LAMBERT v FC of TMembers:
E Fice SM
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
 AATA 442
Egon Fice (Senior Member)
27 June 2013
1. Mr Rodney Lambert was the director of three companies. In 2007 he decided to buy a number of investment properties. However, as he was a director of various companies, he wanted to protect his assets from any liabilities which could result from a breach of his duties as a director.
2. On 1 August 2007 on the advice of his accountant, Mr K Memery, Mr Lambert executed a Deed of Settlement to establish the Lambert Family Trust (the Trust), a discretionary trust. Mr Memery was the settlor of the Trust and Mr Lambert the trustee. The beneficiaries under the Trust were Mr Lambert and his wife Mrs Gayle Lambert, as well has the usual collection of related persons and any school or other establishment for educational or religious purposes and any charity. On that same day Mr Lambert executed a Deed Poll (Deed of Variation) to vary the Trust Deed. The intended effect of the variation was that Mr Lambert would receive the entire income from the trust fund in each accounting period unless he gave notice to the trustee (himself) in writing that he should not receive all of the income.
3. Mr Lambert (as trustee of the trust) then proceeded to purchase three investment properties (Hawthorn, Balaclava and Elwood) in the name of the Trust. Bank loans were obtained to fund the purchase of the properties; however there was an issue regarding whether Mr Lambert obtained the loans as trustee of the Trust or in his personal capacity.
4. Rental income was received from the Trust properties by Mr Lambert into his personal bank account and, according to him; he met the bank expenses in setting up the loans and made the loan repayments including the interest payments in his personal capacity.
5. On 28 September 2009 Mr Lambert lodged his income tax return for the 2009 income year with the Australia Taxation Office
ATC 5752(ATO). He claimed a deduction of $36,440 for interest expenditure and bank fees.
6. On 20 December 2010 Mr Lambert lodged his income tax return for the 2010 income year with the ATO. He claimed a deduction of $86,227 for interest expenditure.
7. Following a review by the ATO of Mr Lambert's tax returns on 17 February 2011, the Commissioner of Taxation (the Commissioner) issued a notice of amended assessment for the 2009 income year disallowing the claimed deduction of $36,440 and imposing an administrative penalty on the shortfall amount of 25% for lack of reasonable care. On the same day the Commissioner issued a notice of assessment for the 2010 income year disallowing the claimed deduction of $86,227 and imposing an administrative penalty on the shortfall amount of 25% for lack of reasonable care.
8. In a letter dated 18 August 2011, an accounting firm, as tax agent on behalf of Mr Lambert, gave notice of his objection against the assessments. However, it is questionable whether there was an objection against the administrative penalty.
9. On 21 December 2011 the Commissioner issued a notice of Objection Decision disallowing Mr Lambert's objection in respect of both income years in question. Although the Commissioner dealt with remission of the shortfall interest charge, the decision makes no mention of the administrative penalty.
10. Mr Lambert lodged an application for review of the Commissioner's Objection Decision with the Tribunal on 17 February 2012. The issues which arise out of that decision are:
- (a) whether the borrower of the moneys for the purchase of the three properties should be regarded as Mr Lambert in his personal capacity rather than as trustee for the Trust;
- (b) if the bank made an error in documenting Mr Lambert in his capacity as trustee for the Trust as the borrower, whether the Commissioner should retrospectively treat Mr Lambert in his personal capacity as the borrower;
- (c) whether the variation to the Deed of Settlement was effective in law;
- (d) whether Mr Lambert was entitled to a deduction for the interest expenses incurred in obtaining the bank loans; and
- (e) whether I am required to determine whether the administrative penalty imposed by the Commissioner should be remitted in any event.
ONUS OF PROOF
11. The Commissioner made it clear in his statement of facts, issues and contentions lodged with the Tribunal that he relied on s 14ZZK of the Taxation Administration Act 1953 (the Administration Act). Section 14ZZK provides:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
- (a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
- (b) the applicant has the burden of proving that:
- (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
- (ii) if the taxation decision concerned is a franking assessment - the assessment is incorrect; or
- (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently.
12. I should also refer to the decision of Brennan J in
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621 where he said:
... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been
ATC 5753made out but whether the amount assessed as taxable income is wrong....
13. Brennan J also referred to the manner in which a taxpayer can discharge the burden of proof. He said that it varies with the circumstances. His Honour said that if the Commissioner and taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it is sufficient for the taxpayer to show he is entitled to succeed on that point. However, in the absence of an agreement confining the issues for determination, his Honour said, at 624 - 625:
Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In
Gauci v. Federal Commissioner of Taxation (44), Mason J. said:
"The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail."
That view, expressed in a dissenting judgment, now prevails:
Macmine Pty. Ltd. v. Commissioner of Taxation (45); McCormack's Case (46).
14. Section 190(b) of the Income Tax Assessment Act 1936 -1969, to which Mason J referred in
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81, is similar to the burden of proof provisions now set out in s 14ZZK of the Administration Act.
THE DEDUCTIBILITY OF INTEREST PAYMENTS ON LOANS OBTAINED TO ACQUIRE INCOME PRODUCING PROPERTY
15. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with general deductions. It provides:
- (1) You can
from your assessable income any loss or outgoing to the extent that:
- (a) it is incurred in gaining or producing your assessable income; or
- (b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
- (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
- (a) it is a loss or outgoing of capital, or of a capital nature; or
- (b) it is a loss or outgoing of a private or domestic nature; or
- (c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income;
- (d) a provision of this Act prevents you from deducting it.
16. Section 25-25 of ITAA 1997 deals specifically with the rules relating to borrowing expenses. Relevantly, it provides:
- (1) You can deduct expenditure you incur for *borrowing money, to the extent that you use the money for the *purpose of producing assessable income. In most cases the deduction is spread over the *period of the loan.
- (2) You can deduct for an income year the maximum amount worked out under subsection (4) if you use the *borrowed money during that income year solely for the *purpose of producing assessable income.
Example: In 1997-98 you borrow $100,000 and incur expenditure of $1500 for the borrowing. You use the money to buy a house. Throughout 1998-99 you rent the house to a tenant. You can deduct for the expenditure for 1998-99 the maximum amount worked out under subsection (4).
