The impact of this case on ATO policy is discussed in Decision Impact Statement: Forrest v Commissioner of Taxation (WAD 101 of 2008 ).
FORREST v FC of TJudges:
Full Federal Court, Perth
MEDIA NEUTRAL CITATION:
 FCAFC 6
Spender, Sundberg and McKerracher JJ
1. This is an appeal pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) from a decision of the Administrative Appeals Tribunal (the Tribunal) Taxation Appeals Division, constituted by a Deputy President, given on 18 April 2008.
2. Section 44 of the AAT Act relevantly provides:
- "(1) A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.
- (3) The Federal Court of Australia has jurisdiction to hear and determine appeals instituted in that Court in accordance with subsections (1) and (2) and that jurisdiction:
- (a) may be exercised by that Court constituted as a Full Court;
- (4) The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision.
- (5) Without limiting by implication the generality of subsection (4), the orders that may be made by the Federal Court of Australia on an appeal include an order affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again, either with or without the hearing of further evidence, by the Tribunal in accordance with the directions of the Court."
3. Branson and Stone JJ in
Colby Corporation Pty Ltd v FCT (2008) 165 FCR 133 said, at 137:
- "13 An applicant's right to invoke the Court's jurisdiction to review the decision of the Tribunal arises under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) and is a right to appeal 'on a question of law':
Birdseye v Australian Securities and Investments Commission (2003) 38 AAR 55 at - per Branson and Stone JJ;
Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 67 ATR 544 at  per Edmonds J. The right to appeal from a decision of the Tribunal is to be distinguished from a right to appeal 'in relation to' a question of law or where the appeal 'involves' a question of law. As Gummow J remarked in
TNT Skypak International (Australia) Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1067 at 1070; 82 ALR 175 at 178, 'The existence of a question of law is ... not merely a qualifying condition to ground the appeal, but also the subject matter of the appeal itself'.
- 14 In Birdseye
38 AAR 55 at  Branson and Stone JJ drew attention to the fact that O 52, r 3(2) of the Federal Court Rules 1979 (Cth) requires a notice of appeal from a decision of the Tribunal to state the questions of law raised by the appeal separately from the grounds relied upon in support of the order sought by the appeal. Their Honours went on at  to observe:
In our view, O 53 r 3(2) discloses an intention that a question of law to be raised on an appeal from the Tribunal should be stated with precision as a pure question of law. It is in the specification of the grounds relied upon in support of the orders sought that, in our view, one should expect to find the links between the question of law, the circumstances of the particular case and the orders sought on the appeal."
4. The background to this appeal is that Mr Forrest (the appellant) was Chief Executive Officer (CEO) and director of Anaconda Nickel Limited (Anaconda). In June 1999, he borrowed $4.5 million for the purpose of purchasing a number of units in the Minderoo Trust. On 16 November 2001, the appellant resigned as CEO of Anaconda, and Anaconda paid $3.5 million to Andersen Legal to be held on trust for the Australian Children's Trust (ACT).
ATC 10653The appeal involves two discrete issues, each of which raises several subsidiary questions.
6. The first is whether the appellant, pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) was entitled to deduct from his taxable income interest costs totalling $858,061.00 incurred in years to 30 June 2000, 30 June 2001, and 30 June 2002, being the costs of borrowing, in June 1999, $4.5 million for the purpose of purchasing a number of units in the Minderoo Trust.
7. That issue depends upon the proper construction of the Minderoo Trust Deed. It is acknowledged, on behalf of the Commissioner of Taxation, that the proper construction of the Deed is a question of law.
8. There is a subsidiary question concerning the question of the deductibility of the interest costs, which is whether the matter, in the event the appellant is successful on the deductibility of interest issue, should be remitted to the Tribunal "to further consider and make findings on the question of apportionment".
9. The second and separate series of questions concern the taxation effects of payment of $3.5 million by Anaconda to the ACT. The Commissioner successfully contended in the Tribunal that the payment was an Eligible Termination Payment (ETP) to the appellant and thus part of his taxable income.
10. The Commissioner further concluded that the omission of this payment from his taxable income in his return constituted recklessness on the part of the taxpayer, and a penalty of 50% of the additional tax was payable. The Tribunal agreed that the appellant was reckless in not including the payment by Anaconda to the ACT in his income. That penalty was not disturbed.
11. The appellant challenges the correctness of the characterisation of the payment as an ETP, and on the question of penalty submitted that gross carelessness had not been established in respect of the omission of that payment from his income in the taxation return and the 50% penalty ought to be remitted.
12. The appellant also unsuccessfully contended before the Tribunal, in the alternative, that if the $3.5 million payment by Anaconda did constitute an ETP, he had made a gift of the payment to the ACT, by directing that the payment be made to an eligible charity for which he was entitled to a deduction under Div 30 of the ITAA 1997, and for which none of s 78A(2)(a), (c), or (d) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applied to disallow the objection.
13. The Tribunal held that each of s 78A(2)(a), (c) and (d) applied to disallow the objection.
14. For the reasons which follow, the Court holds that the appellant was entitled to deduct the interest costs incurred in the tax years ending 30 June 2000, 30 June 2001, and 30 June 2002 from his taxable income, and that given the history of the matter, the question of apportionment is not a matter that can properly be raised in this appeal. On the first issue, the objection decisions in respect of the income tax years ending 30 June 2000, 2001 and 2002, as varied by the decision of the Administrative Appeals Tribunal of 18 December 2008, should be further varied by treating the interest costs totalling $858,061.00 incurred in those years as an allowable deduction pursuant to s 8-1 of the ITAA 1997.
15. For the reasons which follow, in the judgment of the Court the Tribunal was correct to conclude that the payment of $3.5 million by Anaconda to the ACT was an ETP and thus part of his taxable income. However, the finding that the omission was as a result of gross carelessness by the taxpayer is not justified: the penalty in respect of the omission of the ETP from his taxable income should be set aside.
16. Further, the Tribunal was right to disallow the claim for deductibility of $3.5 million as a directed payment to an eligible charity, having regard to s 78A(2) of the ITAA 1936.
Deduction of interest expenses
17. The appellant's written outline accurately summarises the findings of fact made by the Tribunal concerning this question:
- "2. ... During the relevant period to 16 November 2001, the appellant was the Chief Executive Officer and Deputy Chairman of Anaconda, an ASX listed mining company. On 30 April 1999, the Minderoo Trust was settled, and Mr Forrest was issued with 10 units in the Minderoo Trust. On 30 June 1999, Mr Forrest borrowed $4.5 million and used that money to subscribe for 4,293,000 $1 units in the Minderoo Trust. It was on that loan, and subsequent loans to re-finance that loan, that Mr Forrest incurred the relevant interest expenses. Mr Forrest subscribed for the units in the Minderoo Trust in the expectation that the trust would acquire shares in Anaconda with the money he paid to the trust and that, at some future time, Anaconda would pay dividends on those shares. No reason was advanced why Mr Forrest incurred the interest costs other than to earn income from his investment. Mr Cooper, Mr Forrest's accountant, was informed by Mr Forrest and the initial trustee of the Minderoo Trust, Mr James, that the interest payments were incurred for the purpose of the earning income."
18. Whether the expenses for interest are deductible depends on a proper construction of the Minderoo Trust.
19. It is necessary to set out the definition of the terms "Unit Component", "Fixed Income" and "Discretionary Component" and related definitions in cl 1.1 of the Trust Deed, and cll 3.1, 3.2, 4.2, 11 and 12 of the Trust Deed.
- "2.1 Definitions
- Beneficiaries means the Unit Holders and the Discretionary Beneficiaries from time to time;
- Discretionary Beneficiaries means each of the beneficiaries named or referred to in Schedule 6 and each Relative, Eligible Trust and Eligible Company nominated by the Trustee (with the consent of a majority resolution of Unit Holders) to be discretionary beneficiaries in each case as shall not be an Ineligible Person and as shall not have ceased to be a Discretionary Beneficiary by virtue of a declaration made pursuant to clause 11.4;
- Discretionary Component means all Income which represents realised and unrealised capital gains derived from the holding or realisation of any Investment;
- Fixed Income means such of all Income other than income comprising the Discretionary Component;
- (a) the Initial Sum plus all other money paid to and accepted by the Trustee upon an application for Units;
- (b) all other money, property and investments acquired or accepted by the Trustee which becomes subject to the rights and obligations of this deed;
- (c) the Investments and property from time to time representing the Fund together with all additions or accretions to the Fund; and
- (d) all Income.
