ELDERSMEDE PTY LTD & ORS v FC of T

Members:
SA Forgie DP
DG Jarvis DP
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 710

Decision date: 25 June 2004

SA Forgie (Deputy President)

Four applicants, Eldersmede Pty Ltd (``Eldersmede''), Corporate Initiatives Pty Ltd (``CIPL''), Ms Lucy Catherine Altman and Mrs Susan Helen Altman, have applied for review of objection decisions by the respondent, the Commissioner for Taxation (``the Commissioner''). In the case of Eldersmede, its application, which was lodged on 6 September, 2000, sought review of an objection decision made on 25 July, 2000. CIPL lodged an application on 17 January, 2003 seeking review of an objection decision dated 19 November, 2002 and Ms Lucy Altman and Mrs Susan Altman did so on 20 January, 2003 when they sought review of objection decisions dated 19 and 21 November, 2002 respectively. The effect of the objection decisions was to disallow in full the objection made on 15 March, 2000 by Eldersmede against the Commissioner's assessment for the year of income ending 30 June, 1996 and those objections dated 14 June, 2002 by the other three applicants against amended assessments in respect of the same period.

2. At the hearing, we made an order that all of the applications be heard together and that the evidence in each is evidence in the others. The Commissioner conceded at the outset of the hearing that the objection decision in relation to Eldersmede should be set aside and its objection allowed in full. We have reflected that concession in our decision. In essence, the Commissioner conceded that Eldersmede was not liable to pay income tax on the net income that it held as a trustee on the basis that it had validly distributed that income for the year ending 30 June, 1996.

3. The applicants were represented by Ms MacDonald of counsel and the Commissioner by Mr Pagone QC with Ms Harris of counsel. The documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 common to all of the applications together with those specific to each application were admitted in evidence. Also admitted were a statement by Mr Gary Victor Hugo, a chartered accountant, and another by Mr Christopher John Altman, a director of Eldersmede, a statement of facts agreed between the parties and a note relating to a meeting of directors of Eldersmede Pty Ltd held on 22 May, 1996. Oral evidence was given in support of the applicants' cases by Mr Hugo and Mr Altman. No evidence was called on behalf of the Commissioner.

The issues

4. The issue in this case is whether CIPL, Ms Lucy Altman and Ms Susan Altman, who are beneficiaries under trusts holding units in the Citytrak Unit Trust (``CUT'') to which Eldersmede had validly distributed the net income it held as a trustee, are liable to pay income tax as a result of that distribution in respect of the year of income ending 30 June, 1996. Resolution of this issue requires a consideration of what is known as the ``income injection test'' found in Division 270, Schedule 2F of the Income Tax Assessment Act 1936 (``ITAA 1936''). In the context of this case and having regard to those matters agreed between the parties, that test raises for consideration three main issues:

• in providing (as it is agreed it did) a benefit to Southern Building Supplies Pty Ltd (``SBS''), as trustee of CUT, did Eldersmede, as trustee of Eldersmede Distribution Trust (``EDT''), do so under a scheme;
• did SBS, as trustee of CUT, directly or indirectly provide a benefit to Eldersmede, as trustee of EDT, or to an associate of Eldersmede; and
• if so, did it do so under a scheme?

Legislative background

5. As the issues for resolution concern the income year ending 30 June, 1996, they must be considered under ITAA 1936 rather than under the Income Tax Assessment Act 1997 (Income Tax (Transitional Provisions) Act 1997, s. 4-1). In general terms and subject to its other provisions, s. 17 in Part III of the ITAA 1936 provides that income tax is payable by every person upon taxable income derived during each financial year. Subject to certain qualifications ``taxable income'' means ``... the amount remaining after deducting from the assessable income all allowable deductions'' (s. 6(1)). In relation to the income year ending 30 June, 1996, the expression ``assessable income'' meant ``... all the amounts which under the provisions of this Act are included in the assessable income'' (s. 6(1)).

6. A trust is not a ``person'' for the purposes of the ITAA 1936 and so income tax is not generally imposed on the trust, or as it is sometimes described in the legislation, on the

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trust estate itself. In the main, it is imposed on the beneficiaries of the trust. Where a beneficiary is not under any legal disability and is presently entitled to a share of the income of a trust estate, his or her assessable income includes (subject to certain qualifications that are not relevant in this case) his or her share of the net income of the trust estate. Again subject to certain qualifications, the ``net income'' of the trust is the:

``... total assessable income of the trust estate calculated under... [the ITAA 1936] as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions...''

(s. 95(1)).

In circumstances in which no beneficiary is presently entitled or where a beneficiary is under a legal disability, tax is levied against the trustee on the net income of the trust.

7. Part III of the ITAA 1936 is concerned with a person's liability to income taxation and Division 3 of that Part is concerned with deductions. Section 79E provides for the deduction of losses in the years of income ending 30 June, 1990 to 1997. Part IV is concerned with the assessment of a person's liability to pay income tax. In general terms, a person is required to lodge a return and the Commissioner assesses his or her liability on the basis of information in that return and any other information he possesses (s. 166). The Commissioner may amend that assessment if:

``... within 6 years after the day when the tax became due and payable under it, if the amendment is to give effect to...:

(a)...

(b)...

(c) Division 270 of Schedule 2F to this Act;...''

(s. 170(13))

8. In broad terms, Schedule 2F has two aspects. The first is concerned with a situation in which there is a change in ownership or control of a trust or an abnormal trading in its units and the impact of Schedule 2F is determined by whether the trust is or is not an excepted trust. The second is concerned with a situation in which a trust is involved in what is generally described as a scheme to take advantage of deductions. We are concerned with that second situation in which the trust may be prevented from making any use of the deductions, or at least full use of them, in a year of income (ss. 265-10 and 270-5). This is the subject of Division 270 of Schedule 2F.

9. Section 270-15 of Schedule 2F provides that:

``If the requirements of subsection 270-10(1) are satisfied, the consequences are that:

(a) to the extent (if any) that the deduction mentioned in paragraph 270-10(1)(a) relates exclusively, or may appropriately be related, to the scheme assessable income, the deduction is not allowable; and

(b) if the net income of the trust is less than the scheme assessable income or there is not net income - the trust has a net income equal to, or the net income is increased so that it equals, the scheme assessable income; and

(c) paragraph (b) and the scheme assessable income are disregarded in working out any tax loss incurred by the trust in the income year; and

(d) if paragraph (b) applies and the deduction mentioned in paragraph 270-10(1)(a) is for a tax loss - paragraph (b) and the scheme assessable income are disregarded in working out any deduction in respect of the tax loss allowable after the income year.''

10. The requirements of s. 270-10(1) are cumulative and are:

``(1)...

(a) a deduction is allowable to a trust for the income year; and

(b) under a scheme, the following happen (in any order):

(i) the trust derives an amount of assessable income (the scheme assessable income ) in the income year; and

(ii) an outsider to the trust (see section 270-25) directly or indirectly provides a benefit (see section 270-20) to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary; and

Note: The benefit may constitute all or any of the scheme assessable income.

(iii) the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly

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provides a benefit to the outsider to the trust or to an associate of the outsider (other than an associate covered by any of the paragraphs 270-25(1)(a) to (f)); and

Note: The benefit may constitute all or any of the deduction.

(c) it is reasonable to conclude that:

(i) the trust derived the scheme assessable income; or

(ii) the outsider provided the benefit as mentioned in subparagraph (b)(ii); or

(iii) the trustee, beneficiary or associate provided the benefit as mentioned in subparagraph (b)(iii);

wholly or partly, but not merely incidentally, because the deduction would be allowable; and

(d) the trust is not an excepted trust under paragraph 272-100(b), (c) or (d).''

11. The terms used in s. 270-10(1) and in the definitions of those terms in the ITAA 1936 are defined as follows:

associate:

The word `` associate has the same meaning as in section 318.'' (s. 272-140)
Section 318 sets out those who are regarded as the associates of a natural person, company, trustee, partnership and public unit trust entity. Section 318(3) relating to the associates of a trustee is relevant in this case and it provides:
- ``For the purposes of this Part, the following are associates of a trustee (in this section called the `primary entity' ):
  - (a) any entity that benefits under the trust;
  - (b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of the natural person because of subsection (1) or because of this subsection;
  - (c) if a company is an associate of the primary entity because of paragraph (a) or (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection.''

benefit:

``A benefit is:

(a) money, a dividend or property (whether tangible or intangible); or

(b) a right or entitlement (whether or not property); or

(c) services; or

(d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or

(e) the doing of anything that results in the derivation of assessable income; or

(f) anything that, disregarding the preceding paragraphs, is a benefit or advantage.''

(ss. 272-140 and 270-20)

benefiting under a trust:

Section 318(6)(a) further explains the meaning of the term ``benefiting under a trust'' when it provides:
``For the purposes of this section:
- (a) a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts;''

directly or indirectly:

``directly or indirectly has a meaning affected by sections 272-25 and 272-30''

(s. 272-140)

Sections 272-25 and 272-30 affect references in Schedule 2F to persons having, directly or indirectly, a fixed entitlement to share of the income, or capital of a company, partnership or trust.

entity:

An ``entity'' is defined to mean a company, partnership, person in the capacity of trustee and any other person (s. 317).

excepted trust:

``A trust is an excepted trust at a particular time if:

(a) it is a family trust at the particular time; or

(b) it is a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in

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relation to the income year in which the particular time occurs; or

(c) it is the trust of a deceased estate, where the particular time occurs during the period from the death of the individual until the end of the year of income in which the 5th anniversary of the death occurs; or

(d) at the particular time it is a fixed trust that is a unit trust, and persons all of whose income is exempt from tax under section 23, or under Division 50 of the Income Tax Assessment Act 1997, have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the trust.''

(ss. 272-140 and 272-100)

outsider:

``If the trust mentioned in paragraph 270-10(1)(a) is not a family trust, an outsider to the trust is a person other than:

(a) the trustee of the trust; or

(b) a person with a fixed entitlement to a share of the income or the capital of the trust.''

(s. 270-25(2))

scheme:

`` scheme has the same meaning as in subsection 177A(1).'' (s. 272-140)
Although only part of s. 177A is relevant to the matters to be considered in this case, we will set out all of its provisions that relate to the word ``scheme'':
- `` (1) In this Part, unless the contrary intention appears:
- ...
- `scheme' means:
  - (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  - (b) any scheme, plan, proposal, action, course of action or course of conduct;
- ...
- (2) ...
- (3) The reference in the definition of `scheme' in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.
- (4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or persons.
- (5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.''

Background

12. As we have indicated, the parties agreed upon a number of facts in this case. The following paragraphs reflect those agreed facts and also set out findings of fact that we have made on the basis of the oral and written evidence.

The entities and their businesses

13. There are a number of entities that are relevant to consider in this case and we have, based on the Statement of Agreed Facts and, where indicated, on the evidence of Mr Altman or the documentary evidence, made the following findings about them and their various dealings and relationships up to the 30 June, 1996:

(1) The Altman Family Trust
- (a) Establishment:
- The Altman Family Trust was established by a Deed of Settlement dated 20 December, 1991 (Exhibit 3, pages 15-35).
- (b) Trustees:
- Mr Altman and Mrs Susan Altman have, at all material times, been the trustees of the Altman Family Trust.
- (c) Beneficiaries:
- Mrs Susan Altman and Ms Lucy Altman are beneficiaries of that trust.
  
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(2) The Easling Family Trust
- (a) Establishment:
- The Easling Family Trust was established by a Deed of Settlement dated 20 December, 1991 (Exhibit 2, pages 15-35).
- (b) Trustees:
- Mr John Alastair Easling and Mrs Kaye Annette Easling have, at all material times, been the trustees of the Easling Family Trust.
- (b) Beneficiaries:
- CIPL is a beneficiary of that trust.
(3) Eldersmede
- (a) Establishment:
- In December, 1991, the trustees of the Altman Family Trust and the Easling Family Trust together with Fadu Pty Ltd (``Fadu'') and members of the accounting firm used by Mr Altman (``the accountants'') acquired shares in Eldersmede, which was then a shelf company. Fadu and the accountants were passive investors and, generally, did not take an active role in the business of Eldersmede.
- (b) Business:
- Eldersmede's only activity was to act as trustee of Eldersmede Unit Trust (``EUT'') and of EDT.
(4) Eldersmede Unit Trust
- (a) Establishment:
- In December, 1991, those associated with the establishment of Eldersmede also procured the establishment of EUT. Fadu and the accountants did not play any further role.
- At our request, the trust deed establishing EUT was subsequently made available to us and we accept that it was in the same terms as that establishing EDT and later varied (see below).
- (b) Trustee:
- Eldersmede is the trustee of EUT.
- (c) Beneficiary of EUT:
- The net income of EUT is distributed to EDT each year.
- (d) Business conducted by Eldersmede as trustee of EUT:
- As trustee of EUT, Eldersmede purchased a business that traded under the name of Fielders Steel Roofing (``Fielders'') and supplied roofing products. That business had been in receivership but, after its acquisition, had a very good business operating in the Adelaide Hills and Strathalbyn.
(5) Eldersmede Distribution Trust
- (a) Establishment:
- EDT was established in 1993 by virtue of a Deed of Settlement executed on 21 June, 1993.
- (b) Trustee:
- Eldersmede is the trustee of EDT.
- (c) Beneficiaries of EDT:
- Clause 13.1 of the Deed of Settlement provided that, at the end of the Accounting Period and subject to any special rights or restrictions attaching to units of any class, Eldersmede held and stood possessed of the balance of EDT's net income after the deduction of any distributions or any permitted accumulations for the Unit Holders in proportion to the number of units each held.
- Clause 13.2.2, however, permitted Eldersmede to make discretionary distributions to be made during the Accounting Period. Those discretionary distributions could be made to the unit holders in relation to the holders of all units (other than corpus units) registered on the Register at the time and in proportion to the total number of units held by Unit Holders at the time.
- (d) Variation of Deed of Settlement:
- Clause 19 permitted Eldersmede to execute a deed that revoked, resettled, added to or varied the Deed of Trust provided that no variation purported to enable a power to be exercised or property to vest after the Vesting Day and that the variation did not ``affect the beneficial entitlement of any Unit Holder to any Property or Distribution thereof prior to the Variation'' (Exhibit 5, page 63).
- On 20 June, 1995, the Deed of Trust was varied (``Trust Deed Variation'')
  
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  (Exhibit 5, pages 69-77). Clause 13 was removed in its entirety and replaced:
  - (i) Rather than empowering Eldersmede as trustee to resolve to accumulate the whole (or part) of the net income derived during an accounting period or to distribute it to the Unit Holders in proportion to the number of units each held, the new clause 13.1 provided that, at the end of the Accounting Period and subject to any special rights or restrictions attaching to units of any class, Eldersmede held and stood possessed of the whole (or balance) of that net income:
    - ``13.1.3 to [sic] the Eligible Beneficiaries in relation to the Holders of all Units (other than Corpus Units) registered in the Register at the time;
    - 13.1.4 amongst those Eligible Beneficiaries in the same proportion that the number of Units (other than Corpus Units) held by the Holder in relation to each of those Eligible Beneficiaries bears to the aggregate number of Units (other than Corpus Units) in issue at the time; and
    - 13.1.5 to [sic] each Person comprised in the Eligible Beneficiaries referred to in Sub clause 13.1.4. in the amounts or proportions whether exclusive of the other of others of them or otherwise
  - that the Trustee in its absolute and uncontrolled discretion thinks fit indefeasibly and beneficially and absolutely freed and discharged from the trusts and powers contained in this Deed AND ... shall discharge the trusts of that Net Income or that balance by paying or transferring to the Eligible Beneficiaries beneficially entitled thereto pursuant to the Eligible Beneficiaries beneficially entitled thereto pursuant to this Sub- clause or otherwise crediting the amount so Distributed in the Books of the Trust'' (Exhibit 5, page 74).
  - (ii) Clause 13.2 provides that, at any time before the end of the Accounting Period, Eldersmede could, in its discretion, decide to accumulate the net income derived during the Accounting Period (cl. 13.2.1), distribute it (cl. 13.2.2) or distribute a part of the net income and accumulate the balance (cl. 13.2.3). If it decided to distribute the net income, it could do so:
    - ``13.2.2.1 to the Eligible Beneficiaries in relation to the Holders of all Units (other than the Corpus Units) held by the Holders of all Units (other than Corpus Units) registered in the Register at the time;
    - 13.2.2.2 in relation to each of those Eligible Beneficiaries in the same proportion that the number of Units (other than Corpus Units) held by the Holder in relation to each of those Eligible Beneficiaries bears to the aggregate of Units (other than Corpus Units) in issue at the time; and
    - 13.2.2.3 to each Person comprised in the Eligible Beneficiaries referred to in Sub-clause 13.2.2.2 in the amounts or proportions whether exclusive of the other of others of them or otherwise
  - that the Trustee in its absolute and uncontrolled discretion thinks fit;...'' (Exhibit 5, pages 74-75)
  - (iii) Under newly inserted clause 13.3 and notwithstanding the provisions of clauses 13.1, 13.2.2 and 13.2.3, Eldersmede:
    - ``... may Distribute the whole or part of the Net income referred to therein to some one or more of the Unit Holders (other than the Holders of Corpus Units) whether exclusive (sic) the other or others of them that the Trustee in its absolute and uncontrolled discretion thinks fit.'' (cl. 13.3, Exhibit 5, page 75)
  - (iv) The expression ``Eligible Beneficiaries'' is defined in a new
    
