In a recent case, the Full Bench of the Federal Court had to consider whether or not a non-resident individual who had arranged, on behalf of two non-resident companies, to carry on a share trading business in Australia by those two nonresident companies, was a trustee of a trust estate.
The non-resident individual arranged the share trading business on behalf of the two non-resident companies by using share trading accounts in the names of the two non-resident corporations with moneys funnelled through a custodian arrangement with an Australian bank held in that non-resident’s individual’s own name. Presumably it was done this way to avoid the non-resident corporations having to register as foreign companies in Australia if they conducted the share trading directly.
The judge at first instance held on the basis of these facts, that the non-resident individual was liable for the tax on the profits from the share trading because the two non-resident companies were presently entitled to those profits and the non-resident individual was the trustee of that trust estate from which the profits derived by reason of these arrangements. However the Full Bench upheld the appeal by the taxpayer and held that the decision of the judge at first instance was erroneous.
The Full Bench noted that it was common ground that the two non-resident corporations were each carrying on a business of trading in shares and that the shares concerned were the trading stock of those businesses. The effect of this was that:
- the gross proceeds of the sale of shares constituted the assessable income of each of the two non-resident corporations respectively
- the assessable income was derived on an accruals basis
- the derivation of the assessable income occurred either when the share sale contracts were entered into or, at the latest, when they were settled, and
- the gross purchase price of the shares constituted allowable deductions.
Therefore any subsequent payment of the proceeds of sale by the brokers into the bank account held by the non-resident individual was no more than the realisation of income which had already derived by the two non-resident companies.
Although the proceeds of sale of shares upon being deposited into the bank account were impressed with a trust in favour of the two non-resident companies, the proceeds of sale did not comprise the income of a trust estate. The only income of a trust estate that could have arisen in these circumstances would have been any interest earned on the funds deposited in the account not the actual funds which were deposited.
The result is the correct result. If, for example, a taxpayer owns a home unit which is rented out but the whole of the arrangement is managed by a property manager with the gross rental being paid into a trust account, that arrangement does not cause the rental receipts to be income of a trust estate. While interest earned on the trust account may be income of a trust estate, the rental receipts paid into that trust account cannot conceivably be income of a trust estate.