ElecNet (Aust) Pty Ltd, etc v Commissioner Of Taxation [2016] HCA 51: Meaning of Unit Trust

Wednesday 21 December 2016 @ 10.21 a.m. | Corporate & Regulatory | Taxation | Trade & Commerce

In ElecNet (Aust) Pty Ltd (as Trustee for The Electrical Industry Severance Scheme) v Commissioner of Taxation of The Commonwealth of Australia [2016] HCA 51 (21 December 2016), the High Court of Australia has unanimously dismissed an appeal from the Full Court of the Federal Court of Australia holding that the Electrical Industry Severance Scheme (the EISS) is not a unit trust within the meaning of Part III Division 6C of the Income Tax Assessment Act 1936 (Cth) (the ITAA).  

Background to the Case

The appellant (ElecNet) requested, in December 2012, from the respondent (the Commissioner of Taxation), a private ruling seeking confirmation that the EISS was a Unit Trust, for the purposes of the the ITAA Part III Division 6C which deals with the income of certain public trading trusts.

The EISS was established in February 1988 - “. . . in order to provide portability and security of termination and redundancy benefits to workers in the electrical contracting industry” and ElecNet was the trustee of the EISS of which employers within the relevant industry became members. 

Employer members were required to make weekly contributions to EISS in respect of their workers, pursuant to industrial agreements or awards and EISS credited these contributions to an account in the name of each of the relevant workers. Upon a worker’s employment being terminated, EISS was generally required to make a severance or redundancy payment to the worker.

The Commissioner of Taxation's Private Ruling

The Commissioner of Taxation ruled that the EISS was "not a public trading trust" for the purposes of Part II Division 6C of the ITAA because any beneficial interests of the workers were not unitised, that is to say, they were ". . . not discrete parcels of rights over the income or capital of the EISS.  Subsequently, ElecNet filed an objection to the Commissioner of Taxation's private ruling which  was disallowed. ElecNet then lodged an appeal to the Federal Court.

The Federal Court - Primary Judge

In ElecNet (Aust) Pty Ltd (Trustee) v Commissioner of Taxation [2015] FCA 456 (13 May 2015), Justice Davies allowed ElecNet's appeal on two grounds. 

Firstly, Justice Davies found that the concept of a unit trust is that of a trust in which the beneficial interest in property or income of the trust is widely held, whether or not the interest is described as a “unit”, and whether or not the trust is described as a “unit trust”. Justice Davies in reaching this conclusion relied on the inclusive definition of unit in section 102M of the ITAA:

"unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate."

Secondly, Justice Davies found, that under the EISS Deed each worker had a "...discrete proprietary interest in the contributions paid in respect of that worker into the trust fund" and standing to their worker’s account, even though the worker did not have a present right to any immediate payment. This was sufficient to give rise to a beneficial interest in the property of the trust estate within the meaning of “unit” as defined in section 102M of the ITAA.

The Full Federal Court

The Commissioner of Taxation appealed to Full Court of the Federal Court in Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 (14 December 2015) (Jessup, Pagone and Edelman JJ). The Full Court found that it was neither necessary nor appropriate to attempt a conclusive definition of what is a “unit trust” for the purposes of Part III Division 6C of the ITAA. Instead it sufficed that whether a trust was a “unit trust” within the undefined meaning of that term in Part III Division 6C required the text of that Division 6C (including the definitions) to be "construed in light of a functional and descriptive understanding of the nature of a unit trust".

Addressing the EISS specifically, the Full Court found that there were three factors which, when combined, had the effect that, whatever interest a worker might have in the property of the trust, the trust did not fit the functional description of a “unit trust”.

Firstly, any contingent entitlement that a worker might have to a payment upon a severance event was subject to clause 8.1 of the EISS Deed, which provided that clause 8 only applied to a worker who was an "Active Worker" - defined as having “. . . the meaning determined by the Trustee for the purposes of this Deed”. Clause 17 provided that subject to express contrary provision, “ . . . every discretion vested in the Trustee shall be absolute and uncontrolled ... and every power vested in it shall be exercisable in its absolute discretion”.  The result being that ElecNet, as Trustee, had the power to determine a criterion which would entitle a Worker to a contingent distribution.

