The impact of this case on ATO policy is discussed in Decision Impact Statement: The Trustee for MH Ghali Superannuation Fund and Commissioner of Taxation (2010/4923-4924 ).
THE TRUSTEE FOR MH GHALI SUPERANNUATION FUND v FC OF TMembers:
E Fice SM
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
 AATA 527
Egon Fice (Senior Member)
1. MH Ghali Nominees Pty Ltd (Ghali Nominees) is the trustee of the MH Ghali Superannuation Fund (the Superannuation Fund). The directors of Ghali Nominees were Dr Magdi Ghali, Angela Ghali and Joanna Ghali. Dr Ghali and his wife, Angela Ghali, each held one share. The Superannuation Fund is a complying superannuation fund which is self-managed. For the 2005 and 2006 income years, the members of the Superannuation Fund were Dr Ghali and his wife Angela.
2. ACN 051471759 Pty Ltd was the trustee of the Ghali Unit Trust (the Unit Trust). Units in the Unit Trust were initially issued to Ghali Nominees as trustee of the Superannuation Fund and also to Dr Ghali. Dr Ghali and his wife were the directors of ACN 051471759 Pty Ltd. In the 2005 and 2006 income years, the unit holders in the Unit Trust were the Superannuation Fund, Dr Ghali and the MH Ghali Superannuation Fund No 2.
3. Ghali Nominees lodged income tax returns for the 2005 and 2006 income years. The Commissioner of Taxation (the Commissioner) issued assessments for those two years on 22 May 2006 and 1 August 2007 respectively. On 7 October 2008 the Commissioner notified Ghali Nominees that it had been selected for a specific issue audit for the income years 2004, 2005, 2006 and 2007. In a letter dated 13 August 2009 the Commissioner notified Ghali Nominees that the audit had identified that part of the income received by the Superannuation Fund in the 2005 and 2006 income years was not correctly classified as Special Income. The Commissioner stated he proposed to amend the income tax returns for those income years.
4. The Commissioner issued amended assessments to Ghali Nominees for the 2005 and 2006 income years on 21 August 2009. The Commissioner also issued a notice of assessment and liability to pay penalty for both years at the rate of 50% on the ground that the taxpayer was reckless when preparing the income tax returns. Dissatisfied with those amended assessments and the penalty assessment, Mr George Ring, an accountant acting on behalf of Ghali Nominees, lodged with the Commissioner objections in respect of both income years and an objection in respect of the penalty assessment.
5. In a Notice of Objection Decision dated 10 September 2010, the Commissioner notified Ghali Nominees that its objections against the amended assessments for the 2005 and 2006 income years were disallowed in full. The Commissioner reduced the rate of penalty imposed on the tax shortfall to 25%. Dissatisfied with the Commissioner's Objection Decision, Ghali Nominees lodged an application with the Tribunal for review of that decision on 9 November 2010.
6. The parties agreed that there are four issues which need to be determined by the Tribunal. They are:
- (a) whether the applicant held a fixed entitlement to the income of the Unit Trust for the 2005 and 2006 income years for the purposes of s 273(6) and (7) of the Income Tax Assessment Act 1936 (ITAA 36);
- (b) in the event that Ghali Nominees did have a fixed entitlement to the income of the Unit Trust for the relevant years, whether the amounts derived by the Superannuation Fund are otherwise special income for the purposes of s 273(7) of ITAA 36;
- (c) in the event that the income derived was special income, whether a capital gain of $1,995,968 was required to be included in the 2006 income tax return of the Unit Trust in 2006 or at the time of settlement (2012); and
- (d) in the event that the income derived was special income, whether the administrative penalty imposed by the Commissioner was excessive.
SPECIAL INCOME - FIXED ENTITLEMENT - SECTION 273(6)
7. Section 273 of the ITAA 36 was amended by the Superannuation Legislation Amendment Bill (No. 2) 1999 so that distributions from all trusts, other than where the superannuation fund, approved deposit fund or pooled superannuation trust has a fixed entitlement to income from the trust; and non-arm's length trust distributions of income where the superannuation fund, approved deposit fund or pooled superannuation trust has a fixed entitlement to income from the trust, are to be regarded as special income. The Explanatory Memorandum accompanying the Bill explained that the amendments were strictly anti-avoidance in nature. The Australian Taxation Office (ATO) had become aware of arrangements which had circumvented s 273. Pre-tax income of a trust was distributed to a complying superannuation fund set up for the benefit of the beneficiaries of that fund rather than to the beneficiaries themselves. The consequence was that the income was taxed at 15% as income of the superannuation fund rather than at the marginal rate of tax applicable to other beneficiaries.
8. Although the amending provisions were repealed in September 2006, there was no question about the fact that they applied to the 2005 and 2006 income years.
9. In so far as it is relevant for the purposes of this case, s 273 provided:
273 Special income
- (1) This section applies to income derived in a year of income by a fund or unit trust (in this section called the entity) that is a complying superannuation fund, a complying ADF or a PST in relation to the year of income.
- (2) ...
- (3) ...
- (4) Income (other than a dividend to which subsection (2) applies or income derived by the entity in the capacity of beneficiary of a trust estate) derived by the entity from a transaction is special income of the entity if the parties to the transaction were not dealing with each other at arm's length in relation to the transaction and that income is greater than the income that might have been expected to have been derived by the entity from the transaction if those parties had been dealing with each other at arm's length in relation to the transaction.
- (5) A reference in subsection (4) to a transaction includes a reference to a series of transactions.
- (6) Income derived by the entity in the capacity of beneficiary of a trust estate (other than by virtue of holding a fixed entitlement to the income) is special income of the entity.
- (7) Income derived by the entity in the capacity of beneficiary of a trust estate by virtue of holding a fixed entitlement to the income is special income of the entity if:
- (a) the entity acquired the fixed entitlement under an arrangement (see subsection (8)), or the income was derived under an arrangement, some or all of the parties to which were not dealing with each other at arm's length in relation to the arrangement; and
- (b) the amount of the income is greater than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm's length in relation to the arrangement.
- (8) In subsection (7), arrangement means:
- (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
- (b) any scheme, plan, proposal, action, course of action or course of conduct.
10. The first question raised by the parties is whether Ghali Nominees in its capacity as trustee of the Superannuation Fund derived income from the Unit Trust, as a beneficiary of that trust, other than by virtue of holding a fixed entitlement to the income. Ghali Nominees contended that it held a fixed entitlement to the income of the Unit Trust for the 2005 and 2006 income years.
11. It is of some significance to note the units held by various entities in the 2005 and 2006 income years. In a facsimile dated 19 January 2009, Mr Ring provided to the ATO the financial reports for the 2005 and 2006 income years. In those reports, the Balance Sheet disclosed the following subscribed units:
|Year||Superannuation Fund||Dr Ghali|
12. On 29 April 2009 the ATO sent to Mr Ring a report on the progress of the audit being conducted. It created the following tables setting out the units held and distribution entitlements of the Superannuation Fund and Dr Ghali. Those tables were as follows:
|Year||Total Trust Units||Unit Holding||Unit Holding %||Distribution Entitlement||Distribution Received %||Distribution Amount ($)|
|Year||Total Trust Units||Unit Holding||Unit Holding %||Distribution Entitlement||Distribution Received %||Distribution Amount ($)|
|Year||Total Trust Distribution ($)|
13. The ATO then set out a table indicating the proposed amendments to the income years in question on the basis that the distributions from the Unit Trust were deemed to be special income. In an apparent response to the ATO audit report, Mr Ring notified the ATO by facsimile on 15 June 2009 that there were some errors in the Unit Holders Records. Mr Ring referred to the 1992 purchase of a property in Victoria for approximately $1,000,000. He said that Dr Ghali obtained a bank loan for $1,006,000 and that loan was used to purchase units in the Unit Trust. He said the record was not corrected until 2004 although the property was sold in June 2003. He said that at some time prior to the sale, the bank loan was repaid and the units were repaid at issue price. The repurchase of the units had not been recorded. However, other than Mr Ring's statement about these matters, there was no objective evidence to that effect.
