Case notes – the Greenhatch cases

 

This matter originally came before the Administrative Appeals Tribunal as Greenhatch and the Commissioner of Taxation [2011] AATA 478 in June 2011, where the taxpayer was successful.  

However the decisionwas overturned on appeal to the Full Federal Court in Commissioner of Taxation v Greenhatch [2012] FCAFC in June 2012, when the Commissioner prevailed.  

In July 2012 the taxpayer sought special leave to appeal to the High Court. That application has not been heard at the time of posting this analysis (9 July 2012).  

The central considerations in the matter involved the construction of the former s115-215 of the Income Tax Assessment Act 1997 (97 Act).   

That section dealt with attributing a trust amount that was included in the assessable income of a beneficiary of a trust estate to capital gains of that trust estate. 

The relevant provision (section 115-215(3)(c)) formed part of the “additional amount and deduction” mechanism applied by section 115-215 in assessing trust capital gains in the hands of the beneficiaries. As a result of that process, any losses of the beneficiary were applied against the capital gain in that beneficiary’s  hands and that beneficiary’s entitlement to the CGT discount was also taken into account.    

The particular issue for determination in the case involved whether the taxpayer (Mr Greenhatch) was entitled to a deduction for a personal superannuation contribution of $98,000.  

Put shortly, to deduct that contribution, s 290-160 of the 97 Act required that the taxpayer’s wage and salary income must be less than 10% of his total assessable income for the tax year in question.  

The taxpayer’s wage and salary income was $26,538. His assessable income for that year also included two trust distribution amounts:  

  • $112,340 – being the distribution of a net capital gain from the Elke Trust
  • $38,512 – being an income distribution from another trust (the Axia  Trust).  

The Elke Trust’s net income  for tax purposes (after allowing for minor deductions) was $598,563 including: 

  • $225,317 net capital gain;
  • $376,404 income from the Merrits Unit Trust.  

The net capital gain amount arose from the inclusion of a discount capital gain in the Elke Trust’s assessable income. 

The Elke Trust treated the net capital gain as income in accordance with its deed and distributed that amount equally between the taxpayer and his wife. (The “non-taxable” component was also distributed to them equally as capital distributions).   

The income received by the Elke Trust from the Merrits Unit Trust was distributed to another trust (i.e. neither the taxpayer nor his wife had any entitlement to that income).  

Accordingly, in terms of the distribution process, the $112,340 received by the taxpayer was sourced entirely from the discount capital gain made by the Elke Trust. 

The relevance of s 115-215 to the taxpayer’s claim for a deduction  under s 290-160 lay in the mechanics of imputing an additional capital gain to the beneficiary and then providing a deduction of the imputed amount as part of the process of assessing the trust’s discount capital gain in that beneficiary’s hands.  

In particular, the relevance lay in the requirement of s 115-215(3)(c) to double the part of the taxpayer’s trust amount ($112,340) that was attributable to the trust estate’s capital gain ($450,654).   

It appears to have been accepted by all parties without argument (curiously in my view) that the process for calculating the relevant adjusting amounts involved including amounts in the taxpayer’s assessable income.  

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