Elecnet (Aust) Pty Ltd (as trustee for the Electrical Industry Severance Scheme) v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (M104 of 2016)
Judgment date: 21 December 2016
Date published: 23 February 2017

Summary of decision:
Outlines the ATO's response to this case which concerns whether the EISS is a unit trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Overview of facts:
ElecNet is the trustee of a trust known as the Electrical Industry Severance Scheme (the EISS). | Under the EISS, employers within the electrical contracting industry may become members of the scheme and, upon doing so, become obliged to make payments to ElecNet. These payments are credited by ElecNet to accounts in the name of each of the employees in respect of whom a payment is made. The Deed contemplates that, at such time as an employee's employment is terminated, ElecNet is to make a severance or redundancy payment to that employee. In this way, the EISS serves to protect, and allow the portability of, benefits payable to employees upon termination of employment. | ElecNet requested a private ruling from the Commissioner as to whether the EISS is a public trading trust for the purposes of Division 6C of Part III of the ITAA 1936 (Division 6C). If the EISS were a public trading trust, then its net income would be taxed at the rate of tax applicable to a company, not at the rate otherwise applicable under section 99A of the ITAA 1936. | The Commissioner ruled that the EISS is not a public trading trust for the purposes of Division 6C on the ground that the EISS is not a unit trust within the common meaning of that expression. | ElecNet argued that having regard to the inclusive definition of 'unit' in section 102M of the ITAA 1936 that the EISS is a unit trust for the purposes of Division 6C. | Issues decided by the court | The only issue before the Court was whether the EISS is a unit trust for the purposes of Division 6C. The Court held at [69] that the rights conferred on employees 'by the Deed were not such as to support the conclusion that the EISS is a unit trust for the purposes of Division 6C.' | In coming to that conclusion the Court considered 'the effect of the terms of the Deed and the construction of the terms of the provisions of Div 6C by reference to their text, context and purpose.' [42] | Effect of the Deed | In considering the effect of the Deed, the Court stated at [52]: 'Under the terms of the Deed, the making of a Severance Payment or other payment to a Worker, and the determination of the quantum of that payment, do not operate by reference to the Worker's ownership of units, but by reference to the contributions which happen to have been paid over time into that Worker's Account with ElecNet, and the determination by ElecNet to regard the Worker as an Active Worker. The extent of the entitlement of any Worker is not measurable as a percentage of the prescribed trust estate by reference to the terms of the Deed; rather, it depends upon the course of contributions paid on behalf of that Worker over time and the Worker's circumstances. In addition, it is to strain language too far to say that the Worker "holds" the entry in his or her account as a unit. Each Worker can no more be said to be a unitholder in respect of the amounts credited to him or her in ElecNet's books of account than a beneficiary of the estate of a deceased person could be described as a unitholder in respect of the moneys held on that person's behalf in the trust account of the estate's solicitor.' | Division 6C: textual considerations | Importantly, the Court found at [56] that there "is no reason in the text or context of Div 6C to attribute to the undefined expression "unit trust" any meaning other than the meaning evident from the language of Div 6C. That meaning accords with the common usage of the expression "unit trust". As the Commissioner rightly observed, there is no reported case, in Australia or elsewhere, in which the expression "unit trust" has been applied other than in circumstances where, under the applicable trust deed, the beneficial interest in the trust fund is divided into units, which when created or issued are to be held by the persons for whom the trustee maintains and administers the trust estate. | In relation to the argument that the EISS was a unit trust based on the definition of unit the Court found at [54] that the 'inclusive definition of "unit" in s 102M is expressed to relate only to beneficial interests in income or property of a prescribed trust estate. By definition, a prescribed trust estate must be (or have been) a trust estate that is a public trading trust the interests in which are held by unitholders. Jessup J was right to hold that the inclusive definition of "unit" does not expand the meaning of "unit trust" for the purposes of Div 6C.' | And at [55], 'The inclusive definition of "unit" does not encompass an interest that would not otherwise be identifiable as a unit in relation to a prescribed trust estate merely because it is a beneficial interest in any of the income or property of the trust estate. Rather, the inclusive definition of "unit" ensures that a beneficial interest is a "unit" for the purposes of Div 6C, however it might be so described, and even if it is limited to only part of the property or income of the trust estate.' | Purpose of Division 6C | Finally the Court noted that 'a consideration of the purpose of Div 6C is not at odds with, but confirmatory of, the conclusion suggested by the text of the statute.' [58] | After a detailed consideration of its legislative history the Court observed at [62] that the 'purpose of Div 6C is to treat unit trusts for tax purposes as analogous to the relationship between companies and shareholders. The relationship established by the Deed between ElecNet and a Worker is not analogous to that between a company and a shareholder. To observe, as Jessup J did, that the entitlement of any Worker under the EISS is not "unitised" is to note an important respect in which an entitlement under the EISS cannot be regarded as analogous to a share in a company. The making of a contribution by a Member to ElecNet is not analogous to a subscription to the capital of an enterprise which is to generate income from which profits may be distributed to the subscribers.' Further, a payment to a Worker by ElecNet under cl 8 of the Deed is not even tenuously analogous to a dividend paid to a shareholder in a company, because both the making of a payment to a Worker, and the quantum of any such payment, depend on the exercise of a discretion by the trustee having regard to circumstances personal to the potential recipient. | The Court also expressed its concern at [63] that characterising the EISS as a 'unit trust for the purposes of Div 6C may have the unintended and, from the perspective of the recipients, unattractive consequence that Severance Payments made to Workers under the Scheme may be taxable in the hands of the recipients as unit trust dividends' (rather than as employment termination payments under Division 82 or redundancy payments or similar under Division 83 Income Tax Assessment Act 1997).

Issues decided:
The only issue before the Court was whether the EISS is a unit trust for the purposes of Division 6C. The Court held at [69] that the rights conferred on employees 'by the Deed were not such as to support the conclusion that the EISS is a unit trust for the purposes of Division 6C.' In coming to that conclusion the Court considered 'the effect of the terms of the Deed and the construction of the terms of the provisions of Div 6C by reference to their text, context and purpose.' [42] | Effect of the Deed: In considering the effect of the Deed, the Court stated at [52]: 'Under the terms of the Deed, the making of a Severance Payment or other payment to a Worker, and the determination of the quantum of that payment, do not operate by reference to the Worker's ownership of units, but by reference to the contributions which happen to have been paid over time into that Worker's Account with ElecNet, and the determination by ElecNet to regard the Worker as an Active Worker. The extent of the entitlement of any Worker is not measurable as a percentage of the prescribed trust estate by reference to the terms of the Deed; rather, it depends upon the course of contributions paid on behalf of that Worker over time and the Worker's circumstances. In addition, it is to strain language too far to say that the Worker "holds" the entry in his or her account as a unit. Each Worker can no more be said to be a unitholder in respect of the amounts credited to him or her in ElecNet's books of account than a beneficiary of the estate of a deceased person could be described as a unitholder in respect of the moneys held on that person's behalf in the trust account of the estate's solicitor.' | Division 6C: textual considerations: Importantly, the Court found at [56] that there "is no reason in the text or context of Div 6C to attribute to the undefined expression "unit trust" any meaning other than the meaning evident from the language of Div 6C. That meaning accords with the common usage of the expression "unit trust". As the Commissioner rightly observed, there is no reported case, in Australia or elsewhere, in which the expression "unit trust" has been applied other than in circumstances where, under the applicable trust deed, the beneficial interest in the trust fund is divided into units, which when created or issued are to be held by the persons for whom the trustee maintains and administers the trust estate. In relation to the argument that the EISS was a unit trust based on the definition of unit the Court found at [54] that the 'inclusive definition of "unit" in