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    clause 2.18A inserted by the Trust Deed Variation to mean:
    - ``... in relation to any Distribution or Proposed Distribution of Net Income at any time means any one or more of:
      - 2.18A.1 the Unit Holders; and
      - 2.18A.2 the Associates of the Unit Holders
    - or any one or more of them whether exclusive of the other or others of them that the Trustee in its absolute discretion thinks fit BUT the expression does not include the Settlor or the Trustee at that time'' (Exhibit 5, page 71)
  - (v) The term ``Associate'' is defined in newly inserted clause 2.6A. Only sub-clause 2.6A.3 is relevant and it provides that:
    - ```Associate' in relation to a Unit Holder means any one or more of the following:
    - ...
    - 2.6A.3 the trustee (in its capacity as trustee) of any Sub- Trust for the Unit Holder or a Specified Relative thereof.'' (Exhibit 5, page 71)
  - (vi) The term ``Sub-Trust'' is defined in clause 2.37 of the Deed of Trust. In so far as it is relevant in this case, it provides that:
    - ```Sub-Trust' in relation to a Person means the trustee (in its capacity as trustee) for the time being or from time to time of any trust or settlement which holds or is possessed of any property or part thereof or any interest therein (in this Sub-clause referred to as `the Property') in which that Person is:
    - 2.37.1 a beneficiary conting- ently entitled to the Property;
    - 2.37.2 a beneficiary vested in possession of the Property where the beneficial enjoyment thereof is either indefeasibly vested or is vested subject to a power of defeasance or divestiture (not capable of being exercised after the Vesting Day) granted or conferred on that trustee or another Person;
    - 2.37.3 an object or potential object of any special or hybrid or other power of appointment (but not including any general power of appointment) granted or conferred on that trustee or another Person in relation to the Property;
      
      2.37.4 an object of any power of selection granted or conferred on the trustee of any trust or settlement for distribution of the Property; and
      
      2.37.5 an object of any mere power or collateral power granted or conferred on any Person in relation to the Property;
    - BUT the expression does not include any trust or settlement in which:
      - 2.37.6 any Person is capable of being vested in an interest in the Property after the Vesting Day; or
      - 2.37.7 the Trustee has for the time being Resolved to be ineligible to receive any Distribution of Net Income or Corpus of the Trust.''
  - (vii) The word ``Person'' is defined in the Deed of Trust to include ``... a partnership and a Company and a trustee of any trust estate or settlement'' (clause 2.26)
(6) Southern Building Supplies
- (a) Establishment:
- In June, 1992, the trustees of the Altman Family Trust and the Easling Family Trust, Fadu Pty Ltd, the accountants and the trustees of the Sharp Family Trust acquired shares in another shelf company, SBS. On the basis of Mr Altman's evidence, we find that each held 20% of the shares.
(7) Citytrak Unit Trust
- (a) Establishment:
  
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- Those associated with the establishment of SBS also procured the establishment of CUT.
- For the purposes of this case, we find that the trust deed establishing CUT is expressed in terms similar to the Deed of Trust and Trust Deed Variation in relation to EDT. In particular, the provisions in relation to distributions, eligible beneficiaries, associates and sub- trusts are in similar terms (Exhibit 1, pages 201-240).
- (b) Trustee:
- The trustee of CUT is SBS.
- (c) Business conducted by SBS as trustee of CUT:
- As trustee of CUT, SBS acquired a business, operating under the name of Southern Building Supplies and supplying timber to the building industry. Southern Building Supplies had been a customer of Fielders but had subsequently gone into receivership. The trustees of the Altman Family Trust and the Easling Family Trust, Fadu Pty Ltd, and the accountants thought that, as they had done well with Fielders, they would do well with Southern Building Supplies. SBS purchased the Southern Builders Supplies business.
- Mr Altman was a director of SBS and Mr Frank Sharp was its general manager. Together with Mr Stuart Mitchell, who became a shareholder, Mr Sharp had primary responsibility for the management of the business conducted under the name of Southern Building Supplies.
- In September, 1994, the accountants disposed of their interest in CUT, as well as in EUT, and were replaced by Jantzen Investments as trustees for the Jantzen Family Trust.
- Southern Building Supplies proved to be a difficult business as its margins were considerably lower than those in the steel roofing business. Its profitability declined and, in June, 1995, further funds were injected through a new investor, TPS Investments Pty Ltd, as well as through Eldersmede, as trustee of EUT.
- Mr Frank Sharp asked his brother-in-law, Mr Mark Potter, to inject funds and they were injected by Bannock Pty Ltd as trustee for the Mark Potter Family Trust Fund.
- By 1995, Eldersmede, as trustee of EUT, had injected $160,000.00 into SBS. On the basis of Mr Altman's oral evidence, we find that representatives of McCracken Homes Pty Ltd said that the company would inject $150,000 into SBS if Eldersmede, as trustee of EUT, injected a further $100,000. The additional money was injected in May, 1995.
- In September, 1995, a meeting was held among the directors of Eldersmede, as trustee of EUT, Mr Sharpe and representatives of McCracken Homes Pty Ltd. The business was still struggling and under pressure from creditors. A decision was made that no further funds would be injected into the business and that an administrator would be appointed to SBS.
- The Administrator decided that it was possible neither to continue trading nor to sell the business. At that time, Eldersmede and others held a second ranking charge.
- On 13 November, 1995, SBS entered into a Deed of Company Arrangement (``DOCA'') with the Administrator. Under the DOCA, a dividend was to be paid to creditors other than those that were named as the holders of a second ranking charge. Eldersmede was a second ranking creditor and so excluded from the payment of a dividend under the DOCA. The DOCA stated that Eldersmede guaranteed that it would pay the Administrator up to $60,000 to pay the dividend in accordance with its terms. The DOCA did not specify the capacity in which Eldersmede executed it but it was common ground between the parties that it was Eldersmede as trustee of EUT that was a creditor of SBS as trustee of CUT.
- As the Guarantor, Eldersmede entered into a Deed of Guarantee and Indemnity with the Administrator. That document formed Annexure A to the DOCA. Under it, Eldersmede agreed to contribute to the administrator $30,000.00 on or before 31 March, 1996 and, on or before 30
  
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  September, 1996, the balance sufficient to permit payment of a dividend to creditors but amounting to a sum no more than an additional $30,000.00 (T documents, pages 259-270).
- Also entered into on 13 November, 1995 and forming Annexure B to the DOCA, was a Secured Creditors' Deed. It was entered into by the Administrator, the holders of second ranking charges and SBS. Eldersmede was the holder of a second ranking charge. Under the DOCA, the holders of the second ranking charge consented to the surrender of their security and agreed that they would not participate as creditors in the payment of any dividend. Pursuant to its terms, the Administrator was entitled to all of the assets of SBS. (T documents, pages 272-279)
- The DOCA was terminated on 3 November, 1997.

Directors of Eldersmede and SBS and their responsibilities

14. Once SBS had been placed in administration, the directors other than Mr Altman and Mr Easling resigned. That occurred on 27 June, 1996. On the same day, Mr Ron Jantzen was appointed as a director. The effect was that, from that date, the directors of SBS were the same as those for Eldersmede.

15. On the basis of his evidence, we find that Mr Altman had primary responsibility for accounting, finance and related issues relating to Fielders and, from the date of the administration, relating to SBS. In effect, the other directors delegated responsibility for these matters to Mr Altman on the basis that he inform them and consult with them on issues materially affecting them.

16. On the same basis, we find that Mr Easling was primarily responsible for issues relating to sales in Fielders and that Mr Jantzen had primary responsibility for its manufacturing issues.

The unit holders in EUT, EDT and CUT

17. The unit holders in each of the three trusts at the heart of this case are:

(1) The unit holders in EUT as at 30 June, 1996 and 30 June, 1997
+----------------------------------------------------------------------------+
| Unit holder                                          | 30 June, | 30 June, |
|                                                      |   1996   |   1997   |
|----------------------------------------------------------------------------|
| Jantzen Investments as trustee for (``ATF'') Jantzen |          |          |
| Family Trust                                         | 10 units | 14 units |
|----------------------------------------------------------------------------|
| C and S Altman ATF Altman Family Trust               | 30 units | 43 units |
|----------------------------------------------------------------------------|
| J and K Easling ATF Easling Family Trust             | 30 units | 43 units |
|----------------------------------------------------------------------------|
| Fadu Pty Ltd ATF George Nemer Family Settlement      | 30 units |    Nil   |


            
+----------------------------------------------------------------------------+



(2) The unit holders in EDT as at 30 June, 1996 and as at 30 June, 1997
+----------------------------------------------------------------------------+
| Unit holder                                          | 30 June, | 30 June, |
|                                                      |   1996   |   1997   |
|----------------------------------------------------------------------------|
| Jantzen Investments as trustee for (``ATF'')         |          |          |
| Jantzen Family Trust                                 |  1 unit  |  1 unit  |
|----------------------------------------------------------------------------|
C and S Altman ATF Altman Family Trust                 |  2 units |  2 units |
|----------------------------------------------------------------------------|
| J and K Easling ATF Easling Family Trust             |  2 units |  2 units |
|----------------------------------------------------------------------------|
| Fadu Pty Ltd ATF George Nemer Family Settlement      |  1 unit  |    Nil   |
|----------------------------------------------------------------------------|
| Jantzen Investments ATF Jantzen Family Trust, C and  |          |          |
| S Altman ATF Altman Family Trust and J and K Easling |          |          |
| ATF Easling Family Trust (jointly)                   |    Nil   |  1 unit  |
|----------------------------------------------------------------------------|
| Associated Services Pty Ltd                          |  1 unit  |  1 unit  |
|----------------------------------------------------------------------------|
| Electronic Components Pty Ltd                        | 13 units | 13 units |
+----------------------------------------------------------------------------+

(3) The unit holders in CUT as at 30 June, 1996 and as at 30 June, 1997
+----------------------------------------------------------------------------+
| Unit holder                                          | 30 June, | 30 June, |
|                                                      |   1996   |   1997   |
|----------------------------------------------------------------------------|
| Jantzen Investments as trustee for (``ATF'') Jantzen |
| Family Trust                                         | 33 units | 140 units|
|----------------------------------------------------------------------------|
| C and S Altman ATF Altman Family Trust               | 100 units| 430 units|
|----------------------------------------------------------------------------|
| J and K Easling ATF Easling Family Trust             | 100 units| 430 units|
|----------------------------------------------------------------------------|
| Fadu Pty Ltd ATF George Nemer Family Settlement      | 100 units|    Nil   |
|----------------------------------------------------------------------------|
| TPS Investments Pty Ltd                              | 333 units|    Nil   |
|----------------------------------------------------------------------------|
| Bannock Pty Ltd ATF Mark Potter Family Trust         | 200 units|    Nil   |
|----------------------------------------------------------------------------|
| F and J Sharp ATF Sharp Family Trust                 | 134 units|    Nil   |
+----------------------------------------------------------------------------+

Inter-relationships among EDT, EUT, CUT, Altman Family Trust, Easling Family Trust, Mrs Susan Altman, Ms Lucy Altman and CIPL

18. We make the following findings of fact relating to the inter-relationships of each of the entities:

(1) On the basis of Mr Altman's evidence, we find that the net income of EUT has been distributed to EDT since EDT was established in 1993.
(2) C and S Altman as trustees for the Altman Family Trust and J and K Easling as trustee for the Easling Family Trust held units in each of EUT, EDT and CUT.
(3) Having regard to the trust deeds establishing EUT, EDT and CUT, those to whom a distribution may be made (at least after the Trust Deed Variation in the case of EDT and of EUT) are those who are designated as ``Eligible Beneficiaries''. ``Eligible Beneficiaries'' are those who are ``Associates'' of the Primary Beneficiaries as well as the Primary Beneficiaries themselves. Having regard to the definition of an ``Associate'' inserted by the Trust Deed Variation and limiting our findings to the standing of the applicants in this case, we make the following findings:
- (a) EUT
  - Eldersmede, as trustee of EDT, is an Associate of three of the unit holders in EUT (Jantzen Family Trust, Altman Family Trust and the Easling Family Trust). That is so because Eldersmede, as trustee of EDT, is a ``Sub-Trust'' (within the meaning of clause 2.37 rather than a Sub-Trustee) of each of the three unit holders as that term is defined in the Deed of Trust. It is a Sub-Trust as the trustee of that trust holds the Property in which each of the three unit holders is either beneficially entitled (contingently or otherwise) or the object or the object of any power of selection granted or conferred on Eldersmede as trustee of EDT. On this reasoning, Eldersmede, as trustee of EDT, became capable of benefiting under EUT.
- (b) EDT
  - The Deed of Trust establishing EDT is in substantially the same terms as that establishing EUT and the three we have identified as Unit Holders in EDT were also Unit Holders in EUT at all relevant times. The reasoning that we have adopted in the previous paragraph leads us to the conclusion that Eldersmede, as trustee of EUT, is an Associate of the Jantzen Family Trust, Altman Family Trust and the Easling Family Trust. Therefore, it became capable of benefiting under EDT.
    
    ATC 2142
- (c) SBS
  - SBS, as trustee of CUT, is an Associate of three of the unit holders in EDT (Jantzen Family Trust, Altman Family Trust and the Easling Family Trust). That is so because SBS, as trustee of CUT, is a Sub- Trust of each of the three unit holders as that term is defined in the Trust Deed Variation. It is a Sub-Trust as the trustee of that trust holds the Property in which each of the three unit holders is either beneficially entitled (contingently or otherwise) or the object or the object of any power of selection granted or conferred on SBS as trustee of CUT.

