FEATURE ARTICLE -
Advocacy, Issue 98: December 2024
Commissioner of Taxation v Wood [2023] FCA 574; 116 ATR 34 (Stewart J) (2 June 2023)
by Stephen Lee – Denning Chambers
Issue
Whether a payment made to settle litigation qualifies as a deduction from assessable income under s 8-1 of the Income Tax Assessment Act 1997 (Cth).
Facts
From 1998 to 2011, Mr Wood, the taxpayer, was employed by a company he and his wife controlled (C Pty Ltd) to provide consultancy services to another company (A Pty Ltd). A Pty Ltd paid consultancy fees to C Pty Ltd under a consultancy agreement. C Pty Ltd, in turn, paid a salary to Mr Wood.
In 2011, the arrangement came to an end, and Mr Wood took up employment with an unrelated company.
Later, A Pty Ltd sued Mr Wood and C Pty Ltd for damages for $2.4M alleging that Mr Wood had, unbeknown to A Pty Ltd, negotiated a number of unauthorised transactions whilst performing the consultancy services in 2006 or 2007. The claim was for misleading and deceptive conduct, breach of fiduciary duty, breach of contract and breach of statutory duty.
Mr Wood and C Pty Ltd disputed the allegations and filed a cross claim, and Mr Wood separately threatened a defamation claim arising out of statements made to Mr Wood’s new employer concerning A Pty Ltd’s allegations. C Pty Ltd went into liquidation.
In December 2013, a Settlement Deed was entered into between Mr Wood and A Pty Ltd, by which Mr Wood was to pay A Pty Ltd $200,000.00 in return for dismissal of the action, without admission. On the same day, a separate Deed of Release was entered into requiring A Pty Ltd to pay Mr Wood $180,000.00 in return for a release of the defamation claim. It was agreed that one could be set off against the other and Mr Wood paid $20,000.00 on 29 January 2014.
The Commissioner disallowed Mr Wood’s claim to deduct the sum of $200,000.00 in the year ending 30 June 2014. The Commissioner disallowed Mr Wood’s objection, and Mr Wood sought review in the AAT. The AAT overturned the Commissioner’s decision and allowed the deduction. The Commissioner appealed on a question of law to the Federal Court, which dismissed the appeal.
ITAA 1997:
Section 8-1 ITAA 1997 provides (inter alia):
“8-1 General deductions
- You can deduct from your assessable income any loss or outgoing to the extent that:
- it is incurred in gaining or producing your assessable income; …
- However, you cannot deduct a loss or outgoing under this section to the extent that:
- It is a loss or outgoing of capital, or of a capital nature; …”
Stewart J’s Decision:
The Court observed, the relevant principles from Day’s case,[1] as follows:
- s 8-1(1)(a) refer to a relationship between the expenditure incurred and what is productive of assessable income, which is the connection for deductibility;
- “incurred in gaining or producing … assessable income” mean incurred “in the course of gaining or producing” income;
- It is necessary to read “losses and outgoings … incurred in gaining or producing the assessable income” as incurred “in the course of” gaining or producing that income; outgoings may have an effect in gaining income, but losses cannot, as they simply reduce income;
- The statutory words “in the course of” do not require a direct connection between the expenditure and the derivation of income, but requires more than a causal (viz but for) connection. No narrow approach should be taken;
- An outgoing may be referable to a year of income other than that in which it was incurred;
- A way of stating the question to be asked is: “is the occasion of the outgoing found in whatever is productive of actual or expected income?”;
- Essential to the inquiry is the determination of what it is that is productive of assessable income, and seeking to delineate between proper and proscribed conduct is not useful in answering that inquiry.
Stewart J held that the Settlement Sum was properly characterised as being incurred in the course of gaining or producing assessable income, even thought it was referrable to a year of income other than the year in which it was incurred. At [42]-[46] the Court held that the occasion of the liability that was discharged was the work done by Mr Wood as employee of C Pty Ltd, under the consultancy agreement. It did not matter that the liability arose under a Settlement Deed some years after the employment had finished; it arose out of that employment. Mr Wood’s conduct in his employment was the source of income and the cause of the risk of liability. The Settlement Sum avoided the risk of a judgment for a much higher amount, which would have amounted to a much larger reduction in income for the 2006 and 2007 tax years.
