FC of T v PRESTIGE MOTORS PTY LIMITED AS TRUSTEE OF THE PRESTIGE TOYOTA TRUSTJudges: Beaumont J
Full Federal Court
Hill and Sackville JJ
This is an appeal and cross-appeal from orders made by a Judge of this Court [ reported at 97 ATC 4392] on objections made by the respondent/cross respondent (``Prestige'') to assessments issued by the appellant/cross respondent (``the Commissioner''). The assessments were issued in respect of the tax years from 1979 to 1992. Each was based on the application of s 100A of the Income Tax Assessment Act 1936 (the `` ITAA '') to certain transactions involving Prestige and the Prestige Unit Trust (the ``Trust'').
The primary Judge identified three separate transactions or series of transactions, each of which is said by the Commissioner to justify the application of s 100A of the ITAA . The three transactions have been described as
- • the ``RLAV transaction'';
- • the ``1981 NMLA transaction''; and
- • the ``1984 NMLA transaction''.
The RLAV transaction involved the sale by Prestige of a profitable business to the then trustee of the Trust (the ``Trust'') and the issue of 93 per cent of units in the Trust to a company known as Ronald Lyons Australia (Vic) Pty Ltd (``RLAV''). RLAV had substantial tax losses and, prior to the allotment of units, effectively became subject to the control of the same persons who controlled Prestige. Prestige later became the trustee of the Trust. In essence the Commissioner's case is that the arrangement pursuant to which this transaction took place was made for the purpose of avoiding tax. The purpose was to be achieved by diverting income from Prestige to RLAV, thereby enabling the latter to offset the income against its tax losses and to pay interest to an offshore company controlled by the same interests as controlled Prestige.
The Commissioner says that the arrangement constitutes a ``reimbursement agreement'' for the purposes of s 100A of the ITAA and that the income distributed to RLAV is deemed by s 100A(1) to be income to which no beneficiary is presently entitled. The consequence is said to be that the trustee of the Trust (which is Prestige itself) is assessable to income tax at the special rate declared for the purposes of s 99A of the ITAA . That rate is set at the highest marginal rate for individual taxpayers and was 61.5 per cent in the first of the tax years in question and 48 per cent in the last.
The NMLA transactions each involved the issue of units in the Trust to National Mutual Life Association Ltd (``NMLA''), a life assurance company. Pursuant to s 112A of the ITAA , NMLA's assessable income included income derived from assets in its statutory fund. The Commissioner's position is that the agreements pursuant to which these transactions were undertaken had a tax avoidance purpose,
ATC 4244namely the diversion of income from RLAV (after its tax losses had been ``used up'') to the tax exempt NMLA. The Commissioner says that the agreements are reimbursement agreements for the purposes of s 100A of the ITAA and that the trustee of the Trust is assessable at the special rate provided for in s 99A in respect of the income distributed to NMLA.
The primary Judge found in favour of Prestige in relation to the RLAV transaction. His Honour did so on the ground that s 100A, as a matter of construction, applied only to reimbursement agreements entered into in relation to an existing trust estate, and not to agreements which involve the creation of the trust estate. However, his Honour found in favour of the Commissioner in relation to the NMLA transactions.
The Commissioner appeals against the decision in favour of Prestige in relation to the RLAV transaction, while Prestige cross appeals against the decision in favour of the Commissioner in relation to the NMLA transactions. Prestige has filed a notice of contention by which it seeks to support the primary Judge's decision in relation to the RLAV transaction on grounds either rejected or not considered by his Honour.
The statutory scheme
The statutory scheme set out in this part of the judgment is that which was in force during the relevant period.
Section 100A forms part of Division 6 of Part III of the ITAA , which is headed ``Trust Income''. Section 96 states that, except as provided in the ITAA , a trustee ``shall not be liable as trustee to pay income tax upon the income of the trust estate''. Under s 97, where a resident beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary is to include that share of the net income of the trust estate. Section 98 provides that, where a resident beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the trust income, the trustee is assessable to tax in respect of that share of the income as if it were the individual.
Section 99A provides for certain trust income to be taxed at a special rate. In particular, s 99A(4) provides that where there is no part of the net income of a resident trust estate that is
- • included in the assessable income of a beneficiary pursuant to s 97;
- • in respect of which the trustee is liable to pay tax pursuant to s 98; or
- • is income attributable to sources outside Australia and represents income to which a non- resident beneficiary is entitled,
the trustee is to be assessed and liable to pay tax on the net income of the trust estate at the rate declared by Parliament for the purposes of the section. As we have mentioned, during the relevant years of income the declared rate varied, but was as high as 61.5 per cent.
Section 100A was inserted into the ITAA by the Income Tax Assessment Amendment Act 1979 (the `` 1979 Act ''), which also substituted new ss 97, 98 and 99A(4) for earlier versions of those provisions. The legislation was introduced into the Parliament as the Income Tax Assessment Amendment Bill (No 5) 1978, following a statement by the then Treasurer on 11 June 1978. Because the taxpayer placed considerable reliance on the extrinsic materials, it is convenient to refer here to passages in the Treasurer's statement and the Explanatory Memorandum accompanying the Bill. In the 11 June 1978 statement, the Treasurer announced the Government's intention to legislate to overturn schemes which had the ``broad purpose of allowing income derived by trusts to be passed on to beneficiaries in a tax free form''. The statement continued as follows:
``A feature of several of the schemes is a very wide power given to the trustee under the terms of the trust instrument as to the distribution or application of trust income. In reliance on this power, the trustee agrees with promoters of tax schemes and other compliant parties to distribute or apply the bulk of the trust income - either directly or through an interposed trust - for the apparent benefit of specially introduced beneficiaries who do not pay any, or any substantial, amount of tax on the amount distributed or applied.
In some cases the nominal beneficiary selected is a tax-exempt body, such as a charitable institution or sporting association. In other cases, it is a company, set up for the purpose by the promoters of the scheme, that by one means or another escapes payment of
ATC 4245tax on the income. One technique is to set artificially-created paper `losses' off against the income received from the trust. Another technique is to strip assets from the recipient company so that tax assessed on the income cannot be collected. Yet again, the income may be distributed to non-resident individuals each of whom does not have enough Australian taxable income to be liable to tax, but who will account for the income to the Australian family concerned.
The essential element common to the schemes is that, while the income concerned is effectively freed from tax in the hands of the nominal beneficiary, the terms of the underlying arrangement ensure that the beneficiary does not enjoy anything like the full use or benefit of the income. Instead, the arrangement requires a broadly equivalent capital sum - but reduced by the promoter's fee and a modest reward for the services of any participating exempt body - to be directed to persons intended all along as the real beneficiaries of the trust.
The arrangements are often very complex and the party responsible for putting the real beneficiaries in funds may be an associate of the nominal beneficiary. The return of the funds may be achieved by a settlement on another trust established for the benefit of the real beneficiaries of the main trust or their families, by the making to them of what is known colloquially as a `collapsible loan', i.e. a loan that effectively does not have to be repaid, or through the nominal beneficiary having acquired the right to the income by payment to the real beneficiaries of a broadly equivalent sum.
The legislation to counter tax avoidance through trust stripping schemes will broadly be on the lines that any distribution or application of income by a trustee, pursuant to a relevant contract, arrangement or understanding, will be treated as not having been made. This means that the trustee will be liable to be assessed and pay tax at the rate of 60 per cent on the amount involved as if it had been accumulated in the trust.
In broad terms, a relevant contract, arrangement or understanding will be one the terms of which contemplate conferring on a particular beneficiary a `present entitlement' to income of a trust, and under which the beneficiary or an associated party is to provide funds or benefits in money's worth for another person, company or trust.''
The Explanatory Memorandum accom- panying the Bill explained the operation of the proposed s 100A as follows:
``The arrangements generally turn on the operation of section 97 which, as described earlier in this memorandum, provides for a beneficiary to be subject to tax where the beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability. In those circumstances, the beneficiary's share of the trust net income is included in his assessable income and the trustee is not required to pay tax on the income. Where the trustee has a discretion to pay or apply income for the benefit of one or more specified beneficiaries and the trustee exercises the discretion in favour of a beneficiary, section 101 deems the beneficiary to be presently entitled to the amount paid or applied. Such an amount thus also falls to be taxed to the beneficiary under section 97.
A common feature of the tax avoidance arrangements at which the proposed section is directed is for a specially introduced beneficiary to be made presently entitled to income of the trust estate, so that the trustee is relieved of any tax liability on the income. Under the arrangements, the beneficiary also does not pay tax, e.g., because of a peculiar tax status. For example, the beneficiary may be a body or organisation that qualifies for exemption of its income under specific provisions, or it may be another trust that has sufficient deductible losses to absorb its share of income as a beneficiary of the first trust estate.