The financial position and dealings of the entities as at 30 June, 1996

19. We have made the following findings in relation to the financial position of EUT, EDT and CUT and the distributions that were made during the year ending 30 June, 1996:

(1) EUT
- As at 30 June, 1996, EUT recorded an asset in the amount of $410,808.96 being an amount owed to it by CUT.
- EUT made an accounting profit of $1,314,430.52 and had a net taxable income of $1,208,693.00.
- On or about 22 May, 1996, Eldersmede, as trustee for EUT, agreed to make an interim distribution of income from EUT to EDT. At the same time, it made a resolution in relation to that distribution as trustee of EDT (see below).
- On or about 29 June, 1996, Eldersmede, as trustee for EUT, resolved to distribute to itself, in its capacity as trustee of EDT, the whole of its net income being $1,208,693.00.
- The accounts of EUT and EDT were prepared on the basis that EDT was entitled to all of EUT's accounting profit of $1,314,430.52 but the discrepancy between this figure and EUT's net income is of no consequence in this case.
- As a result of the distribution, the liability of EUT to EDT as at 30 June, 1996 was increased from $953,110.18 to $2,267,540.70.
- The distribution was unpaid as at 30 June, 1996.
(2) EDT
- The accounts of EDT reflected the distribution from EUT in showing an accounting profit of $1,314,430.52 and a net income of $1,208,693.00.
- At a meeting of its directors held on or about 22 May, 1996 and immediately after it had made its resolution distributing EUT's income to EDT, Eldersmede, acting as trustee of EDT, resolved to ``... make an interim distribution of income to Southern Building Supplies Pty Ltd. In it's [sic] capacity as trustee for the Citytrak Unit Trust for an amount totalling, but not exceeding, the accumulated losses of the unit trust.'' (Exhibit C)
- On or about 29 June, 1996, Eldersmede, acting as trustee for EDT, resolved to distribute all of the net income of EDT ($1,208,693.00) as follows:
  - ``2.1 SOUTHERN BUILDING SUPPLIES PTY LTD ... in its capacity as trust of `THE CITYTRAK UNIT TRUST' ... an amount of $859,806 in respect of income of the Trust for the purpose of assisting it in the payment of monies to its creditors; and
  - 2.2 LINBECK PTY LTD ... an amount equal to the balance of the income of the Trust... [being an amount of taxable income of $348,887.00]'' (Exhibit 1, page 490)
- Linbeck Pty Ltd (``Linbeck'') and EDT have prepared their accounts on the basis that Linbeck was entitled to the balance of the accounting profit totalling $454,624.52 but the difference in the figures is of no consequence in the context of this case.
- As at 30 June, 1996, EDT recorded a liability in the amount of $859,806.00 to CUT.
- The parties agreed that a third resolution to distribute an amount not exceeding $859,886.00 of EDT's distributable income in respect of the 1996 financial year was made on an unknown date after 29 June, 1996 and after the date of insertion of Division 270 of Schedule 2F
  
  ATC 2143
  in the ITAA 1936 (i.e. 16 April, 1998). We refer to this in greater detail in paragraph 22 below.
- Following the hearing, we issued a direction, dated 19 May, 2004, requiring the parties to advise whether or not they agreed with certain propositions set out in six enumerated paragraphs. In their response dated 31 May, 2004, the applicants' solicitors agreed with the last three propositions (subject to the correction of a typographical error), did not agree with the first proposition and, subject to certain qualifications, agreed with the second and third propositions. In his response dated 28 May, 2004, the Commissioner advised that he agreed with each of the propositions and did so on the basis that there was no evidence before the Tribunal either contradicting or inconsistent with those propositions.
- On receiving those responses, we reformulated the propositions contained in the first three paragraphs of the direction so as to accommodate the applicants' qualifications set out in their response of 31 May, 2004. We then asked the parties to advise whether they agreed the facts as set out in the reformulated propositions. The reformulated propositions are:
  - (a) Save that:
    - (i) there was a set off and novation on 30 June, 1997 resulting in:
      - • a liability of EDT to EUT (being the liability of CUT to EUT amounting to $487,809.05, which was assumed by EDT); and
      - • that liability's being set off against a part of the amount of the distribution payable by EUT to EDT; and
    - (ii) that act of set off and novation constituted by an act by Eldersmede, as trustee of EDT, to obtain part of the amount of the distribution;
  - Eldersmede, as trustee of EDT, did not at any time after 22 May, 1996 and prior to the date of the third resolution referred to in paragraph 22 below call upon Eldersmede, as trustee of EUT, to pay or to take any steps to recover the amount of the distribution made by EUT to EDT out of the net income of EUT in respect of the financial year ended 30 June, 1996.
  - (b) Save to the extent that the position is affected by the qualifications referred to in paragraph (a) above, Eldersmede, as trustee of EDT, did not at any time after 22 May, 1996 and prior to the third resolution referred to in paragraph 22 below call upon Eldersmede, as trustee of EUT, to enter into an agreement to invest the amount distributed to EDT out of the distributable income of EUT for the financial year ended 30 June, 1996 on a commercial basis for the benefit of EDT.
  - (c) Save that:
    - (i) there was a set off and novation on, but not before, 30 June, 1997 resulting in SBS's obtaining the benefit of part of the distribution payable by EDT (being the assumption by EDT of the liability of SBS to EUT amounting to $487,809.05); and
    - (ii) that act of set off and novation constituted an act by SBS, as trustee of CUT, to obtain part of that distribution;
  - SBS, as trustee of CUT, did not at any time after 22 May, 1996 and prior to 30 June, 1997 call upon Eldersmede, as trustee of EDT, to pay or to recover the amount of the distribution made by EDT to CUT out of the net income of EDT in respect of the financial year ended 30 June, 1996.
  - (d) On 30 June, 1997, Eldersmede, as trustee of EDT, assumed the liability of SBS, as trustee of CUT, to discharge the indebtedness of CUT to EUT, which amounted to $487,809.05 as at 30 June, 1997.
  - (e) SBS, as trustee of CUT, did not at any time after 30 June, 1997 and prior to the third resolution referred to above call upon Eldersmede, as trustee of EDT, to pay or to recover the balance of the amount of the
    
    ATC 2144
    distribution made by EDT to CUT in respect of its distributable income for the year ended 30 June, 1996, after deducting the amount of the debt of $487,809.05, for which EDT had assumed liability.
  - (f) SBS, as trustee of CUT, did not at any time after 22 May, 1996 and prior to the third resolution referred to above call upon Eldersmede, as trustee of EDT, to enter into an agreement to invest on a commercial basis, for the benefit of CUT, the amount distributed to CUT out of the distributable income of EDT for the financial ended 30 June, 1996, or the balance of the amount of that distribution after deducting the above amount of $487,809.05.
- In response to the Tribunal's further request, the applicants' solicitors acknowledged on 4 June, 2004 that they agreed with the reformulation of the first three propositions. At the same time, they noted a matter that is not relevant to our consideration. That was that the third resolution by Eldersmede, as trustee for EDT, provided for the distribution of an amount of distributable income not exceeding $859,886.00 to either CUT or Dalfine Pty Ltd subject to paragraph 2.1.1 of the resolution.
- In his response also dated 4 June, 2004, the Commissioner advised that he did not agree with the facts set out in the first three reformulated propositions. He advised that he relied on the oral submissions of counsel in the proceedings as well as on the written Outline of Submissions, Additional Submission on Evidence and Reply Submissions on Evidence filed in the Tribunal.
- In preparing the reformulated propositions set out above, it seemed to us that they represented the findings of fact that were appropriate to make having regard to the evidence already before the Tribunal, the Statement of Agreed Facts and the inferences that could properly be drawn from the evidence as well as the parties' responses to the propositions in their original form.
- We note that both parties have agreed with propositions (d), (e) and (f) above. As regards reformulated propositions (a), (b) and (c), we note that, in large measure, they comprise facts, which are in the knowledge of the applicants but not of the Commissioner. The applicants have agreed with those reformulations. In light of that, we find the facts as set out in the reformulated propositions (a) to (f) above and do so even though the Commissioner has not agreed with reformulated propositions (a), (b) and (c).
(3) CUT
- As at 30 June, 1996, CUT recorded a liability to EUT of $410,808.96.
- CUT was not the subject of a family trust election, within the meaning of s. 272-80 of Schedule 2F of the ITAA Act 1936 in respect of the year ending 30 June, 1996 and consequently, according to s. 272-100, is not an excepted trust.
- Excluding any application of Division 270 of Schedule 2F of the ITAA 1936, a deduction of $859,806.00 was allowable to CUT in the year ending 30 June, 1996. It comprised:
  - • carried forward losses from previous years of $142,780.00; and
  - • a loss for the year ending 30 June, 1996 of $717,026.00.
- As at 30 June, 1996, CUT recorded an asset of $859,806.00 being the distribution from EDT.
- Taking into account that distribution, CUT had net assets of $47,290.28 as at 30 June, 1996.
- On or about 29 June, 1996, the directors of SBS, as trustee of CUT, resolved that the net income of CUT for the year ending 30 June, 1996 be distributed in proportion to the units held in the trust.
(4) Altman Family Trust
- The net income of the Altman Family Trust for the year ending 30 June, 1996 was distributed to its beneficiaries, Mrs Susan Altman and Ms Lucy Altman. The sum of $38,000 was distributed to Ms Lucy Altman and the balance to Mrs Susan Altman. Upon the Commissioner's disallowance of CUT's claim of the
  
  ATC 2145
  deduction of $859,806, the income of the Altman Family Trust was increased by $85,980, which in terms of the trustee's decision, was shared as to $22,283 for Ms Lucy Altman and $63,697 for Mrs Susan Altman.
(5) Easling Family Trust
- The net income of the Easling Family Trust for the year ending 30 June, 1996 was distributed to its beneficiary, CIPL. Again the disallowance by the Commissioner increased the income of CIPL by $85,980.

Summary of the related assets and liabilities as at 30 June, 1996

20. As at 30 June, 1996, the following entries were made in the books of account maintained in relation to SBS as trustee of CUT and Eldersmede as trustee of EDT and EUT:

• in the books of EDT, the raising of a liability account for CUT reflecting the allocation of income of $859,806;
• in the books of CUT:
- (i) the creation of an asset account showing the amount payable by EDT resulting from the income allocation; and
- (ii) various cash advances received from EUT, which collectively revealed an indebtedness of $410,808.96 as at 30 June, 1996;
• in the books of EUT, entries confirming advances made to SBS as trustee of CUT and a balance of $410,808.96 owing at the end of the year.

The financial position and dealings of the entities as at 30 June, 1997

21. On the basis of the Statement of Agreed Facts, we make the following findings of fact relating to the entities, their dealings and financial position at the conclusion of the year ending 30 June, 1997:

(1) Distributions from Eldersmede to SBS
- In its capacity as trustee of either EUT or EDT, Eldersmede has not made any further distributions to SBS as trustee of CUT.
(2) Liability of CUT to EUT
- During the year ending 30 June, 1997, the liability of CUT to EUT increased from the $410,808.96 (as it existed at 30 June, 1996) to $487,809.05.
(3) Unwritten debt novation agreements
- On 30 June, 1997, as a result of an unwritten debt novation agreement between Eldersmede (as trustee of EUT and EDT) and SBS (as trustee of CUT), the following transactions were effected and recorded by way of journal entries in the books of EUT, EDT and CUT:
  - • Eldersmede as trustee of EDT assumed the liability of SBS as trustee of CUT to make the payment of $487,809.05 to Eldersmede as trustee of EUT. The result was CUT's liability to EUT was extinguished and the amount payable to CUT by EDT was correspondingly reduced by that same amount.
  - • The effect of EDT's assumption of that liability was to reduce the amount of income allocation, which had been made by EDT to CUT for the 1996 year and which remained unpaid. After this offset, the balance payable by EDT to CUT had been reduced to $371,996.95. Contemporaneously, the assumption of the debt owing by CUT to EUT was recorded as a credit against moneys owing by EUT to EDT.
- As at 30 June, 1998, the books of EDT showed a liability to CUT amounting to $385,237.84. The books of CUT showed a corresponding amount as an asset.
- On 30 June, 1999, as a result of an unwritten debt novation agreement between Eldersmede (as trustee of EUT and EDT) and SBS (as trustee of CUT), the following transactions were effected and recorded by way of journal entries in the books of EUT, EDT and CUT:
  - • EUT assumed EDT's liability to make the payment of $385,237.84 to CUT. The result was EDT's liability to CUT was extinguished.
  - • The effect of EUT's assumption of that liability was to:
    - (i) reduce to nil CUT's asset, in the form of EDT's liability to it in the sum of $385,237.84;
    - (ii) create an asset in CUT's books representing the liability of EUT to it. The asset was $384,902.84; and
      
      ATC 2146
    - (iii) the existing amount payable by EUT to EDT was reduced in return to the extent of the liability taken over by EUT.

Resolution by Eldersmede as trustee of EDT after 16 April, 1998 but relating to the year ending 30 June, 1996

22. On a date that is unknown but which it is agreed occurred both after 29 June, 1996 and after the date of the insertion of Division 270 of Schedule 2F in the ITAA 1936 (i.e. 16 April, 1998), Mr Altman signed a document that purported to have been made on 29 June, 1996. It was a document that purported to record the minutes of a meeting of the directors of Eldersmede in its capacity as trustee of EDT. In those minutes, it was recorded that Eldersmede resolved that it:

``1. DETERMINES that the whole amount of the Trust income as calculated pursuant to Sub-section 95(1) of the Income Tax Assessment Act 1936 in respect of the period:
- 1.1 commencing on the 1st July 1995; and
- 1.2 ending on the 30th June 1996
(``the Distributable Income') shall be distributed in the manner provided in Resolution 2 hereunder;
2. DISTRIBUTES an amount equal to the sum calculated pursuant to Resolution 1 above:
- 2.1 in respect of the amount of $859,886 of the Distributable Income (or the whole amount of the Distributable Income if that amount is less than $859,886 ):
  - 2.1.1 (subject to this Resolution 2.1.1 and Resolution 2.1.2 below) - to SOUTHERN BUILDING SUPPLIES PTY LTD. ... in its capacity as trustee of... `THE CITYTRAK UNIT TRUST' (`Citytrak') IF no beneficiary thereunder is presently entitled to a share of income or net income thereunder by reason of the passing hereafter of any legislation that operates to deny to Citytrak the benefit of its carried forward revenue losses as a consequence (whether wholly or in part) of the operation of this Resolution 2.1.1; or
  - 2.1.2 (notwithstanding Resolution 2.1.1 above) - in the event that no amount is distributable to Citytrak pursuant to that Resolution - then to DALFINE PTY LTD ...
- as the case may be...'' (Exhibit 5, pages 23-24)

The evidence

23. Mr Altman said in his oral evidence that there were various loan accounts amongst the related trusts but he did not think that interest was charged. There was no practice of calling up the loan accounts but, in the case of the early days of SBS, Eldersmede, as trustee of EUT, would lend it money or pay a creditor and SBS would repay the money. After July, 1994, Eldersmede paid money to SBS but it was not repaid.

24. Mr Altman said that Eldersmede, as trustee of EDT, had paid $30,000.00 on 1 October, 1996 and a further $41,000.00 on 7 February, 1997 to the Administrator of SBS. In both his oral evidence and in his statement, he said that it had done so in order to maintain Fielders' good standing in the public's perception as Fielders had been identified in the past as having an association with the business operated under the name Southern Building Supplies.

25. In his statement, Mr Altman said:

``20. I was aware that the Citytrak Unit Trust would have significant losses for the 1996 income year. I formed the view that it may be appropriate to distribute the net income of Eldersmede Unit Trust for the 1996 income year firstly to the Eldersmede Distribution Trust then from that trust to the Citytrak Unit Trust.

21. I suggested this to the accountant for the group, Gary Hugo, who concurred and he then attended to documenting that income flow, including preparing the terms of the resolution of directors of Eldersmede to give effect to it. The document at pages 489-491 of the Respondent's documents...

22. In line with our division of responsibilities and past practice I informed my fellow directors in Eldersmede, John Easling and Ron Jantzen, that the income for the year was being distributed to the Citytrak Unit Trust and a group company (namely Linbeck Pty Ltd). They concurred

ATC 2147
and consented to that course relying on my judgement.''

(Exhibit A)

26. In his oral evidence, Mr Altman adopted his statement but placed a slightly different emphasis upon events. He said that he consulted Mr Hugo in approximately April, 1996 and put the broad picture to him. Mr Altman told Mr Hugo that there were losses in SBS but profits in Eldersmede as trustee for EUT and asked him whether there was anything that they could do about it. They consulted the group's solicitor, Mr Campbell Rankine, in or about May, 1996. When asked what he was planning to do when he sought advice, Mr Altman said that the end result was that he wanted to use the losses in CUT and he wanted the mechanics of how to do so. He left the mechanics to Mr Hugo and Mr Rankine and did ``not really'' discuss what would happen to the funds after they were taken to CUT. In his statement, Mr Altman said:

``23. At the time of making the decision to direct income to Citytrak Unit Trust I did not direct my mind to physical payment of the income. My only concern at that time was where the net income of the Eldersmede Unit Trust was going. The consequence of then dealing with that distribution was not something that required my immediate attention and so I never considered it at or before that time. As far as I was concerned the income was within the group and which entity held it was not of importance. Assets and liabilities between group entities arising by reason of that income distribution were neutral from a group perspective.

24. I did not at the time of the distribution consider what use the Citytrak Unit Trust may make of the income. It did not require my immediate attention and therefore it was not necessary for me to consider and I did not do so. The only matter which I considered required addressing, and the only matter which I addressed, was where the income of the Eldersmede Unit Trust would flow to.''