- (3) If you use the money only partly for that purpose during the income year, you can deduct the proportion of that maximum amount that is appropriate having regard to
ATC 5754the extent that you used the *borrowed money for that purpose....
17. Plainly, in order to be eligible to deduct interest expenses on borrowed money, that money must be used by the person claiming the deduction solely for the purpose of producing assessable income. The Full Court of the Federal Court (Jenkinson, Hill and O'Loughlin JJ) in
Commissioner of Taxation v Roberts and Smith (1992) 37 FCR 246 dealt with the nexus required to be established between the outgoings and whether they were incurred in gaining or producing the assessable income. Hill J said, at 254 - 255:
The expenditure must have the necessary connection with the operations or activities which more directly gain or produce assessable income so as to meet the statutory criterion that the outgoing be incurred in gaining or producing assessable income or in carrying on a business:
Charles Moore & Co (WA) Pty Ltd v Commissioner of Taxation (Cth) (1956) 95 CLR 344 at 351;
Commissioner of Taxation (Cth) v Smith (1981) 147 CLR 578 at 586. That is to say it must be "incidental and relevant" to that end (
Ronpibon Tin NL v Commissioner of Taxation (Cth) (1949) 78 CLR 47 at 56), although as Williams, Kitto and Taylor JJ observed in Lunney (at 497), expressions of the kind "incidental and relevant" are:
"... not used in an attempt to formulate an exclusive or exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section."...
The mere act of borrowing money, burdened with an obligation to pay interest, does not of itself gain or produce assessable income. The amount borrowed is not assessable income. What operates to gain or produce assessable income is the manner in which those moneys are used, so that the necessary connection between the outgoing for interest and the activities which more directly gain or produce assessable income will be found, in the ordinary case, in the use to which the borrowed funds are put.
18. Hill J also referred to the Full Court of the Federal Court (Brennan, Deane and Sheppard JJ) decision in
Ure v Federal Commissioner of Taxation (1981) 50 FLR 219, a case in which the taxpayer borrowed moneys which he on-lent at 1% per annum to either his wife or a family company. The taxpayer claimed, unsuccessfully, that the money he borrowed or used to produce income and the whole of the interest on the borrowed funds was deductible. Hill J said, at 256:
Brennan J in that case (at 223-224) expressed the test of deductibility of interest in terms of the purposes for which the borrowed money was laid out; turning upon the objective circumstances rather than the subjective state of mind the taxpayer. It depended:
"... Upon what the taxpayer in the circumstances of the case is ascertained to have done in using and arranging for the use of the borrowed moneys."
Deane and Shepherd JJ, on the other hand, recognised that in complex cases where there was no obvious commercial explanation it would be necessary, in the process of characterisation, to have regard to:
"... the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing... it is 'a common sense appreciation of all the guiding features which must provide the ultimate answer'."
19. Hill J also referred to the High Court decision in
Fletcher v Commissioner of Taxation (1991) 173 CLR 1 which was a case dealing with money borrowed by a partnership and used for the purpose of funding an annuity. His Honour said, at 256:
As the court points out in a unanimous judgement of all seven justices, the process of characterisation involved in resolving an issue under s 51(1) will be commonly possible without reference to the taxpayer's subjective thought processes. In other cases
ATC 5755motive may be a relevant fact, at least where the outgoing has been voluntarily incurred.
20. The Commissioner has also issued a Taxation Ruling (IT 2385) dealing with expenses incurred by beneficiaries of discretionary trusts. He referred to a Tribunal decision referred to as QT 85/1311. The Tribunal in that case held that the taxpayer, who was a beneficiary of a discretionary trust, was not entitled to any deduction. That was because the taxpayer had a mere expectancy of receiving income from the trust and was not presently entitled to income from the trust when the expenditure was incurred. Because the taxpayer had no right to demand a share of the trust fund, the Tribunal was not persuaded that a sufficient nexus had been shown between the outgoing and the derivation of the assessable income. That decision appears to have been followed consistently by this Tribunal.
21. Mr T Morganti, who appeared on behalf of Mr Lambert, referred me to the Full Court of the Federal Court of Australia decision in
Forest v Commissioner of Taxation (2010) 78 ATR 417 in which the Court found that:... the rights expressly conferred on the unitholder by cl 4 of the trust deed demonstrate that the settlor's and trustee's objective intention was that income other than capital gains was to be held on a fixed trust for the unitholders, and capital gains were to be held on a discretionary trust. The Tribunal, whose decision was being appealed, held that because the appellant did not have a present entitlement to income received by the discretionary trust, the interest costs were not deductible. The Court said, at 430:
The question of present entitlement relevantly has application only in the context of a beneficiary. For a share of the net income of a trust estate to be included in the assessable income of a beneficiary under s 97 of the ITAA 1936, the beneficiary must be presently entitled to that share of income.
22. It appears now to be settled that a beneficiary under a discretionary trust is not a person who is presently entitled to income and therefore cannot establish a nexus between borrowing expenditure incurred and assessable income resulting from the use of the borrowed moneys.
The bank loans
23. In his witness statement dated 25 February 2013 Mr Lambert explained what he intended would be the arrangement between him and the bank when he acquired the three properties I have referred to above for the purposes of taking advantage of their negative gearing. I should stress that what follows is what Mr Lambert said was his intention at that time.
24. Mr Lambert said that it was his intention to borrow an amount from the bank to enable the purchase of the properties and he was to be personally liable for paying the interest on those loans. The moneys which he borrowed from the bank were lent to the Lambert Family Trust on an interest free basis to enable it to purchase the properties. Trust income would then be paid to Mr Lambert in accordance with the Deed of Settlement as varied by the Deed of Variation.
25. On 7 August 2007 Mr Lambert executed a contract of sale of real estate in respect of the Hawthorn property. The purchaser on that contract is described as: Rodney John Lambert as trustee for Lambert Family Trust.
26. On the same day, Mr Lambert sent an e-mail to Ms Jenny Lang, an employee of the bank, in which he advised Ms Lang that he had signed the contract for the Hawthorn property and wished to finance the full purchase price when the construction of the unit was completed in around March/April 2008. He then said: I signed the contract as trustee of the Lambert Family Trust. I have asked my accountant whether the loans should be in my name or that of the trust. I will advise you when I receive his response.
