The Commissioner’s appeal to the High Court in the case of Thomas v FCT [2015] FCA 968 was heard on 10 and 11 April 2018.

While the High Court has reserved its decision, the transcript reflects the complicated and yet strained interaction between trust and tax law.

The case involved the purported streaming of franking credits in a manner that was different to that which the net income of the trust was resolved to be distributed. That is, in the relevant years:

approximately 90% of the franking credits and foreign income, and 1% of the remaining net income of the trust was purportedly distributed to an individual beneficiary and the balance of the net income of the trust was purportedly distributed to a corporate beneficiary.

This strategy resulted in the corporate beneficiary having a nil tax liability, and the individual beneficiary receiving cash refunds from the franking credits allocated to him.

In the Supreme Court of Queensland (Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417), the Taxpayer successfully obtained a declaration that franking credits could form part of the income of a trust estate. It was on this basis that the Taxpayer was able to differentially stream franking credits.

The Commissioner successfully appealed the Supreme Court of Queensland decision in the Federal Court (Thomas v FCT[2015] FCA 968). Broadly, Justice Greenwood found that:

neither the Commissioner nor the Federal Court was bound by the orders made by the Supreme Court of Queensland and a discretionary trust could not distribute franking credits differently from the manner in which the net income of the trust was distributed.

In the Full Federal Court (Thomas v FCT [2017] FCAFC 57), the Taxpayer succeeded in his appeal and the matter was remitted to the Commissioner for reassessment.

While the Full Federal Court found it difficult to embrace the interpretation made by the Supreme Court of Queensland of the relevant distribution resolutions, it ultimately found that the Supreme Court of Queensland orders were binding on the Commissioner to the extent they determined the rights of the beneficiaries and trustee.

In the High Court transcript, Justice Gleeson notes that the trust deed did not purport to treat franking credits as a species of income, but that this is one of the areas where the proceedings in the Supreme Court of Queensland went wrong – “…the notion that the deed authorised the treatment of franking credits as a species of income is not only wrong under Division 207 but it is wrong even on the deed itself.”