(Exhibit A)

27. After that, he signed the resolution for an interim distribution because the tax law was about to change. That was Mr Rankine's advice at the time. When asked why he had signed two further resolutions about the same income, Mr Altman replied that it was the advice he received and he followed it.

28. Mr Hugo said in his statement (Exhibit B) that the accountancy firm of which he is a principal has acted as the external accountants for Eldersmede as trustee of EUT since 1991 and for SBS as trustee of CUT and Eldersmede as trustee of EDT since those trusts were established. He has been the principal of the firm responsible for the provision of accounting services. In relation to each, he has reported to Mr Altman.

29. Mr Hugo said in his statement that Mr Altman had told him that he proposed that all of the net income of EUT for the year ending 30 June, 1996 would flow to EDT and thereafter partly to CUT and partly to another company in the group. In his oral evidence, Mr Hugo said that Mr Altman spoke to him about whether the group could distribute Fielder's substantial profit through CUT. They spoke about it and agreed to make that distribution. There was a meeting of the directors of Eldersmede in May, 1996. They agreed that Mr Hugo would draft a resolution to effect that distribution. Mr Hugo said in his statement that this resolution was that dated 29 June, 1996 (Exhibit I at pages 489-491). In giving oral evidence, he said that his firm had prepared the resolution dated 22 May, 1996 at this time (Exhibit C). His not referring to it in his statement had been an oversight by his office.

30. In the course of considering the accounts for EUT, EDT and CUT for the year ending 30 June, 1997, Mr Hugo said in his statement that he noticed that there were debts between them which, if set off or transferred, would enable the balance sheets to be simpler. With that in mind and with Mr Altman's approval, he recorded journal entries in the accounts of each of them to give effect to the first unwritten debt novation agreement. Prior to his doing so, Mr Hugo said, he had neither discussed with Mr Altman nor considered what should happen with the amount that was the subject of the resolution to distribute from Eldersmede as trustee for EUT to itself as trustee for EDT and then to SBS as trustee for CUT.

31. In the year ending 30 June, 1999, Mr Hugo said in his statement that he considered that ``a further tidying up of the entities' balance sheets could occur'' in that EDT owed CUT $385,237.84 and EUT owed EDT a debt reflecting the use of EDT ``as [a] conduit for that income'' (Exhibit B, paragraph 13.2). Again with Mr Altman's approval and in order

ATC 2148

to effect that ``tidying up'', Mr Hugo recorded journal entries in the accounts of each of them to give effect to the second unwritten debt novation agreement.

32. Mr Hugo said in his statement that he prepared a second resolution dated 29 June, 1996 but prepared it some time after 16 April, 1998. He arranged for Mr Altman to sign the resolution and for amended taxation returns to be prepared in accordance with it.

33. In his oral evidence, Mr Hugo said that he could not recall if the first resolution dated 29 June, 1996 was prepared at the same time as the second. He agreed that both had been prepared in his office. Earlier, he had said that the first resolution of that date had been made when the accounts and taxation returns had been prepared for the trust. The resolution dated 29 June, 1996 gave effect to the final distributions for the year ending 30 June, 1996.

Consideration

Section 270-15 - the criteria that must be satisfied

34. Before the consequences set out in s. 270-15 must be applied in assessing a trust's assessable income and its deductions, the provisions of s. 270-10 must be fulfilled. As can be seen from the section that we have set out above, it has four main criteria. Of these, it is agreed that three have been fulfilled in their entirety (ss. 270-10(1)(a), (c) and (d)) and one in part (ss. 270-10(1)(b)):

(1) s. 270-10(1)(a):
- It is agreed that a deduction is allowable to SBS, as trustee of CUT, for the year of income ending 30 June, 1996. That deduction is the sum of $142,780 for prior year losses and $717,026 for current year losses.
(2) s. 270-10(1)(b):
- Each of its three subparagraphs must be satisfied. While it is not agreed that the events specified in s. 270-10(1)(b) occurred ``under a scheme'' the following is agreed:
  - (a) It is agreed between the parties that, subject to the qualification we have made, only s. 270-10(b)(i) is fully satisfied. There is no issue between the parties that CUT received a distribution from EDT and that this is an amount of assessable income within the meaning of s. 270-10(b)(i).
  - (b) With regard to s. 270-10(1)(b)(ii), it is agreed between the parties that Eldersmede, as trustee of EDT, is an outsider to CUT. It is also agreed that, in that capacity, Eldersmede directly or indirectly provided a benefit to SBS, as trustee of CUT.
  - (c) With regard to s. 270-10(b)(iii), it is agreed between the parties that Eldersmede, as trustee of EDT, is an outsider to CUT. There remains in issue whether SBS, as trustee of CUT, directly or indirectly, provided a benefit to Eldersmede, as trustee of EDT or one of its associates.
(3) s. 270-10(1)(c):
- As the three subparagraphs of s. 270-10(1)(c) are expressed in the alternative, only one need be satisfied.
- It is agreed that, if the events specified in s. 270-10(b) occurred and occurred ``under a scheme'', s. 270-10(1)(c)(i) is satisfied as it is reasonable to conclude that CUT received the scheme assessable income, wholly or partly, but not merely incidentally, because the deduction would be allowable.
(4) s. 270-10(1)(d):
- CUT is not an excepted trust under ss. 272-100(b), (c) or (d).

35. Mr Pagone made three submissions as to why s. 270-10(1)(b)(iii) has been fulfilled but, before we consider them, we will consider the meaning of the words ``benefit'', ``directly or indirectly'', ``provide'' and ``scheme'' for each is relevant in our consideration of the submissions.

What is a ``benefit''?

36. The word ``benefit'', is defined by reference to both the tangible, such as money, dividend or property, and the intangible, such as a right or entitlement (s. 270-20). Paragraph (f) of the definition is also framed in an uncommon fashion. In stating that ``a benefit is... anything that, disregarding the preceding paragraphs , is a benefit or advantage'' (emphasis added), Parliament has indicated that the meaning given in that paragraph is not to be read down by reference to, the preceding paragraphs in the definition. The implication is that the meaning

ATC 2149

given to the word under paragraph (f) may overlap with the meanings given in the previous paragraphs and may incorporate some or all of those meanings. The implication is that it is to be given a broad meaning but there is no implication that it is to be read so broadly that it has no limitations. The first limitation is in the meaning of the words ``benefit or advantage'' themselves and the second is in the context of Schedule 2F.

37. In so far as they are relevant, the ordinary meanings of the noun ``benefit'' as they appear in the dictionaries are:

``1. A thing well done; a good or noble deed.... 2. a. A kind deed, a kindness; a favour, gift. arch.... c. A benefaction (in somewhat of a legal sense).... 3. a. Advantage, profit, good. (The ordinary sense.)... b. A natural advantage or `gift.'... d. Pecuniary advantage, profit, gain....''

(Oxford English Dictionary, 2nd edition, 1989)

``... 1. An act of kindness. 2. Anything that is for the good of a person or thing....''

(Macquarie Dictionary, 3rd edition, 1997)

Those of ``advantage'' are:

``I. Superior position ... 5. a. A favouring circumstance; anything which gives one the superiority or tends to improve one's position. (The opposite is disadvantage.)

...

II. The result of a superior or better position.

6. a. Benefit; enhancement, improvement; increased well-being or convenience; resulting benefit. to one's advantage: to one's benefit, beneficial to one....''

(Oxford English Dictionary, 2nd edition)

``... 1. any state, circumstance, opportunity, or means specially favourable to success, interest, or any desired end: the advantage of a good education. 2. Benefit; gain; profit: it is to his advantage...''

(Macquarie Dictionary, 3rd edition, 1997)

38. The words ``benefit or advantage'', or one or other of them, are used in different contexts. Part IVA of the ITAA 1936, for example, focuses in part upon whether a person has obtained, or would obtain but for s. 177F, a ``tax benefit'' in connection with a scheme. Neither the word ``benefit'' nor the expression ``tax benefit'' is defined. Rather, s. 177C provides what is to be understood by the expression ``the obtaining by a taxpayer of a tax benefit in connection with a scheme''. That expression has been considered by the Full Court of the Federal Court in
Vincent v FC of T 2002 ATC 4742; (2002) 193 ALR 686 (Hill, Tamberlin and Hely JJ) but the specificity of s. 177C means that it does not assist us in our consideration of the word ``benefit''. The word ``benefit'' is used in defining a ``fringe benefit'' in s. 136(1) of the Fringe Benefits Tax Assessment Act 1986 and is itself defined in that provision. Again, the specificity of the definition does not assist us in this case. The word ``advantage'' has also been considered in other contexts but again more commonly in the context of and expression such as ``take advantage'' in s. 46(1) of the Trade Practices Act 1974 (
Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Co Ltd & Anor (1989) ATPR ¶40-925; (1989) 83 ALR 577, Mason CJ, Wilson, Deane, Dawson and Toohey JJ). Although not precisely on point, these authorities underline the second limitation we have identified and that is that the words ``benefit or advantage'' must be read in their context.

39. The context is, of course, that of Schedule 2F and we have explained its two main aspects above (paragraph 8). The second aspect is the subject of Division 270 and, as s. 270-5 explains, its consequences are that a trust may be prevented from making any use, or at least full use, of deductions in an income year, if there exists a scheme to take advantage of the deductions. There is nothing in Schedule 2F that indicates that either a wide or a narrow meaning should be given to the words. It is a statutory framework which leads to certain consequences for those who fall within its terms. Those consequences are not based upon any finding that there be an intention to avoid the payment of income tax. The explanatory memorandum or the supplementary memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1997 does not suggest otherwise.

40. This leads us to conclude that the words ``benefit or advantage'' should be given their ordinary meanings. That is to say, they should be read as anything that is for the good of a person or thing or that puts him, her or it in a better or more favourable position. What is for the good of another or what is a more

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favourable position may be measured in tangible or intangible terms and is not limited by the tangible and intangible measures set out in the other paragraphs of the definition of ``benefit''.

41. What is good for a person or what puts him or her in a more favourable position is, of course, a matter that depends upon the vantage point from which it is viewed. In the case of s. 270-10(1)(b)(iii), it is to be viewed from the vantage point of the outsider to the trust or of an associate of that outsider. That is not to say, however, that it is to be viewed from the subjective view point of that outsider or associate. The language of s. 270-10 is expressed in objective terms and no reference is made to the subjective aspects of intention. So, for example, s. 270-10(1)(b)(iii) requires that ``the trustee... directly or indirectly provides a benefit to the outsider to the trust or to an associate of the trustee...''. It is not expressed in terms of the trustee's thinking that he, she or it is providing such a benefit or that the outsider to the trust or the associate thinks that it is being provided with such a benefit. It is not expressed in terms of the trustee's attempting to achieve a particular outcome. It is looking only at what has happened. In this regard, s. 270-10(1)(b)(iii) is to be compared with the provisions of Part IVA of the ITAA 1936 relating to schemes and the consideration given to that Part by the Federal Court in a number of cases. We have regard to a selection of those cases below for the word ``scheme'' in Schedule 2F is defined by reference to its definition in Part IVA and conclude that whether or not there is a scheme must be assessed objectively. Consistently with that conclusion and for the reasons we have given earlier in this paragraph, we consider that whether or not a benefit has been provided must be assessed objectively.

What is meant by ``directly or indirectly''?

42. In providing that the expression ``directly or indirectly'' has a meaning affected by ss. 272-25 and 272-30, the definition set out in s. 272-140 requires us to look first to the meaning of the expression on its own but in the context of the ITAA 1936 generally as well as in the context of the particular section under consideration. Only after we have done that, can we ascertain how it has been affected by ss. 272-25 and 272-30 and so come to the meaning that is to be given to it.

43. Beginning with the expression ``directly or indirectly'' itself, it has been considered in a number of different contexts. Among those is s. 26(e) of the Income Tax Assessment Act 1936 which, in so far as it is relevant to this case, provides that a taxpayer's assessable income includes the value to the taxpayer of allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him or her in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him or her. In a joint judgement, Dixon CJ and Williams J said:

``... It is hardly necessary to say that the words `directly or indirectly' extend the operation of the words `in relation to'. In spite of their adverbial form they mean that a direct relation or an indirect relation to the employment or services shall suffice. A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause....''

(
FC of T v Dixon (1952) 10 ATD 82 at 83-84; (1952) 86 CLR 540 at 553-554 (Dixon CJ, Williams and Fullagar JJ, McTiernan and Webb JJ dissenting)

44. In
Law Society of New South Wales v Ramalca Pty Ltd (1988) ANZ ConvR 260; (1988) 12 NSWLR 34 (Hope, Priestly and Clarke JJA), the Court of Appeal considered s. 68(1) of the Legal Practitioners Act 1898 (NSW) provided that it was an offence for any person directly or indirectly to practise as a solicitor without a practising certificate issued by the Council of the Law Society of New South Wales. Priestly JA, with whom Hope and Clarke JJA concurred, referred to a passage from the judgement of Goff J, who had considered a similar provision in s. 20(1) of the Solicitors Act 1957 (UK) in
Green v Hoyle [1976] 1 WLR 575; [1976] 2 All ER 633 (Lord Widgery CJ, O'Connor and Goff JJ):

``... I accept [counsel's] submission that `directly'means doing the relevant act yourself and `indirectly' means doing the relevant act through another person. It follows that if an unqualified person does any of the relevant acts, either himself or through another, then he commits an offence under section 20.''

(at 43 referring to WLR at 584 and All ER at 640)

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45. In certain contexts, s. 50(1) of the Trade Practices Act 1974 imposes a prohibition upon a corporation's acquiring directly or indirectly any shares in the capital or any assets of a body corporate. In
Trade Practices Commission v Australian Iron and Steel Pty Ltd & Ors (1990) ATPR ¶41-001; (1990) 22 FCR 305, 92 ALR 395, Lockhart J said:

``The words `directly or indirectly' in sec 50(1) plainly control the immediately preceding word `acquire'. They relate to the method of acquisition, not its subject matter. They do not qualify the nature or character of the shares or assets the acquisition of which is prohibited. This follows not only from the syntax of s 50(1) but from its evident purpose.

What is a `direct' as opposed to an `indirect' acquisition? A `direct' acquisition is one by the corporation itself. An `indirect' acquisition is an acquisition by someone on behalf of the corporation acting as agent, trustee or nominee: see SA Brewing Holdings Limited (supra), per von Doussa J at p 50,275; and cf Milk Board v Echo Dairies Pty Limited (1963) NSWR 1653 at p 1665; (1963) 80 WN(NSW) 1306 at 1307, per Jacobs J;
Trade Practices Commission v Legion Cabs (Trading) Co-operative Society Limited (1978) ATPR ¶40-092 at 17,905; (1978) 35 FLR 372 at 381-382, per Franki J;
Melville v Mutal Life & Citizens Assurance Co Limited (1980) 1 ANZ Insurance Cases ¶ 60-411 at 77,063; (1980) 47 FLR 201 at 208, per Lockhart J.''

(at ATPR 51,032; FCR 316 and ALR 406)

46. The common theme in these cases is that the expression ``directly or indirectly'' requires first an examination of the outcome that is qualified by the expression and then the proximate and contributory causes of that outcome. In the context of s. 270(1)(b)(iii), the outcome that is qualified by the expression is the provision of a benefit. The question then becomes whether SBS, as trustee of CUT, was the proximate or a contributory cause of the provision of a benefit to Eldersmede, as trustee of EDT, or to an associate of Eldersmede, as trustee of EDT. There is no need for SBS to have itself provided a benefit provided it contributed to the provision of that benefit in some way and even though there may be other factors or actions contributing to the provision of the benefit. If it was either the proximate cause or a contributory cause, it will be taken to have provided that benefit directly or indirectly. There is no need to go further and to characterise whether it was direct or indirect; it was one or the other.