27. Mr Lambert signed a contract of sale of real estate for the Balaclava property on 17 August 2007. The purchaser on that contract is named as: Rodney John Lambert as trustee for the Lambert Family Trust.
28. On 28 March 2008 Mr Lambert signed a contract of sale of real estate in respect of the Elwood property. Although the purchaser was originally described as Lambert Family Trust Rod Lambert & or nominee, Mr Lambert testified that he subsequently nominated himself in his capacity as trustee of the Lambert Family Trust. In his witness statement Mr Lambert said that on 24 April 2008, before any
ATC 5756of the three investment properties with which we are concerned settled and before the bank had advanced any money, he sent Ms Lang an e-mail in which he said: Please find attached the letter from my accountant as requested. He has asked me just to highlight the loan is to me in my name and the ownership of the property is in the name of the trust. I had in evidence a copy of a letter from Mr Memery to Ms Lang dated 24 April 2008 in which he said: I confirm that all income from the Lambert Family Trust and the full benefits of negative gearing can be applied to Rodney Lambert.
29. Mr Lambert testified that he executed the bank loan documents on or around 29 April 2008 in respect of the Elwood property; 12 December 2008 for the Hawthorn property; and 18 May 2009 for the Balaclava property. He said he did not read the bank's documentation carefully but simply signed where he was asked to sign.
30. The evidence before me regarding the legal person to whom the loan was made before Mr Lambert complained to the bank seeking to have the loans restated in the form he described as conforming to his initial instructions is unequivocal. The following summary was extracted from the documents attached to Mr Lambert's witness statement as well as the documents lodged by the Commissioner under s. 37 of the Administrative Appeals Tribunal Act 1975 (the AAT Act).
31. The documents dealing with the loan obtained in respect of the Hawthorn property include the following:
- • the contract of sale for the Hawthorn property executed by Mr Lambert on 7 August 2007 describes the purchaser as Mr Lambert in his capacity as trustee of the Lambert Family Trust
- • a letter from the bank to Mr Lambert dated 26 November 2008 approving his application for an Investment Home Loan which described the offer as: Loan Offer to Rodney John Lambert as trustee for Lambert Family Trust (this heading was bolded)
- • the Consumer Credit Contract Schedule dated 26 November 2008 signed by Mr Lambert which described the borrower as: Rodney John Lambert as Trustee for the Lambert Family Trust; and the opening sentence of that document stating: This Schedule contains particulars of the consumer credit facility which we offer you, the borrower/s named below.
- • a Consumer Credit Contract Schedule signed on behalf the bank by Mr Scott Henricks on 26 November 2008 containing the following caution: You must read both the Schedule and the UTC (usual terms and conditions for consumer mortgage lending) before you sign the Schedule; which also stated: Read the contract documents so that you know exactly what contract you are entering into and what you will have to do under the contract. Fill in or cross out any blank spaces. Get a copy of the contract documents. Do not sign this contract document if there is anything you do not understand.
- • five documents described as Investment Home Loan Summary bearing dates between 3 June 2009 and 30 June 2010, all of which described the borrowers as: Rodney John Lambert ITF (presumably in trust for, however usually described as ATF (as trustee for)) Lambert Family Trust; which Mr Lambert agreed he had received
- • a letter dated 3 June 2009 from the bank, where the borrowers are named as: Rodney John Lambert ITF Lambert Family Trust
- • a Deed of Guarantee - Limited, although not executed, referring to a credit contract resulting from the borrower's acceptance of an offer dated 26 November 2008 for credit, although the borrower on the Deed of Guarantee is described as: Rodney John Lambert
- • a letter dated 4 April 2011 from the bank which refers to changes to the contract for the above loan, the above loan being described as: Credit contract to Rodney John Lambert and Lambert Family Trust
32. The documents dealing with the loan in respect of the Elwood property include the following:
- • a letter from the bank dated 16 April 2008 to Mrs Lambert regarding her intention to become a guarantor which refers to the borrower as: RODNEY JOHN LAMBERT ATF LAMBERT FAMILY TRUST
- • a Consumer Credit Contract Schedule dated 29 April 2008 referring to the borrower as: RODNEY JOHN LAMBERT AS TRUSTEE FOR THE LAMBERT FAMILY TRUST which contains the same cautions to which I have referred in respect of the Hawthorn property
- • a document provided by the bank entitled Consumer Loan Authority (Borrowers), in which the name of the borrower is stated as: Rodney John Lambert as trustee for the Lambert Family Trust
- • a mortgage of land in respect of the Elwood property describing the mortgagor as: Rodney John Lambert; although in cross-examination Mr Lambert agreed that he was not the owner of the property and he assumed he gave the mortgage as trustee
- • a document described as an Acknowledgement and Consent Proof of Identity Details (Borrowers) indicating the application for credit was made by: Rodney John Lambert ITF the Lambert Family Trust
- • a Trustee Declaration describing Rodney John Lambert as the duly appointed trustee of the Trust named below in that document; and a following document describing the name of the Trust as: the Lambert Family Trust and the trustee as Rodney John Lambert. That document also described the transaction as: Accommodation to Rodney John Lambert as Trustee for the Lambert Family Trust and it refers to a security from: Rodney John Lambert as Trustee for the Lambert Family Trust by way of mortgage over [the Elwood property] signed by Mr Lambert. The Trustee Declaration also contains an acknowledgement that the bank relies on the truth of the trustee's declaration and that the declaration induced the bank to enter into the transaction
- • a document entitled Guarantor's Servicing Acknowledgements which the bank signed on 2 June 2008, the borrower named as: Rodney John Lambert ITF of the Lambert Family Trust and the document was signed by Mr Lambert on behalf of the borrower and by Mrs Lambert as the guarantor on the following page which also contains the identical name of the borrower
- • statements described as Investment Home Loan Summary bearing dates between 7 August 2008 and 30 June 2010 describing the borrowers as: Rodney John Lambert ITF the Lambert Family Trust. Mr Lambert agreed he had received those from the bank
33. The documents dealing with the Balaclava property loan include the following:
- • a letter dated 18 May 2009 from the bank which has the following captioned heading: Loan Offer to Rodney John Lambert as trustee for Lambert Family Trust (this heading is bolded) and refers to an application for a Bank Investment Home Loan which has been approved
- • a Consumer Credit Contract Schedule dated 18 May 2009 referring to the borrower as: Rodney John Lambert as Trustee for Lambert Family Trust; which also states: By signing this Schedule you enter into a Contract with us and agree to accept our terms
- • a document entitled Consumer Loan Authority (Borrowers) executed by Mr Lambert on 20 May 2009 describing the borrower as: Rodney John Lambert as trustee for Lambert Family Trust
- • a document entitled Acknowledgement and Consent Proof of Identity Details (Guarantor) describing an application for credit by: Rodney John Lambert ITF Lambert Family Trust which was executed by Mrs Lambert on 20 May 2009
- • a letter from the bank dated 3 June 2009 whereby the bank approved the loan for the acquisition of the Balaclava property, the borrower named as: Lambert Rodney John ATF Lambert Fam (sic)
- • documents described as Investment Home Loan Summary between 3 June 2009 and 30 June 2010 being bank statements in respect of the Balaclava property loan all referred to the borrower as: Rodney John Lambert ITF Lambert Family Trust
34. Except for the Deed of Guarantee dated 26 November 2008, the remaining bank documents in evidence support the fact that the loan was made to Mr Lambert in his capacity as trustee for the Lambert Family Trust.