- Income means income produced from the investment, management or realisation of the Fund (or any part of the Fund) and includes any accretion, gain (whether or not realised), payment or receipt determined by the Trustee to be Income;
- (a) that amount of the capital of the Fund which from time to time represents the aggregate Issue Price of all Units then on issue; and
- (b) any and all Fixed Income so long as the Trust is not treated as a company for tax purposes; and
- (c) if the Trust is treated as a company for tax purposes then the Trust shall have the right to accumulate income. Such accumulation is to be distributed to the Unit Holders.
- 3.1 Declaration of Trust
- The Trustee declares that it holds the Fund for the Beneficiaries upon the trusts and subject to the terms and conditions of this deed.
- 3.2 Trust Divided into Unit Component and Discretionary Income
- The beneficial interest from time to time in the Fund is divided into the Unit Component, held on trust for the Unit Holders from time to time, and the Discretionary Component held on trust for such one or more or all of the Discretionary Beneficiaries from time to time to the exclusion of the other or others of them as the Trustee may from time to time revocably or irrevocably determine in the manner and as referred to in clause 11 and in such amounts, shares, proportions or extents of either or both the Discretionary Component (and if both in the same or different amounts, shares, proportions or extents) in each case as the Trustee in its absolutely and uncontrolled discretion may determine in the manner and as referred to in clause 11.
- 4.2 Interest in Unit Component
- Each Ordinary Unit shall be held by a Unit Holder in accordance with this deed (subject to the rights attached to such Unit) and confers an equal interest in the Unit Component. No Unit confers any interest in any particular part of the Unit Component.
11. DISCRETIONARY INCOME AND APPOINTMENT AND REMOVAL OF DISCRETIONARY BENEFICIARIES
- 11.1 This clause to be amended so that 11.1 stands where Trust is not taxed as a company for tax purposes. If however the Trust is treated as a company for tax purposes then the trust will have the right to accumulate income. Such accumulation to be distributed to the Unit Holders. The Trustee holds the Discretionary Component of a Financial Year on trust for such of the Discretionary Beneficiaries who are, on the last day of that Financial Year, Participating Beneficiaries (as determined in accordance with clause 11.2 and 11.3).
- 11.2 The Trustee may at any time up to and including the last day of a Financial Year revocably or irrevocably determine that one or more Discretionary Beneficiaries are Participating Beneficiaries in relation to that Financial Year provided that no determination made under this clause 11.2 shall be revocable after the end of that Financial Year.
- In making a determination under this clause, the Trustee must also determine the amount, share, proportion or extent of Discretionary Component which each Participating Beneficiary is to be entitled. A determination under this clause may provide that one or more or all Participating Beneficiaries are only entitled to the whole or a part of the Discretionary Component.
12 DETERMINATION OF INCOME
- 12.1 The Trustee without the consent of any person (including but not limited to a Beneficiary) may at any time and from time to time determine whether:
- (i) any amounts received or disbursed, or any amounts of income, profit or gain or loss;
- (ii) any amounts derived accrued or incurred or deemed to have been derived accrued or incurred under the Income Tax Assessment Act 1936 as amended of the Commonwealth of Australia (1936 Act) or the Income Tax Assessment Act 1997 as amended of the Commonwealth of Australia (1997 Act) for or in respect of any Financial Year;
- (iii) any amounts that under the 1936 Act or the 1997 Act are capital gains or capital losses and any amounts that are assessable income or allowable deductions with respect to the net income (as that term is understood for the purposes of section 95 of the 1936 Act or the correspondence provision of the 1997 Act) of this Trust for any Financial Year,
are on capital or income account or partly on capital and partly on income account and in what proportions and the decision of the Trustee whether made in writing or implied from the acts of the Trustee shall be conclusive and binding on all persons; and
ATC 10656(b) any taxes expenses outgoings losses debts or obligations due or accruing shall or ought to be paid or borne out of the capital or income of the Fund and the determination of the Trustee in this respect shall be conclusive and binding on all persons.
- (a) in addition to the powers granted under clause 3.2 and clause 11, may determine that any part of the assessable income (as that term is understood for the purposes of the Income Tax Assessment Act 1936 (as amended) of the Commonwealth of Australia, or the Income Tax Assessment Act 1997 (as amended) of the Commonwealth of Australia) of the Fund of a certain type, source, class or character shall be applied, appointed or paid to or for the benefit of any one or more of the Beneficiaries as assessable income of that or a different type, source, class or character and every such determination shall be recorded by the Trustees in the books of the Trust;
- (b) in addition to the powers granted pursuant to this deed may determine that the whole or any part or parts of the positive difference between the income of the Trust in respect of the whole or part of any Financial Year and the net income (as that term is understood for the purposes of either of the aforesaid Income Tax Assessment Act) of the Trust in respect of such whole or part Financial Year shall be applied appointed or paid to or for the benefit of any one or more of the Beneficiaries as an application appointment or payment separate and distinct from any other and every such determination shall be recorded by the trustees in the books of the Trust;
- (c) in addition to the powers granted under Article 3.2 and clause 11, may determine that any part of the Fund of a certain type, source, class or character shall be appointed, applied or paid to or for the benefit of any one or more of the Beneficiaries as capital of that or a different type, source, class or character and every such determination shall be recorded by the Trustees in the books of the Trust;
- (d) may effect any distribution otherwise in accordance with the terms hereof by means of a transfer in specie of any property whatsoever comprised within the Fund; and
- (e) in addition to the powers granted under clauses 3.2 and 11, may, by act or decision or through their conduct or proceedings, determine whether any real or personal property of the Trust and any increase or decrease in amount, number of value of any real or personal property of the Trust and any receipt of, payment by or profit or loss which is made by, the Trustee or any accrual shall, notwithstanding any other term or provision hereof and irrespective of whether the same has the character of income or capital under general law, be treated for the purposes of this Trust as and credited or debited to capital or income of the Trust and every such determination in relation to any of the matters aforesaid shall be conclusive and binding on all persons having any interest in the Fund or any of the income thereof and shall not be objected to or questioned on any ground whatsoever,
and the failure to record any matter if required as above shall not invalidate or adversely affect such determination."
- 12.1 The Trustee without the consent of any person (including but not limited to a Beneficiary) may at any time and from time to time determine whether:
20. The Tribunal held that by cl 12.1 and possibly 12.2(a) of the Trust Deed, the Minderoo Trust was a discretionary trust of income. The reasoning behind this conclusion appears from  to  of the reasons of the Tribunal:
- "39. The respondent contends that the effect of these provisions read in the context of all the provisions of the Trust Deed is that the Trust is a discretionary trust of income. It is this which the applicant argues is plainly wrong, contending that properly construed the Trust Deed creates the hybrid trust of a fixed trust component and of a discretionary trust component.
ATC 1065740. The respondent argues that the effect of cl 12.1 is to empower the Trustee, without the need for consent of any other person, to at any time and from time to time determine whether any amount received by the Trust is on capital or income account, regardless of the source of the receipt or how the amount received would otherwise be characterised (as capital or revenue) for accounting and income tax purposes. That is, for example, the Trustee could determine that a dividend received by the Trust which would ordinarily form part of the Trust's income shall be on capital account. The consequence it is said is that the Trustee may determine at any time whether any amount received by the Trust shall form part of the Discretionary Component or Fixed Income.
- The further consequence of this, argues the respondent, is that at the time the applicant incurred the interest expenses it was not possible to say whether any future dividends paid by [Anaconda] and received by the Trust would be treated as forming part of the Unit Component to which he would be entitled or as part of the Discretionary Component to which Discretionary/Participating Beneficiaries would be entitled. As the matter was entirely at the discretion of the Trustee it could not be said that at the time of incurring the expenses the applicant had any vested entitlement to a distribution of income from the Trust generated by any dividends received by the Trust. The respondent maintains the correct view is that the applicant's entitlement was entirely contingent and represented a mere hope or expectation.
- The submission is said to be supported by the absence of any evidence of any understanding between the applicant and the Trustee regarding future distributions.
- 41. The applicant brings several arguments against this construction.
- He says that there is an inconsistency between cl 3 and cl 12. I do not agree. Cl 3.2 comes into operation once the determination of relevant character is made under cl 12. The presence of cl 3 does not require cl 12 to be read down on the basis of a distinction between general and specific provisions.
- Likewise it cannot be argued from the language of cl 3 that the objective intention of the parties was to create a fixed trust of income. That is because cl 12 demonstrates the contrary intention.
- The applicant then submits that cl 12 confers a mere power on the Trustee while cl 3 creates a trust. It is said that the discretion conferred on the Trustee in exercising that power is limited to the scope of the power. It is argued that the power is of a fiduciary character so that it must be fairly and honestly exercised in good faith. In exercising the power on the basis of these principles the Trustee 'had no discretion'; that is, the Trustee was bound to correctly characterise a receipt as capital or as income. The power (acknowledged by the applicant to be apparently broad) is to be understood as limited to the beneficiaries' entitlement pursuant to the Trust.
