ANTONOPOULOS & ANOR v FC of T

Members:
SE Frost SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 431

Decision date: 22 June 2011

Senior Member SE Frost

Introduction

1. This is a case about tax deductions claimed by the Applicants but disallowed by the Commissioner. It concerns the effect of certain resolutions made by the trustee of a trust of which the Applicants are beneficiaries. If the effect of the resolutions is that the Applicants became "presently entitled" to trust distributions then the deductions claimed will be allowable. If that is not the effect of the resolutions then the Applicants will not be entitled to deductions unless one of their subsidiary arguments is upheld.

2. Apart from the substantive deductibility issue (which arises in respect of the 2006 and 2007 income years - the "relevant years"), there is the question of administrative penalty to be addressed. The Commissioner says that the Applicants, in claiming the deductions, failed to take reasonable care to comply with a taxation law. That triggered the imposition of an administrative penalty equal to 25% of the tax shortfall. The question is whether the penalty was properly imposed. If it was, then a further question is whether the penalty should be remitted, either wholly or in part.

Background

3. Nicolas Antonopoulos, the First Applicant, is a builder. He is also the sole director of, and the sole shareholder in, Antbuilt Pty Ltd. That company is the trustee of the Antbuilt Trust. Both Mr Antonopoulos and his wife Nancy, the Second Applicant, are potential beneficiaries of the Trust. Mr Antonopoulos is named in the Schedule to the Trust Deed as the Primary Beneficiary. He is also named as the Default Beneficiary. As the spouse of the Primary Beneficiary, Mrs Antonopoulos is a Secondary Beneficiary as defined in the Schedule.

4. The deduction claims at the heart of this dispute fall into two broad categories.

5. The first category relates to funds borrowed by the Applicants and then advanced during the relevant years to Antbuilt, in its capacity as trustee of the Antbuilt Trust, for use as working capital of the business. The Applicants claimed deductions in respect of the interest paid to the bank from which they borrowed the funds.

6. The second category relates to funds borrowed to purchase two residential properties in a Canberra suburb. One of the properties is described as "Bell Street" and the other as "Walker Crescent". During the relevant years[1] From 2 May 2007 to 11 December 2007, Bell Street was rented to a third-party tenant, and so for the last two months of the 2007 income year the property was not available for use by the Trust. the Applicants made the properties available to the Trust for use as residential accommodation for subcontractors working in the building and construction business of the Trust. No rent was paid by the occupants of the properties to either the Applicants or the Trust. The Applicants claimed deductions for expenses incurred in connection with the two properties. Most of those expenses represent interest paid on loans to purchase the properties.

The test for deductibility - the Nexus with assessable income

7. The claims for deduction fall for consideration under s 8-1 of the Income Tax Assessment Act 1997 (the Act). They will be allowable if they were incurred "in gaining or producing [the Applicants'] assessable income".

8. Included in the Applicants' assessable income for each of the relevant years are trust distributions they received from the Antbuilt Trust. Put simply, the Applicants contend that the expenses they incurred (as described in [5] and [6] above) were incurred in gaining or producing those trust distributions.

9. To understand fully their contentions, it is necessary to set out relevant provisions of the Trust Deed, and also the various resolutions made by the Trustee (as referred to in [1] above) on which the Applicants particularly rely.

Relevant provisions of the trust deed

10. The Trust was established by Deed of Settlement dated 29 July 2004. Relevant provisions of the Trust Deed are set out below (underlining added):

  • 3. DISCRETION AS TO INCOME OF THE TRUST FUND
  • ...

  • 3.3 Trustee may determine

    The Trustee may at any time prior to the expiration of any year determine with respect to all or any part of the Income of the Trust Fund derived during any such year:

    • (a) to pay, apply or Set Aside such Income or any part of it for all or one or more of the Primary Beneficiaries living or in existence at the time of the determination;
    • (b) to pay, apply or Set Aside such Income or any part of it for all or one or more of the Secondary Beneficiaries living or in existence at the time of the determination;
    • (c) to pay, apply or Set Aside such Income or any part of it for all or one or more of the Tertiary Beneficiaries living or in existence at the time of the determination;
    • (d) to accumulate such Income or any part of it,

      provided that if the Trustee has not by the Thirtieth (30th) day of June in each such year exercised its discretion to pay, apply, Set Aside or accumulate the whole or any part of such Income then the Trustee shall hold it on trust absolutely for the Default Beneficiaries.