ATC 5758In cross-examination Mr Lambert agreed that where his signature appeared on a document, he in fact signed the document. When asked whether he read the documents which he executed and which indicated that the borrower was Mr Lambert in his capacity as trustee for the Lambert Family Trust, Mr Lambert said: no.
36. The problem with what Mr Lambert said about reading the documents he executed is that it appears to be inconsistent with his witness statement where he said: I did not read the Bank's documentation carefully. Furthermore, the numerous documents which he said he had received from the bank which described the borrower as trustee for the Lambert Family Trust, and the prominence of that description on those documents, leads to the logical conclusion that he must have noticed who the bank understood was the borrower. Despite that, Mr Lambert took no action to rectify what he regarded as a bank error until after these issues arose in respect of the income tax returns he lodged for the 2009 and 2010 income years.
37. Although Mr Lambert referred to an e-mail sent to Ms Lang on 24 April 2008 attaching a letter from Mr Memery and stating that the loan was to be in his name, there was no evidence before me as to what Ms Lang's response was to that request. Ms Lang was not called to give evidence and this caused Ms D Harding of counsel, who appeared on behalf the Commissioner, to question her absence. When asked whether he had made any enquiries of Ms Lang about her availability to give evidence, Mr Lambert said: I don't know what her - I don't know where she is. I don't know whether she is still working with the bank or - I believe she is, but I don't know. Mr Lambert was also questioned about other persons involved with the loans whose names appeared on the loan documents. Ms Harding referred to Mr Owen Eaton and Mr Scott Henricks whose names appeared on those documents. Mr Lambert confirmed he did not know those persons nor had he approached them for the purpose of giving evidence.
38. I also had in evidence a witness statement made by Mr Brendon Eddington who is currently employed as a relationship manager with the bank. He testified that although he had no personal knowledge of the arrangements that applied to Mr Lambert prior to becoming his relationship manager in September 2010, he had spoken with Ms Lang. In cross-examination he was asked whether Ms Lang was still with the bank and he responded that she was. He said that her position was the same as his, a senior relationship manager. He was asked if he was aware of any reason why Ms Lang was unable to give evidence and he said: Well, not really.
39. Mr Eddington was also asked whether he had spoken with either Mr Eaton or Mr Henricks and he said that he had not. However, in the course of his closing submissions, Mr Morganti said: However, the reason that she [Ms Lang] didn't attend or couldn't attend because we followed up again last night to see whether she could come this morning is that her father has recently passed away and she has not been at work for over a week or so. Nevertheless, in her closing submissions Ms Harding submitted that the reasons given for Ms Lang's absence related only to the previous week. They said nothing about any period of time prior to the previous week. With respect to Mr Morganti, that is plainly correct.
40. In fact, subsequently, Mr Morganti submitted that the reason Ms Lang didn't attend was because at the time the matter was being considered, Mr Eddington had provided a written statement which he believed satisfied the requirements to prove there was rectification of the documents which resulted from an error made by the bank. While I accept that this is the explanation for why Ms Lang was not called, and that no adverse inference should be drawn from that, it nevertheless causes problems for Mr Lambert because he bears the onus of proving that the assessments made by the Commissioner were excessive. Furthermore, as Ms Harding submitted, Ms Lang was not the only person who was involved at the time the loans were made and that the loan offers came from Mr Eaton and Mr Henricks on behalf of the bank.
41. In his witness statement made on 8 October 2012, Mr Eddington referred to the e-mail which Mr Lambert sent to Ms Lang on 24 April 2008 and said that the bank prepared the loan documentation naming the borrower as Mr Lambert in his capacity as trustee for the
ATC 5759Lambert Family Trust in error. This is despite the fact that Mr Eddington had no personal knowledge of the basis on which the loan was granted to Mr Lambert because, as he said in his examination in chief, he wasn't the person who established the loan.
42. Mr Eddington testified that it was only after he became the relationship manager responsible for Mr Lambert that Mr Lambert brought to his attention that the loans were not set up in the manner in which he requested. Mr Eddington said that he then did some research by going through previous correspondence recorded on the bank's system and he determined that Mr Lambert had requested the loans be set up differently and he therefore suggested that the bank should fix that. Mr Eddington testified that new loans were not issued and no credit reviews were performed. He said this was the only case where he had renamed an existing loan without adjusting any of the rates, amounts, or anything like that. He also testified that the correction would have retrospective effect from the date of the first loan.
43. In cross-examination Mr Eddington confirmed that the loans in question which were made in 2008/2009 were loans in which he had no involvement. He was then asked to explain the basis of the statement he made in his witness statement referring to the e-mail of 24 April 2008. When asked if that was the only document that he referred to in making that statement he responded: Yes, there is an e-mail which also has an attachment from Mr Lambert's account and that is requesting that the loans be set up in that fashion as well. With respect to Mr Eddington, he appears to have read that into Mr Memery's letter which says nothing at all about how the loan should be set up. Mr Memery simply referred to all income from the Lambert Family Trust and the full benefits of negative gearing. Furthermore, as Ms Harding pointed out to Mr Eddington in the course of his cross-examination, the e-mail from Mr Lambert on 24 April 2008 refers to the loan and not, as Mr Eddington said in his witness statement, the loans. Additionally, the e-mail refers to the property and not the 3 investment properties referred to by Mr Eddington. When asked which loan the e-mail was referring to, Mr Eddington replied that he would be speculating.