14. Mr Ring also stated that the unit holder's records disclosed the issue of 1,300,000 units at $1 to Dr Ghali in 2004. According to Mr Ring, his investigations indicated that the units may never have existed in the present form, whatever is meant by that statement. Mr Ring also stated that he was presently considering his options regarding amending the income tax returns in question. Mr Ring repeated these statements in further facsimiles to the ATO on 17 and 18 June 2009. Mr Ring said that an accountant other than himself had worked on this client's file and had recorded a transfer of units from MH Ghali Pty Ltd. Although Mr Ring in that facsimile said that they were transferred to MH Ghali Pty Ltd, he clearly intended to state that they were transferred to Dr Ghali. The Unit Trust Register seems to record that has having occurred on 30 June 2004. I should say that the Unit Trust Register is very difficult to follow, there being numerous subsequent entries and deletions made from the unit holdings with numerous arrows and lines depicted. One thing however is clear, and that is that the entries are almost all made on 30 June of each year. There were no other documents tendered in evidence to support the basis of any of the subsequent adjustments made to the Unit Trust Register.
15. Taking account of the amendments made to the Unit Trust Register, Mr Ring, in his witness statement made on 13 May 2011, provided the Tribunal with the following table of unit holdings for the 2005 and 2006 income years:
|Ghali Fund||3,295,755 (2,780,935.27+14,819.73+500,000)||3,295,755|
|MH Ghali Superannuation Fund No. 2||100,700||100,700|
16. Mr Ring also said in his witness statement of 13 May 2011 that the MH Ghali Superannuation Fund No. 2 held 100,700 units in the Unit Trust in the 2005 and 2006 income years. He said that this fund became inactive in around 2003 and did not receive any distributions after that time. Mr Ring said he treated its units as part of the Superannuation Fund for this reason.
17. Although Dr Ghali provided a witness statement dated 29 May 2012, and he gave oral evidence, he said that he relied heavily on Mr Ring to prepare and lodge accounts, reports, income tax returns and to attend to all other administrative tasks required for the Superannuation Fund and the Unit Trust. He said he was unaware of the number and type of units held by the unit holders of the Unit Trust in the 2005 and 2006 income years or how income was distributed to the Superannuation Fund from the Unit Trust. He said he relied on Mr Ring to calculate the value of units in the Unit Trust. In cross-examination Dr Ghali was asked if he had authorised Mr Ring to exercise the discretion given to the trustee of the Unit Trust. He said that he followed Mr Ring's advice. He also agreed that he relied on Mr Ring to calculate the value of units in the Unit Trust and that he was not aware of the number or type of units in the Unit Trust.
18. In a Deed of Acknowledgment which appears to have been made on 6 May 2011, and executed by Dr Ghali in his capacity as a director of the trustee of the Unit Trust; as a director of the trustee of the Superannuation Fund; as a director of the trustee of the Ghali Superannuation Fund No. 2; and in his own right, Dr Ghali acknowledged that for and during the years ended 30 June 2005 and 30 June 2006, the unit holding was as follows:
- (a) the Superannuation Fund was registered as the owner of 3,295,755 A Class units in the Unit Trust;
- (b) the Ghali Superannuation Fund No. 2 was registered as the owner of 100,700 A Class units in the Unit Trust; and
- (c) he was registered as the owner of 2,864,180 C Class units in the Unit Trust, being all of the C Class units on issue.
19. When asked about the Deed of Acknowledgment and its execution in the course of his cross-examination, Dr Ghali said that he could not remember executing it but he was certain that he had signed in the various capacities as indicated. He said he believed that at the time he executed that document, the units said to be on issue by the Unit Trust was correct.
20. Regardless of the explanations provided by Mr Ring, the Commissioner issued notices of amended assessment to the Superannuation Fund on 21 August 2009 and 26 August 2009. These amended assessments were in accordance with what was stated in the ATO letter to the trustee of the Superannuation Fund on 13 August 2009, save for a typographical error in the shortfall penalty amount for the 2005 income year. They were as follows:
|Special Income||Original Return||Amended Tax Rate||Shortfall Amount||Penalty-50%|
|Gross Distribution from the Unit Trust - 2005||$361,473 was originally taxed at 15% - tax payable $54,220.95||$361,473 taxed at 47% - tax payable $169,892. 31||$115,671.36 ($169,892.31-$54,220.95)||Shortfall amount at 50% -$57,385.68(sic)-corrected amount $57,835.65|
|Income Distribution and Capital Gains from the Unit Trust - 2006||$1,525,713 originally taxed at 15% - tax payable $228,856.95||$1,525,713 at 47% - tax payable $717,085.11||$488,228.16 ($717,085.11 minus $228,856.95)||Shortfall amount at 50% -$244,114.08|
21. The first ground relied on by the Commissioner is that set out in s 273(6) of ITAA 36. Unless the beneficiary of a trust estate can establish that income derived by it was derived by virtue of holding a fixed entitlement to the income, it is, without anything further, special income.
22. Mr S A Tisher of counsel, who appeared on behalf of the trustee of the Superannuation Fund, submitted that at all relevant times, the trustee of the Superannuation Fund held a fixed entitlement to the income of the Unit Trust. There was no dispute between the parties that for the purposes of s 273(6), a beneficiary would have a fixed entitlement to the income of a trust estate if the beneficiary's interest in the income was vested in interest immediately before the amount was derived by the trustee.
23. Mr S Ure of counsel, who appeared on behalf of the Commissioner, submitted that if a superannuation fund derives income from a trust by way of the trustee or any other person exercising or omitting to exercise a discretion, the fund's interest is not fixed and the income distributed will be special income. He said that only a fund whose entitlement to income derived by the trust was not contingent upon the trustee or another person exercising the discretion held a fixed entitlement to the income.
24. The beneficial interest of unit holders in the Unit Trust is divided into $1 units. The Unit Trust Deed, at clause 2.7, provides that the Trust Fund shall initially be divided into a number of $1 units and classified as A Class, B Class, C Class and D Class units. Clause 2.7.1 provides that A Class units carry an entitlement to a share in the capital of the Trust Fund upon the termination of the trust; the distribution of the income of the trust in accordance with the provisions of clause 12; the right to one vote in respect of each unit held; and the right to resolve by unanimous agreement with other A Class unit holders the amount of the income to be distributed to the holders of B, C and D Class units. Clause 12.1 of the Trust Deed provides for the division and classification of income. Clause 12.3.1 deals with the distribution of income and it provides:
- 12.3.1 The Trustee may subject to the provisions in this clause and subject to any special rights or restrictions provided in clause 2.7 in relation to units of any class distribute at any time to any one or more of the classes of Unitholders or to any one or more of the unitholders within a particular class to the exclusion of other unitholders such of the income of the Trust Fund as the Trustee may in its absolute and uncontrolled discretion decide.
25. Clause 12.3.11 of the Trust Deed provides:
- 12.3.11 The Trustee shall in its absolute discretion determine which class of Unitholders shall be presently entitled to such Income of the Trust Fund as is agreed upon in accordance with the requirements of clause 12.3.1 and in default of such determination the Unitholders in the same proportions as they hold units in the Trust Fund shall notwithstanding classification be presently so entitled.
26. Mr Ure submitted that the Superannuation Fund did not hold a fixed entitlement in the income derived from the Unit Trust as the entitlement of unit holders to income from the Unit Trust was not vested in interest before the trustee derived the income. He submitted it was contingent upon a number of matters, including:
- (a) a unanimous agreement by A Class unit holders resolving the amount of income to be distributed to B, C and D unit holders and the extent of any A Class unit holder's entitlement being dependent upon securing the agreement of each other A Class unit holder;
- (b) when no resolution was made by A Class unit holders under clause 2.7.1, the amount of income to be distributed to C Class unit holders was at the discretion of the trustee in accordance with clause 2.7.3; and
- (c) the trustee retained a discretion to withhold trust income from distribution to the unit holders whether or not the A Class unit holders made a 2.7.1 resolution.