Invariably, the arrangements require this introduced beneficiary to retain only a minor portion of the trust income and to ensure that some other person - the one actually intended to take the benefit - effectively secures enjoyment of the major portion of the trust income but in tax-free form (e.g., by the settlement of a capital sum in another trust estate for the benefit of that person).
The proposed section 100A will look to the existence of an agreement or arrangement
ATC 4246that is entered into otherwise than in the course of ordinary family or commercial dealing and under, or as a result of which, present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of valuable benefits to some other person, company or trust. In those circumstances, the section will require the income of the trust that is dealt with under the `reimbursement agreement' to be treated as having been accumulated by the trustee as income to which no beneficiary is presently entitled. This will result in the trustee being liable to pay tax on the income under section 99A at the prescribed tax rate, 61.5 per cent for 1978-79.
The new section is to apply to reimbursement arrangements giving present entitlement to an introduced beneficiary where the relevant trust income is paid to or applied for the benefit of the beneficiary after 11 June 1978, the day on which the Government announced its intention to introduce legislation to overcome these arrangements.''
Section 100A(1) provides as follows:
``(1) Where -
- (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
- (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the `relevant trust income' ) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement,
the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.''
If s 100A(1) applies to a beneficiary, the effect is that the beneficiary is deemed not to be presently entitled to income, thereby rendering the trustee assessable at the special rate determined pursuant to s 99A of the ITAA .
Section 100A(5) provides as follows:
``For the purposes of subsection (1), but without limiting the generality of that subsection, where -
- (a) a reimbursement agreement was entered into at or after the time when a person became a beneficiary of a trust estate (whether the person became a beneficiary of the trust estate before or after the commencement of this section); and
- (b) the amount (in this subsection referred to as the `increased amount' ) of the share of the income of the trust estate to which the beneficiary is presently entitled exceeds the amount (in this sub- section referred to as the `original amount' ) of the income of the trust estate to which the beneficiary would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into or if an act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement had not occurred,
the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount shall be taken to have arisen out of the reimbursement agreement.''
Subsections 100A(7), (8) and (9) define ``reimbursement agreement'' for the purposes of s 100A:
``100A(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.
100A(8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been
ATC 4247entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
100A(9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.''
Subsections (10) and (11) provide as follows:
``100A(10) A reference in subsection (7) to the payment of money to a person or persons shall be read as including a reference to the payment of money to a person or persons by way of loan.
100A(11) A reference in this section to a person shall be read as including a reference to a person in the capacity of a trustee.''
The expression ``agreement'' is defined in s 100A(13):
```agreement' means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.''
The primary Judge summarised the three transactions. However, because his Honour held that s 100A could not apply to the distributions made in the course of the RLAV transaction, he did not need to deal with that transaction in detail. The following account of the RLAV and NMLA transactions is taken partly from his Honour's judgment, but also draws on an agreed statement of facts tendered in the proceedings.
The RLAV Transaction
For some years prior to 1979 Prestige carried on a successful business as a wholesaler and retailer of Toyota motor vehicles (the ``Business''). The Business yielded substantial income. Prestige at this time was a member of the Perron group of companies, of which the chairman was Mr Lloyd Perron. Other members of the group included Century Finance Pty Ltd (``Century Finance'') and Perron Investments Pty Ltd (``Perron Investments''). Mr Geoffrey Gadsdon was a director of Prestige at all material times and was primarily responsible within the group for the implementation of all three transactions.
In late 1978 Ronald Lyons Australia (Vic) Pty Ltd (``RLAV'') was a wholly owned subsidiary of Ronald Lyons Holdings Ltd (in Liquidation) (``RLH''), a United Kingdom company, and was unrelated to Prestige. RLAV at that time was insolvent and was under the administration of a receiver appointed by RLH's liquidator. RLAV's assets included tax losses of about $2.4 million and land in Melbourne with a market value of about $750,000. Its liabilities included a debt of about $8.2 million to Kaiser Ullman Ltd (``KUL''), secured by a mortgage over the land and about $950,000 due to RLH and other companies in the Lyons group.
Between October 1978 and February 1979 negotiations were undertaken for the assignment to a company incorporated in Singapore, Cholmondeley Commercial and Equitable Estates (Singapore) Pty Ltd (``Cholmondeley''), of the rights of KUL and RLH in respect of the mortgage and of the indebtedness of RLAV. Mr Gadsdon gave evidence that, although the Perron group had no power to control the directors of Cholmondeley in the exercise of their voting rights, the directors of the Perron group companies hoped that the directors of Cholmondeley would act in accordance with the wishes of the Perron group from time to time. His Honour noted that there was no evidence that the hope was misplaced.
On 25 January 1979, a deed of trust (the ``Trust Deed'') was executed, whereby the Trust was established as a unit trust, with LSP Pty Limited (``LSP'') as Trustee. The sum of $100 was settled on the trustee. Under the Trust Deed, the trustee was empowered to issue 50 ``A'' class units and 2,000,200 ``B'' class units.
On 23 February 1979, a series of documents was executed. These included the following:
a deed among KUL, Cholmondeley and RLH whereby KUL assigned its mortgage to RLH in consideration of $810,000 paid by RLH to KUL;
- • a deed between KUL and Cholmondeley whereby RLH assigned to Cholmondeley the debt due by RLAV for a nominal consideration; and
- • a mortgage by RLAV of its land to Century Finance to secure a loan of $1.3 million and an agreement for the postponement of the KUL mortgage (which had been assigned to RLH).
His Honour found that as the result of these documents and actions taken pursuant to them, RLAV's only indebtedness was to Cholmondeley, in the sum of approximately $8 million, and to Century Finance, in the sum of $1.3 million. RLAV's only asset (other than tax losses) was the Melbourne land, which was mortgaged to secure its indebtedness to Cholmondeley and Century Finance.
Between 26 and 28 February 1979, Mr Perron applied for all 50 ``A'' class units and RLAV applied for 1,866,850 (or 93.3 per cent) of the ``B'' class units. Other companies and persons, apparently all shareholders of Prestige, applied for the balance of the ``B'' class units.
On 1 March 1979, the following events occurred:
- (i) Century Finance advanced to RLAV the sum of $1,866,850, on condition that sum be applied to subscribing for units in the Trust and the mortgage between RLAV and Century Finance was varied by increasing the sum secured by $1,866,850.
- (ii) LSP issued to unitholders the units for which they had applied and each unitholder paid $1.00 for each unit so issued. RLAV subscribed $1,866,850 for its units.
- (iii) LSP utilised the bulk of the moneys so paid to pay the taxpayer the agreed purchase price for the Business, namely, $1,915,383, and the purchase of the Business was completed.
- (iv) LSP, as had been intended, retired as trustee of the Trust and appointed the taxpayer as trustee in its place. The reason for LSP acting as trustee of the Trust for a short period was to avoid the difficulty of Prestige selling the Business as owner to itself as Trustee.
The following distributions of income were made to RLAV by the taxpayer, as trustee of the Trust:
``Year ended 30 April 1979 $ 149,348 Year ended 30 April 1980 $2,453,447 Year ended 30 April 1981 $3,492,522 Year ended 30 April 1982 $3,718,575 Year ended 30 April 1983 $NIL''
RLAV did not pay any tax in respect of these distributions since it could deduct RLAV's prior years' losses, pursuant to s 80 of the ITAA .
The balance of available carry forward losses of RLAV at the commencement of each of the following financial years was claimed to be the following:
Year Losses Carried Forward 1979 $2,392,787 1980 $2,346,052 1981 $2,043,539 1982 $ 760,409 1983 $ 144,567
On 27 July 1979, RLAV and Cholmondeley agreed that the interest rate payable on the debt then due from RLAV to Cholmondeley should be increased from 9.5 per cent to 13.5 per cent per annum.
During the 1980, 1981 and 1982 financial years, RLAV paid substantial amounts by way of interest to Cholmondeley. Withholding tax, at the rate of 10 per cent, was paid in respect of the interest remitted to Cholmondeley. The primary Judge found that $4.6 million had been paid by way of interest and withholding tax. However, the statement of facts tendered in the proceedings indicates that approximately $7 million was paid in this way and claimed by RLAV as a tax deduction. The primary Judge found that the arrangements whereby Cholmondeley was paid interest by RLAV in respect of the indebtedness assigned to Cholmondeley ensured that the funds distributed to RLAV remained under the control of interests associated with Mr Perron. His Honour also said that it could safely be assumed that the income distributed to RLAV, which were then utilised in payments to Cholmondeley, ultimately found their way back to entities associated with Mr Perron. However, it was common ground on the appeal that there was no evidence as to the ultimate destination of moneys paid to Cholmondeley.
RLAV also paid some $3.6 million in principal and interest to Century Finance. Although his Honour made no finding as to the proportion of this amount that constituted
ATC 4249interest, we were told from the bar table that some $500,000 was paid by way of interest to Century Finance. There was no evidence to indicate that Century Finance did not pay income tax at the company rate on the interest paid to it by RLAV.