- The applicant says that the more broad expression of the power which appears in cl 12 may be explained by the evidence of the deletion from the Trust Deed of the provisions for Residual Income.
- 42. It is not in issue that the Trustee is required by law to exercise the power in cl 12 fairly, honestly and in good faith. That is, if an item of income has the character of a capital gain the Trustee could not lawfully exercise the power in cl 12 to declare it a non-capital item of income. Likewise, that a non-capital item of income could not be found by exercise of the power to be a capital item. The applicant therefore contends that the power cannot be exercised so as to alter the true character of a receipt, for if that occurred the Trustee would be engaging in a fraud on the power. The concept of fraud on the power is examined in Meagher, Gummow & Lehane's Equity Doctrines and Remedies Fourth ed., (Butterworths LexisNexis, 2002) p 445 and in Dal Pont and Chalmers Equity and Trusts in Australia Fourth ed., (Lawbook Co., 2007) p 249.
ATC 10658It would appear open to argument whether an exercise of the power in cl 12 of the Trust Deed so as to alter the character which an item of income had at law, would in fact establish a fraud on the power. This is because the terms of the power confer the wide discretion on the Trustee. Assume, however, that the power could only be exercised so as to recognize the true character of the any item of income. That does not appear to me to result in a position where the discretionary power provided for in cl 12.1 can be taken at law as having been actually exercised when in fact the power has not been exercised. The problem for the applicant is that the power is provided for in very wide terms so that, until its exercise, it is not possible for it to be known in what terms the Trustee has accepted a particular item of income. Consequently, there cannot be any present entitlement. To establish present entitlement it cannot be assumed that because the power can only be exercised lawfully in one particular way that it has in fact been so exercised.
- I agree with the submissions of the respondent that cl 12.1 would not be in the form in which it now appears if it had been intended that the Trustee was bound to allocate capital gains to the Discretionary Component and all other receipts to the Unit Component. The wide language of the clause requires the Trustee to determine the destination of a distribution of an amount received by the Trust. Until that has been done, the condition of present entitlement cannot be found to exist because, under the provisions of the power in the clause, there exists the real possibility that the Trustee could determine the destination of a distribution other than in accord with whether its true character was that of a capital gain or fixed income."
21. The appellant contends that the Tribunal's construction that the Minderoo Trust was a discretionary trust was erroneous.
22. The appellant contends that the trust is a fixed trust of income, and accordingly, the interest payments claimed by him are wholly deductible. The appellant argues that on its proper construction the Trust Deed created a hybrid trust by which:
- (a) the assets representing the capital subscribed by Unit Holders in the Trust and all income received by the Trust is held on fixed trust for the Unit Holders in the Trust, in proportion to the number of units held by each of the Unit Holders as a proportion of the total number of issued units; and
- (b) all realised and unrealised capital gains derived by the Trust are held on a discretionary trust for the discretionary beneficiaries.
23. The appellant argues that cl 3 creates the trust or trusts, and that cl 12 is a mere power to classify income.
24. The appellant argues that the contention that cl 3 creates the trusts and that cl 12 confers a power is sound, because cl 3 is imperative in its terms, and cl 12 is permissive, the usual distinction between a trust and a power: see Heydon and Leeming Jacobs' Law of Trusts Australia (7th ed) at , where the learned authors say:
"The fundamental difference between a trust and a power of appointment is that a trust is imperative, while a power is permissive. Further, there can be no trust without trust property vested in the trustee; but there is no need for the donee of a power of appointment to have any title to the property; authority to deal with property, such as that conferred by a power of attorney, is sufficient. This emphasises that powers, unlike trusts, may be legal or equitable."
25. The appellant further submits that cl 12 is a power to classify receipts, and does not, and cannot, be used to vary the trusts created by cl 3.
26. The appellant contends:
"Clauses 3.1, 3.2 and 4.2 of the trust deed created a fixed trust of the 'Unit Component', the beneficiaries of which are the unit holders, and a discretionary trust, for the discretionary beneficiaries, of the 'Discretionary Component'. The 'Unit Component' relevantly is defined to mean 'any and all Fixed Income'. 'Fixed Income'
ATC 10659is defined to mean 'all Income other than income comprising the Discretionary Component'. 'Income' is comprehensively defined to include both income and capital gains. 'Discretionary Component' is defined as all 'Income' which represents realised and unrealised capital gains derived from the trust fund. The effect of clause 3, read with the definitions, is that capital gains are held on discretionary trusts for the discretionary beneficiaries and all other receipts (income) are held on a fixed trust for the unit holders."
27. In our opinion, the power conferred by cl 12 cannot be exercised by the trustee wrongly to classify a receipt as a capital gain, when the receipt is, in truth, income, and thus deprive the appellant of his interest in the unit component of the trust. Clause 12 is not an unlimited power to be exercised in the trustee's unconfined discretion.
28. The words used in cl 12 do not have the literal and broad meaning which the Tribunal gave to them. The respondent to this appeal accepts that no effect can be given to cl 12.1 to the extent that it purports to make the trustee's determination "conclusive and binding" to the exclusion of the courts. Clause 12.1 is a power to make an honest administrative determination whether receipts are on capital account or income account. It is not a power to determine, in the trustee's unconfined discretion, whether a receipt "represents realised or unrealised capital gains". It is that fact which determines whether components of the trust fund are held on trust for the discretionary beneficiaries or the Unit Holders. (See the definitions of "Discretionary Component", "Fixed Income", and "Unit Component", and cl 3.2).
29. Clause 12.2(a) is a power to determine how a distribution to beneficiaries is classified. That limited power is not a power which is capable of altering the beneficiaries' rights. Clause 12 is to be read consistently with the balance of the Trust Deed and an appreciation that it contains various powers of an administrative character. The words used can be given full force as a power honestly to classify income or distributions according to law, as the appellant contended to this Court.
30. In our judgment, cl 3.2, together with the definitions, and the rights expressly conferred on the Unit Holder by cl 4, demonstrate that the settlor's and trustee's objective intention was that income other than capital gains was to be held on a fixed trust for the Unit Holders, and capital gains were to be held on a discretionary trust.
31. The error in the reasoning of the Tribunal lies in its view that cl 12 of the Trust Deed gave the trustee a discretionary power to determine whether a receipt was on capital account or on an income account:
"Likewise it cannot be argued from the language of cl 3 that the objective intention of the parties was to create a fixed trust of income. That is because cl 12 demonstrates the contrary intention."
32. That reasoning does not give effect to the language used in the definitions and in cll 3 and 4 of the Trust Deed.
In re Baillie;
Whiting v Cavendish  VLR 171, the clause considered by Mann J provided:
"... my trustees shall have the fullest powers of determining whether and to what extent any particular sum should be treated as capital or income ..."
34. Mann J, at 176, held:
"With reference to that clause, I see no reason whatever for suggesting that it is not a perfectly good and valid clause. Indeed, it seems to me to do no more than declare powers which the trustees would implicitly have by virtue of their office, and it may be said that it relates to matters which are not only within the powers of the trustees to deal with, but which it is their duty to deal with, either with or without the assistance of the Court, as circumstances may require."
35. The clause did no more than declare the powers which a trustee would implicitly have, and which the trustee had a duty to exercise. That is, the trust power conferred by that clause was a power to determine according to law whether a receipt was capital or income.
36. Mann J also held that a trust deed could not preclude interested parties from going to Court to correct an improper or unlawful determination as between income and capital.
Re Wynn (decd);
Public Trustee v Newborough  1 Ch 271, the clause of the will that was the subject of consideration provided that the executor was "authorise[d] and empower[ed] ... to determine ... whether any moneys are to be considered as capital or income ...".
38. The determination by the trustee that certain receipts were capital was held to be reviewable by the Court, and the Court held that the trustee's determination was wrong in law. There was no suggestion in
Re Wynn that the trustee had some discretionary power to determine whether a receipt was on capital account or on income account.
"My Executor may in his discretion ... determine whether receipts or outgoings are capital or income or partly income or capital so as to bind the beneficiaries even though the receipts are from a company that has made a decision on the matter."
40. The Court at first instance, applying
Re Wynn, rejected the argument that the clause conferred a discretion on the executor so as to determine what receipt or outgoing was on capital or revenue account.
42. The Tribunal held that because the appellant did not have a "present entitlement" to income received by the discretionary Minderoo Trust, the interest costs were not deductible: see  of the Tribunal's reasons.
43. We have already concluded that the Minderoo Trust is a fixed trust of income other than capital gains, and is not, in that respect, a discretionary trust. The reference by the Tribunal to "present entitlement" refers to s 97 of the ITAA 1936, and to the notion that, for a share of the net income of a trust estate to be included in the assessable income of a beneficiary under s 97, the beneficiary must be presently entitled to that share of the income.