47. When regard is had to the provisions of s. 270(1)(b)(iii), there is no basis for concluding that the common theme of these cases is inapplicable in its particular context. The same conclusion is reached when regard is had to the overall context of Division 270 of Schedule 2F. It is intended to prevent a trust from making full use of deductions in an income year if a scheme exists to take advantage of those deductions and the provider of the benefit or its associate is in turn the recipient of a flow-back benefit. The meaning we have given to the expression ``directly or indirectly'' is not affected by reference to ss. 272-25 and 272-30 for those sections provide for specific situations in which fixed entitlements are said to be held ``directly or indirectly''. Consistently with our view, they do not attempt to distinguish between ``directly'' or ``indirectly'' but simply provide that in the prescribed situations a certain entity has ``directly or indirectly'' a fixed entitlement in another certain entity. They do not alter the ordinary meaning of the expression ``directly or indirectly'' as it is used elsewhere in Schedule 2F.

What is meant by ``provide''?

48. What is meant by the word ``provides'' in the context of s. 270- 10(1)(b)(iii)? When used as a transitive verb, as it is in the provision, and in so far as it is relevant in this case, it means:

``... 4 v.t. Prepare, get ready, or arrange (something) beforehand. Now rare.... 5 v.t. Equip or fit out with what is necessary for a certain purpose; furnish or supply with something.... 6 v.t. Supply or furnish for use; make available; yield, afford....''

(The New Shorter Oxford English Dictionary, 1993)

``... v.t. 1. to furnish or supply. 2. to afford or yield.... 4. Archaic. to get ready, prepare, or procure beforehand....''

(Macquarie Dictionary, 3rd edition, 1997)

Given the context in which it appears, there seems to be no need to do other than to adopt the ordinary meanings of the word but there are two aspects to those ordinary meanings. One is that of furnishing, supplying or making

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available. The other, although rare, is that of preparing or making ready. It seems to us that it is in the former sense that the word is used in s. 270-10(1)(b)(iii). The words ``directly or indirectly'' qualify the manner in which the trustee ``provides'' a benefit to the outsider or an associate of the outsider. They do not qualify the nature or character of the benefit. The question then becomes, did SBS, as trustee of CUT, directly or indirectly, furnish, supply or make available a benefit to Eldersmede, as trustee of EDT?

What is a scheme?

49. Beginning with the word ``scheme'', Ms MacDonald submitted that the terms in which the word is defined in s. 272-140 mean that we may have regard only to the words of s. 177A(1). We may not have regard to the remaining provisions of s. 177A. We agree with Ms MacDonald that s. 177A defines the word ``scheme'' for the purposes of Part IVA but we do not accept her submission that the omission of a reference to s. 177A(3) in the definition of ``scheme'' in s. 270-10(1) means that it is not relevant in determining the meaning of the word for the purposes of Schedule 2F. Section 177A(3) expressly states that the ``... reference in the definition of 'scheme' in subsection (1)... shall be read...'' in a certain way. Sections 177A(1) and (3) must, therefore, be read together and the meaning of ``scheme'' provided in s. 177A(1) cannot be fully understood without reference to s. 177A(3). Unlike ss. 177A(4) and (5), which relate respectively to the carrying out of a scheme and the purpose of a scheme, the requirement that ss. 177A(3) and 177A(1) must be read together is not expressly limited in its application to Part IVA. As the meaning of s. 177A(1) cannot be understood without reference to s. 177A(3), the operation of s. 177A(3) is not limited in its application to matters under Part IVA and there is nothing either expressly or implicitly in s. 270-10(1) or in Schedule 2F that leads to a contrary conclusion, we consider that the meaning of the word ``scheme'' can only be ascertained by reading both s. 177A(1) and 177A(3).

50. The definition of ``scheme'' is cast very broadly but it is cast in two distinct groups. The ordinary meanings of the words given in the Shorter Oxford English Dictionary (5th edition, 2002) and The Macquarie Dictionary (2nd edition, 1991) chosen in the first group (i.e.``any agreement, arrangement, understanding, promise or undertaking...'') carry with them the notion of something that has been planned or settled upon. In the case of an ``agreement, arrangement... [or] understanding'', the ordinary meanings carry with them the notion of a plan or settlement between two parties or among more. The ordinary meanings of the words ``promise or undertaking'' carry with them the notion of a commitment, assurance or a pledge that could be given either unilaterally by a person or mutually between two persons. Again, there is the notion of something that has been planned or settled upon.

51. The second group of words chosen to define ``scheme'' (i.e. ``any scheme, plan, proposal, action, course of action or course of conduct'') is more eclectic. It is in this group that the word is defined by reference to itself. Of that word, Mason J said, citing
Clowes & Anor v FC of T (1954) 10 ATD 316 at 323; (1954) 91 CLR 209 at 225 per Kitto J, all that it ``... requires is that there should be `some programme, or plan of action'.'' (
Australian Softwood Forests Pty Ltd v Attorney-General (N.S.W.) ex relatione Corporate Affairs Commission (1981) CLC ¶40-734 at 33,283; (1980-1981) 148 CLR 121 at 129). In
Investment and Merchant Finance Corporation Ltd v FC of T 70 ATC 4001 at 4007; (1970) 120 CLR 177 at 189, Windeyer J considered the concept of profit arising from the carrying on or carrying out of any profit-making ``undertaking or scheme''. He said that this presupposes activities which are ``co-ordinated by plan and purpose''. The word ``plan'' carries with it the notion of a scheme. In referring to a scheme or plan that is put forward, the word ``proposal'' refers to the step before there is a scheme or a plan. By way of contrast, the word ``action'' denotes a thing that has been done or a deed. ``Conduct'' may refer to ``... Leadership, command... Direction, management; handling;...'' or ``... Manner of conducting oneself or one's life; behaviour...'' (The New Shorter Oxford English Dictionary, 1993). In doing so, it may refer to things or deeds that have been done or to a direction that can be gleaned from those things or deeds.

52. The word ``course'' is used in both the expressions ``course of action'' and ``course of conduct''. In so far as they are relevant, its ordinary meanings include ``... 2. Onward

ATC 2153

movement in a particular path... 12. fig. The continuous... succession (of events); progress onward or through successive stages...'' (The New Shorter Oxford English Dictionary, 1993). It may also be a ``... 7. a particular manner of proceeding: try another course with him. 8. a systemised or prescribed series: a course of studies, lectures, medical treatments, etc....'' (Macquarie Dictionary, 3rd edition, 1997). Taken with the ordinary meanings of the words ``action'' and ``conduct'', the expressions ``course of action'' and ``course of conduct'' then refer to those things or deeds that have been done that have about them some progression towards an objective or set of objectives. Whether or not all or any of those objectives are achieved is not to the point provided there is a progression.

53. We have also had regard to a number of cases, which have considered the word ``scheme'' in a variety of contexts. They have considered not only the meaning of the word ``scheme'' but the proper approach to be adopted in identifying whether certain actions or events have been in some specified way a result of a scheme. In the case of
Steinberg v FC of T 75 ATC 4221; (1972-1975) 134 CLR 640 (Barwick CJ, Menzies, Gibbs and Stephen JJ), the High Court considered an appeal from Mason J sitting at first instance. His Honour had said:

``The word `scheme' in sec 26(a) connotes some `programme or plan of action' (
Clowes v FC of T (1954) 91 CLR 209, at p 225, per Kitto J.;
XCO Pty. Ltd. v FC of T 71 ATC 4152; (1971) 124 CLR 343, at p 349, per Gibbs J.). In
Investment and Merchant Finance Corporation Ltd. v FC of T 70 ATC 4001; (1970) 120 CLR 177, at pp 188-189, reversed on appeal - see 71 ATC 4140; (1971) 125 CLR 249, speaking of the expression `undertaking or scheme' where used in sec 26(a), Windeyer J. said, at p 4007:

`A scheme presupposes some programme of action, a series of steps all directed to an end result. Similarly, an undertaking is an enterprise directed to an end result. Each word connotes activities that are co-ordinated by plan and purpose - that whatever is done under the scheme or pursuant to the undertaking is done as a means to an end. There may, in one sense, be several transactions, but they are related because all directed to the attainment of the one end, profit.'

But in my view it is not an essential element of a profit-making scheme in sec 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation. In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision.''

(ATC page 4047; CLR pages 669-670)

Section 26(a) of the ITAA 1936 had provided that the assessable income of a taxpayer included ``... profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit- making under-taking or scheme''.

54. On appeal, Barwick CJ said:

``... For there to be a scheme, there must be a plan: it must be the taxpayer's plan and it must exist, in my opinion, at the time of the acquisition of the property: indeed, that acquisition, in my opinion, must be itself part of the scheme and the property acquired the intended vehicle for carrying the scheme into execution. Whilst it need not be fully conceived in all its details at the time of acquisition it must exist as a scheme which in principle embraces all the details yet to be worked out. It must, of course, be a profit- making scheme, that is to say, a scheme to make a capital profit, one which would not fall within sec 25....

... It follows, in my opinion, that a scheme of realisation of an asset not contemplated at the time of its acquisition but subsequently conceived and formulated, is not a scheme within the scope of the second limb of the section. Anything in the decided cases which would suggest that it may be such a scheme ought not, in my opinion, to be followed. I am unable, with great respect, to accept the views expressed by Sir Victor Windeyer in
Buckland v FC of T (1960) 34 ALJR 60, esp at p 62; (1960) ALR at pp 603-604; 12 ATD, at p 169. The scheme, if there be one, must be more specific than an

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intention to turn to profitable account what is acquired. Of course, a scheme, entertained at the point of acquisition, may contemplate alternatives in its execution and, having determined the principles of the scheme, leave details for later decision. But, with due respect to what Sir Owen Dixon said in
The Premier Automatic Ticket Issuers Ltd. v FC of T (1933) 50 CLR 268, there must be an identifiable specific scheme existing at the date of the acquisition of the property which is to be used to execute the scheme to make a profit....''

(ATC page 4228; CLR pages 687-689)

Gibbs J expressly agreed with the approach adopted by Mason J at first instance when he had said that ``it is not an essential element of a profit-making scheme in sec 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation.'' His Honour said on appeal:

``... Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts `one of the many alternatives' that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme: cf.
The Premier Automatic Ticket Issuers Ltd. v FC of T (1933) 50 CLR 268, at p 300;
Buckland v FC of T (1960) 34 ALJR 60, at p 62; (1960) ALR, at pp 602-603; 12 ATD, at p 169.''

(ATC pages 4234-4235; CLR page 700)

55. In the context of the Corporations Law Jenkinson J considered the word ``scheme'' when considering whether or not there was a right to participate, or any interest, in any investment contract given in relation to a public offering of strata titled units in a serviced apartment accommodation complex. An ``investment contract'' was defined in s. 9 of the Corporations Law to mean ``... any contract, scheme or arrangement that, in substance and irrespective of its form, involves the investment of money in or under such circumstances that the investor acquires or may acquire an interest in, or right in respect of, property,... that, under, or in accordance with, the terms of the investment will, or may at the option of the investor, be used or employed in common with any other interest in, or right in respect of, property,... acquired in or under like circumstances.'' Observing that the provisions of the Companies Act 1961 (NSW), which were under consideration by Mason J in Australian Softwood Forests Pty Ltd v Attorney-General (N.S.W.) ex relatione Corporate Affairs Commission, were nearly the same as those in the Corporations Law with which he was concerned, Jenkinson J adopted Mason J's analysis:

``In attempting to apply the statutory definition of `interest' to the transactions already outlined, we must ask ourselves, first, whether there is a `financial or business undertaking or scheme' and, secondly, what are its elements. We begin with the circumstance that the words in question are of very wide import. For example, all that the word `scheme' requires is that there should be `some programme, or plan of action' (
Clowes v FC of T (1954) 91 CLR 209 at p 225). The next step is that, in contradistinction to sec 26(a) of the Income Tax Assessment Act 1936, as amended, which, as Clowes shows, is directed to a profit-making undertaking or scheme carried on by the taxpayer, the statutory definition is not concerned with the identity of the person or persons who carry it on. It is not material that the person who offers the `interests' to the public does not himself carry on the undertaking or scheme. Nor does it matter that by subscribing for an interest a member of the public will constitute himself as one who is engaged in carrying on the enterprise.

Nor again does it matter that the subscriber by accepting the offer constitutes himself as one who executes some elements of the scheme and derives from so doing a financial advantage which is not earned by other participants whose activities relate to other elements in the scheme. It is not an objection to an enterprise qualifying as an undertaking or scheme that it consists of a number of parts or elements, the participation of individual parties being limited to one of these parts or elements, their profit or remuneration being derived from the particular activities in which they

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engage. There is nothing in the notion of an undertaking or scheme that requires or implies that there is joint participation in everything comprised in the plan or that there must be a share or pooling of profits or receipts.''

(CLR pages 33,283-33,284; CLR page 129)

56. The word ``scheme'' was considered in the context of the ITAA 1936 in
Peabody v FC of T 93 ATC 4104; (1993) 40 FCR 531 (Ryan, Hill and Cooper JJ) in which the Full Court of the Federal Court considered s. 177D. In general terms, that section provides that the Part applies to any scheme in which a taxpayer has obtained, or would but for s. 177F obtain, a tax benefit in connection with the scheme and it would be concluded that the person who entered or carried out the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. It sets out matters to which regard must be had in assessing whether that conclusion would be reached. Hill J, with whom Ryan and Cooper JJ agreed, said of s. 177D:

``It will be seen that the determination of what schemes fall within s 177D requires an objective conclusion to be drawn, having regard to the matters referred to in para (b) of the section, but no other matters. It is notable that the subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion. In this way, the provisions of Pt IVA stand in contrast to the similar provisions subsequently enacted in other legislation, for example, s 67 of the Fringe Benefits Tax Assessment Act (Cth).''

(ATC page 4113; FCR page 542)

This passage was considered by Sackville J in
C.C. (New South Wales) Pty Limited (In Liq) v FC of T 97 ATC 4123 and again in the context of Part IVA of the ITAA 1936. His Honour said:

``This proposition was not considered by the High Court in Peabody [
FC of T v Peabody 94 ATC 4663]. Nor was it expressly considered by the High Court in Spotless [
FC T v Spotless Services Ltd 96 ATC 5201; (1996) 141 ALR 92]. However, Hill J's observations are consistent with the way the joint judgment in Spotless states the question required by s. 177D(b) to be considered (at ATC 5210; ALR 102):
- `The eight categories set out in par (b) of s 177D as matters to which regard is to be had ``are posited as objective facts''. That construction is supported by the employment in s 177D of the phrase ``it would be concluded that...''. This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.'[Footnotes omitted.]'' (page 4147)

57. Section 177D was again considered in
Eastern Nitrogen Ltd v FC of T 2001 ATC 4164, (2000-2001) 108 FCR 27 (Lee, Carr and Sundberg JJ) in which Carr J, with whom Lee and Sundberg JJ agreed on this point, noted that:

``The whole tenor of the language in which s 177D(b) is expressed is that of ascertaining an objective purpose by having regard to objective facts.''

(at ATC 4177 and FCR 44)

His Honour concluded that the ``... focus should not be on the actual purpose of the taxpayer but on that purpose as objectively assessed...'' (page 4177). This was applied by the Full Court of the Federal Court in
FC of T v Zoffanies Pty Ltd 2003 ATC 4942, [2003] FCAFC 236 (Hill, Hely and Gyles JJ).

58. The cases illustrate a common approach whether the form of words has been to examine events that have occurred in connection with a scheme or carrying on a scheme or simply in relation to a scheme without more. That common approach has been first to adopt the ordinary meaning of the word ``scheme'' as we have set out above. In defining the word ``scheme'' for the purposes of Division 270 of Schedule 2F, Parliament has chosen a range of words denoting among their ordinary meanings not only actions and deeds and plans to undertake them but also the direction that can be gleaned from actions and deeds. Given that there need not be any intention to avoid the

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payment of income tax to come within the terms of Division 270 and given the breadth of the words chosen by Parliament, we consider that it intended that they be given the full extent of their ordinary meanings.

59. The second aspect of the cases is that they have adopted an objective test in determining whether there has been a scheme and, if so, whether events have occurred in connection (or whatever formulation is used in the legislation) with that scheme. This would seem to be an appropriate approach to adopt in s. 270-10(b). While it does not set out the specific matters to which we must have regard in reaching a conclusion as to whether the prescribed events have happened, it is expressed in objective terms. Furthermore, the word ``scheme'' is defined by reference to its definition in s. 177A of the ITAA 1936. Although not the subject of the cases to which we have referred, ss. 177D and 177F have been and all three sections are part of the suite of provisions in Part IVA of the Act. That means that we consider that an objective approach should not only be adopted in ascertaining whether a benefit has been provided as prescribed but also whether it has been provided under a scheme.

