Kelly v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 361 of 2012)
Judgment date: 8 August 2013
Date published: 28 July 2014

Summary of decision:
Outlines the ATO's response to this case which concerned whether certain interests in a partnership had been effectively and validly assigned to certain trustees; and whether a superannuation contribution for the directors of a corporate trustee was an allowable deduction.

Overview of facts:
The taxpayer was one of seven partners in the Boulton Cleary & Kern Partnership ('the Partnership'), a purported trustee of the Boulton Cleary & Kern Partnership Trust ('the Partnership Trust'), and the sole trustee of the Sean Kelly BCK Holdings Trust ('the Holdings Trust'). | The Commissioner assessed the taxpayer on the basis that he was entitled to 1/7th of the Partnership's income. On objection and subsequent appeal to the Federal Court, the taxpayer argued that part of the income had been assigned to the Partnership Trust and the Holdings Trust as a result of the following transactions: • In 1999 a retiring partner, Mr McFadzean, assigned his 20% interest in the Partnership to the trustees of the Partnership Trust pursuant to a retirement deed ('the 1999 transaction'); • On 29 June 2005 the partners assigned a collective 30% interest in the Partnership to the Partnership Trust ('the 2005 transaction'); and • On 29 June 2006: • the trustees of the Partnership Trust assigned a 4.734% interest in the Partnership to the Holdings Trust; and • the taxpayer assigned a further 3.12% interest in the Partnership to the Holdings Trust. ('the 2006 transactions') | • In 1999 a retiring partner, Mr McFadzean, assigned his 20% interest in the Partnership to the trustees of the Partnership Trust pursuant to a retirement deed ('the 1999 transaction'); • On 29 June 2005 the partners assigned a collective 30% interest in the Partnership to the Partnership Trust ('the 2005 transaction'); and • On 29 June 2006: • the trustees of the Partnership Trust assigned a 4.734% interest in the Partnership to the Holdings Trust; and • the taxpayer assigned a further 3.12% interest in the Partnership to the Holdings Trust. | • the trustees of the Partnership Trust assigned a 4.734% interest in the Partnership to the Holdings Trust; and • the taxpayer assigned a further 3.12% interest in the Partnership to the Holdings Trust. | ('the 2006 transactions') | Before the Federal Court the taxpayer also argued, in the alternative, that he had declared a trust over a portion of his interest in the Partnership in favour of the Partnership Trust pursuant to 2 deeds entered into in October 2008 ('the 2008 transactions'). | During the Federal Court hearing a further issue was raised concerning a deduction for superannuation contributions of $100,000 claimed by the trustee of the Kelly Family Trust ('the Family Trust') under section 290-60 of the Income Tax Assessment Act 1997 ('ITAA 1997'). | The Federal Court ([2012] FCA 423; 2012 ATC 20-319) did not accept that the 1999 transaction conferred a 20% interest in the Partnership upon the Partnership Trust; but did accept that the parties had engaged in transactions which ultimately led to partnership interests totaling 7.857% being assigned to the Holdings Trust. | In a separate judgment ([2012] FCA 689; 2012 ATC 20-329), the Federal Court found that a superannuation deduction was not available under section 290 60 of the ITAA 1997, as the taxpayer was not an 'employee' for the purposes of the expanded definition in section 12 of the Superannuation Guarantee (Administration) Act 1992 ('SGAA'). | The taxpayer appealed to the Full Federal Court in relation to the 1999 transaction and the superannuation deduction. The Commissioner cross-appealed in relation to the 2005 transaction, which, it was argued, formed the basis of the 2006 transactions [43-44]. | Issues Decided by the Court | The Full Federal Court dismissed both appeals, upholding the findings of the Federal Court. | Effectiveness of purported assignments | The 1999 transaction | The Full Federal Court dismissed the taxpayer's appeal in relation to the assignment of the McFadzean partnership interest to the Partnership Trust in 1999. | Importantly, the Full Court found that while Mr McFadzean could assign his partnership interest to the Partnership Trust he could not give the Trust any greater right than the right which was incidental to his interest as a partner. Mr McFadzean only had, and could only assign, an interest in those partnership profits which were attributable to the period before his retirement. | Accordingly, the Full Court held that the primary judge did not err in finding that the retirement deed did not confer upon the Partnership Trust a 20% interest in the partnership which was subsequently formed by the remaining partners [35-37]. | The 2005 transaction | The Full Court dismissed the cross-appeal in relation to the 2005 transaction. The Court considered that there was sufficient objective evidence to support the initial findings of the Federal Court. This evidence, when viewed as a whole, supported a finding that the partners intended to, and did, effect a transfer of a total 30% interest in the Partnership to the Partnership Trust [61]. | The 2008 transactions | The Full Court found that, even if the taxpayer did not require leave to advance his alternative argument in relation to the 2008 transactions, that ground was not supported by the evidence and should be dismissed [84-87]. | The superannuation deduction | The Full Federal Court dismissed the taxpayer's appeal in relation to the superannuation issue. | The Full Court held that the taxpayer and his wife were not 'employees' of the company for the purposes of section 290 60 of the ITAA 1997, as they did not fall within the expanded definition of that term in subsection 12(2) of the SGAA. As directors of the corporate trustee of the Family Trust, the taxpayer and his wife had no entitlement to remuneration unless a resolution was passed in a general meeting to that effect. Without such a resolution, the taxpayer and his wife were not 'entitled to payment', subsection 12(2) did not apply and the trustee was not entitled to a deduction under section 290 60 of the ITAA 1997. [122-123]

