The decision of the Full Federal Court in Lewski’s case
The Full Federal Court reversed the Tribunal’s decision, and found against the ATO, in holding that the effect of the resolutions made on 30 June 2006 was that no beneficiary was presently entitled to any of the trust income on 30 June 2006. Although not determined by the Court, ordinarily this would mean that the trustee was liable for tax on the trust’s $10.1 million net (taxable) income under S.99A, although the ATO may have been out of time to assess the trustee (note that the ATO generally does not accept that a ‘default beneficiary’ can be assessed in this scenario – refer above). The reasons for this conclusion were as follows:
- The Full Federal Court found that both of the resolutions made on 30 June 2006 (i.e., the initial resolution to distribute income and the ‘variation of income resolution’), which were made at, or about, the same time, were interdependent. That is, both resolutions dealt with the same subject matter, being the distribution of trust income for the 2006 income year, with the latter resolution varying, in certain circumstances, the distribution made by the former resolution.
As such, the Full Federal Court found it was artificial to treat the two resolutions as separate and sequential for the purposes of deciding whether the applicant was presently entitled. Rather, the two resolutions must be read together for the purposes of deciding this question.
- The Full Federal Court then noted that, if the two resolutions are read together, the distribution to Roslyn Lewski was contingent and, thus, no present entitlement was created in her favour. The Full Federal Court noted that a distribution of trust income is contingent if the title of the holder depends upon the occurrence of an event, which may or may not take place. A beneficiary cannot be said to have a vested interest in trust income (as is required to create a present entitlement) if that interest depends upon the occurrence of some
The distribution to Roslyn Lewski was contingent as it was not certain that she was presently entitled to 100% of the trust income on 30 June, because a later ATO audit adjustment would disrupt that entitlement. The corporate beneficiary, Australian Commercial Underwriting Pty Ltd, was also not presently entitled to any trust income on 30 June 2006, as its entitlement would only come about upon the happening of a later event (i.e., an ATO audit adjustment).
TAX WARNING – ATO view differs to the outcome in Lewski’s case
It is important to be aware that similar facts to those considered in Lewski’s case are considered in TD 2012/22 (i.e., where a trustee distributes trust income to Mr X and Mrs X equally and then, under a further resolution, resolves to make a corporate beneficiary presently entitled to any increase in trust income resulting from a later ATO audit adjustment).
In TD 2012/22, whilst the ATO takes issue with the purported distribution to the corporate beneficiary (i.e., on the basis its interest is contingent), the ATO allows the present entitlements made in respect of Mr X and Mrs X to stand. Refer to Example 6 at paragraphs 24 to 27 of TD 2012/22. In contrast, in Lewski’s case, the outcome in this basically identical scenario was that no beneficiary was presently entitled to any trust income because all interests were considered to be contingent.
Be aware that TD 2012/22 has been updated to advise that the ATO intends to review the determination in light of the decision in Lewski’s case. Furthermore, the ATO has issued a Decision Impact Statement on Lewski’s case (that also addresses TD 2012/22) stating:
“We anticipate that in contested cases involving 'variation of income' resolutions we will have to raise a number of alternative assessments to deal with the range of possible interpretations of the relevant deed and resolutions.
The ATO considers that the inability to issue an assessment against another taxpayer may be a relevant consideration for the grant of leave to raise new grounds of objection under sections 14ZZK and 14ZZO of the TAA. In appropriate cases we will continue to argue against the grant of leave where it is considered that there is a relevant prejudice to the Commissioner.”
The ATO’s approach in contesting a new ground of objection in circumstances where the ATO is out of time to issue an assessment against another taxpayer was illustrated in Dalby’s case.
It is not yet clear how the ATO will view this type of trust resolution (although the Full Federal Court’s decision in Lewski’s case illustrates the adverse outcome that would likely arise if such a resolution came before the Tribunal or Courts). For this reason, trustees are best advised to avoid the issue altogether by not adopting any wording in a resolution that may create a contingency (e.g., the words “in the event of a later ATO adjustment” should be avoided).
To achieve a similar result, trustees may consider, for example, a fixed dollar distribution in combination with a balance beneficiary, such as the following:
- The first $50,000 of trust income to
- The next $50,000 to
- The balance to Campbell Pty