44. The appellant submitted, correctly in our view:
- "12. To be deductible under s 8-1, an expense must be incurred 'in the course of' gaining or producing assessable income [
FCT v Payne (2001) 202 CLR 93 at  per Gleeson CJ, Kirby and Hayne JJ,
FCT v Day (2008) 83 ALJR 68 at  per Gummow, Hayne, Heydon and Kiefel JJ]. It is both sufficient and necessary that the occasion for the loss be found in whatever would be expected to produce income [
Ronpibon Tin NL v FCT (1949) 78 CLR 47 at 57; Payne at ; Day at ]. The taxpayer's motive or subjective intention is relevant [
Fletcher v FCT (1991) 173 CLR 1 at 17; Day at ]. For expenditure to be deductible it is sufficient that the occasion for incurring the expenditure be a 'genuine and not colourable relationship between the whole of the expenditure and the production of such income' [Fletcher at 17-18]. Interest expenses incurred for the purpose of furthering Mr Forrest's present or future income producing activities are generally deductible [
Steele v DCT (1999) 197 CLR 459 at  per Gleeson CJ, Gaudron and Gummow JJ approving
FCT v Total Holdings (Australia) Pty Limited (1979) 43 FLR 217 at 224; also
Ure v FCT (1981) 50 FLR 219]. Income need not in fact be produced [Steele at ]."
45. The question of present entitlement relevantly has application only in the context of a beneficiary. For a share of the net income of a trust estate to be included in the assessable income of a beneficiary under s 97, the beneficiary must be presently entitled to that share of income.
46. The income of the Minderoo Trust, other than realised and unrealised capital gains, was held on a fixed trust for the Unit Holders in the Trust. It follows that the interest payments claimed by the appellant are wholly deductible.
47. Since we have rejected the conclusion that the Minderoo Trust was a solely discretionary trust, it is unnecessary to consider the alternative submission by the appellant to the effect that even if it were a solely
ATC 10661discretionary trust, the interest expenses incurred by the appellant were incurred "in the course of" gaining or producing assessable income, because the occasion for the loss was an investment expected by the appellant to produce his income.
48. We should say that it is not sufficient for deductibility that the expenditure was genuinely incurred with the subjective purpose of producing income.
49. The written submissions for the Commissioner. under the heading "Apportionment", contended:
- "46 If the applicant succeeds in his appeal on the deductibility of interest outgoings, the matter should be remitted to the Tribunal to further consider and make findings on the question of apportionment. The borrowed funds were used, and were intended by the applicant to be used, to acquire shares in Anaconda. The shares formed the corpus of the trust. If the applicant's construction of the trust deed prevails, he had a vested right to the income generated from the shareholding but any 'capital gains' derived from holding the shares were for the benefit of the Discretionary Beneficiaries."
50. On the question of apportionment, it was submitted in reply for the appellant that:
- "8. ... The respondent has not previously contended that there should be any apportionment. Apportionment is not referred to in the respondent's statement of facts, issues and contentions, was not referred to at the hearing before the Tribunal and is not the subject of any findings. Both parties litigated the interest deduction issue before the Tribunal on the basis that the interest was either wholly deductible or not deductible at all. Apportionment raises issues of fact which were not litigated before the Tribunal and of which Mr Forrest had no notice. Had the respondent contended before the Tribunal that the interest expenses should be apportioned between income and capital Mr Forrest may have adduced further relevant evidence. On well known principles, it is too late for the respondent to contend that the issue of apportionment should be remitted to the Tribunal. The contention that the interest expense should be apportioned between capital and income is in any event without merit."
- (Footnotes omitted).
51. It is not necessary to consider whether the matter should be remitted to the Tribunal to consider further, and make findings on, the question of apportionment. An appeal from the Tribunal pursuant to s 44 of the AAT Act by a party to a proceeding before the Tribunal is an appeal "on a question of law" from the decision of the Tribunal in that proceeding.
52. In circumstances where the question of apportionment was "not referred to in the respondent's statements of facts, issues and contentions, was not referred to at the hearing before the Tribunal and is not the subject of any findings (by the Tribunal)", in our opinion, it is not competent for the respondent now to contend that the issue of apportionment should be remitted to the Tribunal.
53. It is therefore unnecessary to consider whether there is "any merit" in the contention that a basis exists for apportionment of the interest expenses.
Eligible Termination Payment issue
54. The Tribunal found that a payment by Anaconda on 16 November 2001 of $3.5 million to Andersen Legal to be held on trust for the ACT constituted an ETP to the appellant, within s 27A of the ITAA 1936. Leaping Joey Pty Ltd (Leaping Joey) was the trustee of the ACT.
55. Ground 4.3 of the Notice of Appeal asserts:
"The Tribunal erred in law holding that the Anaconda Payment was an Eligible Termination Payment made to the applicant and consequently part of the applicant's taxable income."
56. The questions of law on which the appeal in this respect is said to be based are:
- "2.3 The proper construction of the phrase 'in consequence of' in s 27A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
ATC 106622.4 The proper construction the deed between the applicant and Anaconda Nickel Ltd dated 16 November 2001.
- 2.5 Whether on the facts found, and/or the uncontroverted evidence before the Tribunal, the payment (Anaconda Payment) of $3.5 million by Anaconda Nickel Ltd to the Australian Children's Trust (ACT) was an Eligible Termination Payment made to the applicant, within the meaning of that term in s 27A of the ITAA 1936, and thus part of the applicant's taxable income."
57. Ground 4.3 does not identify, by reference to the questions of law on which the appeal is said to be based, any particular error of law that is alleged to have been made by the Tribunal in finding that the payment was an ETP.
58. The submissions by the appellant in this respect impermissibly seek to overturn the Tribunal's characterisation of the payment as an ETP. The finding on the facts by the Tribunal that the payment by Anaconda to Leaping Joey was an ETP would disclose a question of law only if the only finding open to the Tribunal was that the payment by Anaconda was not in consequence of the termination of the appellant's employment.
59. The words "in consequence of" have their ordinary meaning, and the ordinary meaning of words is a question of fact. In our judgment, it was open to the Tribunal to conclude on the whole of the facts that the payment was made in consequence of the termination of the appellant's employment as the CEO of Anaconda.
60. It is necessary to have regard to all of the circumstances relevant to that payment. From the middle of 1999, the appellant proposed to give some of his family's shareholding in Anaconda to a private charitable trust. Up until 31 May 2001, the appellant and his supporters had effective control of Anaconda. Anglo American PLC (Anglo) and Glencore International AG (Glencore), which owned about 25% and 22% of Anaconda's issued shares respectively, sought to take control of Anaconda and remove the appellant and his supporters from both the Board and management of Anaconda. Anglo requisitioned an Extraordinary General Meeting (EGM) of Anaconda which was to be held on 31 May 2001.
61. The Tribunal found that on the morning of 31 May 2001, the appellant learnt that Anglo and Glencore had sufficient votes to remove him and his supporters from the Board of Anaconda at the EGM.
62. The appellant complains that that finding was "for reasons not explained by the Tribunal". The appellant in a witness statement said that he had had conversations with the Executive Chairman of Sherritt International Corporation (Sherritt International) (which held 9% of the shares of Anaconda), and with Mr Glassenberg, the CEO Elect of Glencore, on the morning of 31 May 2001, as the result of which he learnt both Sherritt International and Glencore proposed to support Anaconda.
63. The appellant said:
"As I was driven into work I kept thinking about how I could make some good out of this disaster and this treachery.
As I was being driven into Anaconda's offices I decided I would try to raise $10 to $12 million for charity. I thought that if Anglo and Glencore would each put in $3.5 million, and I could ask Anaconda to put in $3.5 million, then something good would come of the day. If Anglo, Glencore and Anaconda agreed, and if I could negotiate some protection for shareholders, my supporters and I would go peacefully. I also thought to try and force Sherritt International to make a donation."
64. The appellant and his supporters then negotiated with Anglo and Glencore in the belief that Glencore would make concessions to avoid a public vote. An agreement was reached between the appellant, Anglo and Glencore, and the other major Anaconda shareholder, Sherritt International.
65. The Tribunal summarised the agreement:
- • Glencore re-affirmed its commitment to underwrite a previously announced rights issue, which Anglo and Sherritt International agreed to support.
- • The appellant was to stay as CEO of Anaconda until the earlier of 18 November 2001 or the appointment of a replacement CEO. He was to receive his outstanding leave and similar entitlements and 10m options in Anaconda, exercisable at $2.50.
ATC 10663• The appellant was to remain as a director and Deputy Chairman of Anaconda until some time after he resigned as CEO.
- • Glencore agreed to contribute $3.5 million for a charity to be established by the appellant. Independent Anaconda directors likewise agreed to a further donation in that amount. Anglo agreed in principle to consider the possibility but later did not proceed with making a donation.
