We have previously reported on this case between Mr and Mrs Clark and the Tax Office. The High Court has refused to hear an appeal by the Tax Office. This case had previously been found in favour of the Clarks by the Federal Court which was later confirmed by the Full Bench of the Federal Court.

In the words of Chief Justice French:

This application for special leave by the Commissioner of Taxation raises the question whether a trustee of a unit trust could set-off, against capital gains, capital losses incurred some years before under a different trustee with different unit holders, with an intervening excess of liabilities over assets, subsequent recapitalisation of the trust and a waiver by the original trustee of its rights to be indemnified from the assets of the trust.

The Full Court of the Federal Court held, contrary to the Commissioner’s contentions, that there was an identity between the trust estate in the year in which the assessable capital gain was made and the trust in the years in which the capital losses were incurred so as to allow the latter to be offset against the former.

In the opinion of the Chief Justice, together with that of Justice Crennan and Justice Kiefel, there was not sufficient doubt in the judgement of the Full Bench of the Federal Court concerning continuity of the trust state. The application for special leave was refused and costs were awarded against the Tax Office.

During the years when the relevant transactions occurred Mr and Mrs Clark were long-standing clients of LOVETTS and it is pleasing to see this case finally resolved in their favour.

This case provides substantial clarity in relation to trusts and puts an end to attempts by the Tax Office to destroy trust continuity through philosophical arguments. It further strongly demonstrates the importance of maintaining complete and correct documentation and evidence of transactions and agreements entered into.

[2011] HCATrans 236 [http://www.austlii.edu.au/au/other/HCATrans/2011/236.html], WTB 1461

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