What is meant by ``under a scheme''?

60. The word ``under'' as used in the expression ``under a scheme'' means ``... 16a Authorized or attested by. Arch ME. B In accordance with...'' (The New Shorter Oxford English Dictionary, 1993) and ``... 16. in accordance with: under the provisions of the law...'' (Macquarie Dictionary, 3rd edition, 1997). The word has been considered in the context of the expression ``under an enactment'' and in the context of the expression ``under a contract'' in s. 160U of the ITAA 1936.

61. In
Hutchins v DFC of T 96 ATC 4372, (1996) 65 FCR 269 (Black CJ, Lockhart and Spender JJ), the Full Court of the Federal Court considered whether a decision by the Commissioner of Taxation to vote at a creditors' meeting was a decision of an administrative character made ``under an enactment'' within the meaning of s. 3 of the Administrative Decisions (Judicial Review) Act 1977 (``ADJR Act''), and so subject to review under that Act. Black CJ and Spender J considered that whilst certain provisions of the ITAA 1936 authorised the Commissioner to make the decision to vote, they did not make provision for it. Black CJ said:

``If a decision is neither expressly not impliedly required by an enactment and, although authorised, is authorised by an enactment only in a very general way, it is unlikely to have the character of a decision for which provision is made under an enactment. The connection between the text of the enactment and the decision is likely to be too remote for the decision to have the requisite character.''

(at ATC 4375 and FCR 272)

Spender J said that the relationship between the sections in question and the decision said to have been made under them was ``too remote and non-specific'' for it to be said that provision is made for a such a decision by the Income Tax Assessment Act, and there was no ``sufficient connection'' between the two (at ATC 4376, FCR 273). Whilst Lockhart J reached the opposite conclusion on this point, the members of the Full Court all indicated that if the enactment expressly or impliedly provided for or authorised the decision then it could be said to have been made ``under'' the enactment.

62. The ADJR Act had earlier been considered by the Full Court of the Federal Court in
Australian National University v Burns (1982) 43 ALR 25 (Bowen CJ and Lockhart and Sheppard JJ) when Bowen CJ and Lockhart J said:

``The difficulty in the present case does not lie in the definition of the expression `under an enactment'. We agree with Fox J who said in
Evans v Freimann (1981) 35 ALR 428 at 436; 3 ALD 326 at 333, that the word `under', in the context of the Judicial Review Act, connotes `in pursuance of' or `under the authority of': see also
R v Clyne [1941] VLR 200. The difficulty lies in the application of the expression to particular circumstances. The present case poses the problem in an acute form.''

(page 31)

63. In R v Clyne; ex parte Harrap, [1941] VLR 200, O'Bryan J considered whether or not a person convicted of an offence under the Police Offences Act 1928 (Vic) (``POA 1828'') had a right of appeal for convictions under Part VI of that Act. The appellant was convicted of an offence against a specific section in Part II of the POA 1928, where there was no right of appeal, but argued that because the jurisdiction

ATC 2157

of the Court of Petty Sessions to hear and determine information against him was conferred by a section also contained in Part VI of the POA 1928, his conviction was ``under'' that part of the Act within the meaning of that word in the Section conferring the right of Appeal. O'Bryan J said:

``In one sense every act of a body which is the creature of statute may be said to be done `under' or by virtue of the statute creating it. In another sense the acts of such a body may be said to be done `under' or by virtue of some provision granting a general jurisdiction to act in relation to a variety of matters. But the expression is also quite commonly used in relation to a particular act, where the general jurisdiction to act is assumed, to designate the more particular power to do that particular act. It is rash to attempt to substitute a different expression for the more simple and usual one used, but in this connection `under' is perhaps more aptly translated by the expression `pursuant to' than by the phrase `by virtue of'. It is necessary to have regard to the context to determine in which sense the word is used.''

64. We refer finally to
Mercantile Mutual Life Insurance Co Ltd & Anor v Australian Securities Commission & Ors (1993) 11 ACLC 235; (1993) 112 ALR 463 (Black CJ, Lockhart and Gummow JJ) where the Full Court of the Federal Court considered the validity of an instrument of delegation made by the Australian Securities Commission which delegated powers conferred ``by or under'' the Corporations Law. Black CJ considered the meaning of each of the words ``by'' and ``under'', and observed that the use of both words together extended the scope of the delegation, and meant that it should be construed expansively.

65. The expression ``under a contract'' is used in s. 160U of the ITAA 1936 which deals with the time of disposal and acquisition of an asset for Capital Gains Tax purposes. It was considered by Wilcox J in
Elmslie & Ors v FC of T 93 ATC 4964; (1993) 46 FCR 576, in which he decided whether an asset had been disposed of under a contract. His Honour found that there were heads of agreement predating the document which effected the conveyance of the property that was the subject of the acquisition. He had to determine the date of acquisition and concluded that:

``... for the legislation to work satisfactorily, it is necessary for the courts to confine the words `under a contract', in s 160U(3), to the contract that directly effected the acquisition....''

(at ATC 4976; FCR 592).

66. In a later case,
Kiwi Brands Pty Ltd v FC of T 97 ATC 4879; (1997) 148 ALR 605, North J decided that there was a disposal under a contract where the contract concerned related to the sale and purchase of a business, and expressly required deeds of assignment and of assumption to be delivered at the closing meeting. His Honour referred to the ``dependence of the deeds on the purchase and sale agreement and the function of the deeds as part of the implementation of the transaction'' (at ATC page 4887; ALR page 616). His Honour said:

``The concept of the disposal of an asset `under a contract' is a simply expressed concept which is concerned with the proximity of the relationship between the disposal and the contract....''

(at ATC 4887; ALR 615).

After referring to Wilcox J's conclusion in Elmslie that the words ``under a contract'' in s. 160U(3) should be confined to the particular contract that ``directly effected'' the acquisition, North J said:

``To take phraseology such as `the direct effect' of a contract from the context in which it was used in Elmslie to the present case is to run the risk of straying from the words of the statute itself. As the High Court (Brennan CJ, Dawson, Toohey, Gaudron, McHugh and Gummow JJ) said in
Minister for Immigration and Ethnic Affairs v Guo (1997) 144 ALR 567, at 576-577:

`Nevertheless, it is always dangerous to treat a particular word or phrase as synonymous with a statutory term, no matter how helpful the use of that word or phrase may be in understanding the statutory term.'

One difficulty with the reference to `the direct effect' is that it is an expression of variable meaning. With these qualifications, even if the phrase `under a contract' can be better understood by regarding it as requiring that the disposal be directly effected by the contract, in my view, a sufficiently direct effect exists in the present case between the deeds that effected the

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disposal and the purchase and sale agreement as amended under which those deeds were made. It is not part of the approach of Wilcox J in Elmslie that a disposal occurs under a contract only if the contract itself operates as the transfer of the property in question.''

(at ATC 4890; ALR 618-619).

67. The decision in
Chan & Anor v Cresdon Pty Ltd (1991) ANZ ConvR 3; (1989) 168 CLR 242; 89 ALR 522 is, we think, instructive. In that case, the guarantors of a lease guaranteed performance of the lessee's obligations ``to be performed under this lease''. The guarantors disputed their liability to make payments to the lessor pursuant to this clause. The lease was not registered and was therefore ineffectual to pass an estate or interest in the land concerned. The lessee, however, had gone into the possession of the land, and it was liable to pay rent. The High Court decided that this liability was not an obligation ``to be performed under this lease''. Mason CJ, Brennan, Deane and McHugh JJ said (at ANZ 6; CLR 249-50, ALR 526):

``... The word `under', in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description.''

68. When he referred to this decision in Elmslie & Ors v FC of T (Supra) Wilcox J said (93 ATC at 4976; 118 ALR at 373):

``... Chan is particularly telling. In that case, it was not enough that there was a contract (the lease) that envisaged that the lessee would go into possession and, indeed, required it to do so. It was not enough that, absent the lease, the lessee would not have gone into possession and liability for rent not arisen. For the guarantors' liability to arise, the rental liability had to be incurred under the lease; that is, through its operation as an instrument that created a legal interest.''

69. The authorities to which we have referred indicate that, in various contexts, the word ``under'' in the expression ``under a scheme'' in s. 270(10)(1) of the ITAA 1936 may mean ``pursuant to'', ``in accordance with'', ``provided for in'', ``by virtue of'', ``authorised or required by'', ``directly effected by'' or ``through the operation of, as a matter of legal effect''. In saying this though, we are mindful of the High Court's warning in Minister for Immigration and Ethnic Affairs v Guo that it is dangerous to treat a word phrase as synonymous with a statutory term and we do not propose to do so. What is common to all of these authorities is that there must be a sufficient nexus or connection between two matters so that one may be said to be under the other or to have occurred under the other. As was illustrated by the case of Chan v Cresdon Pty Ltd, that requires an identification of these two aspects before there can be an examination of whether there is a sufficient nexus or connection between the two so that one can be said to have been under the other. In that case, there had to be a sufficient nexus between the rental liability and the lease so that the former could be said to have been incurred under the latter. It was not sufficient to find a nexus, however strong, between the lessee's entering possession and the lease or to make a finding that, but for the lease, the lessee would not have gone into possession. They were not the events or matters between which the link needed to be found. In the context of the case that we must consider, the two aspects have been identified. They are the happenings identified in s. 270-10(1)(b)(i), (ii) and (iii) on the one hand and the scheme on the other. However it is described, the connection, nexus or link between each of the happenings and the scheme must be such that the happening can be said to have been under the scheme. That is to say, the happening is not merely, for example, a remote ``spin off'' of a step that has itself been taken under the scheme.

Do the criteria in s. 270-10(1)(b)(iii) have to be satisfied in any particular year of income?

70. There remains only one question and that is whether the criteria in the section must have been satisfied in the year of income in which use is made of the deductions. Unlike provisions such as ss. 270-10(1)(a) and (b)(i), no reference is made in s. 270-10(1)(iii) to any particular year of income. Having regard to the structure of the provisions as a whole, it seems to us that the benefit need not necessarily have been provided in the year of income in which the deduction has been claimed. What must exist in that year of income is that the trust derived an amount of assessable income, a deduction is allowable to the trust for that year of income and there exists a scheme under

ATC 2159

which the trust derived that assessable income and under which the benefits were provided. Whether or not the benefits were provided within the year of income is not relevant provided the scheme existed and the benefits were provided under that scheme.

Did SBS, as trustee of CUT, directly or indirectly provide a benefit to Eldersmede, as trustee of EDT, or to an associate of Eldersmede - s. 270-10(1)(b)(iii)?

71. Mr Pagone submitted that SBS, as trustee of CUT, has given Eldersmede, as trustee of EDT, a benefit and that it had done so in three ways:

(1) that SBS, by not calling for payment, permitted Eldersmede to retain the use of the distributed funds;
(2) that SBS enabled Eldersmede, as trustee of EDT, to extinguish SBS's liability to Eldersmede, as trustee of EUT, in circumstances in which it could not otherwise have done so; and
(3) that, in distributing its net income on 29 June, 1996, SBS provided a benefit to associates of Eldersmede, as trustee of EDT and of EUT.

We will consider each of these in turn.

The Commissioner's first contention - Did SBS, by not calling for payment of the distributed funds, permit Eldersmede, as trustee of EDT, to retain the use of those funds and so, directly or indirectly, provide a benefit to Eldersmede?

