Cases
Franking credits cannot be distributed separately from the underlying dividends
Federal Commissioner of Taxation v Thomas [2018] HCA 31
The High Court has confirmed that for tax purposes it is not possible for the trustee of a trust to distribute franked dividends to some beneficiaries with the benefit of the franking credits being distributed separately to other beneficiaries (or in different proportions to the franked dividends).
In the relevant income years the trust in question had received some franked dividends. The trustee had resolved to distribute franking credits to certain beneficiaries of the trust separately from, and in different proportions to, the income comprising the underlying franked dividends. This was done in order to maximise refundable tax offsets relating to the franking credits and stream income between beneficiaries to attract the most favourable tax rates.
The tax returns for the trust and beneficiaries were prepared and lodged on the basis that the separation between the dividends and the franking credits was correct. The Commissioner gave notice of a tax audit which caused the trustee to apply for directions from the Supreme Court of Queensland. The trustee obtained directions from the Supreme Court that the resolutions were correct in law. The Commissioner basically ignored this and issued amended assessments, applying the tax laws on the basis that the franking credits could not be dealt with separately from the dividends.
Two beneficiaries of the trust appealed this, arguing that the Commissioner was bound by the Supreme Court decision, even if it was wrong in law. The primary judge dismissed the appeals, but the Full Federal Court found for the beneficiaries, holding that the Commissioner had to apply the tax rules in accordance with the Supreme Court directions.
The Commissioner appealed to the High Court.
Before the High Court the trustee and two beneficiaries accepted that the approach taken was legally ineffective under the tax rules and that the tax rules do not allow franking credits to be dealt with separately from the underlying franked dividends. The High Court ended up concluding that the Commissioner was not bound to apply the tax rules in accordance with the Supreme Court directions.
When dealing with franked dividends passing through a trust there are two broad approaches that are applied for tax purposes. Firstly, there are specific streaming rules which can be used to stream franked dividends and the associated franking credits to particular beneficiaries. These rules apply in a very specific manner and basically ensure that the franking credits follow the dividends. If the streaming rules are not used then the normal proportionate approach will apply and will basically cause the franking credits to be spread amongst the beneficiaries of the trust on a proportionate basis, with the allocation being based on each beneficiary’s percentage share of the distributable income of the trust for that year.
The High Court has confirmed that attempts to separate the franking credits and deal with them as separate items will not be effective for tax purposes, regardless of how resolutions are worded.
Loss from shares – capital or revenue account?
Greig v Commissioner of Taxation [2018] FCA 1084
The Federal Court has held that losses of over $11m made by the taxpayer on disposal of shares in a company were on capital account and could not be claimed as a deduction on revenue account.
The taxpayer had acquired shares in a particular company over a period of time. However, the company failed and was placed into administration. The company’s creditors approved a Deed of Company Administration under which the taxpayer’s shares were transferred for nil consideration, resulting in a loss of $11,851,762 in the 2015 income year. The taxpayer argued that this loan arose either as a result of a business operation or commercial transaction (referring to the High Court decision in the Myer case) or as part of a business of dealing in that company’s shares and claimed a deduction for the loss on revenue account.
The ATO disagreed, arguing that the loss was on capital account and should not be deducted on revenue account.
The Federal Court agreed with the Commissioner, finding that the taxpayer had not acquired the shares as part of a business operation or commercial transaction that should be dealt with on revenue account. Just because shares are acquired with the desire that they will increase in value and be sold at a profit does not necessarily mean that they are held on revenue account. The Court also held that the taxpayer had not bought and sold the shares as part of a business activity. The purchase of the shares in this case was consistent with an investment activity rather than a business activity.