27. Although Mr Tisher submitted that the expression fixed entitlement is not defined in ITAA 36, with respect, that is incorrect. The meaning of that expression was set out in Schedule 2F at Subdivision 272-A of ITAA 36 in the 2005 and 2006 income years and it remains in the current Act. Section 272-5 sets out the meaning of the expression fixed entitlement to a share of income or capital of a trust. Insofar as it is relevant, it provides:
272-5 Fixed entitlement to share of income or capital of a trust
- (1) If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.
28. The question therefore in this case is whether the Unit Trust Deed grants a beneficiary of that trust a vested and indefeasible interest in a share of the income or capital of the trust. If it does, a unit holder has a fixed entitlement to a share of income or capital of the trust. In the High Court of Australia decision
Glenn and others v The Federal Commissioner of Land Tax (1915) 20 CLR 490 Griffith CJ referred to the work of Mr Fearne, Contingent Remainders, where he distinguished between estates vested in possession and estates vested in interest. The author said:
... that an estate is vested when there is an immediate fixed right of present or future enjoyment, is vested in possession when there exists a right of present enjoyment, and is vested in interest when there is a present fixed right of future enjoyment.
29. The Full Court of the Federal Court of Australia in
Walsh Bay Developments Pty Ltd and Another v Federal Commissioner of Taxation (1995) 31 ATR 15 also dealt with the expression present entitlement. Beaumont and Sackville JJ referred to the statement made by Griffith CJ in Glenn's case and went on to explain that an estate is contingent if the title of the holder depends upon the occurrence of an event which may or may not take place. Their Honours said, at 27:
However, the mere fact that an estate will not tall [sic]into possession until the regular determination of a prior estate does not make the first state contingent....
For these reasons it is said that before a beneficiary is entitled to a vested interest two things must occur:
- (a) his identity must be established;
- (b) his right to the interest (as distinguished from his right to possession) must not depend upon the occurrence of some event.
30. Beaumont and Sackville JJ referred to the distinction between vested but defeasible interests and an indefeasible interest as stated in Cheshire's Modern Law of Real Property, where the author said:
A defeasible interest is an interest that is to be defeated by the operation of a subsequent or mixed condition.
An indefeasible interest, or an absolute interest as opposed to a defeasible interest, is one that is not subject to any condition.
31. Beaumont and Sackville JJ also explained that there was a distinction between a contingent interest and a defeasible interest. They said the latter is a vested interest, which is liable to be divested by a supervening event. They said the distinction was not always easy to apply.
32. In my opinion, at the time the Superannuation Fund acquired A Class units in the Unit Trust, as holder of those units, the Superannuation Fund had an immediate fixed right of present or future enjoyment. In other words, it held a vested interest which, at the time of issue, was only vested in interest, not in possession. That is because, in accordance with clause 2.7 of the Trust Deed, the holder of each class of units is granted a right to share in the distribution of the income of that trust. Although it is true to say, as does the Commissioner, that clauses 2.7.1 - 2.7.4 are concerned with the amount of the income which may be distributed to the various classes of unit holders, that does not affect the essential right of a unit holder to the distribution of income from the trust. The opening sentence in each of those clauses is as follows:
- 2.7.1 "A" Class units shall carry an entitlement to a share in the Capital of the Trust Fund upon the termination of the Trust [and] a share in the distribution of the Income of the Trust...
- 2.7.2 "B" Class units shall carry an entitlement to a share in the Capital of the Trust Fund upon the termination of the Trust and a share in the distribution of Income of the Trust...
- 2.7.3 "C" Class units shall carry a right to receive a share in the distribution of the Income of the Trust...
- 2.7.4 "D" Class units shall carry an entitlement to a share in the distribution of Income of the Trust...
33. Although Mr Ure submitted that each of the clauses I have referred to above make it clear that the amount of income to be distributed to each class of unit holder is contingent upon A Class unit holders resolving by unanimous agreement the amount of income to be distributed, that does not, in my opinion, affect the right to income which is created by the issue of a unit. That right is vested in interest giving the holder an immediate fixed right of present or future distributions of income. The quantum of the distribution to each class of unit holders is a discrete matter. It cannot be correct to conflate the right to distribution of income with the amount of income to be distributed and conclude that the interest is not fixed, but rather contingent. To do that, is to insist that the interest must also be vested in possession. That is simply incorrect.
34. Mr Ure also referred to clause 12 of the Trust Deed. As the heading to that clause makes clear, it is concerned with the distribution of income, capital reserve and distribution of capital. It is not concerned with the right to receive income. Clause 12.3.1 grants to the trustee an absolute and uncontrolled discretion regarding the distribution of income, subject to restrictions set out in clause 2.7 in relation to the various classes of units. Clause 12.3.3 grants to the trustee an absolute discretion to hold and accumulate the balance of the income of the Trust Fund. Clause 12.3.11 provides that the trustee, in its absolute discretion, shall determine which class of unit holder is presently entitled to income of the Trust Fund as agreed upon in accordance with clause 12.3.1 and, further, in default of any such determination being made by the trustee, the unit holders are deemed to be presently entitled to that income of the Trust Fund in the same proportions as they hold units in the fund.
35. To fall within the definition of the expression fixed entitlement, a beneficiary's interest need only be vested, not vested in interest and in possession. Hill J explained the difference in
Dwight v Federal Commissioner of Taxation (1992) 23 ATR 236, at 248:
... Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession:
Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496 per Griffiths CJ at 501 per Isaacs J. ...
36. Clause 12.3.11 of the Unit Trust Deed deals with a beneficiary's right to be presently entitled to a distribution of income from the Trust Fund. However that clause must be read subject to the provisions in ITAA 36 dealing with present entitlement. Section 97 of ITAA 36 in essence provides that the assessable income of a beneficiary who is not under any legal disability and is presently entitled to a share of the income of the trust estate includes that beneficiary's share of the net income of the trust estate. Prior to the introduction of s 95A(2), the cases established that a beneficiary was presently entitled to a share of the income of the trust estate if, but only if:
- (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and
- (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment (
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271).
37. Section 95A(2) deems a beneficiary to be presently entitled to the income of the trust estate where the beneficiary has a vested and indefeasible interest in any of the income of that trust estate, but where the beneficiary is not presently entitled to that income. Therefore, it follows, as Hill J said in Dwight's case at 248:
... To put it another way, to the extent that the requirement of "presently entitlement" (sic) requires that the beneficiary be able to call for the income of the trust fund at least by the end of the year of income in all cases, that can be put to one side when considering whether the beneficiary has a vested and indefeasible interest in the income.
38. As the Full Court of the Federal Court (Wilcox and Lee JJ) said in
Commissioner of Taxation v Harmer and Others (1990) 24 FCR 237 at 252:
Whether there is a vested and indefeasible interest depends on the terms of the trust. ...
39. Obviously, the same test is applied to a beneficiary when considering whether that beneficiary has a fixed entitlement to a share of the income or capital of the trust. In my opinion, clause 12.3.11 of the Unit Trust Deed makes it abundantly clear that a unit holder's interest in the income or capital of the trust is vested irrespective of whether the trustee exercises its absolute discretion to determine which class of unit holder is presently entitled to income of the Trust Fund. It is not contingent upon the trustee making a determination or on any other event.
40. The second limb of the definition of fixed entitlement requires that under the trust instrument, a beneficiary must have an indefeasible interest in the share of income of the trust or the capital of the trust. Hill J in Dwight's case said, at 249:
An interest is said to be defeasible where it can be brought to an end and indefeasible where it can not. Thus, a beneficiary with an interest which is not contingent but which interest may be brought to an end by the exercise of a power of appointment, would be said to have a vested but defeasible interest...
An interest may be vested and indefeasible, notwithstanding that it is subject to a security interest in another. ...
41. As the Superannuation Fund held only A Class units, I will only examine that class of unit in order to determine whether the Superannuation Fund has an indefeasible interest.
42. The only clause in the Unit Trust Deed which appears to be relevant to the defeasible question is clause 8 which deals with the forfeiture of units. The reason for the insertion of this clause is that under clause 2.7.1, A Class units may be allotted upon the payment of at least 1 cent per unit with the balance payable at call. Clause 8.1 provides that if a unit holder fails to pay a call or instalment of a call on the day appointed for payment, that Trustee may serve notice on the unit holder requiring payment of so much of the call or instalment as is unpaid together with any interest that has accrued. Failure to make the payment as required by the Trustee may result in the forfeiture of the units by resolution of the Trustee to that effect.