72. The first view put forward by Mr Pagone centred on Eldersmede's having been permitted to retain the use of the funds that are the subject of the distribution i.e. $859,806.00. It has been permitted to do so, Mr Pagone submitted, because SBS has not called for the payment of the distribution to which it was entitled pursuant to the resolution of 29 June, 1996 made by Eldersmede, acting as trustee for EDT. The consequence is that Eldersmede has retained the use of the funds as if they were funds loaned to it. Ms MacDonald rejected this view submitting that the unpaid distribution was held on separate trusts and no longer for the benefit of the beneficiaries of EDT. She relied on clause 2.18 of the Deed of Trust establishing EDT. That clause reads in part:

```Distribute' in relation to Corpus or Net Income of the Trust means to pay apply set aside or make over Property comprised in or forming a constituent part of the Corpus or the Net Income (as the case may be) to or for the benefit of the Unit Holders for their own use and enjoyment beneficially and absolutely; and without limiting the generality of the foregoing the expression extends to and includes:

...

2.18.5 a credit of the Net Income or Corpus in the Books to the allocation accounts to the allocation accounts of the Unit Holders;...

AND (unless the physical possession thereof has passed to the Unit Holders) the Property of the Trust so dealt with shall thereafter be held by the Trustee in a separate trust or trusts for the Unit Holders freed from the trusts and powers contained in this Deed; and the expression 'Distribution' has a corresponding meaning;''

(T documents, pages 204-205)

Mr Pagone submitted that the fact that Eldersmede held the funds that were the subject of the distribution on a separate trust is not to the point. The only point is that Eldersmede retained their use.

73. We have already found that Eldersmede, as trustee of EDT, made three resolutions to distribute the same amount, or substantially the same amount, to SBS, as trustee of CUT. What then is the position? It has been agreed between the parties (and the Commissioner has based his decision to accept Eldersmede's objection on this basis) that Eldersmede effectively made a distribution to SBS, as trustee of CUT, in the financial year ending 30 June, 1996. This must mean that it did so either in its first distribution dated 22 May, 1996 or its second dated 29 June, 1996. The amount of its first distribution was described in Eldersmede's resolution as totalling, but not exceeding, the accumulated losses of CUT. It seems to us that, given the terms of the Deed of Trust and that it appears from the accounts that the accumulated losses of CUT amounted to $859,806.00, this was the effective distribution. That means that, although that sum was not credited (in the sense of being transferred to a loan account) or paid to SBS on 22 May, 1996, it was held by Eldersmede on trust for SBS, as trustee for CUT, as from that date. That trust did not arise by virtue of clause 2.18.5 of the Deed of Trust because SBS was

ATC 2160

not a Unit Holder. It did arise by virtue of equitable principles.

74. In our consideration of Mr Pagone's submission, the fact that the distribution was effectively made on 22 May, 1996 does not render Eldersmede's remaining two distributions inconsequential. The subsequent distribution on 29 June, 1996 to SBS, as trustee of CUT, was in respect of the sum of $859,806.00 and was expressed to be for the purpose of assisting SBS to pay its creditors. The third purported distribution occurred on an unknown date after 29 June, 1996 and after 16 April, 1998 and was in respect of ``the amount of $859,886 of the Distributable Income (or the whole amount of the Distributable Income if that amount is less than $859,886 )''. There is a discrepancy of $80 between the figures in the second and third distributions but it is an inconsequential discrepancy.

75. There is a further discrepancy between the first and second distributions on the one hand and the third on the other which is of some consequence. Rather than making an unqualified distribution to SBS as trustee of CUT, the later resolution distributes it to SBS only if the taxation law enables CUT to have the benefit of its carried forward losses. If CUT could not have the benefit of its carried forward losses with the effect that no beneficiary was presently entitled, the sum of $859,886.00 was to be distributed to Dalfine Pty Ltd. This second discrepancy suggests that the later resolution is not simply correcting a figure in the earlier resolution or perhaps formalising what was assumed, incorrectly, not to have been done before. It is a resolution that ignores the earlier resolution or resolutions and is made on a different basis altogether. Whereas the earlier resolution was directed to assisting SBS as trustee of CUT to pay CUT's debts, the later resolution is directed to ensuring that the beneficiaries of CUT are entitled to a share of income under the trust so that the amount of the distribution will not be taxed in the hands of the trustee at the rate applicable to undistributed profits. The later resolution also reinforces our conclusion that a scheme existed with the purpose of directing assessable income to CUT provided that its carried forward losses were available to offset that income, and the distributions were part of that scheme (see paragraph 99 below).

76. As mentioned in paragraph 19(2) above, the parties have agreed that SBS, as trustee of CUT, did not at any time after 22 May, 1996 and prior to 30 June, 1997 call upon Eldersmede, as trustee of EDT, to pay or take any steps to recover the amount of the distribution to SBS, as trustee of CUT, and after that SBS did not, prior to the third resolution call upon EDT to pay, or take any steps to recover, the balance of the 1996 distribution. Further, SBS did not call upon Eldersmede, as trustee of EDT, to enter into an agreement to invest the amount of the distribution, or the balance outstanding, on a commercial basis for the benefit of CUT. We find that this conferred a benefit on Eldersmede, as trustee of EDT, in that it did not have to source the funds necessary to meet the demands of SBS, as trustee of CUT, or pay interest on the amount remaining unpaid. Also as a result of the delay in transferring the amount or balance to CUT, the value of the payment to be made by Eldersmede, as trustee of EDT, will be less in real terms than would have been the case had SBS promptly called for payment. Therefore, we find that SBS, as trustee of CUT, directly or indirectly provided a benefit to Eldersmede, as trustee of EDT.

77. We further find that CUT also benefited EUT by not calling upon EDT either to pay the amount allocated or to invest that amount on its behalf on commercial terms. If those demands had been made, EDT would have been obliged to make a corresponding demand on EUT in order to obtain the funds necessary to meet the demand by CUT. As no such demand was made by EDT, EUT continued to have the use of the funds equivalent to the amount of its 1996 distribution. As a result, by not calling up the distribution, or the balance of the distribution, from EDT, we find that CUT indirectly conferred a benefit on EUT. We have already found that EUT is an associate of EDT (see paragraphs 93 and 94 below). Furthermore, when an amount of the distribution, or the balance of it, is paid to EDT, that amount will be worth less in real terms than it was as at 22 May (or 30 June), 1996.

78. In reaching these conclusions, we have also had regard to the fact that, once it had made its distribution to SBS, as trustee of CUT, and in the absence of any contrary provision in the Deed of Trust, Eldersmede, as trustee of EDT, had an obligation to inform SBS that it

ATC 2161

was entitled to have the amount of that distribution transferred to it (
Whakatane Paper Mills Ltd v Public Trustee (1939) 39 SR (NSW) 426 at 440 per Long Innes J and
Re Marshall [1914] 1 Ch 192 at 199 per Cozens-Hardy MR). It appears that it had that duty whether or not SBS demanded payment (Ford and Lee, Principles of the Law of Trusts, loose leaf edition, paragraph 16260). As Havers J said in
Hawkesley v May [1956] 1 QB 304 in relation to a trust under which, upon their attaining the age of 21 years, Mr Hawkesley and his sister became absolutely entitled as joint tenants:

``... there was a duty upon the... trustees of the Musgrave settlement, to inform the plaintiff on attaining 21 that he had an interest in the capital and income of the trust funds of the Musgrave settlement. A fortiori, if the trustees did not hand over to the plaintiff on attaining 21 income to which he was entitled, it would be their duty to explain to him that he was entitled to call for and have the interest paid to him....''

(at 322, and approved in
Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, Mahoney and Sheller JJA, Kirby P dissenting at 432 per Mahoney JA)

Furthermore, in the absence of any contrary provision in the Deed of Trust (and clause 2.18 did not apply to it for the reasons we give in the following paragraph), it had a duty to invest the amount of the distribution to CUT prudently in accordance with its obligations ``to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide'' (
Re Whiteley (1886) 33 Ch D 347 at 355 per Lindley LJ; see also
Adamson v Reid (1880) 6 VLR 164 at 167, Molesworth J, and Trustee Act 1936 (SA), s. 7). In addition, Eldersmede as trustee of EUT had similar duties and obligations to itself as trustee of EDT.

79. Clause 13.2, as amended by the Trust Deed Variation, authorised Eldersmede, as trustee of EDT, to make interim distributions to Eligible Beneficiaries. Eligible Beneficiaries include Unit Holders and Associates of Unit Holders by virtue of clause 2.18A. Applying the principles that we have outlined in paragraphs 85-92 below, we find that SBS, as trustee of CUT, is an Associate of one or more of the Unit Holders in EDT and so an entity to which an interim distribution could be made. We note, however, that the word ``distribute'' is defined in clause 2.18 in terms of crediting the amount of the distribution to the allocation accounts of the Unit Holders. No reference is made to the Associates of the Unit Holders to whom a distribution has been made. The continued reference to ``Unit Holders'' in clause 2.18 rather than to ``Eligible Beneficiaries'' even after the Trust Deed Variation was executed may be an oversight of the draftsman. In the absence of an express power in the Deed of Trust as varied, however, Eldersmede's obligations in relation to the distribution could not be discharged by crediting the amount of the distribution to CUT in EDT's books. Instead, it remained obligated as a trustee to pay the amount of the distribution to CUT despite its making the relevant book entries. Whilst the making of the book entries might also have made Eldersmede, as trustee of EDT, liable to SBS, as trustee of CUT, as a debtor, it would not have affected Eldersmede's obligations as a trustee (Ford and Lee, supra, paragraph 1440).

80. What, however, might have been the equitable obligations of Eldersmede, as trustee of EDT and EUT, we find below (paragraph 102) that the course of conduct constituting the scheme included the failure by SBS, as trustee of CUT, to demand payment of the relevant amount or to require its investment on commercial terms for the benefit of CUT. Therefore, SBS, as trustee of CUT, has under the scheme provided benefits to Eldersmede, as trustee of EDT and of EUT, being the benefits we have identified in paragraphs 76 and 77 above.

The Commissioner's second contention - Did SBS, by enabling Eldersmede, as trustee of EDT, to extinguish SBS's liability to Eldersmede, as trustee of EUT, directly or indirectly, provide a benefit to an associate of Eldersmede, as trustee of EDT?

81. This issue raises two subsidiary questions: did SBS, as trustee of CUT, directly or indirectly provide a benefit to Eldersmede, as trustee of EUT; and, if so, was Eldersmede, as trustee of EUT, an associate of Eldersmede, as trustee of EDT. The unwritten novation agreement reached between Eldersmede (as trustee of EUT and EDT) and SBS (as trustee of CUT) on 30 June, 1997 is central to our consideration of the first subsidiary question raised by the second view of events put forward by Mr Pagone. At the time it was reached,

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Eldersmede, as trustee of EUT, was owed $487,809.50 by SBS as trustee of CUT. This represented the money injected by Eldersmede into SBS's business conducted as trustee of CUT. Under the DOCA entered on 13 November, 1995, Eldersmede, as trustee of EUT, surrendered its right to participate as a creditor in the payment of any dividend. Having forfeited its rights, it was no longer entitled, during the term of the DOCA, to recover any of the amount of $487,809.50 that it was owed by SBS.

82. From the point of view of Eldersmede as trustee of EDT, its assumption of SBS's liability as trustee of CUT under the novation agreement entered on 30 June, 1997 neither benefited nor disadvantaged it. Its effect was quite neutral for it simply reduced the amount of the distribution that Eldersmede had not paid to SBS, as trustee of CUT, by $487,809.05 and introduced a new liability to Eldersmede, as trustee of EUT, in the same amount. From the point of view of Eldersmede as trustee of EUT, it had received a credit of $487,809.05 against the amount owing to EDT. That was a reduction that it could not have received under the DOCA. It placed Eldersmede, as trustee of EUT, in a more favourable position than it had enjoyed under the DOCA; the debt it had been owed previously by SBS, as trustee of CUT, had been extinguished. We are satisfied that Eldersmede, as trustee of EUT, had received a benefit within the meaning of ss. 272-140 and 270-20.

83. Can it be said that SBS provided that benefit to Eldersmede, as trustee of EUT, ``... directly or indirectly provides a benefit...'' within the meaning of s. 270-10(1)(b)(iii)? It seems to us that it did. The DOCA prevented Eldersmede as trustee of EUT from seeking payment of the amount of $487,809.05 that it was owed by SBS. The liability by SBS to Eldersmede remained but it was not enforceable. Immediately prior to Eldersmede and SBS's entering their first debt novation agreement on 30 June, 1997, Eldersmede, as trustee of EDT, could not have properly paid out of the funds being held on behalf of CUT the sum of $487,809.05 to itself as trustee of EUT. It could not have been properly paid because, in the absence of any agreement by SBS to do so, payment would have constituted a breach of its duty as trustee of the trust that was established by virtue of clause 2.18 to hold the $859,806.00 distributed to SBS for SBS. SBS would have been entitled to require Eldersmede as trustee of EDT to pay it the whole of the distributed amount of $859,806.00 rather than simply the balance of $385,237.84. The trustee's position would be analogous to that of a person who makes a payment to another's creditor but was under no present or imminent liability to make that payment. The person cannot claim contribution or recoupment for the amount paid (
McLean v Discount and Finance Ltd (1939) 64 CLR 312, Starke, Evatt and McTiernan JJ, Latham CJ dissenting and Rich J not deciding on this point). So too, ``... an insurance policy which is unenforceable for breach of a condition cannot give rise to a claim for contribution by the insurer who meets the claim. (
Austin v Zurich General Accident and Liability Insurance Co Ltd [1945] KB 250; [1945] 1 All ER 316...'' (Halsbury's Laws of Australia, paragraph 370-1100).

84. Once SBS had agreed to Eldersmede's, as trustee of EDT, accepting the liability on its behalf, there was no breach of trust. The offset could be properly made even though SBS did not have a legally enforceable liability to Eldersmede as trustee of EUT. It was SBS's agreement that was the key to Eldersmede's being able to legitimately transfer the funds from one account to the other. It was SBS's agreement that placed Eldersmede in a more favourable position both in enabling it to make the transfer as trustee of EDT and as trustee of EUT in receiving settlement for an unenforceable liability it was owed by SBS. SBS's agreement was a proximate cause of placing Eldersmede in that position. Consequently and in view of our previous finding, we are satisfied SBS, as trustee of CUT provided, directly or indirectly, to Eldersmede, as trustee of EUT, a benefit within the meaning of ss. 272-140 and 270-20.

85. That, however, is not enough to satisfy s. 270-10(1)(b)(iii) for the benefit must be provided by the trust deriving the assessable income (i.e. SBS, as trustee of CUT) to an associate or beneficiary of the trust if it has not been provided to the outsider (i.e. Eldersmede, as trustee of EDT). This is the second subsidiary question to which we referred. Mr Pagone submitted that Eldersmede, as trustee of EUT, is an associate of Eldersmede, as trustee of EDT, but he did not elaborate upon his submission at the hearing. His submission

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requires us to have regard to the definition of ``associate'' in s. 318, which we have set out above, and more particularly to s. 318(3). Is Eldersmede, as trustee of EUT, an entity that benefits under EDT within the meaning of s. 318(3)(a)? In view of the provisions of s. 318(6) there need be no evidence that it has ever benefited but only that it is capable of benefiting. In the case of EUT, that would mean that it would have to be an Eligible Beneficiary as that expression is defined in the Deed of Trust and so an entity in relation to which Eldersmede, as trustee of EDT, could make a distribution (see paragraph 13(5) above).

86. We have already made findings of fact that are relevant to our resolution of this issue. These are summarised in paragraph 18(3) above together with reasoning that is relevant in this context but we will set it out more fully in this section. An Eligible Beneficiary under the Deed of Trust for EDT may be either a Unit Holder or an Associate of a Unit Holder. Eldersmede as trustee of EUT is not a Unit Holder. Is it an Associate of a Unit Holder within the meaning of clause 2.6A inserted by the Trust Deed Variation? In view of the provisions of sub- clauses 2.6A.3 and 2.6A.8.2, the question then becomes whether Eldersmede, as trustee of EUT, is the trustee of any Sub-Trust for a Unit Holder or of a Sub-Trust of a Sub-Trust for a Unit Holder? We will explore that question by reference to one of the Unit Holders in EDT and have chosen C and S Altman, as trustees for the Altman Family Trust. In their capacity as trustees, C and S Altman are regarded as a ``Person'' by virtue of clause 2.26 of EDT's Deed of Trust.

87. In their capacity as trustees for the Altman Family Trust, C and S Altman are beneficiaries contingently entitled to property held by Eldersmede, as trustee of EUT. It follows that the requirements of clause 2.37.1 are met. There then arises a question whether the provisions set out in clause 2.37 are cumulative or are intended to be expressed in the alternative. If the former, it is clear that C and S Altman in their capacity as trustees cannot meet them. Taking, for example, the provision in sub-clause 2.37.2, there is no evidence that C and S Altman, as trustees for the Altman Family Trust, are vested in possession of any property whether indefeasibly or subject to a power of defeasance or divestiture.

88. On their face, the provisions of clause 2.37 could appear to be cumulative for the word ``and'' appears between sub-clauses 2.37.4 and 2.37.5. The use of the word ``and'' as a conjunction in a list does not, however, necessarily lead to the conclusion that every matter on that list must be met. It may be, that taken in its context, the list is indeed cumulative but in a sense that everything on that list is a circumstance of what has gone before. An example of this use of the word ``and'' is set out in Statutory Interpretation in Australia by DC Pearce and RS Geddes (Butterworths, 2001):

``An example of this effect of the word `and' is provided by
Associated Newspaper Ltd v Wavish (1956) 96 CLR 526. Section 169 of the Police Offences Act 1928 (Vic) provided that ```obscene''... includes - (a) tending to deprave and corrupt persons whose minds are open to immoral influences; and (b) unduly emphasizing matters of sex, crimes of violence, gross cruelty or horror'. The High Court held that an article could be obscene if the conditions of either paragraph (a) or (b) were fulfilled. But this did not have the effect of reading the word `and' as `or'. The `and' gave a cumulative effect to the definition - all the matters mentioned in the paragraphs indicated what was obscene - but a dispersive effect was given to the paragraphs as such by the word `includes'. A similar conclusion was reached by Forster CJ in
Gillespie v Ford (1978) 19 ALR 102 where the dispersive effect was said to arise from the general context of the section. Also see
Re Kotses (1995) 132 ALR 409;
Secretary, Department of Employment, Education, Training and Youth Affairs v Gray (1999) 57 ALD 67 at 73-75.''

(paragraph 2.26)

89. There are also cases in which the word ``and'' in a statutory provision has been read as ``or''. That has come about either because the court has considered that the legislature has made an error or, given the purposive approach to construction set out in s. 15AA of the Acts Interpretation Act 1901, it has been thought that the word ``and'' should be read as ``or'' (see Pearce and Geddes at paragraph 2.25 and also
Hepworth v Director of Public Prosecutions (2001) 79 SASR 480 at 485-487, (2001) 120 A Crim R 425 at 430-431 referring to
Re