  • 3.4 Procedure for determination

    The following rules shall apply to any determination made pursuant to subclause 3.3 namely:

    • (a) any determination to accumulate Income shall be conditional upon the law in force in relation to this Deed giving effect to such determination at the end of the year in which such determination is made but except as provided in this subclause 3.4 each such determination shall be irrevocable;
    • (b) ...
    • (c) any determination may be made in writing signed by the Trustee or by resolution duly passed at a meeting of the Trustee or in the case of a determination to pay, apply or Set Aside any amount for any Beneficiary may be made by placing such amount to the credit of such Beneficiary in the books of the Trust Fund or by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such Beneficiary or by paying such amount in cash to or for the benefit of such Beneficiary;
    • (d) the Trustee shall have a complete discretion as to the making of any determination and shall not be bound to assign any reason for making such determination;
    • (e) in making any determination to pay, apply or Set Aside any amount the Trustee may exclude any Beneficiary and may determine to pay, apply or Set Aside such amount between the Beneficiaries in such proportions and in such manner as the Trustee in its absolute discretion shall think fit;
    • (f) if the Income of the Trust Fund in any year includes any amounts which are Net Capital Gains or Taxable Primary Production Income, then in making any determination to pay, apply or Set Aside any portion of the Net Capital Gain or Income from Primary Production, it shall be paid, applied or Set Aside for the benefit of such Beneficiary or Beneficiaries as the Trustee in its absolute discretion shall think fit to the exclusion of some or all of the other Beneficiaries; and
    • (g) if the Trustee receives a Franked Distribution or a Franked Distribution flows indirectly to the Trustee as referred to in Div 207 of Part 3-6 of the [Act] in any year, the Trustee may determine that the whole or some portion of the Franked Distribution shall be paid applied or Set Aside for the benefit of such Beneficiary or Beneficiaries as it in its absolute discretion shall think fit to the exclusion of some or all of the other Beneficiaries.

  • ...

  • 3.7 Vested Interest

    It is declared that each of the Beneficiaries in whose favour:

    • (a) the Trustee may pay, apply or Set Aside the Income for that year; or
    • (b) upon the failure of the Trustee to exercise his discretion to pay, apply Set Aside or accumulate under this clause 3, shall be entitled to share in the Income for that year as is provided in this Deed,

    SHALL have an immediate and indefeasible vested interest in that part of the Income for that year to which that Beneficiary is entitled. It is the express intention of the Settlor that each of the Beneficiaries shall be presently entitled to their share of such Income where the Trustee shall pay, apply or Set Aside the Income or, failing the exercise of the Trustee's discretion to pay, apply Set Aside or accumulate, such Beneficiaries shall be entitled to share in such Income as provided in this Deed and shall be presently entitled to his or her or their share of such Income.

  • ...

  • 5. POWER TO PAY OR APPLY FOR BENEFIT OF BENEFICIARIES
  • ...

  • 5.7 Determination or Resolution

    The payment, application or setting aside of Income of the Trust Fund to or for the benefit of a Beneficiary may be by a determination or resolution of the Trustee, and upon such determination or resolution being made the Beneficiary shall have an immediate vested indefeasible interest in and to that part or parts of the Income of the Trust Fund so paid, applied or Set Aside for the financial year to which the determination or resolution relates.

11. Those clauses of the Trust Deed, and a number of others besides, refer to the Trustee's power to "pay", "apply" or "set aside" the Income of the Trust Fund. That language will need to be borne in mind once the Trustee's resolutions are examined.

The Trustee's resolutions

12. There are three resolutions that the Trustee made and on which the Applicants particularly rely. I will refer to these three resolutions as the "Early Resolutions".

13. The first was made on 30 June 2005 and was recorded as follows (errors have not been corrected):

"...

MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY ACTING AS TRUSTEE FOR THE [ANTBUILT] TRUST, HELD AT REGISTERED OFFICE on 30/06/2005


PRESENT: NICHOLAS ANTONOPOULOS
NANCY ANTONOPOULOS
BUSINESS It was proposed by the directors Nicholas & Nancy Antonopoulos to contribute a loan for working capital to the "Antbuilt Trust" in consideration of trust distributions, a first preference of trust distributions not less than 5% of the total capital contribution loan derived from profits of the trust determined at the financial year end.
In the event of a loss incurred during the relevant year or profit being less than 5% of the total capital contribution/loan as at the relevant year the Directors Nicholas & Nancy Antonopoulos shall be entitled to a total payment of 5% of the total contribution/loan which shall be classified as interest to the extent that the payment has not been made out of profits in that particular year
The Capital contributions/loan may be withdrawn on 2 days notice.
The agreement shall operate until borrowings have been repaid and the accrued cost of borrowings recouped
That final contributions commencing July 2004 are financed from borrowings by the contributors
RESOLUTION It was resolved the trustee accept the offer and due consideration be made when a trust distribution is determined by the trustee that the lenders benefit with a a trust distribution in lieu of a return for their cost of their borrowings
(signed)
NICHOLAS ANTONOPOULOS"

14. The second resolution was made on 31 July 2005 and was similarly described as "Minutes of a Meeting of Directors of the Company acting as Trustee for the [Antbuilt] Trust", and again with both Applicants present. It recorded (errors have not been corrected):

"...