In about April 1983, in consideration of payment by Perron Investments to RLAV of $33,000 and the assumption by Perron Investments of RLAV's liabilities to Cholmondeley, Perron Investments acquired the land held by RLAV and RLAV's units in the Trust. According to its balance sheet of 30 April 1985, RLAV had assets of $41,683 and liabilities of $73,225.
The 1981 NMLA Transaction
On 20 May 1981, Mr Perron wrote to the National Mutual Life Association (``NMLA'') offering NMLA a block of units in the Trust. According to the letter, the units would give the holder the right to fifteen fixed distributions, consisting of six distributions of $1,425,000 at six monthly intervals, followed by a further nine distributions of $3,000 at six monthly intervals. The consideration requested was $6,400,000 and the return to NMLA was said to be 18 per cent per annum. The letter advised that at the expiration of the distribution period of seven and a half years, the units would be worthless and would not participate in any assets, capital or future profits of the Trust.
On 2 September 1981, the Trust Deed was amended, with the consent of unitholders, to the following effect:
- (i) RLAV's 1,866,700 ``B'' class units were reclassified as ``C'' class units, conferring an entitlement to $1 per unit in respect of any redemption or repayment of capital and to certain distributions of income;
- (ii) Prestige, as trustee, was given power to issue 6,400,000 ``D'' class units of $1 each having the right to receive distributions of net income of the Trust as follows:
- ``(v) `D' class units shall entitle the holders thereof in priority to holders of all other classes of units other than the holders of 'B' class units to receive the following distributions from the net income during the periods specified hereunder:
- (A) firstly, six distributions of one million four hundred and twenty five thousand dollars ($1,425,000) each...
- (B) secondly, nine distributions of three thousand dollars ($3,000) each...''
- ``(v) `D' class units shall entitle the holders thereof in priority to holders of all other classes of units other than the holders of 'B' class units to receive the following distributions from the net income during the periods specified hereunder:
The ``D'' class units did not entitle the holder to any voting rights, nor to any surplus of the Trust save for a nominal amount in redemption at the expiration of the period during which they carried an entitlement to receive income.
On 7 September 1981, NMLA applied for 6,400,000 ``D'' class units in the Trust. Those units were issued to NMLA in return for payment of $6.4 million. NMLA's rights to receive the distribution were secured by guarantees and mortgages provided by Mr Perron and companies within his group. This investment by NMLA was the first it had made of this kind.
The following distributions were made by the taxpayer to NMLA as the holder of the ``D'' class units:
Year Ended Distribution 30.6.1982 $2,850,000 30.6.1983 2,850,000 30.6.1984 2,850,000 30.6.1985 6,000 30.6.1986 6,000 30.6.1987 6,000 30.6.1988 6,000 30.6.1989 3,000
The distributions were treated by NMLA and the Commissioner as exempt from income tax pursuant to s 112A of the ITAA , which excludes from the assessable income of a life assurance company income derived from assets in its statutory fund.
The 1984 NMLA Transaction
The 1984 NMLA transaction began when Mr Perron wrote on 14 November 1983 to NMLA, making a further offer for the issue of 5,000,000 units in the Trust with preferential rights as to dividends. The holder of the units was to be entitled to seven six monthly distributions of $975,000, followed by a further eight six monthly distributions of $3,000. Once again, the units were not to carry any entitlements at the expiration of the distribution period. The proposed arrangement produced a return for NMLA of 17 per cent per annum on the sum of $5 million to be subscribed for the units.
Following the acceptance of Mr Perron's proposal, the Trust Deed was amended with the consent of all unit holders to give the trustee
ATC 4250power to issue 10,000,000 ``E'' class units of $1 each with the right to receive such annual or other distributions of the net income of the Trust as the trustee should determine upon issue of the units.
On 26 June 1984, NMLA applied for 5,000,000 ``E'' class units in the Trust, for which it made a part payment of $50,000. The units were issued on 2 July 1984 to NMLA, which paid the balance of $4,950,000. The trustee of the Trust was empowered to redeem and cancel the units at any time after 31 December 1991, by paying the unitholders the sum of $10. The ``E'' class units entitled the holder to the distributions outlined in Mr Perron's letter. Once again, NMLA's rights to receive distributions were secured by mortgages and guarantees from Mr Perron and the Perron group.
Distributions to NMLA, as the holder of ``E'' class units, were made as follows:
Year Ended Distribution 30.6.1985 $1,950,000 30.6.1986 1,950,000 30.6.1987 1,950,000 30.6.1988 978,000 30.6.1989 6,000 30.6.1990 6,000 30.6.1991 6,000 30.6.1992 3,000
Once again, the distributions to NMLA were treated by it and the Commissioner as exempt from income tax pursuant to s 112A of the ITAA .
The reimbursement agreements alleged by the Commissioner
In order to appreciate the reasoning of the primary Judge and the submissions in this Court it is necessary to follow the Commissioner's submissions concerning the reimbursement agreements, as a result of or in connection with which RLAV's entitlement to trust income is said to have arisen.
The RLAV Reimbursement Agreement
The Commissioner contended before the primary Judge that the reimbursement agreement comprised negotiations for and agreement on the implementation of a series of steps:
- (i) settlement of the Trust;
- (ii) acquisition by Cholmondeley of the debts owing by RLAV;
- (iii) acquisition of effective control of RLAV by the restructuring of its indebtedness;
- (iv) the sale of the Business by Prestige to LSP as trustee of the Trust;
- (v) the loan of the subscription moneys by Century Finance to RLAV and the payment by RLAV of the subscription moneys in return for the issue of 93 per cent of the units in the Trust; and
- (vi) the distribution of income to RLAV under the terms of the Trust.
The parties to the reimbursement agreement were said to include Prestige, RLAV, Century Finance, Cholmondeley, Mr Perron, Mr Gadsdon and Mr Fieldhouse (the solicitor for the Perron group).
On the hearing of the appeal, the Commissioner sought to modify this contention in certain respects. Mr Slater QC, who appeared with Mr Durack SC for the Commissioner, said that the steps contemplated by the arrangements included -
- • the incorporation of Cholmondeley in Singapore;
- • the payment of interest to Cholmondeley by RLAV (which was subject only to the 10 per cent withholding tax); and
- • the absence of any liability on the part of RLAV to pay tax on the income distributed to it by the Trust.
We wish to make it clear that in cases such as this, the Commissioner should specify with particularity the nature and scope of the reimbursement agreement alleged. Neither the Court nor the taxpayer should be left in a state of uncertainty on such a critical question. In the ordinary course, it will be open to the Commissioner to amend the particulars, but only if the taxpayer is not thereby prejudiced. Although complaining about the change in the Commissioner's position, Mr Bloom QC, who appeared with Mr Edmonds SC and Mr Payne, did not seriously contend that any prejudice would be occasioned by the Commissioner's reformulation of the terms of the reimbursement agreement. Despite the Commissioner's belated change in position, he should be permitted to rely on the reformulated version of the reimbursement agreement.
The Commissioner submitted that the reimbursement agreement identified by him:
- • provided for the payment of money to Prestige as trustee of the Trust by RLAV (for the issue of units); the payment of money by the Trust to Prestige (as the vendor of the Business); the transfer of property in the form of the assets of the Business from Prestige (as the vendor) to the Trust; and the payment of money by RLAV to Cholmondeley (as interest) (s 100A(7));
- • was entered into for the purpose of relieving from tax the income derived from the Business that would have been paid to Prestige (by diverting it to RLAV and thence in part to Cholmondeley as interest taxed at the rate of 10 per cent) (s 100A(8));
- • was not entered into in the course of ordinary family or commercial dealings (s 100A(13)); and
- • gave rise to the present entitlement of RLAV to the income of the Trust (s 100A(1)).
The NMLA Reimbursement Agreements
The Commissioner's position in relation to the NMLA transactions is that, in each case, they were implemented in accordance with a reimbursement agreement to which the parties were Prestige, RLAV, NMLA, Cholmondeley and individuals associated with those companies. The purpose of the agreements, at least so far as the Perron interests (including RLAV) were concerned was to secure that RLAV would not be liable to pay income tax in respect of the distribution of Trust income, such income being diverted to NMLA, which obtained the advantage provided by s 112A of the ITAA . Both at the trial and in this Court, the Commissioner submitted that the subscription moneys paid by NMLA for units that ultimately were to ``collapse'' to a nominal value, were ``patently designed to recoup or reimburse the Trust for the bulk of the income to be distributed, the difference representing a return to NMLA''.