- • A standstill agreement was entered into preventing Glencore, Anglo, Sherritt International or the appellant from acquiring more than 30% of Anaconda until the later of 90 days after publication of a strategic review of Anaconda or 31 December 2001.
- • A person from Sherritt International was to be appointed Chairman and a new director was appointed to replace the former Chair as director.
- • It was agreed that another director who had resigned and who had been a supporter of the appellant would not be replaced.
- • Anaconda's Chief Finance Officer resigned as both an employee and director of Anaconda.
- • Anglo withdrew its resolutions to remove the appellant and his supporters as directors.
- • A strategic review of Anaconda's activities was to be undertaken.
- • A press release was to be issued.
66. As indicated, one term of the agreement was that Anaconda and Glencore each agreed to donate $3.5 million to a charity to be established by the appellant. Other terms included that the appellant was to stay as CEO of Anaconda until 18 November 2001 or a replacement was appointed, and Anglo withdrew its motion to remove the appellant.
67. The resolutions that could have been passed at the EGM would have immediately removed the appellant and his supporters as directors, and the Board would have terminated the appellant's engagement as CEO. The agreement between the major shareholders was to the effect that although Anglo and Glencore had the votes to remove the appellant immediately, he was to remain as CEO for almost six months, and director for longer.
68. It is clear that part of the agreement reached on 31 May 2001 was that the appellant would resign as CEO of Anaconda; further Anaconda agreed to pay $3.5 million to a charity to be established by the appellant.
69. The minutes of the Anaconda Board Meeting held on 31 May 2001 record that the Board resolved that a "redundancy payment" of $3.5 million to the appellant was fair and reasonable.
70. The Tribunal found, at  of its reasons, that the Board agreed that the redundancy payment be made upon the appellant's retirement.
71. On 31 May 2001, a deed was entered into by the appellant and Anaconda which recorded a redundancy payment of $3.5 million "to the appellant". A director of Anaconda, not in the appellant's camp, pointed out that the agreed payment was to go to a charity to be established by the appellant. A replacement deed was then negotiated between the respective solicitors for Anaconda, Anglo and Glencore. A further deed was entered into on 16 November 2001 between Anaconda and the appellant.
72. The $3.5 million donation was made by Anaconda to the ACT and a donation of $3.5 million was made by Glencore to a trust with the same objects as the ACT. The payment by Anaconda to Andersen Legal to be held on trust for the ACT was on 16 November 2001. On that day, the appellant resigned as CEO of Anaconda.
73. On 28 November 2001, at a Board meeting of Leaping Joey, the Trustee of ACT, at which the attendees were the appellant and his wife, the following resolution was passed:
" IT WAS RESOLVED that the Company in its capacity as Trustee of the Australian Children's Trust be and hereby is authorised to purchase from interests associated with Forrest Family Investments Pty. Ltd., 4,117,647 million Anaconda shares, and from interests associated with John Andrew Forrest to receive a donation of 2,882,353 million Anaconda shares, both at a price of $0.85 per share, such purchases and
ATC 10664donations to take place on 28 November 2001, provided the Company in its capacity as Trustee of the above-mentioned Trust has sufficient funds available to it at the time of such purchase and effective when the charitable tax status of the Trust is ratified by the ATO."
74. On 21 December 2001, Anaconda wrote to Andersen Legal saying, in part:
"In accordance with clause 3(b) of the Termination Deed [the termination deed dated 16 November 2001 between Anaconda and the appellant], the Company hereby directs Andersen Legal to release the Donation ($3.5 million), held in the Andersen Legal Trust account to Leaping Joey Pty Ltd."
75. That payment was made on 31 December 2001.
76. On 15 January 2002, at a meeting of directors of Leaping Joey:
" IT WAS RESOLVED to immediately acquire (on 15 January 2002), a parcel of 7,000,000 million shares in Anaconda Nickel Limited ('Anaconda') from interests associated with Forrest Family Investments Pty Ltd for $0.85 per share (total consideration of $5,950,000)."
77. And further:
" IT WAS RESOLVED that the Company in its capacity as Trustee of the Australian Children's Trust proceed with the share acquisition and release an initial amount of $3,500,000 to interests associated with Forrest Family Investments Pty Ltd representing the first payment of 4,117,647 million Anaconda shares at a price of $0.85 per share."
78. The submissions by the appellant concerning the ETP assert:
"The donation was only an ETP if it was a 'payment made in respect of [Mr Forrest] in consequence of the termination of' Mr Forrest's employment."
79. Goldberg J in
Le Grand v Commissioner of Taxation 2002 ATC 4907; (2002) 124 FCR 53 concluded, at :
"The thrust of the judgments in Reseck and McIntosh is rather to the effect that a payment is made 'in consequence' of a particular circumstance when the payment follows on from, and is an effect or result, in a causal sense, of that circumstance."
80. The judgments referred to by Goldberg J are the judgments in the High Court in
Reseck v FCT 75 ATC 4213; (1975) 133 CLR 45, and the judgments in the Full Court of the Federal Court in
McIntosh v FCT 79 ATC 4325; (1979) 25 ALR 557.
81. Both parties before the Tribunal relied on that passage from the judgment of Goldberg J as to the meaning of the expression "in consequence of".
82. In our judgment, it was open to the Tribunal to conclude that the payment was made in consequence of the termination of the appellant's employment as CEO of Anaconda.
83. Among the facts in leading the Tribunal to that conclusion is the observation, at  of the Tribunal's reasons, that part of the agreement reached on 31 May 2001 was that the appellant would resign as CEO of Anaconda. Further, that Anaconda agreed to pay $3.5 million to a charity to be established by the appellant.
84. The Tribunal also referred at  of its reasons to the circumstance that on or about 31 May 2001, the Board of Anaconda concluded that a "redundancy payment" of $3.5 million to be paid to the appellant was fair and reasonable, together with other severance entitlements. The Board agreed that the redundancy payment be made upon the appellant's retirement. The payment was not in fact to the appellant, but at his direction, to the ACT.
85. The Tribunal also referred, at  of its reasons, to the circumstance that the minutes of the Audit Committee linked the payment to the termination of the appellant's employment as CEO, and similarly, at  of its reasons, the Tribunal referred to the financial statements in Anaconda's annual report, which referred to the payment as forming part of the appellant's termination arrangements.
86. The Tribunal, at  of its reasons, referred to the agreement by the Board to enter into a deed in the context of the appellant's termination, to the payment discussed in the meetings of the Board of Anaconda on 25 and
ATC 1066526 September 2001, and the circumstance that the appellant and Anaconda subsequently entered into a deed dated 16 November 2001.
87. The Tribunal said, in  of its reasons:
"... it is abundantly clear from the recitals and the operative provisions of the November Deed that the payment of the $3.5m was made in consequence of the applicant's termination of his employment in that it followed on from the termination and possessed the requisite connection with the termination. The consideration for the November Deed was expressed to be the mutual promises contained in it. These were that in consideration of the applicant resigning from his employment [Anaconda] agreed, among other things, to acknowledge its commitment to make the payments of $3.5m to [Leaping Joey] to make the payment by the means stipulated in cl 3(b) of the November Deed.
Further, the releases and covenants in cl 5 were expressly stated to be in respect of the applicant's employment 'in accordance with this deed.' They were 'subject to' [Anaconda] making the payment of $3.5m. I agree with the submission of the respondent that the connection between the termination of the applicant's employment and the payment could not be more apparent."
88. It was contended for the appellant that "a payment made pursuant to an agreement between shareholders of a company, including the taxpayer, resolving a dispute about control of the company is not made in consequence of termination of the employment of the taxpayer".
89. This submission is an attempt impermissibly to assert that the characterisation by the Tribunal of the payment as an ETP involved an error in the law, whereas, it is, in truth, nothing more than a challenge to the correctness of the conclusion by the Tribunal, a conclusion that was well and truly open to it.
90. It was submitted for the appellant that "the Tribunal erred in law by not applying a correct construction of s 27A of the ITAA 1936" and that "applying that correct construction the donation made by Anaconda is not an ETP". There was, in fact, no dispute between the parties as to the correct construction of s 27A: the challenge by the appellant is really to the conclusion reached by the Tribunal in applying that construction to the circumstances.
91. It was asserted that the Tribunal applied the "but for" test, which is said to be a wrong test for causation. It was asserted that "but for" is not equivalent to "in consequence of". However, the fact is that the finding by the Tribunal that the decision of the Board of Anaconda on 31 May 2001 to agree to the payment would not have occurred "but for" the appellant deciding that he would resign as CEO was merely one factual finding among many by the Tribunal, and was not an expression of the test which the Tribunal applied to determine whether the payment was in consequence of the termination of the appellant's employment.