Secondly, the Trustee had a discretion to vary the amount standing to the credit of a worker’s account. Clause 7.1(e) gave the Trustee power to debit “. . . such other amount(s) (if any) which the Trustee determines is appropriate or equitable to debit to the worker’s account of the worker”. 

Thirdly, clause 8.3 was found to broadly provided for the amount of a severance payment to be made, which amount was calculated as either: 

  1. an amount “up to and including the amount standing to the credit of the relevant worker’s account”, or 
  2. an amount “up to and including the prescribed amount” plus an amount “up to and including the balance of the relevant worker’s account”.

The Full Court was of the view that the three discretions described above, when considered together, had the effect that any interest that a worker has under the EISS Deed was not capable of being described "functionally" as a "unitised interest under a unit trust". In its terms, the EISS Deed departed so far from the functional concept of a unit trust, as reflected in the context and background to Part III Division 6C of the ITAA, that the trust could not be described as a “unit trust” within Division 6C.

ElecNet's Grounds for Appeal to the High Court

On appeal to the High Court key grounds of appeal were:

  • The Full Court of the Federal Court erred in adopting as the criterion of liability to tax under Part III Division 6C of the ITAA a “. . . functional and descriptive notion of a unit trust” and should have construed the ITAAs 1936 and 1997 (Cth) as ascribing to the term “unit trust” a single, identifiable meaning; and
  • Further, the Full Court of the Federal Court erred in reasoning that the interests of beneficiaries in a unit trust must be “unitised” and should have held that a trust estate under the terms of which the interests of beneficiaries are fixed by reference to identified or indentifiable criteria and may be measured in numerical or proportionate terms is a “unit trust” for the purposes of Part III Division 6C of the ITAA.

The Commissioner of Taxation filed a Notice of Contention, contending that the Full Court ought to have held, contrary to the finding of the primary judge, that the terms of the EISS did not confer on the workers “a beneficial interest, however described, in any of the income or property of the trust estate” within the meaning of the definition of “unit” in section 102M of the ITAA.

The High Court's Decision

The High Court found that the EISS was not a unit trust for the purposes of Part III Division 6C of the ITAA because any interest created by the EISS Deed in favour of employees could not be characterised as a "unit".  Further, the Court also found that the meaning of "unit trust" in Part III Division 6C of the ITAA accorded with the common usage of the expression "unit trust"; that is, a trust whereby the beneficial interest in the trust estate is divided into units as discrete parcels of rights, analogous to shares, which, when created or issued, are to be held by the persons for whose benefit the trustee maintains and administers the trust estate.  The inclusive definition of "unit" found in section 102M of Part III Division 6C of the ITAA did not expand the meaning of "unit trust" for the purposes of the Division - see paragraph 104:

". . . what is determinative in this case is that the beneficial interest in the EISS is not divided into units.  For that reason, the EISS lacks the defining feature of unitisation which characterises a trust as a unit trust.  The EISS provides instead for different amounts of the trust estate to be credited to each individual worker's account, which are then held on trust to make payments to that worker upon the occurrence of a severance event, in an amount to be determined by ElecNet up to the amount standing to the credit of that worker's account. In effect, it creates a series of individual trusts - one for each worker - with capacity in the trustee to treat each of the individual funds as comprising one fund for the purposes of administration and investment.  In essential respects, it is more akin to a defined benefits superannuation scheme fund which is held on trust for the payment of retirement, death or total disability benefits to members or their dependants.  But, be that as it may, it is not a unit trust within the meaning of [Part III] Div 6C [of the ITAA]."

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Sources:

ElecNet (Aust) Pty Ltd (as Trustee For The Electrical Industry Severance Scheme) v Commissioner of Taxation of The Commonwealth of Australia [2016] HCA 51 (21 December 2016) including Summaries and Transcripts of hearings.

Commissioner of Taxation v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178 (14 December 2015)

ElecNet (Aust) Pty Ltd (Trustee) v Commissioner of Taxation [2015] FCA 456 (13 May 2015)

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