On April 12 2017 a very interesting decision by the Full Court of the Federal Court was handed down that allowed the taxpayer's appeal from the Federal Court decision in Thomas v FC of T 2015 ATC 20-526.
The Full Court held that the Supreme Court of Queensland's interpretation of the trust deed and trustee resolutions of a discretionary trust were binding on the Commissioner of Taxation where there were two separate resolutions by the trustee:
- one dealing with the trust's net income for the relevant years in certain proportions; and
- the other with the distribution of franking credits in different proportions.
Although the Full Court expressed some relatively strong scepticism about the construction of the resolutions adopted by Applegarth J in the Supreme Court proceedings, it nevertheless determined that the Commissioner was bound by the declaration made by the Supreme Court.
This decision highlights the importance of properly drafted trust deeds and resolutions by trustees of discretionary trusts, particularly when attempting to distribute different categories of income to beneficiaries.
The judgement includes an analysis of Division 207 of the Income Tax Assessment Act 1997 dealing with franked distributions in the reasoning of Pagone J with which Perram J and Dowsett J agreed.
The decision of the Court also has some comments in respect of the operation of section 96 of the Trusts Act 1973 (Qld) that are worth noting. There are comparative provisions in most other States. It is likely that a Decision Impact Statement will be issued by the ATO in due course.
A copy of the Full Court's judgement can be found here
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