92. It was also asserted that the donation was made "in consequence" of the agreement on 31 May 2001. This submission is somewhat precious. Clause 3(a) of the deed of 16 November 2001 records that:
"The Company acknowledges its commitment to donate an amount of $3.5 million ('the Donation') to Leaping Joey Pty Ltd ('LJACT') as Trustee of the Australian Children's Trust, a trust established by the Employee for the benefit of under-privileged children, or to such other charity for under privileged children as the Employee may nominate to the Company in writing."
93. That commitment was part of the agreement of 31 May 2001. Clause 3(b) of the Deed of 16 November 2001 directed in detail how payment of that donation was to be made.
94. Further, the recitals to the Deed of 16 November 2001 include recitals C and D, which recite:
- "C. Following negotiations between the Company and the Employee the Employee has decided to resign from the Company and agreed to enter into this deed in full and final satisfaction of all claims relating to the Employee's resignation.
- D. The Company has agreed to make a donation of $A3,500,000 to a charity as described below, Glencore International AG has agreed also to donate an equivalent amount to a similar charity for underprivileged children, and Anglo American plc has informed the Employee that it is prepared also to very favourably consider making a donation to a charity as described below if the Employee puts a proposal to it. The Employee has relied upon the representations of Glencore International AG and Anglo American plc in entering into this deed including clause 9 hereof."
95. Clause 4 provided:
"The parties hereby agree and acknowledge that if, for any reason whatsoever, the Donation is treated as an Eligible Termination Payment ('ETP') made by the Company to the Employee, all tax or other amounts payable in respect of the Donation shall be paid by the Employee and the Company shall not be liable for any tax, penalties, fines, costs or other amounts payable in event of the Donation being treated as an ETP."
96. Clause 5 (a) provided:
- "(a) [each party hereto] agrees to release absolutely and forever discharge the other, its employees, agents, servants, directors, shareholders and related bodies corporate from all liabilities, claims, causes of action, suits, demands or rights which the releasing party may have against the other, its employees, agents, servants, directors, shareholders or Related Bodies Corporate arising out of, from, in or in connection with the Employee's employment with the Company, the termination by resignation thereof in accordance with this deed, or both;"
97. Clause 8 provided:
"The Employee and the Company acknowledge that the termination by resignation is entirely amicable and voluntary."
98. Clause 18 provided:
"This deed constitutes the entire agreement between the parties and supersedes all previous representations, warranties, covenants, guarantees, agreements, and other terms and conditions, not contained and recorded in this deed."
99. Having regard to all of the circumstances relating to the payment, the challenge to the finding by the Tribunal that the payment by Anaconda to ACT was an ETP fails.
The alternative contention that the payment to the ACT was a deductible donation to a charity.
100. It was common ground between the parties before the Tribunal that if the $3.5 million payment to the ACT was part of the appellant's taxable income, then he was entitled to a deduction of $3.5 million under Div 30 of the ITAA 1997, unless s 78A of the ITAA 1936 operated to disallow the deduction.
101. The Tribunal concluded that each of s 78A(2)(a)(c) and (d) operated to disallow the deduction.
102. The questions of law with respect to this aspect of the case are said to be:
- "2.6 Whether on the facts found, the evidence before the Tribunal and how the case was conducted at the hearing by the respondent, the applicant was not entitled to deduct the Anaconda Payment from his taxable income because those facts attracted the operation of ss 78A(2)(a), (b) or (d) of the ITAA 1936.
- 2.7 Whether the Tribunal failed to give adequate reasons and whether the Tribunal's decision should be set aside."
103. The grounds of appeal in relation to this alternative ground are set out as grounds 4.4 and 4.5.
- "4.4 ... the Tribunal erred in law in holding that the applicant was not entitled to deduct the Anaconda Payment from his taxable income because the applicant sold shares in Anaconda to the ACT for $3.5 million which benefited the applicant, or reduced the value of the Anaconda Payment to the ACT, attracting the operation of ss 78A(2)(a) or (c) of the ITAA 1936 when the Tribunal should have held that:
- 4.4.1 as the applicant and his associated interests, as a single transaction, transferred 7 million Anaconda shares to the ACT for $3.5 million, which was less than the value of those shares;
ATC 106674.4.2 the conditions in neither s 78A(2)(a) nor s 78A(2)(c) of the ITAA 1936 were satisfied; and
- 4.4.3 the Anaconda Payment was deductible from the applicant's taxable income.
- 4.5 ... to the extent the Tribunal found that s 78A(2)(d) operated to disallow a deduction from the applicant's taxable income of the Anaconda Payment, the Tribunal erred in law in holding that the applicant was not entitled to deduct the Anaconda Payment from his taxable income because of a scheme or arrangement entered into in association with the making of the gift by which property was acquired from the applicant, attracting the operation of s 78A(2)(d) of the ITAA 1936, when:
- 4.5.1 the Tribunal did not find what the scheme or arrangement was;
- 4.5.2 the Tribunal made a finding at  of its reasons which is inconsistent with the conclusion of a scheme or arrangement at  of its reasons;
- 4.5.3 there was no evidence of a scheme or arrangement;
- 4.5.4 no scheme or arrangement as found was put in cross-examination to the applicant and a scheme or arrangement was inconsistent with the applicant's evidence."
104. Ground 4.6 alleges:
"Further to grounds 4.3 to 4.5, the Tribunal erred in law in failing to give adequate reasons."
105. The appellant contends that the Tribunal's reasons in relation to the application of s 78A are inadequate. It is asserted that the Tribunal failed to make findings of fact in relation to two central matters. First, the appellant contended that the sale and donation of 7 million Anaconda shares by his interests to the ACT was a single transaction. That submission, it is said, is not referred to in the Tribunal's reasons.
106. Paragraphs  and  of the Tribunal's reasons state:
- "71. On 31 December 2001, the $3.5M was deposited into [Leaping Joey's] Account.
- 72. On 15 January 2002 $3.5M was withdrawn from the [Leaping Joey] account and deposited into another Westpac account operated in the name of the applicant. The $3.5M was paid by [Leaping Joey] in an off market transaction to the applicant and related parties for the acquisition of 4,117,643 [Anaconda] shares. For the purpose of the transaction the shares were valued at 85 cents each, while on the day the ASX closing price for such shares was 74 cents. The [Anaconda] shares sold in this off market transaction to [Leaping Joey] included 1,976,551 owned directly by the applicant. Of the purchase price the applicant donated back $2.45m to the [ACT], making an effective purchase price of $3.5m."
107. The appellant submits that  of the Tribunal's reasons, particularly the final sentence, suggests that the Tribunal found that the transfer was a single transaction. In that regard, 7,000,000 Anaconda shares at $0.85 each would total $5.95 million. "A donation back" of $2.45 million from the purchase price would represent a donation of 2,882,357 shares, valued at $0.85, leaving a "purchase price" of $3.5 million for 4,117,647 shares at $0.85 per share.
108. However, it was submitted for the appellant that the Tribunal reasoned by reference only to the sale of shares to the ACT without reference to the donation.
109. The second inadequacy is said to be that although the Tribunal found there was an agreement or scheme entered into as part of, or in association with, the making of the $3.5 million donation to the ACT, no terms of that scheme or agreement were found.
110. Before turning to the Tribunal's reasoning, it is helpful to refer to some of the evidence that was before the Tribunal. The appellant, in a witness statement dated 11 May 2007, dealing with events after 31 May 2001, said, at :
"On 31 May 2001 I had no thought of selling any of my, or my family's, Anaconda shares to the trust I intended to set up."
111. Continuing, at  and following:
- "72. In June or July 2001 Nicola and I decided to make a donation to the ACT. We decided to donate 3.5 million of my Anaconda shares to the ACT. At the time the share price of Anaconda was above $1. I decided to make a donation which exceeded the donations by Anaconda and Glencore. ...
ATC 1066873. When Nicola and I decided to make that donation I had not thought of selling any of my Anaconda shares to the ACT.
- 74. However, in about September 2001 I decided to sell some of my shareholding in Anaconda. Anaconda's share price had fallen substantially from its high, and from the price I had bought some of my shares at. I had borrowed substantial amounts of money to buy shares in Anaconda, including the $4.5 million loan I used to subscribe for units in the Minderoo Trust. I was under financial pressure from my bank following the fall in the Anaconda share price. Nicola and I wanted to reduce my debt . I decided to sell some of my Anaconda shares to repay my debt .
- 75. At the time I decided to sell some of my shares to the ACT , I was in Hong Kong. My idea was to sell shares to the ACT, effectively at a discounted price. I decided to combine my proposed donation to the ACT and the sale of some of my shares.