44. In cross-examination Ms Harding asked Mr Eddington why it was he said that the bank prepared the loan documents in error. Mr Eddington said he determined that from the information he had in the system (I assume he meant on the bank's computer file relating to Mr Lambert), being the e-mail correspondence (I understood that to be the e-mail of 24 April 2008) and the conversation he had with Ms Lang. When asked if there was anything else he simply referred to Mr Lambert explaining to him what his intention was at the time the loans were set up. Once again, with respect to Mr Eddington, that cannot be a sufficient basis for determining the bank had made an error. Although Mr Eddington said that he had looked at other documents on the computer system, which he described as interactions or notes on the system that bank officers recorded when having conversations with clients, as well as e-mails other than the e-mail from Mr Lambert on 24 April 2008, I did not have in evidence any response from the bank to that request.
45. Ms Harding referred Mr Eddington to the loan application form prepared in respect of financing the Elwood property. In particular, Ms Harding referred to the general comments and recommendations where, following the date 28 April 2008 is recorded: CARE: The sole borrower and purchaser is a trust. Please prepare a trust declaration. Obviously the new purchased property is a trust asset. As Ms Harding pointed out in her closing submissions, this document was prepared by the bank after Mr Lambert sent his e-mail of 24 April 2008. Mr Eddington agreed that the notation made it clear that the sole borrower was a trust. Ms Harding also referred Mr Eddington to the documents I have described above, noting that they all indicated that the borrower was the Trust. Mr Eddington agreed. When asked if he had any reason to think that the documents were in error from the face of them, he said there was not. Nor had he spoken with any of the authorising officers named on those documents.
46. In his witness statement Mr Eddington said that when the bank was made aware of the error regarding the borrower, the loan documentation was corrected. Ms Harding
ATC 5760directed Mr Eddington to the last exhibit attached to Mr Lambert's witness statement which set out revised Consumer Credit Contract Schedules which were dated 21 February 2012. She noted Mr Eddington said in his witness statement that the correction of the loan documentation was to have retrospective effect so as to commence from the date of the first loan documentation and asked where that was recorded in those documents. Mr Eddington agreed that it was not stated on the documents. He nevertheless said that that was his intention.
47. In his examination in chief Mr Eddington was taken to the Consumer Credit Contract Schedules dated 21 February 2012 which he said did not represent new loans. While he agreed that some of the numbers had changed, he explained this by saying: There would have been some incidental costs or changes in the figure since the original loan date whether - well without seeing a list of the transactions I can't see what they are, but the balance that was printed on the new documents was the balance at that time that we printed it (I understood that to be a reference to all of the new consumer credit schedules). Although Ms Harding noted a number of differences with the terms of the loans as originally formulated, I accept Mr Eddington's explanation that some of the variations simply reflected the passage of time between the original formulation and what he described as the corrected loan documents. The amounts which were initially lent by the bank are roughly the same, allowing for incidental costs as explained by Mr Eddington and which are in fact recorded on the original loan documents, and the interest rates have been updated to reflect those current at the time of the variation.
48. However, there is one fundamental difference which was not explained. The recent Consumer Credit Contract Schedules which apply to the Elwood and Balaclava properties refer to a three-year fixed interest rate commencing on the funding date. The Schedule relating to the Elwood property describes the interest rate as the home loan standard variable rate. By way of contrast, the original loan agreements all referred to the interest rate as the home loan standard variable rate. In fact, an examination of the loan accounts for each of those properties discloses that a varying rate of interest has been charged and paid since the commencement of those loans. Despite that, Mr Eddington testified that the so-called corrected documents were to be applied retrospectively.
49. With respect to Mr Eddington, that is simply not possible. Furthermore, as Ms Harding submitted, the so-called corrected documents make no reference at all to retrospective operation and the documents themselves are in the form of a new lending offer. Each of those documents required Mr Lambert to affix his signature acknowledging acceptance of the offer. Also, the bank appears to have added a further security, being the registered mortgage over the Balaclava property, in respect of the Elwood property loan despite the fact that the Balaclava property was not acquired until approximately 12 months after the Elwood property (settlement taking place on 26 May 2009). That of course could not apply retrospectively. While I have no doubt that, as Mr Eddington said, the bank could add securities to the loans at times after the loans were established, such securities can only come into effect on the date on which they are granted. This simply adds weight to Ms Harding's submission that the loans which Mr Lambert claims are simply a correction of the original position, should be treated as new loans replacing the original loans.
50. In re-examination Mr Morganti asked Mr Eddington what was discussed with Ms Lang which caused him to believe that the bank's intention was to correct the loan documentation retrospectively. He said: I spoke with her about the original application that she took, that she did, or applications that she took and did for Mr Lambert. We, together, went through the correspondence between herself and Mr Lambert and we determined that the original request was for the loans to be in his name only, but for whatever reason that's not the way it was established. When asked whether any reasons were discussed, Mr Eddington said: No. Because Jenny couldn't remember, I wasn't there at the time and there was no evidence on the computer as to why it would have been prepared any differently.
51. It should be clear from this evidence that the reason why the bank made the three loans, the subject matter of this case, available to Mr
ATC 5761Lambert in his capacity as trustee of the Lambert Family Trust remains unexplained. Although I accept Mr Lambert requested that the loans be made to him in his personal capacity, the bank did not do so. Although one possible reason for that may be that an error was made, the evidence before me does not support that conclusion. There are a number of other possible explanations about which I need not speculate. What weighs heavily against Mr Lambert's claim that an error was made is the fact that for over two years, he received and executed numerous bank documents which prominently disclosed that the borrower, as far as the bank was concerned, was Mr Lambert in his capacity as trustee of the Lambert Family Trust. He had ample opportunity in that time to correct the position if there was an error and the bank agreed to accept him in his personal capacity as the borrower. In fact, each loan account statement commences with what is described as an Important note which states: Please ensure you check all the information that appears on your home loan statement and report any discrepancies to us immediately. Each statement describes the borrower has Rodney John Lambert ITF the Lambert Family Trust.