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Licensing Ordinance (1968) 13 FLR 143 at 146-147).

90. A similar approach has been adopted in relation to the construction of instruments. Citing Lord Chelmsford in Abbott v Middleton (1858) 7HL Cas 68 at 89, it has been said that:

``... if the terms of an instrument, when read in their ordinary sense, are contradictory or would lead to an absurdity, then if the language admits one of two constructions, the Court may adopt a construction which avoids the anomalies, even though the construction adopted is not the most obvious or the most grammatically accurate.'' Halsbury's Laws of Australia, paragraph 140-500.

91. Recently, in Boy Scouts of Canada v Doyle (1997) 149 DLR (4th) 22 at 58, Marshall JA held that:

``No exception can be taken with the premise that the word `and' logically will generally import a conjunctive sense in giving legal effect to written instruments. Moreover, there is no doubt that the judges' rationale for holding the reversion operative, other things being equal, would be compelling if the word `and' bore its normal conjunctive sense.

However, that general premise is not an inexorable canon of construction to which there can be no exception. Sometimes the word `and' is read as `or', and vice-versa, by force of the context in which they appear. The governing rule must be that both words should be interpreted so as to make sense and give effect to the document being construed. This will at times lead to `and' being constructed disjunctively and, conversely, the normal alternative sense `or' ceding to a conjunctive meaning. (See, for example, Doe d. Bedford v White (1827) 4 BING 276, 130 ER 773, where `and' was construed as `or' and, conversely,
Clergue v H H Vivian & Co (1909) 41 SCR 607, per Anglin J at p 617, where `or' was interpreted as `and'). In holding use of the word `and' in the reversion proviso left him no alternative but to rule the land reverted to the Crown, the judge must be regarded as falling into the error of not exploring whether the context of its use might import a disjunctive sense to the word.''

92. The Tribunal is also mindful of the judgment of Lord Reid in
R v Federal Steam Navigation Co Ltd (1974) 1 WLR 505 at 508 to 509 where His Lordship drew a distinction between commercial or informal writings on the one hand, and deeds and statutes on the other. In that case Lord Reid said:

``There is a multitude of cases where courts have considered whether it is proper to substitute one word for another and in particular whether it is proper to substitute `and' for `or' or vice versa. There may be some difference between commercial or informal writings on the one hand and deeds and statutes on the other. One is entitled to expect greater skill in drafting deeds and statutes. A great number of different words have been used in stating the criteria, and I do not think it would be useful or indeed possible to examine them all. Cases where it has been properly held that a word can be struck out of a deed or statute and another substituted can as far as I am aware be grouped under three heads: where without such substitution the provision is unintelligible or absurd or totally unreasonably; where it is unworkable; and where it is totally irreconcilable with the plain intention shown by the rest of the deed or statute. I do not say that in all such cases it is proper to strike out a word and substitute another. What I do say is that I cannot discover or recall any case outside of these three classes where such substitution would be permissible.''

93. Bearing these principles of construction in mind, we return to the Deed of Trust. It is apparent from the terms of the Trust Deed Variation dated 20 June 1995, which amended the Trust Deed constituting EDT, that its central purpose was twofold. Its first was to permit discretionary distributions of the net income of the Trust. Its second was to enlarge the scope of beneficiaries to whom distributions could be made in the discretion of the trustee. We refer in this regard to paragraph 13(5)(d) above. The Trust Deed Variation incorporated into the Deed of Trust a provision for ``Eligible Beneficiaries''. That expression was defined in terms which expressly included ``Associates of the Unit Holders'', which, in turn, was defined to include a wide range of persons, including ``the trustee (in its capacity as trustee) of any Sub-Trust for the Unit Holder'' (see clauses 3.1

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and 3.2 of the Trust Deed Variation), and new sub-clause 2.6A.3 of the new definition of ``Associate'' in relation to a Unit Holder). The expression ``Sub-Trust'' in the newly inserted sub-clause 2.6A3 is defined in clause 2.37 of the Deed of Trust. The opening words of clause 2.37 make it clear that the clause is directed to identifying those who may be regarded as a Sub-Trust of a Person. It would be completely inconsistent with the clear intention of the Trust Deed Variation to expand the category of Eligible Beneficiaries if the definition of ``Sub- Trust'' were in interpreted in such a way that, in order to be regarded as a Sub-Trust, a trustee of a trust or settlement would have to satisfy the criteria in each of the sub-clauses of clause 2.37. The five sub-clauses are directed to five disparate criteria and situations in which a person does not meet all five criteria spring readily to mind. Indeed, we have been unable to conceive of any situation in which a person would meet all five. One example will suffice. Sub-clause 2.37.3 provides that the Person be the object of any special or hybrid power or other power of appointment (but not including any general power of appointment) whereas clause 2.37.1 provides that the person be a beneficiary contingently entitled to the Property. The person's contingent entitlement could arise from his or her being the object of a general power of appointment and yet clause 2.37.1 is not limited in any way. Sense can only be made of the two clauses and of the remaining three criteria in clause 2.37 if each of the five sub-clauses is to be treated as a situation in which there is regarded to be a Sub- Trust in relation to a Person described in each of them. Hence the word ``and'' denotes the five situations in which there is a Sub-Trust rather than denoting five criteria that must be met by each Person before there is a Sub-Trust. We note in passing and for the sake of consistency that, in drafting new clause 2.6A, defining the word ``Associate'', the draftsman of the Trust Deed Variation adopted an approach consistent with that adopted in clause 2.37. That is to say, he provided that a Unit Holder was any one or more of those who met the criteria set out in a list of five and separated the penultimate and ultimate criteria with ``and'' rather than ``or'' as might be expected.

94. Taking our example of C and S Altman as trustee for the Altman Family Trust, we are satisfied that Eldersmede, as trustee of EUT, is to be regarded as their Sub-Trust. That follows from their being a beneficiary contingently entitled to property held or possessed by Eldersmede, as trustee of EUT. As it is a Sub- Trust, it is an Associate within the meaning of sub-clause 2.6A.3 of C and S Altman as trustee for the Altman Family Trust. As an Associate, Eldersmede, as trustee of EUT, is an Eligible Beneficiary within the meaning of clause 2.18A of the Deed of Trust and so a person to whom Eldersmede, as trustee of EDT, could make a distribution. That means that they were capable of benefiting under EDT as provided in s. 318(6) and so an entity that is regarded as benefiting under EDT within the meaning of s. 318(3)(a). Therefore, Eldersmede, as trustee of EUT, was an associate within the meaning of s. 318(3). It follows in our view that, when it entered the novation agreement, SBS, as trustee of CUT, provided a benefit to an associate of Eldersmede, as trustee of EDT, within the meaning of s. 270-10(1).

The Commissioner's third contention - Did SBS, in distributing its net income on 29 June, 1996, provide a benefit to Eldersmede, as trustee of EDT, or to one or more of its associates?

95. The third view of events taken by Mr Pagone centred upon the resolution made by the directors of SBS, as trustee of CUT, which resolved that the net income of CUT for the year ending 30 June, 1996 be distributed in proportion to the units held in the trust. Having regard to the unit holders of CUT, we find that, among the beneficiaries to whom net income could be distributed, were Jantzen Investments as trustee for the Jantzen Family Trust, Mr Christopher Altman and Mrs Susan Altman as trustees of the Altman Family Trust, Mr John Easling and Mrs Kaye Easling as trustees of the Easling Family Trust and Fadu Pty Ltd as trustee for the George Nemer Family Settlement. These entities are also beneficiaries of EDT. As such, they are, within the meaning of ss. 272-140 and 318(3), associates of Eldersmede, as trustee of EDT. Eldersmede, as trustee of EDT, is an outsider to SBS, as trustee of CUT.

96. Ms MacDonald submitted that no benefit was obtained as none of the unit holders in CUT had actually received any payment or other benefit from the increase in the value of the units in CUT from nil to $47.29 resulting from the distribution made in its favour. Entries

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in a balance sheet, she continued, do not of themselves provide a benefit and nor does a figure in those balance sheets necessarily give the market value of an asset.

97. Before we ask ourselves any question regarding the capacity in which any benefit was received, we must first ask whether a benefit was provided, either directly or indirectly, at all to any entity as a result of SBS's resolving on 29 June, 1996 to distribute its income. Certainly, at first blush, it appears that a benefit in the form of the distribution has initially been provided by SBS, as trustee of CUT, to its Unit Holders. Whether that was so depends upon whether it had any income to distribute. The terms in which the resolution was couched was that the net income of CUT for the year ending 30 June, 1996 be distributed in proportion to the units held in the trust. The term ``net income'' is defined in the Deed of Trust as meaning:

``2.22 `Net Income' in relation to an Accounting Period or part thereof means the total of net profit together with the gross income (less all losses and outgoings and other charges in relation thereto) derived by the Trustee in the Accounting Period or part thereof (as the case may be) calculated in accordance with:

2.22.1 (except where Sub-clause 2.22.2 applies) generally accepted accounting methods and standards;

2.22.2 the Assessment Act AND for the purposes of this Sub-clause all Corpus and accretions thereto that are required to be included in the assessable income of the Trust pursuant to the provisions of Section 160ZO of the Assessment Act shall be deemed to be Net Income of the Trust and shall be dealt with accordingly by the Trustee EXCEPT where the Trustee otherwise determines; or

2.22.3 the other accounting method or procedure (if any) from time to time declared by the Trustee to be the method or procedure by which the Net Income of the Trust is to be calculated;

BUT unless otherwise determined the Net Income shall be fixed and calculated in accordance with and pursuant to Section 95 of the Assessment Act; AND (in relation to a Distribution of Net Income) the expression has the additional meaning it would have as if a reference to a Distribution of Net Income were a reference to a Distribution of Property constituting or representing Net Income;''

(Exhibit 5, page 34)

98. In so far as it is relevant in this case, s. 95(1) of the ITAA 1936 defines ``net income'' in relation to a trust estate as ``... the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions except...'' those the provision goes on to specify. In the taxation return lodged in respect of the year ended 30 June, 1996, the net taxable income after allowing for all past and current trading losses was a zero figure. If that were correct, it would follow that there was no distribution to the Eligible Beneficiaries of CUT or to any other entity. There would, therefore, be no benefit if its net taxable income were indeed zero. That, however, is not the position as we have found it to be. In view of the conclusion that we have reached on the first view put forward by Mr Pagone and on whether or not the relevant benefits have been provided under a scheme, it follows that SBS would be denied the benefit of its carried forward revenue losses. The net taxable income would be far from zero and the Unit Holders to whom the distribution was made would receive a distribution and so a benefit. If we are incorrect in our conclusion that the relevant benefits have been provided under a scheme, then it would follow that SBS, as trustee of CUT, would be entitled to claim the losses and thus no benefit would flow to Eldersmede, as trustee of EDT, or to any of its associates. That would mean that SBS, as trustee of CUT, did not provide a benefit to Eldersmede, as trustee of EDT, or to any of its associates.

Conclusion regarding the application of s. 270-10(1)(b)(iii)

99. Putting to one side the question of whether the benefits were derived under a scheme, it follows that, in our view, s. 270-10(1)(iii) has been satisfied on all three contentions advanced on behalf of the Commissioner.

Did SBS, as trustee of CUT, provide the benefit under a scheme?

100. Turning to s. 270-10(1)(b), each of its subparagraphs must be satisfied before the section itself can be said to have been satisfied. In order for each to be satisfied, the event

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specified in each must have occurred ``under a scheme'' and we have set our understanding of that expression above. That is to say and based on our findings, the following must have occurred under a scheme: SBS, as trustee of CUT, must have derived an amount of scheme assessable income in the income year; Eldersmede, as trustee of EDT, directly or indirectly provided a benefit to SBS, as trustee of CUT; and SBS, as trustee of CUT, directly or indirectly provided a benefit to Eldersmede, as trustee of EDT.

101. On the basis of their evidence, we find that from a date on or about 13 November, 1995 when SBS entered the DOCA, Mr Altman had effective control of all matters relating to SBS. Prior to that date he had similar control of all matters relating to Fielders, and so to the business operated by CUT. Mr Hugo had responsibility for all accounting matters in relation to Eldersmede and SBS. The other directors effectively delegated their responsibilities to Mr Altman and so we are satisfied that, between them, Mr Altman and Mr Hugo were the ``driving forces'' behind the decisions that were taken or conduct, such as ``tidying up'' the accounts that occurred. We are also mindful, though, that we must consider whether, objectively, the events occurred or results were effected under a scheme. It is not an assessment of what was in the minds of the controlling interests in the companies or of anybody else.

102. In considering whether the events did happen under a scheme, we have had regard to the actions and conduct of both Eldersmede and SBS against the backdrop of their financial affairs. Viewed objectively, we are satisfied that there was a scheme to direct assessable income to the loss trust (CUT). In this regard, we are satisfied that the following course of action or conduct happened over a period commencing in or about June, 1995 and concluding on the date of the third distribution and was part of a scheme within the meaning of s. 272-140 of the ITAA 1936:

(1) on 20 June, 1995, there was a variation of the Deed of Trust in relation to EDT to facilitate the redirection of assessable income;
(2) the directors of Eldersmede and of SBS were standardised as from 27 June, 1996;
(3) there was a re-arrangement of Unit Holders in EUT, EDT and CUT so that all units were held by the same parties;
(4) a resolution was passed by Eldersmede, as trustee of EUT, to pay income to itself, as trustee of EDT, with the amounts allocated remaining unpaid;
(5) a resolution was passed by Eldersmede, as trustee of EDT, to pay income to SBS, as trustee of CUT, with the amounts allocated remaining unpaid;
(6) the above income allocations remained unpaid but were recorded by journal entry in the books of account of EUT, EDT and CUT;
(7) subject to the qualifications referred to in paragraph 19(2)(c) above, SBS, as trustee of CUT, took no steps to recover the above allocations to it (or the balance of that allocation after allowing for the amount of the set off) from Eldersmede, as trustee of EDT, or to require Eldersmede in that capacity to invest on commercial terms, for the benefit of CUT, the amount of the allocation (or the balance of it);
(8) subject to the qualifications referred to in paragraphs 19(2)(a) and 19(2)(b) above, Eldersmede, as trustee of EDT, took no steps to recover the above allocation to it (or the balance of that allocation after allowing for the amount of the set off) from itself as trustee of EUT, or to require the investment of the amount of the allocation (or the balance of it) on commercial terms, for the benefit of EDT; and
(9) the passing of a ``fail safe'' resolution by SBS, as trustee of CUT in favour of its Unit Holders to ensure that if it had net income in the relevant year, it would be distributed to beneficiaries of that trust and would not be taxed in the hands of SBS as trustee.

103. On the evidence of Mr Altman, we are satisfied that the scheme had its origin in a discussion that took place between him and Mr Hugo in or about April, 1996. By that time, Eldersmede, as trustee of EUT, and others had injected significant capital into SBS, as trustee of CUT, for the operation of Southern Building Supplies. During that discussion, the possibility of channelling profits from EUT to CUT was first raised by Mr Altman. The means of enabling that to happen were left to Mr Hugo and the solicitor, Mr Rankine.

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104. We note that the Trust Deed Variation prepared by Mr Rankine purports to be dated 20 June, 1995. There are two matters that give lie to the date it bears. One is that it was stamped by the Commissioner of Stamps on 25 June, 1997. The other relates to the purposes for which it was made. We have already identified those as being to permit discretionary distributions of the net income of the Trust and to enlarge the scope of beneficiaries to whom distributions could be made in the discretion of the trustee (see paragraph 91 above). In light of these two matters, we are satisfied that the Trust Deed Variation was signed some time after April, 1996 and not on 20 June, 1995.

105. Having identified the scheme, we find that under the scheme:

• SBS, as trustee of CUT, derived the scheme assessable income of $859,806.00; and
• in allocating its net income for the 1996 year, Eldersmede, as trustee of EDT, directly provided a benefit to SBS, as trustee of CUT.

We also find that, in allowing Eldersmede, as trustee of EDT, to retain the use of $859,806.00 (and later, the balance of that amount after deducting the set off) free of any encumbrance or charge, SBS, as trustee of CUT, provided a benefit to Eldersmede, as trustee of EDT, and provided that benefit under the scheme we have identified.

106. Returning to our earlier finding that the distribution made by SBS, as trustee of CUT to its Unit Holders represented a benefit to associates of EDT, we have considered whether that benefit was derived under the scheme. Having regard to the terms of that distribution, we find that it allocated CUT's net income as a safeguard against the possible failure of the scheme. That is to say, should it be the case that SBS, as trustee of CUT, were left with net income in the relevant year, it would be distributed to beneficiaries of that trust and not be taxed in the hands of SBS, as trustee. We are satisfied that the resolution making that distribution formed part of the scheme. Consequently, we conclude that the benefit provided to associates of Eldersmede, as trustee of EDT, was provided under the scheme.

107. We take a different view on the benefit arising under the novation agreements. The purpose of the scheme to direct assessable income from EUT to CUT to the extent that the income matched CUT's accumulated losses had been achieved prior to the novation agreements' being entered. We are not satisfied that they were either in accordance with the scheme or sufficiently connected to it so that they could be said to have happened under the scheme. It follows that we have concluded that the benefit that we found to have resulted from those novation agreements did not happen under the scheme.

108. In conclusion, we are satisfied that there has been a course of conduct, and so a scheme, under which the events specified in s. 270-10(1)(b) have happened. It follows that we are also satisfied that the requirements of s. 270-10(1) have been satisfied and so the consequences set out in s. 270-15 must follow. 109. For the reasons we have given, we:

1. in relation to the application by Eldersmede Pty Ltd for review of the respondent's objection decision dated 25 July, 2000, decide that:
- (1) the objection decision is set aside;
- (2) there is substituted for that decision a decision that the objection by Eldersmede Pty Ltd is allowed in full; and
- (3) the matter is remitted to the respondent for recalculation of the assessment in accordance with this decision; and
2. in relation to the applications by Corporate Initiatives Pty Ltd, Lucy Catherine Altman and Susan Helen Altman, affirm the objection decisions under review.

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