The High Court has allowed one appeal, partly allowed a second appeal, and dismissed two appeals from a decision of the Full Federal Court on the taxation of franked distributions from trusts. In 2006 to 2008, the trustee (Thomas Nominees Pty Ltd) of a trust (the Thomas Investment Trust), received franked distributions within the meaning of div 207. Division 207 of pt 3-6 of the Income Tax Assessment Act 1997 (Cth) lays out the tax implications of trust income that includes franked distributions. In those years, the trustee passed resolutions that sought to distribute the franking credits between the trust’s beneficiaries separately from, and in different proportions to, the income that comprised the franked distributions (see details at [20]ff). The trustee referred to this as the ‘Bifurcation Assumption’, and lodged tax returns on the basis that this was legally effective under div 207. In 2010, the Queensland Supreme Court issued ‘directions’ to the Trustee that those resolutions did give effect to the Bifurcation Assumption, and that this was legally effective under div 207.
Two of the beneficiaries (the taxpayers) filed appeals in the Federal Court under pt IVC of the Taxation Administration Act 1953 (Cth), arguing that the Bifurcation Assumption was not legally effective under div 207 (see at [34]ff). The central issue before the High Court was whether the FCAFC was bound by the directions given by the QSC and its holding that the Bifurcation Assumption was in line with div 207, and, if the FCAFC was not so bound, how div 207 should apply to the trustee’s resolutions.
The High Court (Kiefel CJ, Bell, Keane, Nettle, Gordon and Edelman JJ, and Gageler J) unanimously held that the FCAFC erred in holding that it was bound to follow the QSC ruling. The FCAFC ‘misunderstood and misapplied’ the central case on directions, Continue reading