52. Ms Harding submitted that the conclusion I should draw from the revised Consumer Credit Contract Schedules prepared on 21 February 2012 was that the original loans were brought to an end and replaced with new loans to Mr Lambert in his personal capacity. I find that the weight of the evidence supports that submission.
53. Furthermore, Ms Harding directed my attention to the High Court decision in
Toll (F GCT) Pty Ltd v Alphapharm Pty Ltd and Others (2004) 219 CLR 165 where the Court said, at 176:
This Court, in
Pacific Carriers Ltd v BNP Paribas (6), has recently reaffirmed the principal of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement.
54. The Court went on to discuss the significance of contracting parties executing a contractual document. It said, at 177 - 178:
Consistent with this objective approach to the determination of the rights and liabilities of contracting parties is the significance which the law attaches to the signature (or execution) of a contractual document. In
Parker v South Eastern Railway Company, (9) Mellish LJ drew a significant distinction as follows:
"In an ordinary case, where an action is brought on a written agreement which is signed by the defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents....
More recently, in words that are apposite to the present case, in
Wilton v Farnworth (10) Latham CJ said:
"In the absence of fraud or some other of the special circumstances of the character mentioned, a man cannot escape the consequences of signing a document by saying, and proving, that he did not understand it. Unless he was prepared to take the chance of being bound by the terms of the document, whatever they might be, it was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it. Any weakening of these principles would make chaos of every-day business transactions."...
It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document
ATC 5762or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it.
55. I find that on the evidence before me, it is not possible to conclude, on the balance of probabilities, that the original loan agreements between the bank and Mr Lambert are vitiated by mistake. While the evidence discloses that Mr Lambert made a request for the loan to be made to him in his personal capacity, there was no evidence about the bank's response to that request. In fact, some four days after the request was made, the bank sent documents to Mr Lambert for execution which clearly and prominently disclosed that the borrower was Mr Lambert in his capacity as trustee for the Lambert Family Trust. All of the subsequent documents relating directly to the loan disclosed Mr Lambert as the borrower in his capacity as trustee. Also prominently disclosed on those documents was the caution that he should read the documents and be satisfied with their accuracy prior to signing. He signed those documents without questioning the description of the borrower. There can be no question that he was aware that the documents had legal effect. He did not take any steps to alter the name of the borrower until after he discovered that the Commissioner disallowed his claimed deductions.
56. Mr Eddington's evidence regarding the bank's mistake is unhelpful. He was not the bank officer involved at the time the loans were granted. Although he asked Ms Lang why the loans were established in the way they were, he said she could not recall. His opinion that the bank made a mistake was based predominantly if not solely on the e-mail sent to the bank by Mr Lambert on 24 April 2008 and the letter the bank received from Mr Memery. Without any response from the bank to Mr Lambert's request, that evidence leads nowhere. Accordingly, I find that the bank loans made to Mr Lambert which he claimed were subsequently on-lent to the Trust were in fact made to Mr Lambert in his capacity as trustee for the Lambert Family Trust.
57. Mr Morganti submitted that whether Mr Lambert incurred interest in his own name or as trustee, at law, he was nevertheless liable to pay the interest personally. He referred to the High Court of Australia decision in
Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319. Although the Vacuum Oil case was concerned with the executor of a deceased estate and concerned liability in respect of debts incurred by the executor in carrying on the business following his appointment, that case accurately states the general law position of trustees' liability. Dal Pont puts it this way in his text, Equity and Trusts in Australia (5th ed, 2011) at 23.120:
As the legal owner of the trust property, a trustee is personally liable for debts incurred in performing trust. However, because trustees manage the trust property for the benefit of beneficiaries, they may have recourse to that property to satisfy debts incurred on the trust's behalf. The right has been described as "an incident of trusteeship that enables a trustee to act in the best interests of the trust in an impartial and disinterested manner with some assurance that his personal financial position will not be prejudiced". It is recognised both at general law and by the trustee legislation.
58. In this matter, the trustee's powers are set out in clause 6 of the Deed of Settlement. The trustee has power to raise financial accommodation on terms and conditions as to interest return and otherwise and for such purposes as the trustee may in its absolute discretion think fit for the carrying out of the Trust (clause 6(b)(i)). Clause 20(b) of the Deed of Settlement provides that the Trustees shall be indemnified out of the assets of the trust fund for all liabilities incurred by them in the course of acting for the Trust. It necessarily follows that if Mr Lambert in fact borrowed moneys from the bank in his personal capacity, he was not entitled to be indemnified for liabilities arising under that loan from assets of the Trust. That is because he would not be acting for the Trust in obtaining that facility. As I understood Mr Morganti's submission, it did not matter whether he was entitled to an indemnity, he nevertheless incurred the debts in his own name
ATC 5763and therefore was entitled to a deduction for the interest expense.
59. The problem I see with that submission is that while Mr Lambert may have incurred a personal liability to the bank if in fact he borrowed moneys from the bank in his capacity as trustee (regardless of any right to indemnity), that is the general law position. In this matter we are dealing with the consequences of those actions in the context of income tax legislation. It is that legislation which must be applied when determining whether Mr Lambert acquired a right to claim the interest expenses as a deduction for the years in question.
60. As Ms Harding submitted, Mr Lambert acting in his capacity as trustee of the Lambert Family Trust is a different entity to Mr Lambert acting in his personal capacity. If authority is needed, Subdivision 960-E of ITAA 1997 deals with the subject of entities. Because a trust is not in itself a legal entity, s. 960-100 (1) provides:
- (1) Entity means any of the following:
- (a) an individual;
- (b) a body corporate;
- (c) a body politic;
- (d) a partnership;
- (e) any other unincorporated Association or body of persons;
- (f) a trust;
- (g) our *superannuation fund;
- (h) an *approved deposit fund.
Note: The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.
61. Section 960-100 (2) provides:
The trustee of a trust, of a *superannuation fund or of an *approved deposit fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.
Note 1: This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person.
Note 2: The entity that is the trustee of a trust or fund does not change merely because of a change in the person who is the trustee of the trust or fund, or persons who are the trustees of the trust or fund.
62. Section 960-100 (3) then goes on to explain:
A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity .
