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On 3 October 2025, Deputy President Lazanas of the Administrative Review Tribunal (ART) decided XLZH and Commissioner of Taxation (Taxation) [2025] ARTA 2154 (XLZH), setting aside an objection decision by the Commissioner of Taxation (Commissioner) that denied the pre-CGT status of shares disposed of by a discretionary trust (Trust), thereby affirming the applicant taxpayer’s entitlement to disregard for tax purposes the resulting $64.4m capital gain it received from the Trust.
Context
XLZH concerned the application of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), which deems pre-CGT assets to be post-CGT when ‘majority underlying interests’ therein are not held by the same ‘ultimate owners’ who held those interests immediately prior to the advent of CGT on 20 September 1985. Relevantly, Division 149 succeeds former section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), expressing the same ideas for an identical purpose.
Like its predecessor provision, the prima facie application of Division 149 is subject to a discretion conferred on the Commissioner to treat Division 149 as not applying where he is satisfied, or thinks it is reasonable to assume, that at all times on and after 20 September 1985 and before a particular time the ‘majority underlying interests’ in an asset were had by ‘ultimate owners’ who had ‘majority underlying interests’ in that asset before that day.
In dispute between the applicant and the Commissioner was the correct application of the foregoing discretion in the specific context of an ostensibly pre-CGT asset held by a discretionary trust.
Facts
The materially relevant facts in XLZH were:
- In 1977, a discretionary trust (Trust) was settled by deed of trust. Relevantly, the trust deed defines the Trust’s beneficiaries as any persons and/or companied listed and described as such in the schedule thereto, or subsequently appointed as such by the nominator, although the nominator could not himself be a beneficiary;
- Practically, the listed beneficiaries were current and potential family members of the nominator and his wife (the applicant), as well as a named charitable trust;
- The trust deed conferred on the trustee absolute discretion as to the distribution of the Trust’s capital and income;
- In June 1988, a new company (Alpha) was incorporated, with the trustee of the Trust becoming the sole shareholder thereof shortly thereafter. Relevantly, the shares in Alpha were deemed by the Commissioner to have been acquired by the trustee of the Trust before 20 September 1985 following a transfer of business assets thereto and a successful private binding ruling application regarding the application of former subsection 160ZZN(7) of the ITAA 1936;
- In June 2011, another company (Beta), the sole share in which was held by a third company (Delta) as trustee of a hybrid trust (Delta Trust) in which there were two unit holders (the nominator of the Trust and the applicant) and other individual discretionary objects, was appointed as a beneficiary of the Trust;
- During the 2020 income year, the Trust disposed of the shares in Alpha to an unrelated third party for consideration in excess of $100m. The resultant capital gain of $64.4m was distributed to XLZH;
- The Commissioner assessed XLZH on the $64.4m capital gain, contending that the appointment of Beta as a beneficiary in June 2011 caused the ‘majority underlying interests’ in the shares in Alpha to cease being a pre-CGT asset pursuant to Division 149; and
- Since the appointment of Beta as a beneficiary of the Trust and up to and including the 2020 income year, the nominator did not, in any income year, receive or become entitled to receive an amount equal to or greater than 50% of income referable to dividends paid in respect of the shares in Alpha. In other words, the majority of the Trust’s income was distributed to family beneficiaries.
Submissions
The applicant, citing seminal authorities such as Gartside v IRC [1968] AC 533, centred on the entrenched principle that the object of a discretionary trust has no legal or beneficial interest therein, meaning:
- It is impossible, in the case of a discretionary trust, to establish the requisite continuity of ‘majority underlying interests’ under Division 149; and
- Inversely, the mere appointment of a discretionary object could not result in any change in ‘majority underlying interests’ as defined.
Notwithstanding these difficulties, the applicant further submitted that Division 149 is clearly intended to be capable of applying in the context of discretionary trusts, and that its statutory purpose can only be achieved by applying the Commissioner’s discretion in a manner that addresses the harshness arising from the abovementioned impossibility.
In support of the foregoing, the applicant noted that her construction of Division 149 was, as demonstrated by the content of administrative guidance from the commissioner (viz. IT 2340[1]), consistent with how the Commissioner administered the IT 2340 relevantly provides as follows at paragraph 5:
‘In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.’
In contrast, the Commissioner’s submissions were broadly predicated on the nominator of the Trust becoming a person possibly able to benefit from the shares in Alpha, indirectly via Beta and the Delta Trust upon the appointment of Beta as a beneficiary of the Trust and the shares in Alpha resultantly ceasing to be pre-CGT assets on that date. The Commissioner contended that he was not bound by IT 2340 since it preceded the commencement of the formal rulings regime on 1 July 1992 and that it was in any case a non-exhaustive publication.
Decision
The ART decided in favour of the applicant, setting aside the Commissioner’s objection decision and substituting it with a decision that the applicant’s antecedent objection be allowed.
The decision was arrived at largely on the basis of the perceived imperative that the provisions of Division 149 be construed as permitting the coherent identification of whether an asset held by a discretionary trust has ceased being a pre-CGT asset as well as the principle enunciated in Eichmann v Commissioner of Taxation [2020] FCAFC 155 that concessional provisions (e.g., that conferring the Commissioner’s discretion under Division 149) should be construed beneficially rather than restrictively in order to promote the concessional purpose. Approaching the task of statutory construction with these in mind impelled the conclusion that at all times, the ‘majority underlying interests’ in the shares in Alpha had been held by the same ‘ultimate owners’ who held those interests immediately before 20 September 1985 with it having been accepted that the underpinning words ‘beneficial interests’ should be broadly construed and it being the case that the nominator of the Trust received less than 50% of the dividends sourced from the Alpha shares.
With reference to the application of IT 2340, Deputy President Lazanas concluded that the Commissioner is arguably ‘administratively bound’ thereby notwithstanding that its issuance preceded the formal rulings regime. This was primarily attributable to his acknowledgment at paragraph 39 of TR 2006/10 that “the policy of the ATO is to stand by what is said in a formal ruling and to depart from a formal ruling only when there are good and substantial reasons to do so”.
Implications
The decision in XLZH is potentially a watershed one for taxpayers holding pre-CGT assets through discretionary trust structures.
We have in recent times observed the Commissioner applying the technical position he espoused in XLZH in the context of his compliance activity and determination of private ruling requests. That technical position, which can be highly adverse to affected taxpayers, has now been rebuffed by the ART, which has called for reversion to the principles set out in IT 2340 on which taxpayers have historically relied.
In-scope taxpayers should not, however, ‘pop the cork’ prematurely, with the broad ramifications of the decision and the Commissioner’s focus on succession planning as a key risk area both making it likely that the Commissioner will exercise his right to appeal to the Federal Court[2].
FOR MORE INFORMATION
Whilst we will monitor the situation and communications relevant developments as they arise, taxpayers holding pre-CGT assets through discretionary trust structures are encouraged to immediately contact their local RSM advisor for tailored advice.