The primary Judge's reasons
The RLAV Transaction
The primary Judge rejected a submission by Prestige that s 100A of the ITAA did not apply to the RLAV transaction because there had been no ``reimbursement'' of Prestige in its own right. Prestige had contended that the essential indicium of transactions caught by s 100A is that the beneficiary receives income in a tax free or capital form. In this case, however, Prestige had not been reimbursed for the income forgone by it; rather it had been paid the purchase price for the Business and continued to receive income from the Trust. His Honour considered that Prestige's submission placed too much emphasis on the word ``reimbursement'', as distinct from the definition of ``reimbursement agreement'' in s 100A(7).
However, the primary Judge upheld an alternative submission made by the taxpayer. This was that, having regard to the mischief s 100A was intended to redress, the section should be given a restrictive interpretation
``... such that, when section 100A(1) refers to a beneficiary of a trust estate being presently entitled to income, the reference should be limited to a trust estate which is existing at the time when the relevant reimbursement agreement is made. The reimbursement agreement must involve the beneficiary becoming a beneficiary or being introduced into the trust estate....''
[ at 4399]
His Honour considered that an important feature of the case was that income had not been diverted from a beneficiary of the Trust, nor from the trustee. Rather, advantage had been taken of s 80 of the ITAA , which permitted the losses of RLAV in previous years to be deducted from assessable income in subsequent years, provided that there had been substantial continuity of beneficial ownership of the shares in RLAV ( ITAA , s 80A). Had the Trust not been established, none of the beneficiaries of the Trust would have derived any of the income in question. Any tax advantages were gained by reason of the applicability of s 80, not by reason of the ability to distribute income to a beneficiary introduced into a trust.
His Honour continued as follows [ at 4400]:
``The language of section 100A(8) indicates that the Parliament intended that Section 100A would apply when a particular purpose was present. That purpose is the purpose of securing that a person who, if the reimbursement agreement is not entered into, would have a potential liability to pay income tax in respect of a year of income, would not be liable. That is to say, unless something happens as a consequence of the reimbursement agreement, a liability would
ATC 4252arise: but for some further juridical act or acts, being the reimbursement agreement, a liability for tax would arise in relation to that income that has been derived or is expected to be derived.
Such a notion is consistent with section 100A(1) if that provision is read as referring to a trust estate which exists outside and independently of the reimbursement agreement. It is a somewhat forced notion to speak of the present entitlement of a beneficiary of a trust estate arising out of a reimbursement agreement or arising by reason of an act, transaction or circumstance that occurred in connection with or as a result of a reimbursement agreement, in circumstances where the trust estate itself exists only as a consequence of implementing the reimbursement agreement. The language of section 100A(1) is less strained when the reference to a trust estate is read as a reference to a trust estate which exists before and independently of the reimbursement agreement out of which, or as a result of which, the present entitlement of the beneficiary under that trust estate arises.''
This analysis, together with the extrinsic material, supported the view that s 100A was to be regarded as a specific anti-avoidance measure. From this it was said to follow that the section was not intended to apply to any present entitlement of RLAV to any share of the income of the Trust.
The 1981 NMLA Transaction
The primary Judge found that the steps comprising the NMLA transaction had been carried out as part of a predetermined plan involving at least Mr Perron and Mr Gadsdon. His Honour further found that the purpose of certain participants in the transaction was that RLAV should not be liable to income tax in respect of the profits of the Business that would otherwise be distributed to it by reason of its holding of ``B'' class units in the Trust. There was a reimbursement agreement within s 100A(7), since the arrangements contemplated that NMLA would pay money to Prestige, as trustee of the Trust. Prestige's purpose in entering the agreement included securing that RLAV, which would have been liable to pay tax in the relevant years of income, would not be liable to pay income tax in respect of those years.
The primary Judge noted that the 1981 agreement, relied on by the Commissioner, was different in character from the RLAV agreement, since the Trust was in existence when the 1981 agreement was made. Thus it was not open to the taxpayer to escape s 100A on the basis that the Trust was created at the same time as the alleged reimbursement agreement. His Honour also held that the fact that NMLA received interest in respect of the amounts subscribed for units did not prevent the agreement being one that provided for payment of money to the taxpayer by NMLA.
The final question was whether the 1981 agreement was entered into ``in the course of ordinary commercial dealing'' and was therefore outside the definition of ``agreement'' in s 100A(13). In this respect, his Honour observed that the taxpayer had adduced no direct evidence as to the manner in which the sum paid by NMLA for the units had been employed in the Business conducted by the Trust. All that was apparent from the evidence was that the funds had been lent unsecured to other entities associated with Mr Perron. His Honour found that the taxpayer had obtained no advantage from the making of interest free loans with the funds subscribed by NMLA. He concluded as follows [ at 4405]:
``In the light of my conclusion as to the purpose of the 1981 NMLA Transactions, and having regard to the absence of any cogent evidence as to the commercial justification for the Taxpayer's raising moneys from NMLA as trustee of the Trust and lending the moneys free of interest to other members of the Perron Group, I do not consider that the arrangements were entered into in the course of ordinary commercial dealing. It follows that the exclusionary part of section 100A(13) does not assist the Taxpayer.''
The 1984 NMLA Transaction
The primary Judge considered that the analysis in relation to the 1981 NMLA transaction applied, with two exceptions, with equal force to the 1984 NMLA transaction.
The first exception was the question of purpose under s 100A(8). On this issue, his Honour drew the inference that the purpose of the individuals involved in the 1984 NMLA transaction was to ensure that the holders of the ``B'' class units or, alternatively, the taxpayer as trustee, would not be liable to pay income tax
ATC 4253or would be liable to pay less income tax in subsequent years in respect of distributions of income of the Trust.
The second exception was the question of whether the 1984 NMLA transaction was entered into in the ordinary course of commercial dealing. The evidence showed that the funds raised from the issue of the ``E'' class units were used to acquire two properties for the Trust. Each property had been acquired by Prestige as trustee from itself as beneficial owner. His Honour found that the properties had previously been used by Prestige as trustee in connection with the Business and that no charge had been levied for the use of the properties. In other words, Prestige in its capacity as trustee, had had the use of the properties without charge.
The primary Judge concluded [ at 4406] that the 1984 NMLA transaction was not entered into in the course of ordinary commercial dealing:
``Clearly, a decision made by the Taxpayer, as trustee, to purchase the properties on which it carried on the Business might be justified from a commercial point of view. Real commercial advantages might flow to the trustee of a trust from the security of owning its business premises. However, there was no evidence as to any perceived future benefit for the Trust in owning the properties. There was no immediate commercial benefit, in money terms, so far as the Trust was concerned: a substantial sum had to be borrowed to pay the price and substantial distributions of income had to be made, in the form of the annuity payments to NMLA, to service the borrowing.
Nor was there evidence that the Taxpayer, as trustee, was, in fact, any more secure than it had been before the transfer of the properties. That is to say, the Trust had the use of the properties beforehand without any apparent obligation to pay rent and there was nothing to suggest that the Taxpayer, as owner in its own right of the properties, had made any threat of dispossession.''
It should be noted that his Honour, in making the finding that the Trust was not obliged to pay rent for the use of the properties, apparently overlooked evidence in the accounts of the Trust indicating that rent had been paid by the Trust in respect of the properties over a number of years. We shall return to this point.
Primary Judge's Conclusion
His Honour concluded that, insofar as the assessments under challenge were based on treatment of the distributions to RLAV as income to which no beneficiary was presently entitled, the assessments were to be set aside. Insofar as they were based on the same treatment of distributions made to NMLA in the course of the 1981 NMLA transaction and the 1984 NMLA transaction they were confirmed.
Prestige's Submissions on the RLAV Transaction
Prestige submitted that the primary Judge had reached the correct conclusion in relation to the RLAV transaction. It relied on six arguments, although there was some overlap among them. Several of the arguments were advanced by way of a notice of contention.
First, Prestige supported the primary Judge's construction of s 100A(7), namely, that a ``reimbursement agreement'' for the purposes of the subsection is limited to an agreement entered into after the time when the relevant person became a beneficiary of the trust estate. In other words, according to Prestige, s 100A(7) is satisfied only if the trust estate exists before the alleged reimbursement agreement was entered into and was created independently of that agreement. The reimbursement agreement alleged by the Commissioner did not meet the requirement, since the Trust estate did not exist independently of the agreement. The reimbursement agreement alleged by the Commissioner contemplated the creation of the Trust as one of the steps in the arrangement.
Mr Bloom submitted that this construction of s 100A was supported by the fact that s 100A was not a general anti-avoidance provision, but a specific provision designed to deal with the mischief of ``trust stripping''. The extrinsic materials demonstrated that this was so. A specific anti-avoidance provision should be given an interpretation sufficient to deal with the mischief identified by Parliament and should not be read so widely as to embrace matters which were not the mischief sought to be remedied. It followed that the reference in subss (1) and (7) of s 100A to the beneficiary of a trust estate meant the beneficiary of an existing trust estate.
