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Mixed success for taxpayer in Guardian appeal provides little comfort for trusts
Technical article

Mixed success for taxpayer in Guardian appeal provides little comfort for trusts

The Full Federal Court has handed down its decision in FCT v Guardian AIT Pty Ltd [2023] FCAFC 3 (“Guardian”) which considered the application of anti-avoidance rules to trust distributions to a corporate beneficiary.

The Commissioner’s appeal was unsuccessful on section 100A but successful under Part IVA for one of the two income years in dispute. The decision helps to provide some further clarity as to when these anti-avoidance provisions may apply to trust distributions.


Guardian involved distributions of trust income by the Australian Investment Trust (“AIT“) to a corporate beneficiary (“AITCS“). AITCS had been established in June 2012 by the controller of the group to be used as a vehicle for wealth accumulation as part of his transition to retirement and wind-down of existing businesses in the group. AITCS was made presently entitled to approximately $2.6 million of AIT’s trust income in each of the 2012, 2013 and 2014 years.

AITCS paid a franked dividend equal to the post-tax amount of its share of trust income for the 2012 and 2013 years to AIT (its sole shareholder) in the following income year. AIT streamed that franked income to the individual controller of the group who had by that time become a non-resident of Australia. No further Australian tax was payable on the dividend that flowed to the non-resident because it was franked and therefore not subject to dividend withholding tax. Effectively, the total tax on the net income of the AIT was limited to the corporate rate. For the 2014 year, AITCS dealt with its unpaid present entitlement by entering into a complying Division 7A loan agreement with AIT in March 2016.

The ATO was unsuccessful before the Federal Court in challenging these trust distributions under both section 100A and Part IVA. The ATO appealed in relation to the application of Part IVA to the 2012 and 2013 years and the application of section 100A only for the 2013 year. It did not challenge the decision in respect of the 2014 year.

Decision on section 100A

The ATO’s appeal on section 100A was unsuccessful, with Hespe J (with whom the other two judges agreed) concluding that there was no relevant agreement or understanding for AITCS to pay a dividend by 23 June 2013, being the day the distribution resolution was made. Hespe J held that while there may have been an expectation that an arrangement would be entered into at a later time for the payment of a dividend, for section 100A to apply there must, at the date of the resolution, be a consensus existing between two or more parties. Where the agreement or understanding is said to involve that beneficiary making a payment, the beneficiary must be one of those parties.

Hespe J dismissed the ATO’s arguments that the existence of the alleged arrangement or understanding could be inferred as at 23 June 2013. Even if the taxpayer’s advisers reached such an understanding at the time of the resolution it could not be attributed to the corporate beneficiary. Hespe J found that the decision for AITCS to pay a dividend was only agreed to after a 15 January 2014 email recommendation from the taxpayer’s adviser. The lack of an agreement at the earlier time of 23 June 2013 meant that there was no relevant arrangement or understanding such that section 100A could not apply.

The decision seems to suggest that section 100A may not apply to legitimate trust distributions (which can be called on by that beneficiary), where at the time of making the distribution no pre-planned arrangement exists relating to how the entitlement to receive the distribution will be dealt with.

Decision on Part IVA

The ATO’s appeal on Part IVA was only partly successful, with the Court finding that a scheme existed in both years but a dominant purpose of obtaining a tax benefit was only present for 2013.

The Court found that a scheme existed in relation to both years involving:

  • the appointment of income by AIT to AITCS;
  • AITCS distributing a franked dividend in the following year to AIT; and
  • that franked income being streamed to the non-resident controller of the group.

The tax benefit identified for each year was the non-inclusion of the share of AIT’s net income by the non-resident individual under a counterfactual involving the direct distribution to him. Under the counterfactual, the share of trust income would have been taxed at the marginal rates applicable to non-residents rather than the 30% corporate tax rate (without further withholding tax payable on the franked dividend).

The Court considered the eight factors and concluded that a dominant purpose of the parties that carried out the scheme was not the tax benefit for the 2012 year as AIT’s distributions were the product of an evolving set of circumstances with no objective basis on 30 June 2012 to expect AITCS would subsequently pay a dividend. However, by the following year the implementation of the strategy that had been developed in the prior year could objectively be viewed as having been entered into for a dominant purpose of obtaining the identified tax benefit. In particular, it could not objectively be concluded that the distributions from AIT to AITCS were for the purpose of using AITCS as a wealth accumulation vehicle given the amounts were paid out in full as franked dividends (following payment of corporate tax) within eight months of the entitlements arising.

Difference between Part IVA and section 100A analysis

A key difference between the Court’s approach to the application of Part IVA compared to section 100A was that the concept of a “scheme” was said to be broader than an “arrangement” or “understanding”. For there be a “scheme” to which Part IVA can apply, it is not necessary to establish a pre-existing plan or common intention between multiple parties. The Court also emphasised the objective basis on which Part IVA applies compared to the actual or subject purpose required under section 100A.


This decision may provide some comfort to taxpayers regarding the application of section 100A, particularly where a trust distribution can be shown to not be made as part of any plan involving subsequent transactions being entered into by beneficiaries.

Guardian serves as a useful reminder that, regardless of whether section 100A applies, the ATO can and will seek to apply Part IVA to arrangements involving trust distributions as evidenced by this decision as well as its success in Minerva Financial Group Pty Ltd v FCT (currently on appeal), emphasising that great care needs to be taken when making year-end trust distributions.

It is therefore important that taxpayers are aware of these court decisions and that their trust distributions are not made solely or predominantly for the purposes of reducing income tax otherwise payable. That is, there must be substance to the distributions made to beneficiaries.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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