Case: Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2001) 75 ALJR 1172
Outcome: cited
the High Court in Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2001) 75 ALJR 1172 considered the re-settlement analysis undertaken by the Full Court, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ, observed at [36] that, as the Full Court and the Administrative Appeals Tribunal had held, the question of the availability of the deduction was one of continuity to be considered, in that case, in the context of a superannuation fund which, of its nature, may be expected to undergo change. The Court at [36] said this: The question is whether the eligible entity which derived the taxable income in the year ended 30 June 1995 is a different entity from the eligible entity that incurred losses in the earlier years. If, as the appellant contends, it is a different entity, there is a question as to what happened to the original entity. The three main indicia of continuity for the purposes of Part IX are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property , and membership . Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity. The trusts under which the fund operated in 1994-95 were constituted by the original trust deed in 1988 as varied by the exercise, in 1993, of a power of amendment. The property the subject of the trusts did not alter at the time the amendments took effect. Persons who were members of the fund before the amendments remained members of the fund after the amendments. The fund, both before and after the amendments, was administered as a single fund, and treated in that way by the regulatory authority. [emphasis added] Although the Court framed those three indicia of continuity "for the purposes of Part IX " of the 1936 Act in the context of a superannuation trust, the notion of continuity in the trust estate that derived the income or made the capital gain and that incurred the loss on revenue account or suffered the capital loss also determines the availability of the allowable deduction or the application of previously unapplied capital losses. There is no reason to believe that these three indicia of continuity do not equally apply to trust estates for the purposes of Division 6 of Part III of the 1936 Act and the 1997 Act. The Commissioner contends that the arrangements of June 1993 brought about a break in continuity firstly in the trust fund; secondly, in the trustee's interest in the trust estate; and thirdly, in the interests of the beneficiaries in the trust fund. Continuity in the Trust Fund Mr Denoon and Mr Clark intended however that the CU Trust continue in operation. It was necessary for Mr Clark's purposes that it do so. Both men proceeded on the footing that Mr Denoon "hoped" to be able to make a matching contribution to the CU Trust by 30 June 1995. In the period between 24 June 1993 and 30 June 1995, they investigated potential property development projects to be undertaken by the CU Trust for the long term, during the period of Mr Denoon's consultancy. The question that arises is whether the suspension arrangements and the effect upon the administration of the trust by CEPL from 24 June 1993 brought about changes in the interests of the unitholders, that is, the rights attaching to membership of the trust, so as to destroy the necessary continuity in the trust fund that made the capital gain in the 2001 income year and that which suffered the capital loss in the 1993 income year. Did the changes terminate the existence of the CU Trust or produce the result that it did not make the capital gain in question? Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2001) 75 ALJR 1172 at [36]. The points along the continuum were these. The Rothwells shares were acquired in the 1988 financial year. They rapidly lost value. They were sold by the trustee on 26 May 1993 giving rise to a CGT disposal and a capital loss. On 24 June 1993 the suspension arrangements were put in place pending the realisation of either an expectation or a hope of Mr Denoon's matching contribution. By 27 July 1994, Gemridge had made it plain to the trustee that it could not make a matching contribution and on 27 June 1995 the trustee agreed to the transfer of the Denoon units to Clark Holdings. The transfers were signed on 26 April 1996. In 1997, the Gladstone properties were acquired and in the 2001 income year the CU Trust realised a capital gain upon the disposal of those properties. All of the units in the CU Trust on 26 May 1993 were held by the Denoon interests. By the arrangements of 24 June 1993, 50% of those units were transferred to the Clark interests. The Denoon interests retained 50% of the issued units although the joint venture arrangements placed the rights attaching to those units, in practical terms, in suspension.