Mr Bloom put forward a related submission that the word ``person'' in s 100A(8) should be confined to a person who is beneficiary or trustee of an existing trust. In other words, it was said that a tax avoidance purpose was relevant only if the person whose liability to tax was eliminated or reduced was a beneficiary or trustee of a trust. In this case, although Prestige ultimately became the trustee of the Trust, it was not involved with the Trust when it sold the Business to the then trustee, LSP.
Secondly, Prestige challenged the primary Judge's holding that the word ``reimburse- ment'' did not control the definition of ``reimbursement agreement'' in s 100A(7). His Honour held that s 100A was not confined to an agreement providing for the payment of money or the transfer of property, the effect of which is to reimburse the relevant beneficiary of the trust. Mr Bloom submitted that the statutory expression was intended to capture agreements under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to another person. The reimbursement agreement alleged by the Commissioner did not identify any element of reimbursement by RLAV for its present entitlement to a distribution of income under the Trust.
Thirdly, Prestige submitted that the reimbursement agreement alleged by the Commissioner was not one that ``provide [ d] for the payment of money or the transfer of property to... a person or persons other than the beneficiary'' within the meaning of s 100A(7). The Commissioner had identified the agreement as comprising negotiations for an agreement on the implementation of the various steps comprised in the RLAV transaction. Mr Bloom submitted that the agreement itself must provide for the outcome required by s 100A(7). The agreement identified by the Commissioner did not do so.
- (a) Mr Bloom accepted that the establishment of the Trust provided for the payment of money to a person other than RLAV, namely LSP as trustee of the Trust. But RLAV was not a party to this agreement and this meant that the agreement could not be characterised as a ``reimbursement agreement''.
- (b) The sale of the Business to LSP provided for the payment of money to a person other than RLAV (namely, Prestige as the owner of the Business). However, RLAV was not a party to that agreement.
- (c) RLAV admittedly had subscribed $1.866 million for 93 per cent of the units in the Trust. But, given that the units ranked pari passu with other units (although only ``A'' units carried voting rights), RLAV's subscription for the units was in the course of an ordinary commercial dealing and this fell outside s 100A.
- (d) The distribution of income to RLAV through the Trust could not be a ``reimbursement agreement'' since the payment was made to RLAV, a beneficiary of the Trust.
- (e) The payment of interest by RLAV to Cholmondeley was consistent with an ordinary commercial dealing, representing interest on indebtedness (albeit assigned by the original creditor to Cholmondeley) predating any of the elements of the transaction relied on by the Commissioner.
Fourthly, the alleged reimbursement agreement identified by the Commissioner did not conform with s 100A(8) of the ITAA . To do so, the identified agreement had to be capable of securing the non-payment of income tax for which Prestige would otherwise be liable. The only element of the agreement that was capable of achieving this result was the sale of the Business by Prestige (as owner) to the trustee of the Trust. But this was excluded by s 100A(13), since the sale was made in the course of ordinary commercial dealing.
Fifthly, although his Honour had made no finding on this issue, the alleged identification agreement did not include RLAV as a party. Mr Bloom submitted that, for s 100A to operate on the agreement identified by the Commissioner, RLAV had to be a party. RLAV was not a party to the ``overall'' transaction identified by the Commissioner, since it was not a party to a number of the critical elements such as the settlement of the Trust and the acquisition by Cholmondeley of the debts owing by RLAV. If RLAV was not a party to constituent elements of the overall agreement, it could not have been a party to the overall arrangement.
Sixthly, Prestige submitted that the components of the alleged reimbursement agreement were each entered into in the ordinary course of commercial dealing. The
ATC 4255only transaction which provided for the payment of money or transfer of property to a person other than a beneficiary, and which was capable of securing the result that Prestige would not be liable to pay income tax, was the sale of the Business by the taxpayer to the trustee. This was an ordinary commercial dealing. While RLAV's accrued tax losses might have explained its attractiveness as a participating unitholder in the Trust, the acquisition of RLAV, because of those attributes, was entirely commercial. Similarly, the payment by RLAV of its subscription moneys was also an ordinary commercial transaction.
Mr Bloom argued that, had RLAV beneficially acquired 100 per cent of the Business by a direct transfer from Prestige for the same consideration, s 100A could not have applied. So, too, if it had acquired a 93 per cent interest in the Business as a partner. The Commissioner's case was therefore founded on the circumstance that the purchaser of the Business was a trustee of a unit trust, in which RLAV beneficially owned 93 per cent of the units. This highlighted that the Commissioner was attempting to use s 100A of the ITAA as a general anti-avoidance provision, in circum- stances where the then current general anti- avoidance provision would not have assisted him.
Prestige's Submissions on the NMLA Transactions
Prestige relied on the submission that the agreements pursuant to which NMLA subscribed for units in the Trust could not constitute a ``reimbursement agreement''. In order for there to be ``reimbursement'' it was at least necessary that the relevant beneficiary be a party to the reimbursement. Given the return on NMLA's investment, it could not be said that its return was merely a small profit. It received a commercial profit. Thus its payments to Prestige could not be described as reimbursements.
Prestige also submitted that each agreement was entered into in the course of ordinary commercial dealing. The 1981 NMLA transaction answered that description, both from the point of view of Prestige and NMLA. From Prestige's point of view, it raised capital, in substance by the sale of an annuity. How Prestige applied the capital so raised was not relevant to the characterisation of the course of dealing between Prestige and NMLA. From NMLA's point of view, as the primary Judge found, the arrangement was an appropriate investment for its statutory fund.
Even if it was permissible to consider how Prestige had applied the funds subscribed by NMLA in 1981, the fact that the moneys were lent interest free and unsecured to associated entities did not convert what was otherwise ordinary commercial dealing into something which was neither ordinary nor commercial.
Similarly, if it was permissible to consider how the funds subscribed by NMLA in 1984 had been applied by Prestige, the primary Judge's reasoning involved an erroneous finding of fact. His Honour had found that Prestige (as trustee of the Trust) had previously enjoyed rent free the use of the properties acquired from the NMLA subscription moneys. In fact, the Trust had paid rent for those properties. Accordingly, the funds were applied in a manner that provided the Trust with a commercial advantage, namely, the acquisition of real estate and the consequent reduction of outgoings.
The Commissioner's Submissions on the RLAV Transaction
First, the Commissioner submitted that there was no sound basis for restricting the scope of s 100A of the ITAA , and for reading it as referring only to a trust estate which exists before and independently of the reimbursement agreement. To do so, according to Mr Slater, amounted to interpolating words into the enacted text of the section. The words of s 100A were not ambiguous or uncertain and there was therefore no warrant for relying on extraneous materials to curtail the operation of the provisions.
Mr Slater argued that the extrinsic materials do not support the proposition that s 100A should be confined to ``trust stripping'' in the form of an arrangement which enables a beneficiary of a trust to enjoy income in a tax free or capital form. Trust stripping can often take place in circumstances where the beneficiary whose tax liability has been eliminated or reduced does not receive the major portion of what otherwise would be income in a tax free form, since the benefit is diverted to a different (although related) party. Furthermore, there was no principle of construction that would confine the operation of s 100A by reference to the availability or
ATC 4256efficacy of other anti-avoidance provisions of the ITAA .
Secondly, the Commissioner submitted that, since the expression ``reimbursement agree- ment'' is exhaustively defined in s 100A(7), there is no justification for limiting the scope of the definition by focusing on the word ``reimbursement''. There is no need for the Commissioner to demonstrate that, in addition to meeting the requirements specified in s 100A(7) (as elaborated on in subss (8), (9) and (13)), there is also an element of ``reimbursement'' in the ordinary connotation of that word.
Thirdly, Mr Slater contended that Prestige's remaining submissions concerning the RLAV transaction each suffered from a common flaw. The submissions focused on individual parts of the arrangements contemplated by the reimbursement agreement, as though they were quite discrete transactions divorced from the context of the overall arrangement. Once the broader view was taken, it could be seen that the RLAV reimbursement agreement provided for the payment of money or the transfer of property to a person or persons other than the beneficiary. It could also be seen that the agreement secured the non-payment of tax for which Prestige would otherwise have been liable and, further, that RLAV was a party to the agreement. Similarly, an overall view clearly showed that the RLAV reimbursement agreement had not been entered into in the course of ordinary commercial dealing.
The Commissioner's Submissions on the NMLA Transaction
The Commissioner submitted that the authorities (such as
Peate v FC of T (1964) 13 ATD 346 ; (1964) 111 CLR 443 and
FC of T v Gulland ; Watson v FC of T ; Pincus v FC of T 85 ATC 4765 ; (1985) 160 CLR 55 ), established that a substantial purpose of tax avoidance is inconsistent with the notion of ordinary business or commercial dealing. An examination of the NMLA transactions demonstrated that neither was a transaction in the ordinary course of commercial dealing.