s 102M is expressed to relate only to beneficial interests in income or property of a prescribed trust estate. By definition, a prescribed trust estate must be (or have been) a trust estate that is a public trading trust the interests in which are held by unitholders. Jessup J was right to hold that the inclusive definition of "unit" does not expand the meaning of "unit trust" for the purposes of Div 6C.' And at [55], 'The inclusive definition of "unit" does not encompass an interest that would not otherwise be identifiable as a unit in relation to a prescribed trust estate merely because it is a beneficial interest in any of the income or property of the trust estate. Rather, the inclusive definition of "unit" ensures that a beneficial interest is a "unit" for the purposes of Div 6C, however it might be so described, and even if it is limited to only part of the property or income of the trust estate.' | Purpose of Division 6C: Finally the Court noted that 'a consideration of the purpose of Div 6C is not at odds with, but confirmatory of, the conclusion suggested by the text of the statute.' [58] After a detailed consideration of its legislative history the Court observed at [62] that the 'purpose of Div 6C is to treat unit trusts for tax purposes as analogous to the relationship between companies and shareholders. The relationship established by the Deed between ElecNet and a Worker is not analogous to that between a company and a shareholder. To observe, as Jessup J did, that the entitlement of any Worker under the EISS is not "unitised" is to note an important respect in which an entitlement under the EISS cannot be regarded as analogous to a share in a company. The making of a contribution by a Member to ElecNet is not analogous to a subscription to the capital of an enterprise which is to generate income from which profits may be distributed to the subscribers.' Further, a payment to a Worker by ElecNet under cl 8 of the Deed is not even tenuously analogous to a dividend paid to a shareholder in a company, because both the making of a payment to a Worker, and the quantum of any such payment, depend on the exercise of a discretion by the trustee having regard to circumstances personal to the potential recipient. The Court also expressed its concern at [63] that characterising the EISS as a 'unit trust for the purposes of Div 6C may have the unintended and, from the perspective of the recipients, unattractive consequence that Severance Payments made to Workers under the Scheme may be taxable in the hands of the recipients as unit trust dividends' (rather than as employment termination payments under Division 82 or redundancy payments or similar under Division 83 Income Tax Assessment Act 1997).

ATO view of decision:
The Court's decision is consistent with the Commissioner's view of the law.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings and Determinations) | None. | Implications for impacted Law Administration Practice Statements | None.

Legislative references: Income Tax Assessment Act 1936 96 97 98 101 102 102E 102F 102G 102H 102J 102K 102M 102N 102P 102Q 102R 102S 102T 177E Income Tax Rates Act 1986 12(9) 23 25 Taxation Laws Amendment Act (No 4) 1985 16 Income Tax Laws Amendment Act (No 3) 1981 10 Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 Sch 5, Pt 2 Sch 5, Pt 3 Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 Sch 3, item 8
Case references: Attorney-General for NSW v Brewery Employes Union of NSW (1908) 6 CLR 469 [1908] HCA 94 BERT Pty Ltd as trustee for the BERT Fund No. 2 v Commissioner of Taxation [2013] AATA 584 (2013) 2013 ATC 10-332 (2013) 95 ATR 457 Caboche v Ramsay (1993) 119 ALR 215 Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 [1998] HCA 4 Costa & Duppe Properties Pty Ltd v Duppe [1986] VR 90 Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 [1954] HCA 16 (1954) 10 ATD 328 CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 ElecNet (Aust) Pty Ltd (as Trustee for the Electrical Industry Severance Scheme) v Federal Commissioner of Taxation [2015] FCA 456 2015 ATC 20-507 Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 [2010] HCA 10 (2010) 75 ATR 1 (2010) 2010 ATC 20-170 Federal Commissioner of Taxation v Elecnet (Aust) Pty Ltd (2015) 239 FCR 359 (2015) 2015 ATC 20-550 In re Baden's Deed Trusts [1971] AC 424 Macaura v Northern Assurance Co Ltd [1925] AC 619 Mahony v Commissioner of Taxation (1967) 41 ALJR 232 (1967) 14 ATD 519 MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494 [1999] HCA 51 Portland v Topham [1864] 11 HL Cas 32 11 ER 1242 Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 [1966] HCA 48 (1966) 14 ATD 286 Vatcher v Paull [1915] AC 372 Redman v Permanent Trustee Co of New South Wales Ltd (1916) 22 CLR 84 [1916] HCA 47 Re Burton; Wily v Burton (1994) 126 ALR 557 Finch v Telstra Super Pty Ltd (2010) 242 CLR 254 [2010] HCA 36