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FCT v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 – Commissioner fails on 100A grounds but finds partial success with Part IVA
The Commissioner has found partial success in his appeal against Logan J’s decision in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619. The relevant facts can be summarised as follows. In the 2012 and 2013 income years:
- the trustee (Guardian) of a trust (AIT) made a newly incorporated, wholly owned corporate beneficiary (AITCS) presently entitled to the net income of the trust (other than franked dividends);
- this entitlement was not initially paid (UPE);
- AITCS paid its income tax liability by drawing on its UPE;
- AITCS then declared a fully franked dividend in the following income year to Guardian (as trustee for AIT), which was set off against the UPE; and
- Guardian resolved to distribute all fully franked dividends it received to a non-resident beneficiary (Mr Springer) who was also the controller of all the relevant entities.
This arrangement can be described as a ‘mini washing machine’ arrangement. It had the effect of converting income that would have been taxed at non-resident marginal rates if it had been distributed directly to Mr Springer (i.e. straight from AIT to Mr Springer), to income that was only taxed at the corporate tax rate (by flowing the income from AIT to AITCS back to AIT via a franked dividend from AITCS and then distributing all fully franked dividends to Mr Springer).
Guardian succeeded in arguing that section 100A and Part IVA did not apply to the above scenario at first instance. The Commissioner appealed, arguing section 100A applied to the 2013 income year and Part IVA applied to both the 2012 and 2013 income years.
The Full Federal Court unanimously held that:
- Based on the written and contemporaneous evidence led by the taxpayer, it could not be said that at the time AITCS was made presently entitled to AIT’s net income in June 2013 there was a ‘reimbursement agreement’ (or any type of agreement) for AITCS to declare a franked dividend in the following income year to AIT to offset the UPE. Section 100A therefore did not apply to the 2013 income year. Notably, as the Court found there was no ‘reimbursement agreement’, it did not consider the scope of the ‘ordinary family or commercial dealing’ exception.
- Part IVA applied to cancel the tax benefit obtained by Mr Springer under the scheme concerning AIT’s income distributions for the 2013 income year, but did not apply to the similar scheme in the 2012 income year. This was because ‘the form of the 2013 related scheme was not the product of an evolving set of circumstances, but was the implementation of a strategy that had been developed with the evolution and implementation of the 2012 related scheme‘ (at [223]). That is, the Court considered that, when viewed objectively, the repetition in 2013 of what had previously occurred in 2012 had been done for the dominant purpose of enabling Mr Springer to obtain a tax benefit.
For a detailed analysis of the decision, register for our section 100A webinar next Tuesday (7 February).
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