In the case of the 1981 NMLA transaction, a number of factors pointed to the agreement having the single objective purpose of tax avoidance, not an ordinary commercial dealing. These included the following:
- • the use by Prestige of the subscription moneys to make interest free loans to associates;
- • the readiness of the parties to exploit novel and ingenious means of tax avoidance;
- • the exchange of income for capital by the use of ``collapsing units'';
- • the absence of any commercial explanation for the initial proposal to NMLA; and
- • the variation of the Trust deed to the prejudice of RLAV, with its consent.
In the case of the 1984 NMLA transaction, Mr Slater pointed to the fact that the annual benefit from the 1981 transaction was substantially exhausted with the June 1984 distribution of $2.85 million. There was no business necessity for the Trust to acquire land, since it already had the use of the land. There was nothing to indicate that the Trust, which was owed some $4,780,000 by companies within the Perron group, required further capital. Indeed, the purchase price of the land was also $4,780,000, which amount was provided by an exchange of cheques with debtor companies within the group. The only plausible explanation for the agreement to issue ``E'' class units to NMLA was to enable the group to escape tax on the income derived from the Business by diverting that income to NMLA and securing a payment of capital in return.
The Application of s 100A to the Facts
Much of Prestige's argument was directed to the proposition that the text of s 100A of the
should be read in the light of the extraneous materials to which we have referred. But as Mason CJ, Wilson and Dawson JJ said in
Re Bolton; Ex parte Beane (1987) 162 CLR 514 at 518 , of a second reading speech by the Minister,
``while deserving serious consideration, [ it] cannot be determinative; it is available as an aid to interpretation. The words of a Minister must not be substituted for the text of the law.... The function of the Court is to give effect to the will of Parliament as expressed in the law.''
Minister for Immigration and Ethnic Affairs v Tang Jia Xin (1994) 125 ALR 203 at
ATC 4257207 .) This is not to say that the legislative text is to be considered in isolation. The words are to be understood in the context of the enactment as a whole, the legislative history of the provision in question (including the mischief to be remedied) and, in appropriate cases, having regard to the consequences that would flow if one construction were preferred over another:
Emanuele & Anor v ASC & Ors (1997) 15 ACLC 763 at 782; (1996-1997) 188 CLR 114 at 146 , per Kirby J. Nonetheless, the starting point must be the text of the law, having regard to its ``ordinary meaning and grammatical sense'':
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 at 4306; (1980-1981) 147 CLR 297 at 321 , per Mason CJ and Wilson J.
Section 100A(1) of the ITAA operates where the present entitlement of a beneficiary to a share of the income of a trust estate arose out of a reimbursement agreement or
``by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement.''
It is necessary to turn to s 100A(7) for the definition of ``reimbursement agreement'', although that definition is expressly made subject to subs (8) and requires reference to be made to subss (9) and (13).
The consequences of the application of s 100A are set out in subs (1). The subsection postulates that, apart from the operation of the section, there is a beneficiary ``presently entitled to a share of the income of the trust estate''. The reference to the word ``income'' is to the trust law income of the relevant trust estate:
Taylor & Anor v DFC of T 69 ATC 4072 ; (1969) 123 CLR 206 ;
Davis & Anor v FC of T 89 ATC 4377 ; (1989) 86 ALR 195 (FCA/ Hill J), at ATC 4403; ALR 229-230. It is not necessary to consider the difficulties which arise where the tax law income and the trust law income do not coincide, since no such discrepancy has been suggested in the present case. (This question was recently considered by Merkel J in
Richardson v FC of T 97 ATC 5098 at 5111-5113 , where his Honour, obiter , declined to follow part of the reasoning in Davis , notwithstanding that Davis had been followed in
Richard Walter Pty Ltd v FC of T 95 ATC 4440 (FCA/Tamberlin J) at 4445 , in a passage not affected by the subsequent appeal:
Richard Walter Pty Limited v FC of T 96 ATC 4550 ; (1996) 67 FCR 243 (FCA/FC). The usual position is that where a beneficiary of a trust estate is presently entitled to a percentage of the trust law income, there is to be included in his or her assessable income the same percentage of the tax law income, pursuant to s 97 of the ITAA .)
Where s 100A(1) of the ITAA applies, for example because a body which pays little or no tax is presently entitled to a share of the income of a trust estate by reason of a reimbursement agreement, it treats the beneficiary for all purposes of the ITAA as not presently entitled to that income. The consequence is that the trustee of the trust is assessed and liable to pay tax pursuant to s 99A of the ITAA . As has previously been explained, s 99A imposes upon the trustee in respect of income to which no person is presently entitled a special rate of tax equivalent to the highest marginal rate.
Section 100A(7) provides that a reference in s 100A, in relation to a beneficiary of the trust estate (that is, the beneficiary who is presently entitled), to a reimbursement agreement is to be read
``... as a reference to an agreement... that provides for the payment of money or the transfer of property to... a person or persons other than the beneficiary....''
The word ``agreement'' is given the widest definition in s 100A(13). It includes arrangements and understandings. These can be informal, express or implied, and need not be enforceable or even intended to be enforceable. The only exclusion from the definition is ``an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing''.
Some of the submissions on behalf of Prestige rather suggested that in order for an agreement to be within s 100A it had to be one that was legally enforceable. That is clearly incorrect. So, for example, if there were an arrangement that Cholmondeley would act in accordance with the wishes of the Perron group, that would be an ``agreement'' within the definition in subs (13). If the understanding required the directors of Cholmondeley to ensure that interest paid to it by RLAV would remain available to the Perron interests, that understanding would be part of the agreement, even though no person had any legal right to enforce it.
In each of the three transactions, there is no doubt that there was an agreement in the sense in which that word is used in s 100A(13). In the case of the RLAV transaction, the elaborate documentation and series of steps outlined earlier in this judgment plainly reflected an understanding or arrangement to which a number of companies and persons were parties. These included RLAV, the liabilities of which were effectively consolidated and rearranged by the documents executed on 23 February 1979 and which subscribed for and on 1 March 1979 received units in the Trust (using the advance from Century Finance to meet the subscription price). It is clear that the arrangements preceding the execution of the documen- tation contemplated the participation of Cholmondeley in the transaction, since (as his Honour found) an understanding was in place whereby Cholmondeley's directors would act in accordance with the wishes of the Perron group from time to time and interest payments to Cholmondeley commenced within a short time after completion of the documentation.
In the case of the NMLA transactions, it was not seriously in dispute that the issue of units to NMLA and the subsequent dealings outlined earlier were the product of an antecedent agreement or arrangement. That agreement or arrangement involved RLAV, as a party, since in each case the Trust deed was amended, with RLAV's consent, to alter its entitlements to distribution of income.
The next question is whether the reimbursement agreements satisfied the terms of s 100A(7), in that they ``provide [ d] for'' the payment of money or the transfer of property to a person or persons other than the beneficiary. In the case of the RLAV transaction, it would seem that a number of payments or transfers answer the statutory description. Most obviously, the reimbursement agreement contemplated that the parties to it intended that RLAV (the beneficiary that became presently entitled to income) would pay very large amounts of interest to Cholmondeley. The bulk of Trust income distributed to RLAV was in fact paid or at least credited to Cholmondeley in the succeeding financial years. In this way some $7 million was paid or credited to Cholmondeley and claimed by RLAV as a deduction from the assessable income. In view of the finding that there was an expectation that the directors of Cholmondeley would act in accordance with the wishes of the Perron group, the result of the payment of interest was that the funds remained within the control of the Perron interests subject only to the payment of withholding tax at the rate of ten per cent. It is unnecessary to determine whether, as the primary Judge was prepared to infer, the moneys paid owed to Cholmondeley ``ultimately found their way back to entities associated with Mr Perron''. It suffices that the agreement provided for payments of interest of RLAV to Cholmondeley.
It may be that, as the Commissioner submitted, the payment by LSP, as trustee of the Trust to Prestige, of the purchase price for the Business and the transfer of the Business assets by Prestige to LPS also answered the description of payment of money to transfer of property for which the reimbursement agreement provided. However, it is enough to satisfy s 100A(7) that the reimbursement agreement provide for the payment of money to Cholmondeley.
Section 100A(8) excludes from the scope of a ``reimbursement agreement'' an agreement not entered into for the purpose, or for purposes that included the purpose identified in the sub- section. That purpose is to secure that a person who, if the agreement had not been entered into, would have been liable to pay income tax, would not be so liable or would be liable to pay less income tax than if the agreement had not been entered into. Section 100A(9) provides that an agreement is to be taken to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. It follows from these provisions that what is to be investigated is the purpose of one or more of the parties to the reimbursement agreement. To this extent, s 100A of the ITAA differs from s 260(1) which is concerned with the purpose or effect of a contract, agreement or arrangement . It also differs from Part IVA of the ITAA which excludes from the matters to be considered any question of subjective purpose: see s 177D(2)(b).