It was irrelevant that his alleged conduct was wrongful or outside the scope of his employment.
The Commissioner submitted that s 8-1(1)(a) was not satisfied as there was no connection with the gaining of assessable income in the 2014 year. Stewart J rejected this, saying at [44] that “a loss that is a reduction of past income can also qualify as a general deduction”.
The Commissioner further submitted that the $200,000.00 payment was an outgoing of a capital nature, because it preserved Mr Wood’s reputation in the finance industry. Stewart J rejected this at [52], because the payment was rather to be characterised as preventing litigation risk arising from his prior employment. It “arose out of the very activities the respondent performed in gaining assessable income”: [53]. The purpose of the Deed of Release was irrelevant.
The Commissioner has published a Decision Impact Statement on 21 February 2024 in relation to this case. The Commissioner’s view is that, “this decision has limited application beyond its own factual circumstances”. The Commissioner is also of the view that the “decision does not represent a departure from established principles concerning section 8-1, and cases concerning the application of these principles always turn on the facts of the particular case”.
Commissioner of Taxation v Carter [2022] HCA 10; 274 CLR 304 (6 April 2022)
by Stephen Lee – Denning Chambers
Issue
Whether a disclaimer executed by a beneficiary after 30 June is effective to retrospectively expunge a present entitlement to income from a trust estate as at 30 June. That is, the issue was one of timing. Is a beneficiary’s present entitlement to be determined immediately prior to the end of the year of income, or can events after the end of the year of income affect or alter that position?
Facts
The Whitby Trust was a traditional family discretionary trust, settled on 27 July 2005. The Trustee was a corporate trustee, controlled by Mr Carratti. The Primary Beneficiaries were Mr Caratti’s five children, some of whom were the respondents to the appeal.
By 30 June 2014, the Trustee had failed to appoint or accumulate the income for that year. The Trust Deed included default distribution clauses, such that no income remained with the Trustee. On 27 October 2015, the Commissioner issued amended assessments to each of the five children for one-fifth of the income of the Whitby Trust for the 2014 year on the basis that they were “presently entitled” to the income of the trust for that year. The respondent beneficiaries then executed deeds of disclaimer on 3 and 4 November 2014 disclaiming any and all right, title and interest in the income for that year. Those disclaimers were ineffective. Further disclaimers were signed on 30 September 2016.
The Commissioner contended that the disclaimers did not apply retrospectively to disapply s 97 of the Income Tax Assessment Act 1936 (ITAA 1936). The respondents sought review in the AAT. On review, the AAT accepted that the most recent disclaimers were ineffective because the earlier disclaimer amounted to a tacit acceptance of the gift of income for the 2014 year, and in any event held that a disclaimer made after 30 June 2014 could not retrospectively affect the children’s “present entitlement” as at 30 June. The Full Court of the Federal Court held that the disclaimers were effective, the earlier disclaimer was not a tacit acceptance of the default gift and the disclaimers could and did have the result that, retrospectively, the beneficiaries did not have a present entitlement to the 2014 income as at 30 June 2014. The Commissioner appealed to the High Court. The High Court allowed the appeal, holding that the latest disclaimers were ineffective as the Commissioner’s right to tax the beneficiaries was based on their “present entitlement” to the income as at 30 June 2014. A joint judgment was delivered by Gageler, Gordon, Steward and Gleeson JJ. Edelman J concurred but for different reasons.
Legislative and Trust Framework:
Section 96 of the ITAA 1936 provides that “Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate”.
Section 97(1) ITAA 1936 relevantly provides that:
“Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
- the assessable income of the beneficiary shall include:
- so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; …”
Sections 98, 99 and 99A also operate by reference to the facts, events and legal relationship in existence at the end of the income year.