Example: In addition to his or her personal capacity, an individual may be:
- • sole trustee of one or more trusts; and
- • one of a number of trustees of a further trust.
In his or her personal capacity, he or she is one entity. As trustee of each trust, he or she is a different entity. The trustees of the further trust are a different entity again, of which the individual is a member.
63. It should be apparent from the above that the capacity in which Mr Lambert borrowed funds from the bank is significant. That is because, for income tax purposes, the person is taken to be a different entity.
VARIATION TO THE DEED OF SETTLEMENT
64. The Deed of Settlement executed by Mr Lambert was not one prepared specifically for his circumstances. Mr Lambert testified that when seeking advice from Mr Memery he was told that the cheapest way to achieve the outcome he desired was to obtain an off-the-shelf trust deed. However, because the deed which he obtained was in respect of a discretionary trust, and he was advised that to make sure of the connection between his expenses and the income he expected to receive by way of rental from the properties acquired, an amendment to the deed was required.
65. I have already referred to the taxation ruling (IT 2385) made on 19 March 1987 in which the Commissioner referred to a Tribunal decision which dealt with a discretionary trust. The taxpayer had claimed certain deductions against the trust distribution. The Tribunal held that the taxpayer was not entitled to any deduction because the expenditure was not
ATC 5764incurred in gaining or producing the taxpayer's assessable income. The ruling stated:
The decision of the Tribunal is in accordance with the Commissioner's current practice of not allowing deductions under sub-section 51 (1) to the beneficiaries of trusts in relation to trust income unless it is established that they were presently entitled to the trust income when the expenditure was incurred.
66. The High Court of Australia (French CJ, Gummow, Hayne, Heydon and Crennan JJ) in
Federal Commissioner of Taxation v Bamford and Others (2010) 240 CLR 481, when dealing with the expression presently entitled to a share of the income of the trust estate found in s. 97 (1) of the Income Tax Assessment Act 1936 (ITAA 1936), said at 505:
The effect of the authorities dealing with the phrase "presently entitled" was considered in
Harmer v Federal Commissioner of Taxation (56), where it was accepted that a beneficiary would be so entitled if, and 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."
67. There was no dispute that the beneficiary under a discretionary trust could not properly be said to have been presently entitled to income from the trust. It was for that reason that Mr Lambert decided that the Deed of Settlement should be amended so as to make it clear that he had a present entitlement to the distribution of income from the Trust. As Mr Morganti said in a letter to the ATO dated 17 August 2012: The effective (sic) of the variation was to provide the Applicant with a vested and indefeasible interest in any income of the Trust until such entitlement is renounced.
68. The Deed of Settlement was purportedly varied by a Deed of Variation executed by Mr Lambert on 1 August 2007. The recitals set out Mr Lambert's intention as follows:
The Trustee wishes to allocate all of the Income of the Trust to Rodney John Lambert so long as Rodney John Lambert wishes to receive such Income.
69. The operative part of the Deed of Variation then states:
This Deed Poll witnesses that in exercise of the powers in this behalf given to the Trustee by Clause 15 of the Deed, the Trustee declares that as from the date of this Deed Poll:
"The whole of the income of the Trust Fund for each accounting period must be paid or set aside for Rodney John Lambert unless prior to the end of an accounting period, Rodney John Lambert has given the Trustee written notice that:
He does not want any of the Income for that accounting period paid or set aside for him, in which case the Trustee shall deal with the Income for that accounting period as provided for in clause 15."
70. Mr Lambert's signature on the Deed of Variation was witnessed by Janice Memery.
71. Clause 15 of the Deed of Settlement deals with the distribution of trust funds. It contains a number of subclauses, the relevant one for these purposes being that under the heading Discretions. It provides:
15. (a) The Trustees shall hold the Trust Fund or such parts of the Trust Fund as have not been appropriated or distributed and which have not vested absolutely; and
- (i) shall pay or apply or appropriate the whole or such part of the income of the Trust Fund and in such manner and at such times as the Trustees shall in their absolute discretion think fit to or for the benefit of one or more of the members of the discretionary class and if the Trustees shall think it desirable unequally between the members of such class or for or towards the maintenance support education or benefit of such one or more to the exclusion of the other or others of such members as the
ATC 5765Trustees shall in their absolute discretion determine.
72. The expression Discretionary Class is defined in Clause 2 to include those persons named as Specified Beneficiaries in the Schedule as well as the Corpus Beneficiaries including the parents, grandparents, brothers, sisters, spouses, former spouses, children, and grandchildren of the Specified beneficiaries or the Corpus beneficiaries.
73. The Schedule to the Deed of Settlement names Rodney John Lambert and Gayle Lambert as the Corpus Beneficiaries. There are no named Specified Beneficiaries.
74. Clause 23 of the Deed of Settlement provides for the amendment of the Deed. It states:
23. The Trustees for the time being may with the consent in writing of the Appointor (if any) from time to time revoke add to or vary any of the terms or conditions of this deed Provided that any such amendment shall not infringe the rule against perpetuities, or affect the beneficial entitlement to any amount set aside allotted to or used for the benefit of any beneficiary prior to the date of any such variation alteration or addition.
75. Clause 22 of the Deed of Settlement also says this about the discretions which may be exercised by the trustees:
22. Every discretion and power exerciseable by the Trustees shall be absolute and fully discretionary without any restriction being implied from any other provision of this deed or otherwise.
76. Clause 21 Deed of Settlement provides for disclosure to persons who may be affected. It provides:
21. The Trustees shall disclose details of their decisions to any person who may be affected by them and to the Appointor, any auditor of the Trust Fund, and any other person who may be entitled to receive the relevant details, but shall not disclose details of their discussions or of any matters taken into consideration before arriving at the decisions.
77. Ms Harding submitted, correctly in my view, that when examining the scheme of tax legislation in the context of income derived by a trustee, one needs to first examine the actual entitlement of beneficiaries to income in accordance with trust principles and then determine the tax liability in accordance with income tax legislation. This accords with what Sundberg J said in
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 74-75 and which was cited with approval by the High Court in Bamford's case where the Court said, at 508:
Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate.
