before the trial hearing was a further ground on which particulars might be refused. However this analysis is not readily supportable. If the company was entitled to particulars, the provision of those particulars should have been ordered, and if an adjournment of the final hearing was consequently necessary, an appropriate order as to costs could be made.

  The decision in this case illustrates two important matters. First, Part IVA is an extremely difficult and uncertain provision. It contains many ambiguities, and specific advice should be obtained as to whether it may apply in any particular case. Secondly, the Federal Court members of the judiciary are in many instances favourably inclined towards the Commissioner, and this must be taken into account when decisions of the Federal Court are being evaluated.

  I.C.F. Spry Q.C.

• Trust Taxation

• An important new decision on the taxation of trusts – Bamford v. F.C.T. [2009] A.T.C. 9647 (Full Court of the Federal Court).

  Section 97(1) of the Income Tax Assessment Act (I.T.A.A.) provides that where a beneficiary is presently entitled to a share of the income of the trust estate” his assessable income shall include “that share of the net income of the trust estate”. Often problems have arisen because the income (under ordinary trust conceptions) of a trust estate differs – often substantially – from the net income (i.e. the taxable income) of the trust estate.

  In these circumstances there is a question whether “share” means the actual amount in dollars to which the beneficiary is entitled, or the proportion of the trust income to which he is entitled.

  Emmett J. (with whom Stone and Perram JJ. agreed on this point) held that “share” should receive the meaning of “proportion”. He said, “The term ‘that share’ in section 97(1) refers to a beneficiary’s proportionate or fractional entitlement to the income of the trust estate.” Thus, a beneficiary presently entitled to income of the trust estate in a given year will have included in that beneficiary’s assessable income the proportion of the net income (i.e. the taxable income) of the trust estate equal to the proportion that the income of the trust estate total to which the beneficiary is presently entitled bears to the total income that has been distributed during the year or remains available for distribution as at the end of the year, in accordance with the ordinary principles of trusts and trust accounting.

  The Federal Court also emphasized that for these purposes all of the provisions of the relevant trust deed must be taken into account. These provisions govern, and override, general principles of trust accounting. Therefore if under the trust deed the trustees have determined that capital gains should be included in the trust income of the relevant year, that determination is binding: and the beneficiary’s share must be ascertained on the assumption that the income of the trust estate includes the relevant capital gains.

  This important decision adds to the difficulties presented to taxation advisors when it is being determined how items should be categorized in the tax returns of trusts or in the tax returns of beneficiaries, especially in view of observations made in Richardson v. F.C.T. [2001] A.T.C. 4621 in which Kenny J. stated that certain exercises by trustees of their discretion did not bind the Commissioner.

• I.C.F. Spry Q.C.

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