43. In his first witness statement made on 13 May 2011, Mr Ring testified that the amount of $1 was paid for each unit, regardless of class type. In his second witness statement dated 2 March 2012 Mr Ring testified that the units acquired by the Superannuation Fund in the Unit Trust were paid for by cheque drawn on the Superannuation Fund. He also stated that further units were issued to the Superannuation Fund by way of reinvestment of profit distributions previously made by the Unit Trust. In cross-examination, Dr Ghali confirmed that the units acquired by the Superannuation Fund were paid for by cheque. There was no evidence before me to the contrary and accordingly I find that all of the A Class units held by the Superannuation Fund were fully paid. Therefore, none of the units held by the Superannuation Fund were subject to a call and hence to forfeiture.
44. For the reasons I have set out above, I find that the income derived by the Superannuation Fund in its capacity as a beneficiary of the Unit Trust was by virtue of holding a fixed entitlement to the income. It follows that the income derived by the Superannuation Fund in its capacity as a beneficiary of the Unit Trust cannot be special income pursuant to s 273(6) of ITAA 36.
FIXED ENTITLEMENT UNDER AN ARRANGEMENT - SECTION 273(7) - FIRST LIMB
45. Section 273(7) applies where an entity derives income in its capacity as a beneficiary of a trust estate by virtue of holding a fixed entitlement to the income. Such income is special income if:
- (a) the fixed entitlement or income was derived under an arrangement where some or all of the parties to that arrangement were not dealing with each other at arm's length; and
- (b) the amount of the income is greater than might have been expected if the parties had been dealing with each other at arm's length.
46. The expression arrangement is defined in s 273(8) which I have set out above. The Superannuation Fund did not dispute that the acquisition of units in the Unit Trust was an arrangement within the meaning of s 273(8) for the purposes of s 273(7)(a). As I understood that submission, the Superannuation Fund did not dispute that it acquired a fixed entitlement by the allotment of units in the Unit Trust under an arrangement. Given the width of the definition, I find that concession was properly made. The Superannuation Fund did however dispute the Commissioner's claim that the parties to the arrangement did not deal with each other at arm's length.
47. As Mr Tisher submitted, the expression arm's length is defined in s 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 97). That section states:
arm's length : in determining whether parties deal at arm's length , consider any connection between them and any other relevant circumstance.
48. I agree with Mr Tisher's submission that the statutory definition in fact contains a direction about how to determine whether the parties are dealing at arm's length rather than a definition or explanation of the expression. There are numerous cases which have dealt with this expression in the context of taxation disputes. As Hill J pointed out in
Trustee for the Estate of the late A W Furse No 5 Will Trust v Federal Commissioner of Taxation (1990) 21 ATR 1123, the expression dealing with each other at arm's length is to be distinguished from the expression not at arm's length. As to the latter expression, his Honour said that the words under consideration made it clear that the statute was concerned with the relationship between parties rather than the quality of the dealing between them. This was also made clear by Davies J in Re Hains (deceased);
Barnsdall v Federal Commissioner of Taxation (1988) 19 ATR 1352 where he said, at 1355:
If the term were simply "not at arm's length",
Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 would apply....
However, s 26AAA(4) used the expression "not dealing with each other at arm's length". That term should not be read as if the words "dealing with" were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion.
49. Dowsett J in
Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 summarised the cases dealing with this expression where he said at 213:
I have no real difficulty with any of the propositions which emerge from those cases. They may be summarised as follows:
- • in determining whether parties have dealt with each other at arm's length in a particular transaction, one may have regard to the relationship between them;
- • one must also examine the circumstances of the transaction and the context in which it occurred;
- • one should do so with a view to determining whether or not the parties have conducted the transaction in a way which one would expect of parties dealing at arm's length in such a transaction;
- • relevant factors which may emerge include existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might enable either party to influence or control the other, or induce either party to serve a common interest and so modify the terms on which strangers would deal;
- • where the parties are not in an arm's length relationship, one may infer that they did not deal with each other at arm's length, and that the resultant transaction is not at arm's length;
- • however related parties may, in some circumstances, so conduct a dealing as to displace any inference based on the relationship;
- • un-related parties may, on occasions, deal with each other in such a way that the resultant transaction may not properly be considered to be at arm's length.
50. Although Dowsett J dissented in that case, on the ground whether the transaction between the parties was conducted at arm's length, the majority, Edmonds and Gordon JJ, did not disapprove of his analysis of the cases or of the summary I have set out above.
Allen (As Trustee of the Allen's Asphalt Staff Superannuation Fund) v Federal Commissioner of Taxation (2010) 80 ATR 849, Collier J referred to the Australian Trade Commission case and said, at 871:
... It follows from this consideration that, if conduct of parties is not consistent with conduct of independent third parties, because one party is exerting personal influence or control over the other or others, dealings between them cannot be termed "arm's length."
In this case the relevant trusts, established for the benefit of persons including the applicant, could not realistically be said to be at arms length [sic] either from each other or the applicant. All relevant actions leading to and including the distribution of income to the superannuation fund were taken either by Mr Allen or by trusts under his control.
52. The starting point for this analysis must necessarily be the relationship between the Unit Trust and the Superannuation Fund. The trustee of each of these entities is a corporation. Ghali Nominees is the trustee of the Superannuation Fund and ACN 051471759 Pty Ltd is the trustee of the Unit Trust. Dr Ghali, his wife and his daughter are the directors of Ghali Nominees. Dr Ghali and his wife are shareholders in that company and they are also the members of the Superannuation Fund. Dr Ghali and his wife are the directors of ACN 051471759 Pty Ltd. Other than the Superannuation Fund and the No 2 Superannuation Fund, the only other entities which are recorded as having held units in the Unit Trust were MH Ghali Pty Ltd and Dr Ghali. In his witness statement made on 13 May 2011 Mr Ring testified that Dr Ghali controlled between five and seven entities.
53. All of the documents in evidence which have been executed by the trustees of the Superannuation Fund and the Unit Trust have been executed by Dr Ghali as director and Mrs Ghali as secretary. More significantly, Mr Ring testified that the Unit Trust Register recording issued units contain errors which he subsequently corrected. Following the making of those corrections, a Deed of Acknowledgment was executed by ACN 051471759 Pty Ltd, MH Ghali Nominees Pty Ltd as trustee of the Superannuation Fund, MH Ghali Nominees Pty Ltd as trustee of the No 2 Superannuation Fund and by Dr Ghali. Dr Ghali executed that deed as a director of each of those entities as well as in his own right. Furthermore, Mr Ring testified that he had a close working relationship with Dr Ghali who he visited about four times per year to discuss his affairs in some detail. He also said he spoke with him on the telephone every 10 days or so.
54. In my view, the evidence discloses that Dr Ghali is in fact the controller of each of the entities I have referred to above. There was no evidence before me that any of the other directors participated in the decision-making in respect of any of the corporate entities. In fact, Dr Ghali testified that he was unaware of the number and type of units held by the unit holders of the Unit Trust in the 2005 and 2006 income years or how income was distributed to the Superannuation Fund from the Unit Trust. He said he relied on Mr Ring to calculate the value of units in the Unit Trust. He confirmed that Mr Ring visited him in Tasmania a few times each year to discuss my financial affairs and that they also spoke on the phone. In cross-examination Dr Ghali agreed that his wife authorised him to deal with Mr Ring generally and specifically with the Superannuation Fund. He also testified that when it came to the exercise of discretion, he followed Mr Ring's advice as he trusted him. Therefore, there can be no doubt that the trustees of the Superannuation Fund and the Unit Fund are related entities.
55. Given my finding that Dr Ghali was the person directing the dealings between the Unit Trust and the Superannuation Fund, and that in fact he acted on both sides of any such negotiations, one might reasonably be forgiven for coming to the conclusion that any such dealings could not be at arm's length. In fact Davies J in Hains' case, at 1355-1356, referred to two Canadian cases making that exact point. Cattanach J in
Minister of National Revenue v Merritt  CTC 207 said, at 217:
In my view, the basic premise on which this analysis is based is that, where the "mind" by which the bargaining is directed on behalf of one party to a contract is the same "mind" that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm's length. In other words where the evidence reveals that the same person was "dictating" the "terms of the bargain" on behalf of both parties, it cannot be said that the parties were dealing at arm's length.
