The High Court has refused an application for special leave by the Commissioner of Taxation to appeal against the decision of the Full Federal Court. The Commissioner of Taxation has a view about trust resettlements which is at odds with earlier High Court decisions although this opinion is not stated in any tax ruling but rather is the subject of a paper. It is yet to be seen what the Commissioner will make of this refusal of leave and whether or not he will find a later trust case to challenge what occurred before the Full Federal Court. The decision of the Full Federal Court in addition to earlier High Court authority suggests that there can be major changes to the terms of a trust without causing a trust resettlement.
The majority of the Full Court held that in accordance with an earlier High Court decision, two of the indicia for the continued existence of a trust estate were that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question. However this did not mean that there had to be a strict or even partial identity of property or of membership.
Although the trust property and objects in the case of the trust before the Court had changed from time to time, the Court held that there was no change in the continuum of that trust property and membership for the continued existence of that trust between when the losses were incurred and the gain which was made.
The Court said that the general law was that the four essential indicia of the existence of a trust were the trustee, trust property, the beneficiary and an equitable obligation annexed to the trust property and that there was nothing in the provisions of the Tax Acts which imposed some statutory requirement of continuity for determining when there is a sufficient identity of the trusts involved.
Therefore the majority of the Full Bench had concluded that there was a sufficient identity between the trust estate in the year in which the assessable capital gain was made and the trust in the years in which the capital losses were incurred so as to allow the latter to be offset against the former. This was so even though:
- the capital losses had been incurred some years before under a different trustee with different unit holders
- there had been an intervening excess of liabilities over assets • there had been a subsequent recapitalisation of the trust
- there had been a waiver by the original trustee of its right to be indemnified from the assets of the trust.
In joint decision by Chief Justice French, Justice Crennan and Justice Kieffel the High Court noted that the Full Court had held, contrary to the Commissioner’s contentions, that there was an identity between the trust estate in the year in which the assessable capital gain was made and the trust in the years in which the capital losses were incurred so as to allow the latter to be offset against the former. In the their Honours’ view, the decision of the Full Court involved characterisation and evaluation of the continuity of the trust in the trust estate and was not attended with sufficient doubt to warrant the grant of special leave.