- 76. My idea was to make a part donation and part sale, effectively of 7 million shares at an average price of 50 cents a share. I believed that was a win-win situation. I could repay part of my debt and relieve the financial pressure arising from my debt . The ACT would receive 7 million shares at below the market value of the shares. Although I was concerned that Glencore with Anglo had control of Anaconda, I believed that the share price would increase and I thought the charity would do well from the Anaconda shares. By making the sale and gift to the ACT there would be no publicity in relation to me selling Anaconda shares. I still believed that publicity about me selling Anaconda shares would adversely affect the market's confidence in Anaconda.
- 77. I asked for the payment by Anaconda of $3.5 million to the ACT to be made early so as to allow me to sell and give 7 million Anaconda shares to the ACT as soon as practicable. The reason was that once the sale and gift occurred, I could then repay some of my debt."
- (Emphasis added)
112. It is apparent, first, that the "7 million shares" results from the perception by the appellant that shares that he owns can be dealt with in the same way as shares owned by other legal entities, including other companies. Notwithstanding
Salomon v A Saloman & Co Ltd  AC 22, the appellant obviously believed that he could deal with assets of a company as if they were his own, and that in the alleged "single transaction", shares owned by him, by the appellant and his wife, and shares owned by Metal Holdings Pty Ltd, should be regarded in law as if they were his.
113. Concerning the sales of Anaconda shares to ACT, the appellant said, at  - :
- "92. The proposal I put to Valerie Davies was that my family would sell just over 4.1 million Anaconda shares at $0.85 each to the ACT, for a total price of $3.5 million. My family would, together with that sale, also give about 2.9 million Anaconda shares to the ACT so that the ACT would receive 7 million shares for $3.5 million, an average of $0.50 a share.
- 93. The gift and sale were a combined proposal. My intention was to effectively sell the 7 million shares to the ACT at an average of $0.50 each, a substantial discount to the market price. My intention was to give the ACT the value of each share above $0.50. My intention was that the ACT could then sell those Anaconda shares at the trust's independent directors' discretion, and at a profit. I believed that would be at a profit which would benefit underprivileged children.
- 94. Valerie Davies made the decision to accept the gift and buy the shares. I was not involved in that decision. Valerie Davies told me she wished the charity to buy the shares and accept the gift, which was recorded at a board meeting on 28 November 2001 attended only by Nicola and me. I do not now recall why effectively the same resolution was recorded at a meeting on 15 January 2002.
ATC 1066995. Leaping Joey was authorised to, and later did:
- (1) purchase 4,117,647 Anaconda shares from me, me and Nicola and the Minderoo Trust ;
- (2) receive a donation of 2,882,353 Anaconda shares from Metal Holdings Pty Ltd , a company that held many of my family's assets."
- (Emphasis added).
114. The resolution of the Trustee of the ACT at a meeting attended by the appellant and his wife on 28 November 2001 is set out at  above. The minutes of the meeting of the Trustee of the ACT held on 15 January 2002 which record the two resolutions of that meeting in relation to the acquisition of shares in Anaconda by the Trustee of the ACT is set out in  and  above.
115. The resolutions are highly relevant, but it is unnecessary to set their contents out again. Nowhere is there any reference to 50 cents a share.
116. There are two parcels of shares referred to in the minutes of 28 November 2001: one of 4,117,647 referred to in the second resolution; and the other was the balance up to 7 million. Both parcels of shares were valued at 85 cents per share for the purposes of the acquisition by Leaping Joey.
117. It was put to the appellant in cross-examination before the Tribunal:
"... at that time you needed cash to reduce debt?---But I was always giving away the equivalent number of shares to bring the share price down to 50 cents so it didn't actually matter.
But by doing it this way you were able to get in a lump sum $3.5 million immediately from Leaping Joey?---That's true, but I don't see how that's affected by the share price when I was always giving away the balance of the shares to bring the price down to 50 cents."
118. Section 78A(2)(a) of the ITAA 1936 provides:
"Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the donor ) to a fund, authority, institution or person is not an allowable deduction under Division 30 of the Income Tax Assessment Act 1997 where:
- (a) by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of:
- (i) the making or receipt of the gift; or
- (ii) any agreement or scheme entered into in association with the making or receipt of the gift;
- the amount or value of the benefit derived by the fund, authority, institution or person as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift;
119. The acquisition of shares in Anaconda by Leaping Joey from "interests associated with" the appellant was contingent on the receipt of Leaping Joey of the $3.5 million from Anaconda.
120. The Tribunal said, in  of its reasons:
"The applicant formed the intention that [Leaping Joey] as trustee of the [ACT] would use the $3.5m to be paid by [Anaconda] to purchase shares in [Anaconda] held by the applicant and related entities. Following the direction by the applicant on 20 December 2001 for the payment to be made to [Leaping Joey], it used the amount received to purchase shares in [Anaconda] from the applicant and related entities. It did so at a price of $0.85 per share on 15 January 2002 on which day the ASX closing price for [Anaconda] shares was $0.74."
ATC 10670The complaint by the appellant is that the Tribunal misstated the submission made by him, and did not deal with the submission made by him, namely, that the transfer of 7 million shares by him and his interests to the ACT at an average cost of $0.50 a share, on a day when the shares closed at $0.74 a share, increased the wealth of the Trust. It was submitted that s 78A(2)(a) did not operate to disallow the deduction, as the value of the $3.5 million donation paid by Anaconda to the ACT was not decreased.
122. The Tribunal said, as part of its reasons in :
"The acquisition of the shares was an 'act, transaction or circumstance' that occurred either as part of, or in connection with, or as a result of the making or receipt of the gift. It was also the subject of an agreement or scheme entered into and associated with the making or receipt of the gift. The purpose of the application by the applicant to [Anaconda] for advance payment of the $3.5m in September 2001 was to enable [Leaping Joey] to be put in funds to purchase the shares so that the applicant could pay off debts. The arrangements made for the funds to be paid to [Leaping Joey] and the minutes of it further establish the connection, scheme or agreement."
123. The resolutions recorded in the minutes of Leaping Joey referred to by the Tribunal are set out in ,  and  above.
124. The Tribunal's reasoning in  and  has been set out in  above.
125. The Tribunal said, in  and  of its reasons:
"On 15 February 2002 the applicant's interests transferred 7m ABC shares [Anaconda] shares to [Leaping Joey] for which they were paid $3.5m.
In about May 2002, Glencore made its donation of $3.5 m to a separate charitable trust for transfer to the applicant's nominated trust."
126. It is not possible to regard the events that occurred in connection with the purchase of 4,117,647 Anaconda shares at $0.85 each by Leaping Joey, and the gift on 15 February 2002 by Metal Holdings Pty Ltd of 2,882,353 Anaconda shares to the ACT as "a single transaction", nor is it possible to regard the appellant and the appellant's family companies or interests as a singular legal entity, so that one can regard the events that occurred as "the transfer of 7m shares by him and his interests" to the ACT at an average cost of $0.50 a share.
127. The fact is that ACT bought 4,117,647 Anaconda shares (only some of which were owned by the appellant) for $3.5 million, which was the amount which it received from Anaconda at the direction of the appellant. The purchase was at $0.85 a share, at a time when the market value of the shares was $0.74. Further, the 4,117,647 Anaconda shares were owned by the appellant, the appellant and his wife, and the Minderoo Trust. Of the 4,117,647 shares, 1,976,551 were owned directly by the appellant. These were sold by the appellant to the ACT at $0.85 a share when the closing price for Anaconda shares was $0.74.
128. Paragraph 77 of the witness statement of the appellant says:
"I asked for the payment by Anaconda of $3.5 million to the ACT to be made early so as to allow me to sell and give 7 million Anaconda shares to the ACT as soon as practicable. The reason was that once the sale and gift occurred, I could then repay some of my debt."
129. As earlier indicated, the appellant clearly makes no distinction between his own shares, shares owned by his wife and himself, and by the Minderoo Trust, nor shares owned by Metal Holdings, who gifted 2,882,353 Anaconda shares to the ACT, and in respect of which gift Metal Holdings was no doubt entitled to a deduction pursuant to Div 30 of the ITAA 1997.
130. The $3.5 million donation paid by Anaconda to the ACT was expended by ACT in acquiring slightly more than 4 million shares in Anaconda at $0.85 per share on 15 January 2002, when the closing price for Anaconda shares on that day was $0.74.
ATC 10671There is a paragraph in the Tribunal's reasons, contained in , which is difficult to understand. That paragraph commences with the sentence, "The applicant contends that the receipt of the funds by [Leaping Joey] as trustee for the [ACT] and the acquisition of the shares are separate transactions". Whether that is a misstatement, and "respondent" should be substituted for "applicant", is not clear. Further, the rest of that particular paragraph is difficult to follow.