It is not difficult, so far as the agreement or understanding relating to the RLAV transaction is concerned, to infer that one of the parties to the agreement or understanding had the purpose identified in s 100A(8). The arrangements were formulated by Mr Gadsdon and Mr Fielding, doubtless with the knowledge and assent of Mr
ATC 4259Perron. Each of them must have intended that Prestige, which but for the implementation of the arrangements, would have carried on the Business in its own name, would no longer derive income and thus would pay less tax than it otherwise would have paid. Following implementation of the arrangements, Prestige continued to carry on the Business, but in its capacity as trustee of the Trust. The income from the Business, as was intended by the parties to the agreement or understanding, flowed to RLAV (as to 93 per cent). RLAV had the advantage of accumulated tax losses and (as contemplated by the reimbursement agreement) continuing deductions for the interest payments to Cholmondeley.
In the case of the NMLA transactions, it should be inferred that Mr Perron (who made the written offers to NMLA) intended that tax that otherwise would have been paid by RLAV would not be paid by it. Prior to the amendment of the Trust Deed in 1981, RLAV was entitled to the distribution of the bulk of the Trust's income, but the effect of the agreement with NMLA was that future distribution of the bulk of Trust income was to be made to NMLA. Prior to the 1984 amendments, RLAV (or possibly Mr Perron as the holder of the ``A'' class units), would have been entitled to the bulk of the Trust's income, but instead the bulk of the income was paid to NMLA. Of course, because NMLA enjoyed the benefits of s 112A of the ITAA , it escaped tax on the distributions made to it.
The remaining question under s 100A of the ITAA is whether the agreements we have identified were entered into in the course of ordinary commercial dealing (s 100A(13)). We shall return to that issue after addressing other arguments put forward on behalf of Prestige.
An Existing Trust?
Prestige attempted to avoid the apparent application of s 100A by confining the statutory concept of ``reimbursement agreement'' to one entered into in relation to an existing trust, where the trust was created independently of the agreement. In substance, as Mr Slater suggested, Prestige's submission seeks to insert an implied qualification into s 100A(1) after ``beneficiary of a trust estate'', namely the words ``existing at the time the reimbursement agreement referred to in (b) was made''. An alternative means of reaching the same result is to qualify the definition of ``reimbursement agreement'' in subs (7), by adding the words ``but entered into after the creation of the trust estate''. In the absence of words to this effect being read into s 100A, it is difficult to see why the language should be read as limited to agreements entered into in relation to existing trusts. In this respect we do not agree with the primary Judge's view that the language of s 100A is ``less restrained'' if conferred in the manner suggested by Prestige. For example, there is no reason why the present entitlement of a beneficiary to trust income cannot be said to arise out of an act or transaction that occurred as a result of a reimbursement agreement, merely because the agreement predated the creation of the trust.
Mr Bloom relied primarily on the proposition that s 100A is a ``specific, anti-avoidance'' provision designed to deal with trust stripping to support the submission that the section should be construed more narrowly than its language itself might suggest. He submitted that the extraneous materials demonstrated that what the legislators had in mind was a specific form of trust stripping, involving an existing trust which has income that would be assessable to the beneficiaries or the trustee if steps were not taken. Accordingly, a new beneficiary, such as a tax exempt body, is introduced into the trust and the trust income is effectively diverted to the introduced beneficiary. That beneficiary effectively ``reimburses'' the major portion of the income received by it to the existing beneficiary or trustee, but in a tax free or largely tax free form.
There are several answers to this submission. First, the mere fact that s 100A can be characterised as a specific anti-avoidance provision does not demonstrate that it should be given a narrower approach than its ordinary meaning and grammatical sense suggest. It is clear from
Cooper Brookes v FC of T
that a specific anti-avoidance provision (there s 80C of the
) can be given its literal meaning if to do so gives effect to the intention of the legislature, although the literal interpretation will not be adopted if it results in an operation which is capricious and irrational: at ATC 4299-4300; CLR 310-311, per Stephen J; at ATC 4306; CLR 321 per Mason and Wilson JJ. Of course, as we have said, this is consistent with s 100A being construed with an eye to the mischief it was designed to remedy:
FC of T v
ATC 4260Radilo Enterprises Pty Ltd 97 ATC 4151 at 4155 , per Lee J.
Secondly, there is nothing to suggest that irrational or absurd consequences flow from applying s 100A to trusts set up in consequence of what are otherwise reimbursement agreements, as distinct from trusts which were in existence prior to the agreements being entered into. It must be remembered that s 100A has its own safeguards, notably the exclusion of agreements not entered into for tax avoidance purposes (s 100A(8)) and of agreements entered into in the course of ordinary family or commercial dealing (s 100A(13)). There may well be tax avoidance arrangements that satisfy s 100A, yet contemplate the creation of a new trust. For example, the arrangements may provide from the beginning a class of beneficiaries wide enough to include a tax exempt body, with the intention that expected income be paid to that body in return for an agreed capital payment. Of course, the fact that a new trust is to be created may bear on the question of purpose and of ordinary commercial or family dealing. But there is no reason to read down the language of s 100A to exclude a particular category of tax avoidance arrangements that otherwise satisfy the statutory language, merely because the trust was not in existence when the arrangements were formulated.
Thirdly, the extrinsic materials do not support the proposition that Parliament intended to impose the special rate of tax only in the circumstances identified by Mr Bloom. It is clear that the Treasurer's statement of 11 June 1978 and the Explanatory Memorandum accompanying the subsequent Bill identified trust stripping as the avoidance device that had to be counteracted. But it is equally clear that the examples given were intended to be illustrative, and not an exhaustive statement of the transactions that were to be subject to the legislation. This was made explicit in the Treasurer's second reading speech which pointed out that there were several variants of a trust stripping scheme but ``for the most part'' they relied on a nominal beneficiary being introduced into a trust and being made presently entitled to income: Cth Parl Deb , HR, 23 November 1978, 3310.
Examples given in Explanatory Memoranda or second reading speeches of transactions or arrangements intended to be caught by legislation may be very helpful in identifying the mischief to be addressed and in construing otherwise ambiguous legislation so that it does apply to the identified transactions or arrangements. But considerable care should be exercised before relying on examples given in this way in order to read down the statutory language. The extrinsic materials in the present case are entirely consistent with the legislation having been framed broadly enough to catch not merely the transactions referred to in those materials, but other arrangements having similar characteristics. For example, all the illustrations of trust stripping arrangements given in the extrinsic materials contemplate the payment of trust income to a body not liable to pay any tax at all (as was the case with RLAV by reason of its accumulated losses). Yet there is no reason to think that s 100A was intended to be restricted to arrangements which provide for the payment of income to entities not liable to any tax. The RLAV transaction, as we have said, involved the payment of interest to Cholmondeley, subject to the deduction of withholding tax at the rate of 10 per cent. The fact that tax at this rate was deducted (comparing, as it does, to the special rate of up to 61.5 per cent) hardly takes the transaction outside the mischief Parliament sought to attack.
The same caution should be exercised when considering
in judgments. Just as the extrinsic materials should not be read more restrictively than the authors intended, so comments made on decided cases should be read in context. For example, in
East Finchley Pty Ltd v FC of T 89 ATC 5280 at 5293; (1989) 90 ALR 457 at 472-473 , Hill J gave illustrations of trust stripping arrangements to which s 100A was clearly intended to apply. However, his Honour plainly did not assay an exhaustive collection of such arrangements and the judgment should not be read as though it did.
For much the same reasons, we do not think that there is any warrant for restricting the meaning of the word ``person'' in s 100A(8) to a beneficiary or a trustee of a trust. There is nothing in the language or structure of s 100A to suggest that such a restrictive construction should be adopted. It should be remembered that s 100A(9) makes it clear that an agreement is taken to have been entered into for a tax avoidance purpose if any of the parties to it
ATC 4261entered the agreement for that purpose. This suggests that the word ``person'' in s 100A(8) should be given its ordinary meaning. The direction in s 100A(11) that a reference to a ``person'' is to include ``a reference to a person in the capacity of a trustee'' does not constitute a reason for taking a different view.
It is true that, in the usual case to which s 100A applies, the person whose tax liability is reduced or eliminated is a beneficiary or trustee of the trust. But this is not necessarily always the case. An arrangement may contemplate the distribution of trust income to a beneficiary exempt from tax and payments by that beneficiary to another person. The object of the arrangement as a whole may be to eliminate or reduce the tax liability of a third party, perhaps an entity associated with the recipient of the payments. To apply s 100A in these circum- stances (assuming the other requirements of the section are satisfied) is neither absurd nor at odds with the evident legislative intent.