Issues decided:
The Full Federal Court dismissed both appeals, upholding the findings of the Federal Court. | Effectiveness of purported assignments: The 1999 transaction The Full Federal Court dismissed the taxpayer's appeal in relation to the assignment of the McFadzean partnership interest to the Partnership Trust in 1999. Importantly, the Full Court found that while Mr McFadzean could assign his partnership interest to the Partnership Trust he could not give the Trust any greater right than the right which was incidental to his interest as a partner. Mr McFadzean only had, and could only assign, an interest in those partnership profits which were attributable to the period before his retirement. Accordingly, the Full Court held that the primary judge did not err in finding that the retirement deed did not confer upon the Partnership Trust a 20% interest in the partnership which was subsequently formed by the remaining partners [35-37]. The 2005 transaction The Full Court dismissed the cross-appeal in relation to the 2005 transaction. The Court considered that there was sufficient objective evidence to support the initial findings of the Federal Court. This evidence, when viewed as a whole, supported a finding that the partners intended to, and did, effect a transfer of a total 30% interest in the Partnership to the Partnership Trust [61]. The 2008 transactions The Full Court found that, even if the taxpayer did not require leave to advance his alternative argument in relation to the 2008 transactions, that ground was not supported by the evidence and should be dismissed [84-87]. | The superannuation deduction: The Full Federal Court dismissed the taxpayer's appeal in relation to the superannuation issue. The Full Court held that the taxpayer and his wife were not 'employees' of the company for the purposes of section 290 60 of the ITAA 1997, as they did not fall within the expanded definition of that term in subsection 12(2) of the SGAA. As directors of the corporate trustee of the Family Trust, the taxpayer and his wife had no entitlement to remuneration unless a resolution was passed in a general meeting to that effect. Without such a resolution, the taxpayer and his wife were not 'entitled to payment', subsection 12(2) did not apply and the trustee was not entitled to a deduction under section 290 60 of the ITAA 1997. [122-123]

ATO view of decision:
Assignment of interests in the Partnership | The decision of the Full Federal Court was based on findings of fact made by the Federal Court. The ATO respectfully accepts the Full Federal Court's view that it was open to the Federal Court to find that the taxpayer had assigned a portion of his partnership interest in the 2005 income year. | The superannuation deduction | The ATO notes that the Full Federal Court's decision is consistent with the Commissioner's view in paragraph 243 of Taxation Ruling TR 2010/1 that a superannuation contribution for the director of a corporate trustee can only be deducted from the income of the trust if the director is a common law employee of the trust engaged in producing the assessable income of the trust or its business.

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

Legislative references: Income Tax Assessment Act 1997 290-60 290-65 290-70 Superannuation Guarantee (Administration) Act 1992 12(2)
Case references: Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 80 ATC 4076 (1980) 10 ATR 608 Kelly v Federal Commissioner of Taxation [2012] FCA 423 2012 ATC 20-319 Kelly v Federal Commissioner of Taxation (No 2) [2012] FCA 689 2012 ATC 20-329
Subject references: Partnership income Partnership interests Everett assignments Superannuation deductions