132. What is clear is that the Tribunal considered that the acquisition of the shares, numbering 4,117,647, by ACT from the appellant, the appellant and his wife, and from the Minderoo Trust, was an "act, transaction or circumstance" that occurred either as part of, or in connection with, or as a result of the making or receipt of the gift. It was open to the Tribunal to conclude that the purpose of the application by the appellant to Anaconda for advanced payment of the $3.5 million in September 2001 was to enable Leaping Joey to have the funds to purchase those shares, with the consequence that the appellant could pay off debts. By reason of that "act, transaction or circumstance" identified by the Tribunal, namely the equation of the 4,117,647 shares, the benefit derived by ACT as a consequence of the gift was less than the value of the gift when the gift was made.
133. The Tribunal was right to conclude that the amount or value of the benefit derived by ACT as a consequence of the gift of $3.5 million was less than the amount or value at the time when the gift was made. Paragraph (a) of s 78A(2) would therefore apply to preclude an allowable deduction in respect of the gift.
134. Section 78A(2)(c) of the ITAA 1936 provides that an allowable deduction not be available where:
"... by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under Division 30 of the Income Tax Assessment Act 1997; ..."
135. Quite apart from whether s 78A(2)(a) operated to disallow an allowable deduction, it is plain that s 78A(2)(c) of the ITAA 1936 applies to disallow the deduction.
136. The question posed by s 78A(2)(c) is whether, by reason of any transaction or circumstance, the donor has obtained a benefit, advantage, right or privilege, other than the benefit of deduction that would be allowable. Even if the "act, transaction or circumstance" contemplates the entirety of the events, including the acquisition by Leaping Joey of 4,117,647 Anaconda shares of the appellant, the appellant and his wife, and the Minderoo Trust at $0.85 a share, and a donation of 2,882,353 million shares in Anaconda by Metal Holdings to Leaping Joey, the appellant obtained a benefit that was in addition to the benefit of any deduction that would be allowable in respect of the donation by direction of the $3.5 million to the ACT.
137. The Anaconda shares acquired by Leaping Joey at $0.85 per share acquired off market included the acquisition of 1,976,551 shares owned directly by the appellant on the day when the closing price for such shares was $0.74 per share. The appellant therefore obtained a benefit of 1,976,551 shares at $0.85 per share, namely, $1,680,068, which was in addition to any deduction that would be allowable in respect of the donation by direction of the $3.5 million to the ACT.
138. The reasoning of the Tribunal indicates that it understood and did not misstate the submissions made to it on the appellant's behalf.
139. The Tribunal said, at  of its reasons:
"The applicant denies that he obtained a benefit from the sale. He says this is because the sale of the shares was only part of the transaction. It is submitted by him that the transaction as a whole was the combined sale and gift of a total of 7m [Anaconda] shares at an average price of $0.50 a share, a substantial discount to the market price of the shares on each day the [ACT] resolved to buy the shares and accept a gift of shares, and on the day of the transfer of shares. He argues that it was not suggested in
ATC 10672cross-examination that the sale and gift were separate transactions. Rather the paragraph should be understood as requiring that the interests of a donor and his associates be combined in assessing whether a benefit, advantage, right or privilege is obtained by making the gift. On the transfer of the 7m [Anaconda] shares to the [ACT], the average price of the transfer was significantly below market value of the shares, so that no benefit was obtained by the applicant. Also, he received no benefit from the combined sale and gift as the value of his interest as beneficiary of [ACT] which also transferred shares with him was decreased by the value of the [Anaconda] shares given to the [ACT]."
140. The question is, in the light of all of the circumstances, did the donor obtain a benefit, advantage, right or privilege other than the benefit of a deduction?
141. The respondent contended to the Tribunal that the appellant derived a benefit from the sale of the shares, being the proceeds of the sale, and also the sale of the shares at an inflated price, ie at a price higher than their worth. This contention the Tribunal accepted as correct, as it plainly is.
142. Section 78A(2)(d) provides that there is no allowable deduction available where:
"by reason of any agreement or scheme entered into as part of or in association with the making of the gift, any property, other than property comprising the gift, has been acquired or will be acquired, whether directly or indirectly, from the person or donor or an associate of the donor by that fund, authority or institution or by another fund, authority or institution."
143. Here again, the question is plain: it is whether, by reason of any agreement or scheme entered into in association with the making of the gift, any property other than property comprising the gift has been acquired from the donor.
144. The evidence from the appellant's own mouth, in his witness statement, and from the minutes of the meetings of Leaping Joey, establishes that there was an agreement or scheme in association with the making of a gift, by which property was acquired from the donor. Section 78A(2)(d) is satisfied.
145. The Tribunal concluded, in this respect, at  of its reasons:
"I have found that the making of the gift was not the result of the commercial settlement reached on 31 May 2001 and has to be understood in the wider evidentiary context, including the evidence relating to the November Deed. The contentions upon which the applicant relies to resist the application of this paragraph of s 78A(2) are not made out."
The penalties in respect of the Eligible Termination Payment
146. Pursuant to s 284-90 of the Taxation Administration Act 1953 (Cth), the Tribunal upheld a 50% penalty imposed on the appellant, on the basis that his claim that the $3.5 million was not part of his taxable income was reckless.
147. The test of recklessness is objective, and requires "gross carelessness" rather than mere negligence:
FCT v R & D Holdings Pty Ltd 2007 ATC 4731; (2007) 160 FCR 248 at -.
148. The finding of recklessness was founded on a conclusion that the appellant "did not carefully instruct" Mr Cooper, the Ernst and Young tax partner responsible for the appellant's tax return, and thus Mr Cooper "was not put on further inquiry and investigation". The finding of the Tribunal was based significantly on the contents of the 16 November Deed. However, the Tribunal found the appellant had provided Mr Cooper with the 16 November Deed.
149. Having regard to cl 4 of the November Deed, both the appellant and his accountant were on notice of a view that the payment was an ETP.
150. The Tribunal observed, at  of its reasons, "One of the commercial solicitors had expressed the opinion the payment was not an ETP".
151. It is plain that both the appellant and Mr Cooper turned their minds to the issue of whether the payment was an ETP. The appellant gave to his accountant the 16 November Deed, and cl 4 of that Deed raised
ATC 10673the question of whether the donation was an ETP. The conclusion of the accountant was that, on reading the Deed, the payment was not an ETP.
152. The conclusion which the accountant reached, while erroneous, was not "grossly careless". It was reached having regard to the relevant information, and involved a reasonable professional judgment. The November Deed acknowledged Anaconda's pre-existing liability to make the payment, and referred to Glencore's liability to make a similar payment. The Deed provided for the appellant's resignation. The view that the donation was a pre-existing obligation and the appellant's resignation a new obligation was a view that could reasonably be adopted, with the consequence that the donation was not payable "as a consequence of" the appellant's resignation.
153. The accountant having been provided with the November Deed addressing directly the question of whether the donation was an ETP, it cannot reasonably be argued that the accountant and the appellant were guilty of gross carelessness and formed an unreasonable view, even though, as it turned out, the contrary view has prevailed.
154. In the circumstances, the penalty of 50% of the additional tax should be varied by reducing that penalty to nil.
155. The orders of the Court are that the objection decisions in respect of the Income Tax years ending 30 June 2000, 2001 and 2002, as varied by the decision of the Administrative Appeals Tribunal of 18 April 2008, be further varied by:
- 1. Treating the interest costs totalling $858,061.00 incurred in those years as an allowable deduction pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth); and
- 2. Reducing the penalty of 50% of the tax payable in respect of the non-inclusion of $3.5 million paid by Anaconda Nickel Limited at the direction of the J.A.H. Forrest to the Australian Children's Trust, to nil.
156. Other than the variations referred to above, and the variation referred to by the Tribunal in its decision given on 21 April 2008, in respect of the reduction of penalty to nil in respect of the claims for deductibility of interest payments on borrowing costs for the purchase of units in a Unit Trust in each of the years of income ended 30 June 2000, 2001 and 2002, the reviewable decisions in respect of the appellant's liability of tax in each of those years should be affirmed.
157. As to costs, costs ordinarily follow the event. The appellant has been wholly successful in his claim about the deductibility of interest payments concerning the costs of borrowing, and successful in his claim that this Court should not remit the matter to the Tribunal to consider the question of apportionment of those deductions.
158. The appellant has thus been successful to a significant degree.
159. In respect of discrete issues concerning whether the payment by Anaconda to the ACT was an ETP, and alternatively, whether the appellant is entitled to an allowable deduction in respect of that payment, he was unsuccessful. Nonetheless, he has succeeded in having the 50% penalty in respect of the non-inclusion of that payment as income in his tax return reduced to nil.
160. In all the circumstances, it is appropriate to order that the respondent pay two-thirds of the costs of the appellant of the appeal, to be taxed if not agreed.