Federal Court hands down decision in family trust case

On 21 December 2016, the Commissioner of Taxation completed an audit into the taxation affairs of Michael Hayes Family Pty Ltd, the trustee of the Michael Hayes Family Trust. Michael Hayes was the sole director of the trustee of the family trust. 

The Commissioner of Taxation issued notices of assessment to Mr Hayes in respect of the 2010 to 2014 income years.

An objection by Mr Hayes against the assessments was allowed in part in respect of the 2011 income year but otherwise disallowed. Mr Hayes then applied for an appeal against the commissioner’s objection decision.

The basis of the commissioner’s assessments was that, in each of the relevant years, Mr Hayes was presently entitled to any income of two trusts, the MJH Trading Trust and the MJH Fixed Trust, and assessable pursuant to section 99A of the Income Tax Assessment Act 1936 (Cth) (ITAA 36).

Mr Hayes denied the alleged present entitlement and sought to prove that the assessments were excessive on the grounds that the MJH Trading Trust was, in each income year, a public trading trust within Div 6C of Pt III of the ITAA 36, with the consequence that neither Mr Hayes nor the MJH Fixed Trust was presently entitled to any income of the MJH Trading Trust.

Alternatively, it sought to prove that the trustee of the MJH Trading Trust exercised a power to accumulate its income in the relevant income years, so that neither the MJH Fixed Trust nor Mr Hayes was presently entitled to any of its income.

Mr Hayes contended that:

(a) The MJH Trading Trust was a public unit trust under section 102P(2)(a) because an SMSF, the MJH Superannuation Fund, held an express option to acquire 20 units, amounting to 20 per cent in the MJH Trading Trust;

(b) Alternatively, the MJH Trading Trust was a public unit trust by virtue of section 102P(10) deeming the superannuation fund to be treated as though it owned the 20 units in the MJH Trading Trust;

(c) The MJH Trading Trust was a trading trust within section 102N(1)(b) because its trustee owned 100 per cent of another trust, the MJH Rural Trust, which carried on a business of primary production; and

(d) In any event, MHFT was not presently entitled to any income of the MJH Fixed Trust or the MJH Trading Trust, because the trustee of the MJH Trading Trust accumulated its income in each relevant year of income.

On the other hand, the commissioner’s detailed rationale for the assessments was as follows. In each of the relevant years, Mr Hayes, as trustee for MFT, was presently entitled to:

(a) 80 per cent of the net income of the MJH Trading Trust; and

(b) 95 per cent of the 20 per cent share of the net income of the MJH Fixed Trust.

The court found that while the SMSF did not directly own any units in the MJH Trading Trust, the trustee of the SMSF did have a 5 per cent interest as an absolute beneficiary of the MJH Fixed Trust.

Mr Hayes submitted that the indirect interest satisfied the requirement that it held, or had the right to acquire, 20 per cent of the beneficial interests in income or property of the MJH Trading Trust.

The court agreed that under one of the clauses in the deed of the MJH Fixed Trust Deed, Ragem as trustee of the super fund had an option to acquire any asset forming part of the trust fund of the MJH Fixed Trust.

Justice John Logan noted that the trust fund included 20 units in the MJH Trading Trust, which constitutes 20 per cent of the beneficial interest in its income and capital.

“Therefore, in each of the relevant years, Ragem, as trustee of the SMSF, had a right to acquire units in the MJH Trading Trust entitling it to 20 per cent of the beneficial interests in the income and capital of the MJH Trading Trust,” he said.

The court also concluded that the MJH Trading Trust was a public unit trust during the relevant years, in accordance with section 102P.

It also determined that the MJH Trading Trust was a trading trust under section 102N(1)(b).

This was on the basis that Mr Hayes was the sole director of both the trustee of the MJH Fixed Trust and the trustee of a second trust, the MJH Rural Trust.

Justice Logan said that, in practice, each of these trustees was thus under common control, but, as sole beneficiary of the MJH Rural Trust, the trustee of the MJH Trading Trust could require the trustee of the MJH Rural Trust to terminate the trust and transfer to it all the trust property, after payment of any liabilities.

“Taken in conjunction, these features mean that the trustee of the MJH Trading Trust could, throughout the relevant years, control the affairs or operations of the MJH Rural Trust,” it said.

“It follows that each of the criteria in section 102R of the ITAA 36 are met on the evidence. The MJH Trading Trust was, during the relevant years, a public trading trust.”

Mr Hayes submitted that, even if the MJH Trading Trust were not a public trading trust, it was not, as its trustee, liable to tax under section 99A of the ITAA 1936 in the relevant years.

It submitted that under the clauses of the deed, the trustee had decided to accumulate any part of the net income for a year.

Justice Logan said on the evidence of the financial accounts and subject to the distribution in respect of the 2011 income year to a non-unit holder, the trustee of the MJH Trading Trust credited its accounting profit to a retained profits account rather than distributing it to the unit holders in each year of income.

“The consequence is that neither Hayes nor the MJH Fixed Trust was entitled to any of the net income of the MJH Trading during the relevant years. On this basis also, the assessments are wholly excessive,” he said.

“Hayes has proved that the assessments are wholly excessive. Its appeal must therefore be allowed, the objection decision set aside and the matter remitted to the commissioner for the issuing of amended assessments in accordance with these reasons for judgement.”