BUSINESS It was proposed by the directors Nicholas & Nancy Antonopoulos to contribute short term accommodation facilities at their investment property Bell st Griffith for itinerant contractors of "Antbuilt Trust" in consideration for trust distributions from profits derived by the trust at the financial year end.
That the property is financed from borrowings and is incurring interest.
RESOLUTION It was resolved the trustee accept the offer and due consideration be made when a trust distribution is determined by the trustee that the lenders benefit with a a trust distribution in lieu of a return for their cost of their borrowings and running cost of their property
That the accrued benefit recieved by the beneficiary shall equal the accummulated cost of property expenses
(signed)
NICHOLAS ANTONOPOULOS"

15. The third resolution was made on 30 June 2006 and was identical to the second resolution except that it had a reference to "Walker St" (sic) instead of Bell Street.

The Applicants' contentions in respect of the Early Resolutions

16. Dr Dwyer submitted that the Early Resolutions were intended to apply not only to the particular income year in which they were made, but also to future income years as well. The Applicants contend that the effect of the Early Resolutions was to render the Applicants "presently entitled" to distributions from the Trust, so making their expenses deductible.

17. The Applicants' case is articulated in this way so as to meet the requirement, established in numerous authorities, that a person claiming deductions of the kinds claimed here must be "presently entitled" to a share of the income of a trust estate. A person who has nothing more than an "expectation" of a trust distribution, or who may be described only as a "potential" recipient of trust income, cannot claim deductions since she is unable to show that she has anything more than a contingent right to a share of the trust income.

18. Relevant authorities include
Case M36, 80 ATC 280 and
Case U44, 87 ATC 318. In the former case, Dr G W Beck, a Member of the No. 3 Taxation Board of Review, said at p 281:

More particularly, if a separate decision is required from a party other than the taxpayer before income arising from the expenditure can find its way to the taxpayer, it is difficult to accept that the association, or nexus, between expenditure and income required by sec 51 [now s 8-1 of the Act] exists.

19. In Case U44, Dr P Gerber, then a Senior Member of this Tribunal, adopted Dr Beck's view of the law and added at p 320 (original emphasis):

... before this kind of expenditure can be deemed to be an allowable deduction, it must be demonstrated that the claimant is presently entitled to a share of the income of the trust estate.

20. The Commissioner's public rulings IT 328 and IT 329, which were referred to in argument by Dr Dwyer for the Applicants, discuss the notion of "present entitlement". IT 328 says at [15], for example, that a beneficiary should be considered "presently entitled" to income only if (relevantly, at paragraph (c)):

... the trustee has validly exercised a power granted to him under the trust deed which has the effect of making the beneficiary "presently entitled" ...

21. IT 329 explains at [3] that:

... the trustee has to take some formal action which, having regard to the terms of the particular trust instrument, has the legal effect of giving the beneficiary an immediate and irrevocable vested interest in the income - i.e. the beneficiary has to be put in a position where he would be able to demand an immediate payment ...

22. Dr Dwyer submitted that the Early Resolutions amounted to "binding agreements which gave [the Applicants] a vested and indefeasible interest once the agreements were minuted". The Trustee was bound in equity to honour the promises it had made. The Applicants were therefore "presently entitled" to income from the trust fund. Since the nexus between the expenditure and assessable income is established, the deductions claimed are allowable.

The Trustee's Later Resolutions

23. The Trustee made separate resolutions (the "Later Resolutions") concerning the distribution of trust income for the relevant years.

24. In respect of the 2006 income year, there were two resolutions. The first was dated 29 June 2006 and was in the following terms (errors have not been corrected):

"...