56. Nevertheless, Davies J accepted that there may be transactions between related parties in which the parties deal with each other at arm's length. This was the case notwithstanding a close relationship between the parties or the power of one party to control the other. Even though, as a matter of common sense, it cannot be said that a person dealing effectively with themselves in a different capacity can do so at arm's length, I propose to look in more detail at the transactions between the two parties in order to determine conclusively whether the parties were dealing with each other at arm's length.
57. The only evidence before me about the allocation of units in the Unit Trust was that either provided by Mr Ring in his witness statements and orally, and two copies of the register recording the issue of units. Both Mr Ring and Dr Ghali gave evidence that the units were paid for by cheque. They also gave evidence about the revocation of units. However there was no other documentation to support that evidence and in fact Mr Ring's evidence was that no unit certificates were ever issued to unit holders as is required under the Unit Trust Deed in clauses 2.8.4 - 2.8.8.
58. The closing figures recording allocated units for the 2005 and 2006 income years of course are recorded in the Balance Sheet of the Unit Trust for those years. Logically, I would also have expected the closing balances for those years to be recorded in the Balance Sheet of the Superannuation Fund as assets, usually described under the heading Investments. While there are in fact unit issues recorded in the Superannuation Fund Balance Sheet for those years indicating investments in the nature of units in unlisted unit trusts, those figures do not correspond with the Balance Sheet of the Unit Trust indicating allotment of units to the Superannuation Fund.
59. Although Mr Ring, in his third witness statement made on 18 May 2012, testified that each time units were issued or redeemed the transaction was evidenced by entries in the Unit Trust Register and by Journal entry and ledger entry in the books of the relevant entity, the Register attached to Mr Ring's first witness statement only records entries made on 30 June 2003, 30 June 2004, 30 June 2005, and 1 July 2006. I should however point out that even though I have only copies of the Register before me, it is clear to me that the attachment to Mr Ring's first witness statement was subsequently amended by whiting out the entry which previously read 30 June 2007 and in its place was substituted the words July 2005 and 1 July 2006 on the same line. The earlier version of the copy of the relevant Register page appears to have been sent to the ATO on 19 January 2009. The effect of that alteration is that rather than 1,500,000 units being allocated to the Superannuation Fund on 30 June 2007, that allocation is now recorded as having taken place on 1 July 2006. While that of course does not affect the income years with which this matter is concerned, it does not give me great confidence in the accuracy of the Register. Furthermore, as the Register discloses, there are numerous allocations and redemptions recorded on 30 June 2003 and 2004. Some of the annotations to those entries indicate that they were made to correct distribution. On its face, it appears that those entries were made subsequent to distributions being made. If that was the case, it simply underscores the fact that the allocation of units in the Unit Trust and subsequent distributions of income from Unit Trust investments had nothing whatsoever to do with arm's length dealings.
60. In his witness statement dated 18 May 2012 Mr Ring testified that in June 2004 2,000,000 units owned by Dr Ghali were redeemed for $1 per unit. The Unit Trust Register records the removal of 2,000,000 units from Dr Ghali's holding and the description given is Tfrd to loan MHG. Assuming that the description is intended to mean that on redemption of the units, the capital held by Dr Ghali was transferred to a debt owed to him by the Unit Trust, one would expect to see an increase in the Unit Trust's liabilities of $2,000,000 recorded in the Balance Sheet for 30 June 2004. In fact, it does not, although the balance sheet records Loan - MHG, AG, JRG, the balance as at 30 June 2004 is $0.
61. There are many other discrepancies in the Register recording the issue and redemption of units, some of which remain unexplained. In a facsimile to the ATO dated 17 June 2009 Mr Ring pointed out that in 1995 an accountant other than himself worked on this client's file and made an entry in the Unit Trust Ledger indicating the issue of 1,300,000 units to MH Ghali Pty Ltd. According to Mr Ring, it became obvious to him that this could not be the true situation because MH Ghali Pty Ltd was a medical practice company and did not own units in the Unit Trust. Therefore, in the 2004 income year, units were transferred to Dr Ghali who already held units in the trust. Mr Ring then said: It now appears on investigation that these units were never in fact issued and certainly not to MH Ghali Pty Ltd or to MH Ghali personally. Mr Ring also said that no money ever changed hands and the debt of $1,300,000 remained on the Balance Sheet of the Unit Trust.
62. Although Mr Ring said in his witness statement of 18 May 2012 that each time units were issued or redeemed the transaction was evidenced by entries in the Unit Trust Register and by a Journal entry and ledger entry in the books of the entity, other than amended copies of the Register, no other bookkeeping records were in evidence. It is also evident that the subsequent amendments to units issued and their redemption came about only because of the audit and the Progress of Audit Report provided by the ATO on 29 April 2009. There was no evidence before me of the underlying transactions to which the now amended accounts refer. There are no unit certificates or copies of cheque butts or like documents evidencing payment for issued units or payment by the Unit Trust where units have been redeemed. One might be forgiven for coming to the conclusion that the various transactions have taken place simply by entries in the Register and accounts. In my opinion, that is not the purpose of accounting records. They are produced in order to record the transactions which have in fact taken place, rather than constituting the transaction itself. It also amplifies the fact that the issue and redemption of units were not at arm's length. This is not the conduct one would expect where parties were dealing with each other at arm's length.
63. I accept Mr Ure's submissions that the informality with which the books and records of the Unit Trust were maintained indicates the parties were not dealing at arm's length in relation to the arrangements. As Mr Ure said:
- (a) no certificates were issued to unit holders;
- (b) Mr Ring treated the units of the Superannuation Fund No 2 as being part of the Superannuation Fund in the relevant years;
- (c) no resolutions were made as to how income would be distributed by the trustee for the relevant years; and
- (d) errors made with the Register was said to have been corrected and the number of units held by the unit holders later confirmed by a Deed of Acknowledgment, that Deed of course being executed solely by Dr Ghali.
64. Given that income was distributed at the end of each of the income years in question according to the number of units held by each of the unit holders, and the acquisition of those units occurred when the parties were not dealing with each other at arm's length in relation to the arrangement, it necessarily follows that the income so derived was under an arrangement where the parties were not dealing with each other at arm's length.
65. Accordingly, I find that the matters set out in s 273(7)(a) of ITAA 36 have been made out.
FIXED ENTITLEMENT UNDER AN ARRANGEMENT - SECTION 273(7) - SECOND LIMB
66. The second limb of s 273(7) deals with whether the amount of income is greater than might have been expected to have been derived by the entity if the parties were dealing with each other at arm's length in relation to the arrangement.
67. Mr Tisher submitted that the amount of income derived from the arrangement was no greater than might have been expected to have been derived if, as the Superannuation Fund contended, it had been dealing with the Unit Trust at arm's length in relation to the arrangement. Mr Tisher relied on the evidence given by Mr Ring that:
- (a) distributions of income were only ever made by reference to the number of units held by the unit holders;
- (b) in distributing income to the Superannuation Fund for the relevant years, the trustee of the Unit Trust determined the entitlement of the Superannuation Fund to include the unit holding of the No 2 Fund; and
- (c) the amount received by the Superannuation Fund was "close enough to correct" as a percentage of its entitlement.
68. Mr Ure submitted that if the Superannuation Fund and the Unit Trust had been dealing with each other at arm's length in relation to the arrangements, it might be expected that:
- (a) the Superannuation Fund would have acquired each unit in the Unit Trust for consideration equal to the market value of each unit at the time of its acquisition;
- (b) the market value of units would be elevated some time shortly before a distribution of income was expected to be made;
- (c) the market value of C Class units would be less than the market value of A Class units in view of the inferior rights attaching to them;
- (d) unit holders in the Units Trust would receive in respect of units redeemed or surrendered an amount equal to the market value of the units at the time of redemption or surrender; and
- (e) the proportion in which the Superannuation Fund would become entitled to the income of the trust would be equal to the proportion of the Superannuation Fund's unit holding in the trust.