Construction of ``Reimbursement Agreement''
Contrary to Prestige's submission (a submission also rejected by the primary Judge) the definition of ``reimbursement agreement'' in s 100A(7) cannot be controlled by the word ``reimbursement''. It is not helpful to resort to the ordinary meaning of a defined word or expression in construing the definition:
Telstra Corporation Ltd v Australasian Performing Right Association Ltd (1997) 146 ALR 649 at 657 , per Dawson and Gaudron JJ. As Rich J said in
Mutual Acceptance Co Ltd v FC of T (1944) 7 ATD 506 at 511; (1944) 69 CLR 389 at 398 :
``... A definition of this kind is not an exercise in philology. It is a mechanical device to save repetition.''
The defined expression can have no meaning other than that which is stated in the definition:
Gough v Gough [ 1891] 2 QB 665 at 674 , per Lord Esher MR. To the extent that it may suggest otherwise, the judgment of Barwick CJ in
U.G. Insurances Pty Ltd v Commissioner of Stamp Duties for New South Wales (1973) 128 CLR 353 at 360 , should not be taken as authority for any general proposition that in construing a defined expression regard should be had to the expression itself to cast light on the definition. While Mason J agreed with Barwick CJ (at 372), the remaining members of the Court did not adopt the same approach: see at 365, per Menzies J; at 369-370, per Gibbs J; at 372, per Stephen J.
Did the Agreement Provide for Payments?
As has been seen, Mr Bloom on behalf of Prestige contended that the agreement pursuant to which the RLAV transaction took place was not one that provided for the payment of money to a person other than the beneficiary. Mr Bloom identified a series of payments and submitted that none of them was a payment for which the agreement provided, in the sense required by s 100A(7).
We have already explained why we consider the reimbursement agreement relating to the RLAV transaction provided for the payment of money, inter alia , by RLAV to Cholmondeley. The flaw in Prestige's approach is that it examines particular elements of the transaction in isolation from the agreement (in the sense of arrangement or understanding) which gave rise to the transaction as a whole. The inquiry required by s 100A(7) is whether there was an agreement in relation to the beneficiary of a trust estate (RLAV), that provided for the payment of money to a person (Cholmondeley) other than the beneficiary. The documents executed and the dealings implemented in the present case point unequivocally to an agreement (in the relevant sense) which contemplated and intended that RLAV would pay interest to Cholmondeley out of trust income distributed to it (RLAV). RLAV was itself a party to this agreement, since its participation was required on a number of key events. It is not to the point, in our opinion, that the interest payments to Cholmondeley, if viewed in isolation, might be thought to be consistent with ordinary commercial dealing. The question posed by s 100A, especially subs (13), is whether the agreement was entered into in the course of ordinary commercial dealing, not whether a particular element in a transaction implemented pursuant to that agreement could be so characterised.
Similarly, it is not a ground for resisting the application of s 100A to characterise the sale of the Business by Prestige to LSP, as trustee of the Trust, as one made in the course of ordinary commercial dealing. The question is not whether that sale, viewed in isolation, could be seen as an ordinary commercial dealing. It is whether the agreement or understanding, which provided for a large number of dealings including the sale of the Business, was entered
ATC 4262into in the course of ordinary commercial dealing.
Ordinary Commercial Dealing
The wording of the exclusion in s 100A(13) derives from the judgment of Lord Denning, on behalf of the Privy Council, in
Newton & Ors v FC of T (1958) 11 ATD 442 at 445; (1958) 98 CLR 1 at 8 . There his Lordship, in discussing s 260 of the ITAA , contrasted an arrangement implemented in a particular way to avoid tax with ``transactions that are capable of explanation by reference to ordinary business or family dealing''.
There is a danger that, when words used in a judgment are translated into the legislation, the change of context may alter the meaning of the words from that which they originally bore. It is clear from both the judgment of the Privy Council and from the language of the High Court on the same case (
FC of T v Newton (1957) 96 CLR 578 ) that s 260 was regarded as involving a dichotomy. A transaction was either stamped as one entered into to avoid tax or as one about which it could be predicted that it was entered into in the course of ordinary family or commercial dealing. In the former case the transaction was caught by s 260; in the latter case it was outside the section. We do not need to decide in the present case whether s 100A imports a similar dichotomy. In particular we do not need to decide whether if an agreement is shown to have been ``entered into in the course of ordinary commercial dealing'', the operation of s 100A is spent, regardless of whether the commercial purpose was subsidiary to the purpose of tax avoidance. In our view, none of the transactions was entered into in the course of ordinary commercial dealing.
We have already referred to Prestige's submission that the reimbursement agreement relating to the RLAV transaction was entered into in the course of ordinary commercial dealing. Mr Bloom contended that the agreement should be seen, for the purpose of s 100A of the ITAA , as no more than an agreement for the transfer of the Business from Perron Investments to LSP, as the original trustee of the new trust. If the agreement went no further than this, it might well be characterised as an ordinary family or commercial dealing. But the difficulty with Prestige's submission has already been identified. It focuses on one element in the RLAV transaction, namely, the sale of the Business by Prestige to LSP as trustee of the Trust. But the reimbursement agreement contemplated, inter alia , that LSP would be replaced as trustee by Prestige, which would carry on the Business in its new capacity; that units in the Trust would be issued to RLAV; that distributions of Trust income would be made to RLAV; that those distributions would be partly offset against tax losses and partly used to pay interest to Cholmondeley (with some moneys being paid to Century Finance); and that Cholmondeley would act in accordance with the wishes of the Perron interests. The transaction, or series of transactions, contemplated by the agreement was very different from a straightforward sale of a business by one entity within a group to another.
Mr Bloom did not suggest that there was any commercial motivation for the sale of the Business. In the circumstances, the sale can be seen as one element of a larger one-off transaction designed to avoid tax. It cannot be described as an agreement entered into in the course of ordinary commercial dealing.
Mr Bloom suggested that RLAV could have acquired Business directly from Prestige or as a partner, thereby securing for itself the benefit of the income stream to offset against its accumulated losses. Whether it could have done so depends upon a number of factors that were not explored in depth in the argument. In any event, the issue is not whether RLAV, or any of the Perron companies could have achieved the same result by other means, but whether the means adopted were caught by s 100A of the ITAA .
The NMLA transactions involved the companies and individuals within the Perron group, on the one hand, and NMLA, on the other. Whether the agreement was in the course of ordinary commercial dealing might be answered differently depending upon whether the issue is addressed from the perspective of Prestige or other entities within the Perron group, or from NMLA's perspective. Section 100A(13) does not make it explicit how the issue is to be determined when what is said to be a reimbursement agreement involves parties which have dealt at arm's length with those whose purpose is to avoid liability to pay income tax. In our view, the question is to be addressed, at least principally, from the point of view of those who have that purpose. If it were
ATC 4263otherwise, s 100A could be rendered nugatory in its application to classic cases of trust stripping, since in such a case the introduced beneficiary may well enter the agreement in the course of its ordinary commercial dealings.
The primary Judge found that the moneys raised by the Trust by means of the 1981 NMLA transaction had been lent unsecured to other entities associated with Mr Perron. His Honour further found that Prestige had not discharged the onus of establishing that there was any commercial justification for the raising of money from NMLA. There is no basis for interfering with those findings. This leaves the only explanation for the entry into the agreement as the elimination or reduction of tax liabilities. To describe the transaction, as Mr Bloom did, as one in the nature of an annuity, does not advance the matter. Even if that is a correct description of the transaction it does not determine whether the agreement was entered into in the course of ordinary commercial dealing. The only conclusion open in the circumstances we have described is that the agreement was not entered into in the course of ordinary commercial dealing.
In our view, there is no significant distinction between the 1984 NMLA transaction and the 1981 NMLA transaction. It is true, as we have noted, that his Honour was in error in finding that there had been no rent debited to the Trust in its accounts, in respect of the use of the land of which Prestige was the proprietor and beneficial owner. But the mere fact that the moneys subscribed by NMLA were employed by Prestige (as trustee of the Trust) to acquire title to the land, does not establish that there was any commercial necessity or justification for the transaction. As Mr Slater pointed out, the Trust was a substantial creditor of other companies in the Perron group and could have funded the acquisition of the properties by an intra-group exchange of cheques. As with the 1981 NMLA transaction, Prestige did not discharge the onus of showing that there was a commercial reason to raise capital from outside the group. Having regard to the substantial completion of the 1981 NMLA transaction (by means of the final large distribution to NMLA in June 1984), the similarities in the form of the two transactions (including the ``collapsing'' nature of the units) and the obvious tax advantages to the Trust, the appropriate conclusion is that the agreement was entered into only for the purpose of enabling Perron Investments, as the holder of the ``A'' class units, to avoid liability to income tax on the Trust income that otherwise would have been distributed to it. The agreement was not entered into in the course of ordinary commercial dealing.
The Commissioner's appeal should be allowed. Prestige's cross-appeal should be dismissed. Prestige should pay the Commissioner's costs of the appeal and cross- appeal.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The cross-appeal be dismissed.
3. The respondent pay the appellant's costs of the appeal and of the cross-appeal.
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