Commercial Nominees case
Recently, in FCT vs Commercial Nominees of Australia Ltd [2001] HCA 33, the High Court dismissed the Tax Commissioner’s appeal and upheld the earlier decision of the full Federal Court that a superannuation fund was entitled to a tax deduction for prior year losses.
Notwithstanding that substantial amendments had been made to the fund’s trust deed (under its broad amending powers), the Court held that there had not been a “resettlement” of the trust and that the entity seeking to recoup the tax losses was essentially the same entity that incurred them.
Background
The fund was originally established in 1988 to provide superannuation benefits to the employees of a group of companies known as the Miden Group. In the 1988/89 and 1989/90 income years, the return of contributions to relevant employer companies generated deductible losses in the fund.
In 1993, the Miden Group’s business failed and a decision was made to invite employers outside the Miden Group and their employees to join the fund. Extensive amendments were made to the fund’s trust deed, including the conversion of the fund from a defined benefit fund to an accumulation fund and the provision of an entirely new class of members (ie non-group members). The amendments were in accordance with the terms of the trust deed.
In the 1994/95 income year, the fund claimed the earlier losses as a tax deduction. The Commissioner denied the deductions on the basis that, in view of the amendments, there had been a resettlement of fund assets that resulted in the creation of a new trust.
Decision
The High Court held that there had been sufficient continuity of the fund as the same taxpayer, and as such, the fund was entitled to a tax deduction for the prior year losses. The Court said that the key question of continuity must be considered in the context of a superannuation fund that, of its nature, may be expected to undergo change. The three main indicia of continuity are:
Constitution of trust – there was continuity of the trust deed, as the trust was still operated under the original deed as varied by the exercise of a power of amendment which the original deed was always subject. The trust changes were no more than an exercise of the broad amending powers in the original trust deed.
Trust property – the trust property did not alter at the time the amendments took effect.
Members – persons who were members of the fund before the amendments remained members of the fund after the amendments. Also, the trustee always had the power under the original deed to accept contributions from non-group members.
Comment
It should be remembered that this decision is one that turns on a specific fact situation. It does not establish a blanket exemption from trust resettlement for superannuation funds. Rather, it highlights the potential benefits of a broadly drafted trust deed to ensure the continuity of a fund. The decision should be read with a warning that the result could have been different if the original trust deed was less flexible or one of the indicia of continuity had been breached.
Tax Office correction
The ATO has indicated that an error has been identified in the calculation of the post-June 1983 ETP threshold for the year ended June 30, 1985. According to the ATO, that error was compounded in calculating the threshold for the subsequent 1994/95 to 2000/01 income years. As a result, the ATO has issued Errata for the Determinations for each of the affected years. The Errata sets out the correct threshold on the post-June 1983 component of an ETP for each of the affected years.
The Deputy Tax Commissioner, Leo Bator, has indicated that the ATO will examine the returns of affected taxpayers and automatically send amended assessments and refunds of the amount owing plus interest. The ATO anticipates that the mail-out of refunds plus interest will begin in early December 2001.