69. Although Dr Ghali held only C Class units and the Superannuation Fund only A Class units, Mr Ring testified that all units were issued and redeemed for $1. Although Mr Ure submitted that the various classes of units should be valued differently because C Class units do not carry a right to a distribution of capital, while I do not disagree with that submission, there is no need for me to take that any further. Although Mr Ring testified that distributions of income were only ever made by reference to the number of units held, the problem with that statement is, for example, on 30 June 2004, prior to the Unit Trust Register being amended by Mr Ring, 3,418,996 units were issued and 2,027,724 units were redeemed. The Superannuation Fund increased its holding by 1,000,000 units and Dr Ghali by 1,691,272 units. While the Register contains references to transfers and adjustments from years going back as far as 1992, the precise reason why it was that the number of units issued and redeemed on 30 June 2004 occurred on that day remains unexplained.
70. Prior to amendment, the 2005 year disclosed 500,000 units issued to the Superannuation Fund. However, after Mr Ring amended the register following the ATO audit, 2,306,000 C Class shares were redeemed by Dr Ghali. Mr Ring also, for unexplained reasons, amended the units held by the Superannuation Fund by 14,819. He included the units held by the Superannuation Fund No 2, being 100,700 units, as units of the Superannuation Fund. The only explanation given by Mr Ring for the redemption of the 2,306,000 units and the issue of 500,000 units was that these transactions occurred in 2005 and were inadvertently not reported. Other than Mr Ring saying so, there was no evidence before me which would support a further issue and redemption of units in the Unit Trust.
71. Prior to Mr Ring amending the Register, on 30 June 2005 the Superannuation Fund held 3,280,935 units. In its tax return for the 2005 income year, the Superannuation Fund declared gross distribution from trusts in the amount of $368,530. In its Detailed Operating Statement for the year ended 30 June 2005, the Superannuation Fund recorded distributions received from the Unit Trust of $361,473. This figure coincides with the Unit Trust profit distribution summary for the year ended 30 June 2006. Prior to amending the Register, Dr Ghali is recorded as holding 5,170,180 units as at 30 June 2005. The Unit Trust profit distribution summary for the year ended the 30 June 2005 records Dr Ghali as receiving $287,581.21. There was also an undistributed sum in the amount $16,520.55. The total distribution amounts to $649,054.21. The proportionate share of distribution received by the Superannuation Fund was 55.7%.
72. Prior to the amendments being made to the Register by Mr Ring, the total units issued by the Unit Trust as at 30 June 2005 was 8,551,815. The Superannuation Fund held 3,280,935 units or 38.4% of units on issue. On these figures alone, it cannot be said, as does Mr Ring, that distributions were only made in proportion to the units held. They clearly were not.
73. There is the further complicating factor in the 2006 income year of a capital gain of $1,995,986 from the disposal of a dairy farm in Tasmania. According to Mr Ring in his witness statement of 13 May 2011, the capital gain amount was included in the total business income return ($3,120,068) by the Unit Trust in the 2006 income year. The distribution statement included in the 2006 income tax return records a distribution to the Superannuation Fund of $1,747,239. That distribution is also recorded in the profit distribution summary for the year ended 30 June 2006 in the accounts of the Unit Trust. According to Mr Ring, this is incorrect. The tax return lodged by the Superannuation Fund for the 2006 income year discloses gross distribution from trusts of $1,118,886 and $427,657 as net capital gain. Mr Ring also said these figures were incorrect.
74. Mr Ring testified that he had requested an amended assessment for the Unit Trust so as to remove the capital gain from the 2006 income year. He said this was because the property concerned was sold on a terms contract which provided for settlement to occur in the 2012 income year. He submitted that the capital gain need not be included in the income tax return of the Unit Trust for the 2006 year until settlement occurred. For the reasons I have set out below, I do not agree with that submission. The Unit Trust Register does not disclose the issue or redemption of any units in the 2006 income year. Therefore, prior to Mr Ring making amendments by the redemption of 2,306,000 C Class units, the Superannuation Fund held 38.4% of the units on issue. The proportionate share of income should therefore have been $1,079,544. This is of course in stark contrast to the distribution recorded by the Unit Trust in its 2006 Profit Distribution Summary. It recorded distribution to the Superannuation Fund of $1,747,239.
75. Although Mr Ring said he had requested an amended assessment for the Unit Trust and, I presume, the Superannuation Fund, and Mr Ring has now amended the Balance Sheet for the Unit Trust for the 2005 and 2006 income years, the problem remains that I have no evidence whatsoever before me that any of the underlying transactions have also been undone given that the accounting records indicated distributions of money. I have not seen any bank statements or any documents which would indicate that what is now recorded in the accounts is in fact a recording of actual transactions.
76. From the evidence before me, it appears all that has been done is to amend the accounts of the two entities without any underlying adjustments to support those amendments. It is as if I am expected to accept that the amendment of accounts is an accurate reflection of the transactions without the provision of any evidence supporting those amendments. Given that the applicant in this proceeding bears the onus of proving that the assessments are excessive (s 14ZZK of the Taxation Administration Act 1953(TAA)), I cannot accept that the applicant has discharged that onus. Accordingly, I find that the amount of income derived by the Superannuation Fund in its capacity as a beneficiary of the Unit Trust was greater than might have been expected to have been derived by the Superannuation Fund if those parties had been dealing with each other at arm's length.
UNITS HELD AND DISTRIBUTION ENTITLEMENTS OF THE SUPERANNUATION FUND
77. Although the ATO provided Mr Ring with a report including tables setting out units held and distribution entitlements of the Superannuation Fund and Dr Ghali, which I have referred to at paragraph 12 of these reasons, after examining in some detail the documents in evidence, it is my view that the table provided by the ATO should be amended in accordance with the following:
|Year||Total Trust Units||Unit Holding||Unit Holding %||Distribution Entitlement ($)||Distribution Received %||Distribution Amount ($)|
TREATMENT OF CAPITAL GAIN
78. In a facsimile sent to the ATO on 16 November 2009 Mr Ring explained that a substantial capital gain was included in the Unit Trust distribution for the 2006 income year. He said the gain resulted from the disposal of a farm property under a terms contract of sale. Mr Ring referred to a Taxation Determination, 94/89, issued on 24 November 1994.
79. The contract of sale was made on 19 September 2005. It provided for a deposit of $80,000 to be paid upon the signing of the contract and the payment of instalments on 4 July 2006, 2007, 2008, 2009 and 2010 together with interest at the rate of 4.25% per annum and or such other rate as may be fixed by the Federal Reserve Bank, provided that the interest not fall below 4%. The balance of the purchase price was to be paid on 4 July 2011 together with interest at the rate calculated in the manner I have mentioned above. Also, clause 3.2 of the contract provided that as at the date of the agreement, the purchaser was entitled to receipt of the rents and profits from the property. Clause 6 provided that at completion, the vendor was required to provide a good marketable documentary title to the property.
80. Mr Tisher submitted that the capital gain of $1,995,968 was not required to be included in the 2006 income year tax return of the Unit Trust until a change of ownership occurred. He contended that s 104-10 of the ITAA 97 applied. He also referred to the predecessor s 160 M of ITAA 36. In fact, there is some confusion about whether ITAA 97 or ITAA 36 should be applied to the transaction in question. The Capital Gains Tax (CGT) provisions in ITAA 36 were rewritten as part of the Tax Law Improvement Project and inserted into ITAA 97 by the Tax Law Improvement Act (No. 1) 1998. The Part IIIA provisions which deal with CGT in ITAA 36 remained in that Act until 14 September 2006 (when they were repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006) along with the rewritten provisions set out in Subdivision 104-A of ITAA 97.