MINUTES OF A MEETING OF ANTBUILT PTY LTD TRUSTEE FOR THE ABOVENAMED TRUST HELD AT REGISTERED OFFICE ON 29.6.06


PRESENT: NICHOLAS ANTONOPOULOS
NANCY ANTONOPOULOS
DISTRIBUTION OF INCOME: Resolved that the trustee will, in the exercise of the discretionary powers granted to it under the trust deed hold, set aside and appropriate the whole of the income of the trust for the year ending 30th June 2006 for the benefit of:
NICHOLAS ANTONOPOULOS
NANCY ANTONOPOULOS
THE FIRST $60,000
BALANCE THEREOF
To include a distribution in lieu of rent and interest the trust has agreed to reimburse and recompensate the beneficiaries as per the agreement minuted.
It is recorded that the exact amount of this entitlement is not ascertainable until the accounts of the trust are finalised.
It is nevertheless recognised and admitted that by virtue of the exercises of the trustee's power's, the beneficiaries now have an immediate and indefeasable right to income so applied or set aside.
It is further recorded and amitted that the trustee is legally obligated to pay such income forthwith upon lawful demand being made therefore. Until such demand is made it is understood that the income is remain on deposit with the trustee of the trust on interest free terms.
Signed as a correct record.
(signed)
NICHOLAS ANTONOPOULOS"

25. The second resolution for the 2006 income year was dated 17 July 2006. It put final numbers to the resolution dated 29 June 2006. It was in the following terms (errors have not been corrected):

"...

MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY ACTING AS TRUSTEE FOR THE [ANTBUILT] TRUST, HELD AT REGISTERED OFFICE 17.7.06


PRESENT: NICHOLAS ANTONOPOULOS
NANCY ANTONOPOULOS
In their capacity as directors of the company.
DISTRIBUTION OF INCOME: It was noted that the accounts of the trust for the year ended 30th June 2006 had been completed and disclosed a surplus for the year of $468,719
In accordance with an earlier resolution of the company determining in whose favour the discretion of the trustee would be exercised in respect of the surplus for the year ended June 30th 2006
It was resolved that a distribution be made to the following beneficiaries.,
Nicholas Antonopoulos Income Distribution $46,500
Nicholas Antonopoulos Lieu of interest $13,500 $60,000
Nancy Antonopoulos Income Distribution $395,219
Nancy Antonopoulos Lieu of interest $13,500 $408,719
Total $468,719
Signed as correct
(signed)
NICHOLAS ANTONOPOULOS"

26. Likewise, in respect of the 2007 income year, there were two resolutions. The first was dated 29 June 2007 and its terms were identical to those of the resolution dated 29 June 2006, with two exceptions - the amounts differed from those for 2006; and there was a distribution to a third named beneficiary. The second resolution for the 2007 income year was dated 17 July 2007. It was in the following terms (errors have not been corrected):

"...

MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY ACTING AS TRUSTEE FOR THE [ANTBUILT] TRUST, HELD AT REGISTERED OFFICE 17.7.07


PRESENT: NICHOLAS ANTONOPOULOS
NANCY ANTONOPOULOS
In their capacity as directors of the company.
DISTRIBUTION OF INCOME: It was noted that the accounts of the trust for the year ended 30th June 2007 had been completed and disclosed a surplus for the year of $379,377
In accordance with an earlier resolution of the company determining in whose favour the discretion of the trustee would be exercised in respect of the surplus for the year ended June 30th 2007
It was resolved that a distribution be made to the following beneficiaries,
Nicholas Antonopoulos Income Distribution $92,000
Nicholas Antonopoulos Lieu of rent Walker Cl $14,500
Nicholas Antonopoulos Lieu of interest $13,500 $120,000
Nancy Antonopoulos Income Distribution $161,377
Nancy Antonopoulos Lieu of rent Walker Cl $14,500
Nancy Antonopoulos Lieu of interest $13,500 $189,377
AALTECH Trust $70,000
Total $379,377
Signed as correct
(signed)
NICHOLAS ANTONOPOULOS"

Were the Applicants "presently entitled" to distributions of trust income upon the making of the Early Resolutions?

27. I do not agree with the Applicants' contention that the Early Resolutions rendered the Applicants "presently entitled" to distributions of trust income. While it may be accepted that the Trustee was bound to honour its promise, the real question is: what promise did it make? And the answer to that question must be that it promised to give "due consideration" to making trust distributions when it came to exercise its discretion in the future.

28. The language of the Early Resolutions is not the language of the Trust Deed. Each of the Early Resolutions, although appearing to record the striking of a bargain - an offer made by the Applicants "in consideration of" or "in consideration for" trust distributions - is in truth, and in terms, a resolution by the trustee that it do no more than make "due consideration" to benefit the Applicants with a trust distribution when a trust distribution is determined by the trustee. If the Early Resolutions had amounted to an immediately "vested and indefeasible interest once the agreements were minuted", as Dr Dwyer asserts, then there would have been no need to refer to the trustee's acknowledgment that it would give "due consideration" to distributing income when a trust distribution is determined by the trustee.

