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Minerva Financial Group Pty Ltd v FCT [2022] FCA 1092 – Federal court finds two out of three schemes entered into for dominant purpose of obtaining a tax benefit
The Federal Court has ruled that a taxpayer entered into two schemes for the dominant purpose of obtaining a tax benefit. However, the Court rejected the Commissioner’s contention that a third scheme was also entered into for the dominant purpose of obtaining a tax benefit. The schemes were connected with the restructure of a financial services business to the effect that income flowed through trusts to non-resident beneficiaries rather than being derived by resident companies.
The taxpayer was part of a group of companies and trusts which carried on a financial services business (Group). In 2007-2008, the Group undertook a series of steps prior to conducting an IPO of stapled securities in the taxpayer and an associated Trust (MFGT) (which ultimately did not proceed for a variety of reasons). This included deciding to establish all future securitisation trusts under the Minerva Holding Trust (MHT) rather than the main operating company in the Group (LF) (as had been done previously). LF and another resident company in the Group held special units in MHT to which the taxpayer, as trustee of MHT, had discretion to distribute MHT’s distributable income. The Commissioner contended that holding the securitisation trusts under MHT and not LF resulted in income that would have been taxed in a corporate environment instead being taxed in the newly established trust environment. This allowed income to ultimately flow to the non-resident owners of the trusts at a 10% withholding tax rate (instead of the 30% withholding rate which would have applied if the income had continued to be taxed in a corporate environment). The Commissioner asserted that the taxpayer had entered into or carried out three schemes in the 2012 to 2015 income years for the dominant purpose of obtaining a tax benefit within the meaning of section 177D of the ITAA 1936 and accordingly issued determinations under section 177F of the ITAA 1936 to cancel the tax benefits obtained. Effect was given to those determinations by the Commissioner issuing amended assessments to the taxpayer for the relevant income years.
The Court ultimately:
- rejected the Commissioner’s argument that the first scheme (comprising the establishment of corporate and trust ‘silos’, the nomination of MHT as the residual income unitholder of the securitisation trusts established from 2009, and the directing of income from those trusts through MHT) was entered into or carried out for the dominant purpose of enabling it to obtain a tax benefit in connection with that scheme; and
- held that the taxpayer entered into or carried out the second scheme (consisting of the transfer of ownership of MFGT from the taxpayer to the non-resident owners in December 2007, and the taxpayer’s decision as the trustee of MHT to distribute only nominal amounts of MHT’s distributable income into the corporate environment) and the third scheme (which was similar to the second scheme, except that it did not involve a transfer of ownership in MFGT) for the dominant purposes of enabling it to obtain tax benefits in connection with those schemes (rather than for the commercial purposes pleaded by the taxpayer).
BBlood Enterprises Pty Ltd v FCT [2022] FCA 1112 – Federal Court upholds application of section 100A to trust arrangement
The Federal Court has upheld the Commissioner’s assessment of the trustee of a discretionary trust on an amount of trust income on the basis that section 100A of the ITAA 1936 applied to deem a beneficiary of that trust not to be presently entitled to that income.
The relevant taxpayers were a corporate beneficiary (Beneficiary Co) of a discretionary trust (Trust) and the trustee (Trustee) of that trust. A company with retained earnings (and which the Trust held 99% of the shares in) bought back shares the Trustee held in it in the 2014 income year. The proceeds (about $10 million) were deemed to be a dividend for tax purposes by section 159GZZZP of the ITAA 1936. The Trust also received approximately $300k of other income in the 2014 income year. Beneficiary Co, which had been newly introduced as a beneficiary of the Trust, was made presently entitled to all the trust’s income in the 2014 income year. The consequences of this were that:
- Beneficiary Co was assessed on the Trust’s net income (which included the share buy-back deemed dividend), with the tax payable by it on the dividend being wholly offset by the associated franking credits; and
- the Trustee was not liable to pay any income tax as all of the Trust’s income had been distributed.
The Commissioner issued:
- an assessment to the Trustee assessing it on the relevant income on the basis that section 100A applied to deem Beneficiary Co not to be presently entitled to that income; and
- an alternative amended assessment to Beneficiary Co denying its tax offset in respect of the franking credits on the basis that section 207-150(1) of the ITAA 1997 disentitled it from claiming a franking offset as the deemed dividend was part of a ‘dividend-stripping operation’ as defined in section 207-155 of the ITAA 1997.
The taxpayers objected to the assessments on a number of grounds, but the Court ultimately dismissed their applications. It found that:
- the assessment the Commissioner had issued to the Trustee was an original assessment which the Commissioner was authorised to make;
- section 100A applied such that Beneficiary Co was deemed not to be presently entitled to the income of the Trust for the 2014 income year (with the Court holding that there was an overall agreement that was not entered into in the course of an ordinary family or commercial dealing, and that that agreement did not need to be a in substance a ‘reimbursement’ within the ordinary meaning of that word for the beneficiary being made presently entitled to the income of the trust);
- section 207-35(6) of the ITAA 1997 consequently applied to increase the Trustee’s liability to tax under section 99A of the ITAA 1936 by the amount of the deemed dividend and the associated franking credit; and
- in the event that section 100A did not apply, section 207-150 would apply because the deemed dividend was part of a ‘dividend stripping operation’ as defined by section 207-155.
Absolute Vision Technologies Pty Ltd v Innovation and Science Australia [2022] AATA 2319 – AAT finds software development not eligible R&D activities
The AAT has affirmed a decision of Innovation and Science Australia that the relevant taxpayer’s software development activities were not eligible ‘core’ or ‘supporting’ R&D activities for the purposes of the R&D tax offset. The reason for this was that, based on the taxpayer’s evidence (which the AAT observed was either ‘scanty’ or not provided by someone with the appropriate expertise), the Tribunal concluded that the taxpayer had not engaged in research. |