81. I am uncertain as to which Act should be applied to the sale transaction which took place on 19 September 2005. I am aware that there have been many cases before the courts where the argument has been raised that a later statute has repealed an earlier statute, not by express words, but by implication (see D C Pearce and R S Geddes, Statutory Interpretation in Australia, 2011). The maxim which has been applied can be stated as: later Acts repeal earlier inconsistent Acts. While it appears there is a presumption that the legislature does not intend to contradict itself and intends both Acts to operate within their given sphere, there may be repeal by implication where there is inconsistency. The High Court (Gaudron J) said in
Saraswati v R (1991) 172 CLR 1 at 17:
It is a basic rule of construction that, in the absence of express words, an earlier statutory provision is not repealed, altered or derogated from by a later provision unless an intention to that effect is necessarily to be implied. There must be very strong grounds to support that implication, for there is a general presumption that the legislature intended that both provisions should operate and that, to the extent that they would otherwise overlap, one should be read as subject to the other...
82. In my opinion, the provisions in both Acts in this case are identical and there is no inconsistency. Accordingly, I have referred to both. The relevant sections of each Act are as set out below.
INCOME TAX ASSESSMENT ACT 1936
- 160M What constitutes a disposal or acquisition
- (1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.
- (3) Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by:
- (d) subject to subsection (4), a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person.
- (4) A change shall not be taken to have occurred in the ownership of an asset by a transaction referred to in paragraph (3)(d) if the period for which the person referred to in that paragraph has the use and enjoyment of the asset terminates without the title to the asset passing to that person and nothing in section 170 prevents the amendment of an assessment for the purpose of giving effect to this subsection.
- 160U Time of disposal and acquisition
- (7) Where the acquisition or disposal of the asset occurred as a result of a transaction referred to in paragraph 160M(3)(d), the time of acquisition or disposal shall be taken to have been the time when the use and enjoyment of the asset was first obtained by the person mentioned in that paragraph.
INCOME TAX ASSESSMENT ACT 1997
- 102-25 Order of application of CGT events
- (1) Work out if a *CGT event (except *CGT events D1 and H2) happens to your situation. If more than one event can happen, the one you use is the one that is the most specific to your situation.
- 104-5 Summary of the CGT events
CGT events Event number and description Time of event is: Capital gain is: Capital loss is: A1 Disposal of a CGT asset [See section 104-10] when disposal contract is entered into or, if none, when entity stops being asset's owner capital proceeds from disposal less asset's cost base asset's reduced cost base less capital proceeds B1 Use and enjoyment before title passes [See section 104-15] when use of CGT asset passes capital proceeds less asset's cost base asset's reduced cost base less capital proceeds
- 104-10 Disposal of a CGT asset: CGT event A1
- (1) CGT event A1 happens if you *dispose of a *CGT asset.
- (2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
- (a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
- (b) merely because of a change of trustee.
- 104-15 Use and enjoyment before title passes: CGT event B1
- (1) CGT event B1 happens if you enter into an agreement with another entity under which:
- (a) the right to the use and enjoyment of a *CGT asset you own passes to the other entity; and
- (b) title in the asset will or may pass to the other entity at or before the end of the agreement.
Division 240 provides for the inclusion of amounts under hire purchase agreements in assessable income.
- (2) The time of the event is when the other entity first obtains the use and enjoyment of the asset.
83. In my opinion, it is clear that Item A1 in ITAA 97 applies where a contract is entered into which results in disposal of the asset. As is stated in s 104-10(2), a disposal of an asset takes place where there is a change of ownership. Likewise, s 160M(1) provides that where a change of ownership has occurred, the change shall be deemed to have effected disposal of the asset by the person who owned it immediately before the change. The contract of sale which was entered into on 19 September 2005 clearly states that title to the property will only be provided to the purchaser at completion. Until that date, the purchaser is entitled to the receipt of rents and profits. Therefore, there was plainly no disposal of the asset at the time the contract was signed. Disposal will only occur on completion of the contract as that is when title will pass. However, the purchaser clearly obtained a right to use and enjoy the property prior to the title passing. That event falls within Item B1 and the time of the event is when the use of the CGT asset passes. Because the signing of a contract for sale did not dispose of the asset (it did not result in a change of ownership), there is no need to resort to s 102-25 of ITAA 97.
84. The signing of the contract on 19 September 2005 is deemed to result in a change of ownership (a disposal) and that is spelt out most clearly in s 160M(3)(d) of ITAA 36. As is set out in s 160AY(2), the capital gains and capital losses provisions in Part IIIA apply if a taxpayer disposes of an asset. Similarly, s 100-20 of ITAA 97 deals with which events attract CGT. Section 100-20(1) provides that a taxpayer makes a capital gain or loss only if a CGT event happens. Furthermore, s 100-20(3) provides that the time when a CGT event happens is important for a number of reasons, in particular for working out whether a capital gain or loss from the event affects a taxpayer's income tax for the current or another income year. It also states: If a CGT event involves a contract, the time of the event will often be when the contract is made, not when it is completed. Accordingly, I find that the capital gains from the disposal of the property on 19 September 2005 were properly recorded in the 2006 income tax return of the Unit Trust.
PENALTY AND REMISSION
85. Liability for an administrative penalty is provided for in s 284-75 of the TAA. In so far as it is relevant to the present matter, s 284-75 provides:
284-75 Liability to penalty
- (1) You are liable to an administrative penalty if:
- (a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and
- (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
- (c) you have a *shortfall amount as a result of the statement.
Subsection 2(2) specifies laws that are not taxation laws for the purposes of this Subdivision.
- (2) You are liable to an administrative penalty if:
- (a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under an *income tax law; and
- (b) in the statement, you treated an *income tax law as applying to a matter or identical matters in a particular way that was not *reasonably arguable; and
- (c) you have a *shortfall amount as a result of the statement; and
- (d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you.
- (1) You are liable to an administrative penalty if:
86. Although the Commissioner assessed the applicant as being liable to an administrative penalty of 50% of the shortfall amount due to recklessness, in his objection decision this was reduced to 25% on the grounds that the applicant or his agent failed to take reasonable care in preparing the applicant's income tax returns for the 2005 and 2006 income years. Section 284-90 of the TAA sets out a table which establishes the base penalty amount in accordance with a number of categories. Item 4, which provides for a 25% of shortfall penalty, describes the situation in which that penalty is applicable in the following way:
Your shortfall amount or part of it resulted from you or your agent treating an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your income tax return.
87. The Commissioner contended that the Superannuation Fund failed to classify the income derived from the Unit Trust as special income and as a result, the statements in its income tax returns in the respective years were false or misleading in a material particular. The applicant contends that it did not make a false statement to the Commissioner.
88. Mr Ure argued that the relationship between Dr Ghali, the Unit Trust and the Superannuation Fund was not straightforward and was apt to give rise to foreseeable taxation consequences. Mr Ure submitted that the Superannuation Fund engaged tax agents to manage its tax affairs. Mr Ring was the principal of the firm of tax agents and he was aware of special income, as he said in evidence that he spoke to a partner from the accountancy firm Pitcher Partners about this. In fact, in his witness statement made on 13 May 2011 Mr Ring testified that he spoke with a Mr Mark Northeast on the telephone, maybe once or twice. He said that in the course of the conversation he was told not to forget about special income but Mr Northeast did not enlarge on it and as he was driving in traffic at that time, he must have been distracted or forgotten about it. He said he had been aware of special income many years earlier but that it hadn't been an issue in his practice and it just slipped off the radar.
89. The Full Court of the Federal Court in
Allen and Another v Federal Commissioner of Taxation (2011) 195 FCR 416 (Keane CJ, Greenwood and Middleton JJ) dealt with the expression reasonably arguable in the context of s 273(7). The Court referred to s 226K of ITAA 36 which it said was analogous to s 284-75 of the TAA and summarised the judgement of Hill J in
Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1. His Honour said, at 26-27:
- 1. The test to be applied is objective, not subjective. This is clear from the use of the words "it would be concluded" in para(1)(b) of the section;
- 2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer's claim;
- 3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument;
- 4. The decision-maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to "the authorities";
- 5. It is not necessary that the decision-maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer's argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer's argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer's argument is wrong. The standard is not as high as that. The word "about" indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;
- 6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be "about as likely as not correct" when regard is to be had to the material constituting "the authorities"; and
- 7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved.
