The High Court has dismissed an appeal against a decision of the Full Federal Court on the meaning of ‘unit trusts’ for tax purposes. The appellant is the trustee of the Electrical Industry Severance Scheme Trust (the ‘EISS trust’), which protects redundancy or insolvency pay entitlements of employees in the electrical trades industry by requiring employers to pay money into a fund, from which payments could be made to employees following termination of their employment. The appellant sought a ruling from the respondent that the EISS trust was a unit trust for the purposes of div 6C of the Income Tax Assessment Act 1936 (Cth), and the Commissioner ruled that it was not a unit trust. While div 6C does not define ‘unit trust’ it does define ‘unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate’. On appeal to the Federal Court, Davies J held that the EISS trust was a unit trust. A majority of the Full Court allowed the Commissioner’s appeal, holding that the EISS trust was not a unit trust because employee interests in the EISS trust were not unitised interests and thus did not accord with the requirements of the concept of a unit trust.
The High Court unanimously dismissed the appeal, holding that the EISS is not a unit trust in the sense required by div 6C. The plurality (Kiefel, Gageler, Keane and Gordon JJ) rejected the appellant’s various arguments that the rights created by the trust deed in favour of the employees gave the EISS the character of a unit trust. Those submissions included arguments that the FCAFC majority judges erred in applying a ‘functional’ conception of a unit trust rather than the meaning required by div 6C, that the div 6C definition of ‘unit’ was inclusive and not constrained by a priori assumptions about the nature of unit trusts, and that the FCAFC should instead have identified the effects of the relevant terms of the trust deed, and then construed Div 6C according to its text, context and purpose, and then ascertained whether this trust falls within its operation (see at –, and see Commissioner’s contentions at –). Taking this approach, the plurality held that even assuming that the beneficial interests of workers are contingent on the ElecNet’s exercise of discretion, the trust deed still does not divide those interests into units that are then issued to and held by the workers: ‘The problem for ElecNet’s argument is not that the beneficial interest of each Worker is not described as a “unit” but that it is not “described” by the Deed at all. That is simply a reflection of the circumstance that the Deed does not concern itself with the creation of discrete parcels of rights which might be dealt with as items of commerce analogously with shares in a company (see at –).
Turning to the text, context and purpose of div 6C, the plurality held that there was no reason to give ‘unit trust’ any meaning other than that evident from the language of div 6C, which is the meaning accorded to the common usage of the phrase ‘unit trust’ (at ):
To observe, as Jessup J did, that the entitlement of any Worker under the EISS is not ‘unitised’ is to note an important respect in which an entitlement under the EISS cannot be regarded as analogous to a share in a company. The making of a contribution by a Member to ElecNet is not analogous to a subscription to the capital of an enterprise which is to generate income from which profits may be distributed to the subscribers. Further, a payment to a Worker by ElecNet under cl 8 of the Deed is not even tenuously analogous to a dividend paid to a shareholder in a company, because both the making of a payment to a Worker, and the quantum of any such payment, depend on the exercise of a discretion by the trustee having regard to circumstances personal to the potential recipient.
Finally, while div 6C’s purpose is to treat unit trusts as analogous to company–shareholder relationships for tax purposes, here the relationship between ElecNet and the employees was not analogous to a company–shareholder relation (at ). Noting that characterising the EISS as a unit trust could likely have unintended tax consequences that would be to the detriment of the employees, the plurality rejected ElecNet’s argument that payments to employees would not fall within the s 102M definition of ‘unit trust dividend’ as they would be ‘redemptions’ of rights held by employees: the payment process under the deed did not involve any act or process of cancellation, extinguishment or redemption (at –).
Nettle J also dismissed the appeal. After discussing the text, context and purpose of Div 6C and the meaning of ‘unit trust’ (see ff), Nettle J held that ‘unit trust’ is ‘a trust in which the beneficial interest is divided into units analogous to shares in a company’ such that each unit is equivalent and capable of cancellation, extinguishment or redemption by processes similar to those of shares in a company (at ). Here, the beneficial interests — specifically, an amount standing to the credit of a particular employee’s account —were not comparable to those kinds of units: the accounts are likely to be in different amounts, the rights of particular employees vary considerably, and in paying out an entitlement there is no process akin to cancellation, extinguishment or redemption (at ). Nettle J also rejected ElecNet’s contention that a range of different unit trusts existed and that the EISS fitted at least into a ‘penumbral area’ between simple cases and a boundary: ‘If accepted’ that argument ‘would mean that any form of trust … would qualify as a unit trust within the meaning of Div 6C provided it were possible to measure the value of each beneficiary’s beneficial interest in the trust estate and express that value as a fraction or percentage of the total value of the trust estate’ (at ).
|High Court Judgment|| HCA 51||21 December 2016|
|High Court Documents||ElecNet|
|Full Court Hearing|| HCATrans 237||11 October 2016|
|Special Leave Hearing|| HCATrans 170||28 July 2016|
|Appeal from FCAFC|| FCAFC 178||14 December 2015|
|| FCA 456||13 May 2015|