The Whitby Trust conferred a familiar discretionary power on the trustee to distribute income to any beneficiary “at any time before the expiration of any Accounting Period”, being 30 June or to accumulate all or any part of the income (cl 3.7). The Trust Deed also contained (cl 3.7) a familiar default beneficiary clause that “If in relation to any Accounting Period, the Trustee has made no effective determination … in respect to any part of the income of that Accounting Period immediately prior to the end of the last day of that Accounting Period, then the Trustee shall hold that income in trust for [a formula which here referred to the Principal Beneficiaries as were then living].” This clause was to ensure that the income, if not otherwise dealt with, was distributed.
High Court’s Decision:
It was argued for the taxpayers that the disclaimers had effectively removed all entitlement to the income, retrospectively. The High Court rejected that argument. Their Honours regarded the question as simply one of statutory construction, particularly of s 97.
In the joint judgment at [21], it was important that s 97 is directed to identifying the position immediately prior to the end of the year of income. Their Honours referred to with approval the Court’s decision in Bamford,[2] which itself approved the Court’s earlier decision in Harmer. [3] It was said in Harmer that a beneficiary would be presently entitled if and only if:
“(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the year of income and whether or not the trustee has the funds available for immediate payment.”
The Court observed at [24] that the taxpayer’s submission would lead to uncertainty which may not be resolved for years. At [26], it was acknowledged that there may be apparent unfairness of this result, but that was addressed by the Parliament in that s 97 speaks of the “net income” of the estate, not distributable income, and of “present entitlement” not receipt.
Thus the joint judgment held that when s 97(1) refers to present entitlement, it refers to the present legal right of a beneficiary to demand and receive a share of the distributable income of the trust estate. That entitlement is determined immediately before the end of the relevant income year, that is just prior to midnight at the end of the year of income: [19]-[20]. This “cannot be altered after the end of the income year”: [23]. The disclaimers were not effective to “retrospectively expunge” the rights of the Commissioner against the respondents: [27].
The taxpayers argued that this would be inconsistent with the principle that the donee of a gift is required to assent to a gift for it to take effect. Their Honours said that their conclusion was consistent with that principle, because of the presumption of assent, which is a presumption of law: [29]-[30].
Edelman J differed on this point, saying that in equity assent is not necessary to constitute a valid trust and hence irrelevant to the notional allocation of income: [38]-[40]. His Honour otherwise agreed with the joint judgment.
This provides a salutary lesson for trustees of discretionary trusts (and beneficiaries of such) to make decisions about income before the end of the financial year.
[1] Commissioner of Taxation v Day (2008) 236 CLR 163.[2] Commissioner of Taxation v Bamford (2010) 240 CLR 481.[3] Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271.
Automotive Invest Pty Ltd v Commissioner of Taxation (2024) 419 ALR 324; [2024] HCA 36 – Divergence in the Contemporary Approach to Statutory Construction
By Richard Schulte – Hemmant’s List
Introduction
The decision in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36 exposes a divergence in the contemporary approach to statutory construction amongst some judges of the High Court. Outwardly, the case addresses the question of “purpose” within the framework of the A New Tax System (Luxury Car Tax) Act 1999 (Cth) (LCT Act). The issue was whether the display of luxury and collectable cars at the “Gosford Classic Car Museum”, which operated as a car dealership, constituted a use of a car “for a purpose other than a quotable purpose” thereby triggering a tax liability.
The majority (Edelman, Steward, and Gleeson JJ) concluded that the cars were held for sale, with the museum functioning as a novel technique to attract purchasers such that there was no liability to tax. Whereas the minority (Gageler CJ and Jagot J) considered that the museum served as a distinct use apart from the purpose of sale, making the cars subject to luxury car tax.
Whilst not specifically referenced by either the majority or the minority, unsurprisingly, the Court has adopted the contemporary approach[1] to interpreting legislation. That is, with the benefit of context, the task of construction begins and ends with the statutory text. Constructional choices between one meaning and another usually turn on coherence with the statutory objects or policies rather than “linguistic fit”.[2]
Broadly, the decision of the majority as compared to the minority reveals points of divergence in the application of the contemporary approach. The purpose of this note is to identify some of the points of difference and briefly explain the guidance practitioners can take from the decision.