90. The first point which needs to be made is that Mr Ring was aware of the special income provisions in s 237 of ITAA 36. Although he testified that he had contact with an accountant who was more familiar with those provisions, he nevertheless said he overlooked its significance when preparing the income tax returns for the Superannuation Fund. In my opinion, a tax agent taking reasonable care with the preparation of an income tax return, objectively, would have turned his mind to the special income provisions. This is particularly so where the Superannuation Fund was a beneficiary of a unit trust and the controller of both entities was the same person. In fact, given that the purpose of s 273 was to prevent a taxpayer being able to divert income which ordinarily would have been assessed at the top marginal rate into a superannuation fund which would be assessed at the concessional rate, it is reasonable to expect a tax agent to apply that section of ITAA 36.
91. I was also concerned by the fact that, on being made aware by the ATO that the Unit Trust distributions were liable to the special income provisions, Mr Ring appeared to attempt to rectify the situation by first indicating that 1,300,000 units transferred to MH Ghali Pty Ltd in 2004 may have never existed in the present form. Mr Ring also suggested that the inclusion of a capital gain in the 2006 income year may be incorrect. Three days later, Mr Ring wrote to the ATO describing a $1,000,000 loan which Dr Ghali used to purchase units in the Unit Trust but that the unit holders' records were not corrected until 2004. He said the property was sold in June 2003 at which time the units issued to Dr Ghali were redeemed. He then said that the Unit Holders' Register would be corrected. In the copy of the amended Unit Holders' Register attached to his first witness statement, Mr Ring disclosed redemption of 2,306,000 units by Dr Ghali. No explanation has been provided for that redemption. Nor was there any objective evidence other than in the amended accounts that this was in fact a transaction which was recorded rather than simply a book entry. On its face, it simply appears to be an attempt to justify the disproportionate distribution made to the Superannuation Fund.
92. The third matter which is of concern is the belated attempt to exclude the capital gain made by the Unit Trust in the 2006 income year. A competent tax agent would have understood that a capital gain might arise on the disposition of an asset. Disposal takes place when there is a change of ownership. Quite plainly, in a terms contract, disposal does not take place until conclusion. Nevertheless, the capital gains tax provisions have anticipated such a contract and deemed a disposal to take place where the purchaser obtains a right to use and enjoy that property prior to title passing. On a capital gain or capital loss occurring, the capital gains tax provisions become operative. I find that it is not reasonably arguable to suggest, as does the applicant in this matter, that a capital gain does not arise until the contract was concluded. To do so is to simply ignore the provisions which plainly contemplate a disposition under a terms contract where the purchaser acquires the beneficial use of the property prior to conclusion.
93. The question in this case is not whether Dr Ghali exercised reasonable care. His evidence was that he had little involvement in his own tax affairs or the affairs of the Superannuation Fund and Unit Trust. He relied on his tax agent, Mr Ring. Section 284-75(1) and (2) of the TAA make it clear that liability to an administrative penalty occurs if the agent makes a false or misleading statement in a material particular and the shortfall amount results from that statement. I find that the income tax returns lodged on behalf of the Superannuation Fund for the income years 2005 and 2006 contained statements which were false or misleading in a material particular and they resulted in a shortfall amount in that the amount of the taxpayer's liability was less than it would otherwise have been. I am also satisfied, if it were necessary, that the statement made by Mr Ring to the Commissioner regarding the Unit Trust distributions and the capital gain were not reasonably arguable and they resulted in a shortfall amount. Therefore, I find that the applicant is subject to a base penalty amount of 25% of the shortfall amount.
94. Mr Tisher submitted that should I find that the applicant was subject to an administrative penalty, the Commissioner should remit all or part of that penalty. Section 298-20 of the TAA provides:
298-20 Remission of penalty
- (1) The Commissioner may remit all or a part of the penalty.
- (2) If the Commissioner decides:
- (a) not to remit the penalty; or
- (b) to remit only part of the penalty; the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.
95. The Full Court of the Federal Court in
Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 dealt with the exercise of discretion under s 298-20 of the TAA. The Court said, at 292:
... The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer.
The Court also said, at 291:
To the extent that the primary judge concluded that it is necessary that there be special circumstances before the discretion to remit can be exercised, her Honour was in error. ...
96. Middleton J in
The Commissioner of Taxation of the Commonwealth of Australia v Traviati  FCA 546, although dealing with s 227(3) of ITAA 36, which is in similar terms to s 298-20 of the TAA, said, at :
Section 227(3) in its terms gave the Commissioner and unfettered discretion to remit the whole, or any part of the additional tax payable. Where discretion is so unconfined, the factors which the decision-maker can consider are similarly unconfined, except insofar that they are limited by subject-matter, scope and purpose of the statute:...
His Honour went on to say, at :
Broadly speaking, the main consideration relevant to the discretion in s 227(3) was whether any part of the penalty should be remitted on the basis that the outcome is harsh so as to provide an unjust result, having regard to the particular circumstances of the taxpayer:...
97. Mr Tisher submitted that there were numerous extenuating circumstances which rendered the penalty imposed unjust and excessive. He referred to Mr Ring's evidence that he was a sole practitioner in a rural city during the 2005 and 2006 income years. In November 1995, he had major heart surgery. Although his condition had improved, high pressure in his practice required him to take time off from time to time. He said that the firm, Preston Coe & Ring, had an excellent tax compliance record and Mr Ring went to considerable lengths to ensure that the Superannuation Fund acted in accordance with the tax legislation. He submitted that the penalty imposed on the shortfall amount should be remitted as it would be unreasonable, unjust and excessively punitive not to do so.
98. With respect to Mr Tisher, I cannot accept that submission. I find that the 25% penalty imposed by the Commissioner was not unjust or excessive. As a registered tax agent, I would expect Mr Ring to have taken total responsibility for ensuring that the income tax returns lodged on behalf of the Superannuation Fund were, in all respects, in accordance with the law. In fact, Mr Ring admitted that he was aware of the special income provisions but had overlooked that when lodging the returns. It then appears that he has attempted to rectify the situation by altering the number of C Class units held by Dr Ghali, thereby altering the entitlement of the Superannuation Fund to a higher distribution in proportion to the units it held. I have also referred to the capital gains argument subsequently raised in respect of the 2006 income year. In my opinion, that argument was not reasonably open to the applicant given the clear provisions in ITAA 97 dealing with terms contracts. For those reasons, I find that the circumstances of this case do not warrant remission of the penalties imposed by ITAA 97.
99. The Commissioner contended that the Superannuation Fund was subject to the special income provisions in s 273 of ITAA 36 for the 2005 and 2006 income years. That was because either the Superannuation Fund did not derive income from the Unit Trust by virtue of holding a fixed entitlement to that income or, alternatively, if it held a fixed entitlement to that income, the income was derived under an arrangement where the parties were not dealing with each other at arm's length and the amount of income derived was greater than might have been expected to have been derived if it had been dealing at arm's length in relation to the arrangement.
100. I have found that the income of the Superannuation Fund which it derived as a consequence of holding units in the Unit Trust was by virtue of holding a fixed entitlement to the income. Therefore s 273(6) does not apply. However, I have found that s 273(7) does apply to the income derived by the Superannuation Fund. That is because it derived the fixed entitlement under an arrangement where the parties were not dealing with each other at arm's length. Furthermore, the amount of the income derived by the Superannuation Fund as a beneficiary of the Unit Trust was greater than might have been expected to have been derived if it had been dealing with the Unit Trust at arm's length. It follows that the income so derived must be regarded as special income.
101. The Superannuation Fund also contended that the capital gain made on the disposal of a property, which occurred under a terms contract to be concluded in 2011, should be brought into account in the 2012 income year. I have found that the capital gain was properly brought into account in the 2006 income year. The disposal of that asset was deemed to have occurred at the time the terms contract was executed.
102. I have also found that the Superannuation Fund was liable for an administrative penalty in accordance with s 284-75 of the TAA. In my opinion, the correct penalty rate was 25%. I have found that the Superannuation Fund has not established any grounds for remission of that penalty.
103. The Objection Decision made by the Commissioner on 10 September 2010 regarding the amended assessments for the 2005 and 2006 income years was correct. The Commissioner's decision to reduce the penalty imposed on the tax shortfall to 25% was also correct. I affirm that decision.