29. By contrast, the Later Resolutions, in language more closely resembling that of the Trust Deed, speak of "hold[ing], set[ting] aside and appropriat[ing]" the income of the trust for the particular year of income. They also recognise and admit that the beneficiaries "now" have an immediate and indefeasible right to income "so applied or set aside".

30. I have concluded that the Applicants did not become "presently entitled" to income from the Trust until the Later Resolutions, made on 29 June 2006 and 29 June 2007, which recorded the Trustee's exercise of discretion to "hold, set aside or appropriate" the income, to the extent there recorded, for their benefit. It follows that the Applicants' primary submission fails.

The Applicants' alternative submissions

31. The alternative submissions are made on behalf of the First Applicant alone.

32. The first alternative submission is the "Default Beneficiary" submission. It is set out in [84] to [87] of the Applicants' Statement of Facts and Contentions (ASFC), as follows:

Mr Nicolas Antonopoulos was the default beneficiary of the Trust and presumptively entitled to income unless the Trustee chose to exercise its discretion in favour of some other beneficiary.

Mr Nicolas Antonopoulos was in a position to prevent the trustee so doing. Indeed, the Trustee, as a sole director, sole shareholder company, was his alter ego .

Therefore at the time of incurring expense Mr Nicolas Antonopoulos had an entitlement to income from the Trust which could not be divested without his consent and he was not a mere discretionary beneficiary.

It follows that he could be treated as having an almost certain entitlement to the income of the Trust rather than a mere spes or expectancy.

33. That submission disregards the legality of the arrangements by which the company, and the trust of which it was the trustee, chose to conduct its affairs. It seeks to undermine the provisions of the Trust Deed which required the exercise of a discretion by the Trustee (Antbuilt Pty Ltd), not by Mr Antonopoulos in respect of the income of the Trust. If the submission were to succeed, then the Early Resolutions and the Later Resolutions would all be unnecessary. The submission is rejected.

34. The remaining alternative submissions all have a "what might have been" flavour about them. The "Director" submission at ASFC [88] to [107] seems to suggest that the trust distributions could be regarded as a proxy for director's fees forgone by Mr Antonopoulos. The "Shareholder" submission at ASFC [108] to [113] is based on an assertion that Mr Antonopoulos increased the profitability of the company by making money and property available to the company and "increased profitability of the business could generate increased revenue for the Company itself and eventual dividends for the shareholder" (at [112]). The submission does nothing to bolster Mr Antonopoulos' claim that the expenses are deductible.

35. Dr Dwyer did not seriously press the "Property" or the "Financial resources" submissions at [114] to [121] of ASFC.

36. It follows that the Applicants have failed to demonstrate that the deductions claimed are available to them.

Penalty

37. The administrative penalty of 25% was imposed on the basis that (legislative references are to provisions in Schedule 1 to the Taxation Administration Act 1953):

  • • the Applicants made a statement to the Commissioner (s 284-75(1)(a));
  • • the statement was false or misleading in a material particular (s 284-75(1)(b));
  • • the Applicants have a shortfall amount as a result of the statement (s 284-75(1)(c));
  • • the shortfall amount resulted from a failure by the Applicants or their agent to take reasonable care to comply with a taxation law (item 3 in the table in s 284-90(1)).

38. The Applicants' submissions emphasise the absence of evasion or an intention to evade tax, and the absence of recklessness on their part. Those contentions may be accepted, but as the elements set out in [37] demonstrate, they are irrelevant to the question to be decided by the Tribunal on review.

39. The Applicants have failed to address the question whether they and their agent did indeed take reasonable care in making the statements they did. It must be remembered that they based their claim on their asserted "present entitlement" to income - and their own statements and that of their accountant confirm that this was always at least the primary basis, but more likely the only basis, of their claim.

40. There is no evidence of the level of care, if any, that they took to try to ensure that the claim was well founded. The most generous view that could be taken of the Early Resolutions is that they were uncertain in their effect, but there is no evidence that the Applicants did any more than tell their accountant what they wanted to achieve, or that the accountant did any more than draft the Early Resolutions as the means to achieve it. There is no evidence, for example, that the accountant gave formal advice in relation to the effect of the Early Resolutions; there is no evidence of any steps that he may have taken in drafting those resolutions, in deciding on their final form, or in rejecting (if that is what he did) alternative formulations of them.

41. Having regard to the Applicants' submissions, both written and oral, I am satisfied that the administrative penalty of 25% was properly imposed and I am not satisfied that it should be remitted to any extent.

Conclusion

42. The objection decisions must therefore be affirmed.


Footnotes

[1] From 2 May 2007 to 11 December 2007, Bell Street was rented to a third-party tenant, and so for the last two months of the 2007 income year the property was not available for use by the Trust.

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