The Majority’s Approach
The majority first considered the circumstances of the introduction of luxury car tax, looking at both the history and the explanatory memorandum.[3] Emphasis was placed on the design attributed to the tax as explained in the EM.[4]
As expected, the text of the LCT Act is exposed in detail. The majority identified the things that influenced their approach to statutory construction.
First, a feature of the LCT Act is the presence of an internal aid to construction of the “operative provisions” by the use of “explanatory sections”, which can only be used in certain ways.[5] For example, the explanatory sections can only be used to determine the purpose or object underlying the operative provision.[6]
Second, the majority considered that the LCT Act was drafted to speak to the public using ordinary language and communication. In applying the ordinary rules of interpretation to that language, it was an important contextual point that the LCT Act created a tax in the course of commercial activity. That recognition informed two further observations that influenced interpretation. First, that it is always important to look “at the substance and reality of the matter” and that a “commonsense and commercial approach” should be applied to the LCT Act.[7]
The ordinary language of the LCT Act was on one hand concerned with “intended purpose” and on another, also concerned with “actual purpose”.[8] The constructional choice was whether the reference to “purpose” was to the objective or subjective purpose of the person whose purpose was in issue.[9]
The Commissioner argued that the references to the word “purpose” was to “objective purpose” ascertained by inference from how the cars were in fact used, to the exclusion of evidence given by the taxpayer.[10]
To expose the “constructional choice” as to the meaning of “purpose”, the majority differentiated between “motive”, “means” and “purpose”.[11] With that understanding, it was possible to characterise the relevant person’s purpose or end at the proper level of generality, as distinct from any motive for that purpose or the intended means of achieving that purpose.[12]
The majority then looked at three different ways that “purpose” might be ascertained.
First, it was considered that “purposes” of their nature had to be attributed to a person and was subjective in the sense that it belonged to a subject. A person’s purposes could only be proved by their direct evidence, or by inference from the circumstances, or both.[13]
Second, the majority recognised that the law is sometimes concerned with the “purpose” of a legal construct such as the “reasonable person”. In those circumstances, a person cannot give direct evidence of the purpose of the “reasonable person”. That “purpose” can only be established by inference from the circumstances as to the purpose that such a reasonable person in the relevant position would have had.[14]
Third, “purpose” is determined by reference to the object which some act is “apt to achieve”. Objective purpose can be determined by reference to what a reasonable person engaging in the act would expect to achieve.[15]
The majority then reasoned that “purpose” in the text of the LCT Act was the taxpayer’s purpose. “Purpose” was neither the purpose of a reasonable person nor the purpose of a reasonable person in the position of the taxpayer that was “apt to achieve”.[16] Primarily, this approach was justified by use of the words “you” and “intention” permitting the conclusion that the provision was directed at the taxpayer’s purpose.[17]
That approach was then applied consistently (and conventionally) to subsequent references to “purpose”. Absent express language to justify a change, there was no justification to switch from the taxpayer’s purpose to the objective purpose of a reasonable person in the position of the taxpayer.[18] In terms of proving the point, evidence of the circumstances in which the actual use occurred was not necessarily more probative than the sworn or affirmed testimony of a witness in inferring actual purpose.[19]
Without specific reference to it, the majority applied section 15AA of the Acts Interpretation Act 1901 (Cth), interpreting the LCT Act in line with its purpose of taxing luxury cars at the point of final consumption. This pragmatic approach aligned with commercial realities and the legislative objective of the LCT Act.
The Minority’s Approach
The minority provide a strict study consistent with the proposition that the task of construction begins, as it ends, with the statutory text.[20] As compared to the approach of the majority, there is no reference to the explanatory memorandum, historical context or how those matters might affect constructional choices. That must necessarily be, because for the minority such context was not necessary to assist in fixing the meaning of the statutory text.
For the minority, constructional choices were focused on ordinary or grammatical meaning (literalism) as opposed to seeking coherence with statutory objects or policies. It was said: “the LCT Act must be construed not in accordance with some superimposed policy reflecting the general scheme of the LCT Act but in accordance with the terms of its provisions.”[21]
For the minority, the issue was not “purpose”, but rather “use” for a purpose other than that exclusively permitted without the imposition of tax.[22] That was a question of fact answered by an “objective characterisation of the purpose or purposes of the use itself viewed from the perspective of an independent observer.” That question was not answered merely by ascertaining the subjective state of mind of the taxpayer.[23]
The literal analysis of the minority meant the threshold to engage liability for tax was very low. All that needed to be shown objectively was that a car was being used for a purpose other than for sale. Using the car in a museum negotiated that threshold.
