Cajkusic concerned a situation where the Commissioner issued default assessments to beneficiaries of a family trust (“the Trust”) under section 97 and Part IVA of the ITAA36. The default assessments related to the disallowance of deductions claimed by the trustee of the trust in each of the 1997 and 1998 years for contributions made, and implementation costs incurred, in relation to an employee benefit arrangement (“EBA”). For reasons that do not directly affect the outcome of the decision, the dispute relating to the 1997 income year was resolved prior to any proceedings occurring.
The Commissioner’s disallowance of the deductions resulted in the Trust having “net income” in the 1998 income year and the issue became whether the Trust had any “income” under section 97 of the ITAA36 so that the beneficiaries could be assessed on their proportion of the Trust’s “net income”.
At first instance, the AAT held that neither the contributions nor the implementation costs were deductible because there was no evidence to show that the contributions made to the employee benefit trusts satisfied section 8-1 of the ITAA97. As a consequence of the deductions being denied, the Tribunal then held that the “net income” had to be distributed to the default beneficiaries equally. The Tribunal did not directly address whether any beneficiaries were “presently entitled” to the “income” of the Trust.
On appeal to the Full Federal Court, the taxpayers argued that for them to be assessed on the Trust’s net income:
- the Trust must have “income” for section 97 purposes; and
- the beneficiaries must be presently entitled to that “income”.
As the Trust’s deed did not equate “income” to “net income” and provided the trustee with a discretion in determine what was “income”, the Full Court determined that the “distributable net income” of the Trust was nil notwithstanding the denial of the deductions by the Commissioner. This was because the trustee of the Trust treated the EBA contributions and implementation costs as expenses in determining the Trust’s “distributable net income”. In particular, the Full Court (at paragraph 27) stated that:
“Once again, this case is concerned with the proper determination of the net distributable income – the s 97 income – and, in our view, it is made quite clear that in the determination of that amount, the terms of the trust instrument will prevail over any accounting principles that may otherwise be appropriate to the type of business being conducted.”
Later, in discussion the Commissioner’s submissions on the decision of Chief Justice Gleeson in the High Court decision of FCT v ANZ Savings Bank, the Full Court added:
“The Chief Justice was not, as the [Commissioner’s] submission would have it, saying that a provision of the trust deed could not prescribe what was a receipt on revenue account and what was an outgoing on revenue account for the purpose of determining the s 97 income, that is, the distributable net income.”
Commissioner’s decision impact statement
Since the Full Court’s decision, many advisors have (correctly or incorrectly) formed the view that the terms of a trust deed could define what “income” was for the purposes of section 97 of the ITAA36. This is entirely consistent with paragraphs 27 and 29 of the unanimous joint judgement of the Full Court reproduced above.
The Commissioner’s decision impact statement takes a different view to these advisors and effectively confines the Full Court’s comments relating to the issue as obiter. Instead, the Commissioner relies on a few Full Federal Court and High Court decisions in arguing that a deed cannot define what “income” is for section 97 purposes.
The Commissioner’s view of the decision is based on a key assumption that the Full Court’s use of the phrase “net distributable income” cannot be substituted for the phrase “income of the trust estate” in section 97 of the 1936 Act. Instead, the Commissioner’s view is that:
- the Full Court merely used the phrase “net distributable income” in calculating whether the beneficiaries were presently entitled to the "income of the trust estate"; and
- “presently entitled to the income of the trust estate” requires a review of “present entitlement” and “income of the trust estate”.
The Commissioner then relies on a differently constituted Full Federal Court decision of FCT v Totledge. In Totledge, the Full Court defined the phrase “presently entitled to the income of the trust estate” as being:
“a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries.”
The Commissioner’s view is that his interpretation is consistent with the High Court’s decision in FCT v ANZ Savings Bank, where the High Court held that the provisions of the trust deed cannot alter the character of certain amounts in the hands of the trustee.
The Commissioner does not consider that the Cajkusic decision impacts on the interpretation of the phrase in Totledge. In fact, the Commissioner considers the two decisions to be consistent, because although what was received by the Trust in the relevant year was received as “income of the trust estate”, no part of it was legally distributable to the beneficiaries pursuant to the terms of the trust deed. Therefore, the beneficiaries were not “presently entitled to the income of the trust estate”.
What is missing from the decision impact statement is why the above extract from Totledge is not also consistent with paragraphs 27 and 29 of the Full Court decision reproduced above. It is out view that what is trust law income must always be decided in the context of the particular trust, and especially the trust instrument (see, for example, paragraphs 22 to 27 of the Full Court decision). In this context, the decision of the Full Court in Totledge is entirely consistent with the Full Court’s decision in Cajkusic.
In essence, the Commissioner does not consider the Cajkusic decision to be authority for the proposition that the terms of a trust instrument can govern what is income for the purposes of section 97(1) of the 1936 Act.
However, the Commissioner has agreed that since there is some uncertainty on the issue, he will seek to further test the issue in the appellate courts as soon as the opportunity arises.
Where to from here?
Advisors who have relied on this decision to state that “income” for section 97 purposes can be calculated with reference to the trust deed must now exercise caution following the release of the Commissioner’s decision impact statement – at least until the issue is again tested in the appellate courts.