Conclusion
Both the majority and the minority followed the approach that statutory construction begins and ends with the text. The real difference in their approaches concerns when and how “context” is deployed. The minority eschewed any real resort to context preferring a literal meaning that was plain and coherent. The majority deployed context immediately. Construing the LCT Act in “context” resulted in meaning being given to language that was more granular and nuanced as compared to a literal meaning.
For practitioners advising on the operation of legislation the guidance is clear. There is a divergence in approach evident in the High Court. As can be seen from the decision in Automotive Invest that divergence can produce profoundly different outcomes. Prudence dictates that to reveal those possibly different outcomes it is not enough to simply explore the “the contemporary approach” but resort must also be had to a strict literalism in navigating statutory construction.
[1] See Pierce, Statutory Interpretation in Australia, 10ed, Chapter 2.[2] See SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362 per Gageler J [37]-[39]. To similar effect, see Kiefel CJ, Nettle and Gordon JJ [14].[3] [2024] HCA 36, [60].[4] [2024] HCA 36, [61].[5] See Part 5, Division 23, LCT Act.[6] Section 23.10(2)(a) LCT Act.[7] [2024] HCA 36, [105].[8] [2024] HCA 36, [106].[9] [2024] HCA 36, [109].[10] [2024] HCA 36, [109].[11] [2024] HCA 36, [110].[12] [2024] HCA 36, [111].[13] [2024] HCA 36, [113].[14] [2024] HCA 36, [115].[15] [2024] HCA 36, [117].[16] [2024] HCA 36, [143].[17] [2024] HCA 36, [126]-[128].[18] [2024] HCA 36, [131].[19] [2024] HCA 36, [134].[20] [2024] HCA 36, [4]-[16].[21] [2024] HCA 36, [55].[22] [2024] HCA 36, [9] and [19].[23] [2024] HCA 36, [55].
Century Mining Pty Limited v The Commissioner of State Revenue [2024] QSC 143 (4 July 2024) (Treston J)
by Samantha Amos – George Street Chambers
The Supreme Court has now clarified the limits of what constitutes a ‘marine cost’ for the purposes of calculating deductions from the gross value of a mineral for royalty purposes.
Century Mining Pty Limited exported zinc concentrate and silver mined from its operations at Century Mine in Lawn Hill from the Port of Karumba. Due to the physical limitations of the port, Century Mining loaded the minerals at the port onto on a transhipment vessel, the MV Wunma, which then transported the minerals to ocean-going vessels which were berthed in a roadstead anchorage just outside of the port limits.
Century Mining claimed that the costs of the MV Wunma were freight costs within the definition of ‘marine cost’ under s 54 of the Mineral Resources Regulation 2013 (Qld). The costs included not only diesel and operating costs, but dredging costs of the port and Norman River and port fees (at [11]). Section 54 provides that the value of minerals must be worked out by working out the gross value of the mineral under Part 5 and subtracting specified amounts including the marine cost for the mineral.
The Commissioner disallowed the claimed costs on objection. Century Mining appealed to the Supreme Court under ss 69 and 70 of the Taxation Administration Act 2001 (Qld).
Her Honour Justice Treston dismissed the appeal. Her Honour found at paragraph [92] that freight and insurance costs relating to the transport by water to a port outside of the State does not include those costs to transport the mineral to the point of loading on the ocean-going vessel and does not apply to activities occurring at or prior to the point of loading on the ocean-going vessel. Freight and insurance costs must be just that, costs of freight and insurance, costs ‘relating to’ freight and insurance are not covered by the definition. ‘Marine costs’ are those are proven to be freight or insurance costs and being those costs which are activities occurring, or risks arising, after the mineral is loaded onto the ocean-going vessel.
The appeal period expired on 1 August 2024, with no appeal filed.