78. Ms Harding also took issue with Mr Lambert's contention that it was always his intention that the Trust would be settled with a non-discretionary income entitlement vested in him; but with a discretionary power to distribute capital vested in the trustee. She referred to the recital to the Deed of Settlement which stated that the Settlor desired to provide for certain beneficiaries, and Clause 1 which provided that the Settled Sum and any other property paid or transferred to the Trustees was to be held on trust and investments and moneys representing the trust fund upon trusts (sic) and subject to the powers and provisions set out in the Deed. Ms Harding noted that the powers and provisions in the Deed include Clause 15(a)(i) which deals with the discretionary distribution of income. She also noted that the Deed of Variation, in its first recital, referred to the settled sum stated in the Deed of Settlement to be for the benefit of beneficiaries specified in that deed and upon the terms and conditions contained in it.
79. Ms Harding submitted that Mr Lambert, as trustee, was under a fiduciary duty to exercise the powers and discretions conferred on him in that capacity upon real and genuine consideration in accordance with the purposes for which the discretion was conferred. She referred to the Supreme Court of Victoria (McGarvie J) decision in
Karger v Paul  VR 161. When examining whether the discretionary power given to Trustees could be examined by the Court, his Honour said:
ATC 5766I regard it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration. To borrow a phrase from the passage quoted in
Partridge v The Equity Trustees Executors and Agency company limited  HCA 42; (1947) 75 CLR 149, at page 164, there must be the "exercise of an active discretion".
80. That submission was not contentious and I accept it as correct. As Dal Pont states in his text at 25.10 where he deals with the power of variation in a trust instrument:
Importantly, any power of variation must be exercised properly for the purposes for which it is conferred. This is no more than an application of the doctrine of fraud on a power (as to which see [8.50]-[8.85]). Persons conferred a broad discretion to vary must therefore form an opinion based on the correct understanding and construction of the matter to be considered.
81. Ms Harding then submitted that although Mr Lambert asserted that the Deed of Variation was an exercise of power under Clause 23 of the Deed of Settlement, there was no reference to Clause 23 in the Deed of Variation. She submitted that the language used in the recital to the Deed of Variation and its operative provisions were consistent with a purported exercise of power under Clause 15(a)(i) dealing with discretionary distributions.
82. In his closing submissions, Mr Morganti said it was Mr Lambert's view that the Deed of Settlement was varied under Clause 23 despite the fact that the Deed of Variation made no reference to that clause. Mr Morganti also referred to the fact that the Appointor (Mr Memery) had provided consent in writing stating that he consented to the amendment to Clause 15 of the Lambert Family Trust deed. He submitted that the reference to the exercise of powers under Clause 15 of the Deed of Settlement in the Deed of Variation was: not as properly drafted as it could be. He also agreed that no notice of the variation had been given to other beneficiaries affected by it. When I referred Mr Morganti to the disclosure requirements set out in Clause 21 of the Deed of Settlement, he said:
And we say that has been met because the parties that are directly affected by that particular disclosure were only those being the beneficiaries of Mr Lambert and Mrs Lambert and they had full knowledge of what the creation of the settlor of the trust was seeking to do.
83. I pointed out to Mr Morganti that we did not have evidence from Mrs Lambert. He agreed. Nor for that matter, did I have before me any indication that Mrs Lambert was aware of the proposed variation to the Deed of Settlement.
84. In her closing submissions Ms Harding, when referring to the consent given by Mr Memery as Appointor under the Deed of Settlement to the variation of that deed, submitted the proper construction of the deed does not depend on the subjective intention of a person who did not execute it. To construe the deed, one needs to examine the words used in the first instance. If there was ambiguity in understanding the words used, then one might go beyond words used in the document itself. I accept that submission as being an accurate statement of how I should go about determining the intention of Mr Lambert in executing the Deed of Variation. When construing a testamentary deed, the House of Lords (Lord Upjohn) in
Wishaw and Another v Stephens and Others  A.C. 508, at 522, said:
There is no doubt that the first task is to try to ascertain the settlor's intention, so to speak, without regard to the consequences, and then, having construed the document, apply the test. The court, whose task it is to discover that intention, starts by applying the usual canons of construction; words must be given their usual meaning, the clause should be read literally and in accordance with the ordinary rules of grammar. But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere, the draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and
ATC 5767desire to make sense of the settlor's or parties' expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it.
85. Ms Harding also referred to the passage I have quoted from the High Court of Australia decision in the Alphapharm case.
86. Ms Harding submitted that the words in the Deed of Variation, which was executed by Mr Lambert, must be interpreted literally. There was no need to have regard to anyone else's subjective intentions let alone those of Mr Memery. In my opinion, that submission is also correct. The subjective understanding of Mr Lambert or Mr Memery, given years after the deed was executed, cannot possibly displace the words recorded in the deed.
87. With respect to Mr Morganti, it is not sufficient to suggest, as he did, that the Deed of Variation could have been better drafted. The operative part of that document plainly states that in exercising the powers under Clause 15 of the Deed of Settlement, all of the income from the Trust for each accounting period is to be paid to Mr Lambert unless he gives written notice to the contrary. Because Clause 15(a)(i) expressly refers to the discretion which the trustee may exercise in appropriating the income of the trust fund, it seems to me to be unavoidable to interpret the Deed of Variation as simply an exercise of that discretion to distribute income of the Trust or at least an attempt to exercise that discretion. The Deed of Settlement was not being amended. If I am correct about that, then the question which arises is whether that was a valid exercise of power conferred on the trustees in Clause 15(a)(i).
88. In my opinion, it was not. In dealing with the exercise of a trustee's discretion, Dal Pont said, at [23.30]:
The trustee is often given powers equivalent to absolute ownership. This does not, however, allow a trustee to exercise discretion in her or his own interests - after all, discretions vested in a trustee are vested in a capacity (see [22.70]) - or to act on a whim. Rather, the trustee's discretion must be exercised in accordance with the purpose for which it was conferred. It must not be exercised irresponsibly, capriciously or wantonly, as such conduct would not fulfil the required good faith and real and genuine consideration the exercise demands.
89. The first, and obvious, point to make is that in this case, if the Deed of Variation is simply an exercise of discretion set out in Clause 15(a)(i) of the Deed of Settlement, the trustee has exercised this discretion solely in his interests. That is evidenced by the deposits made in Mr Lambert's bank account, which was solely in his name, and which he agreed was rental income from the three properties. It cannot properly be said that the exercise of that discretion was in the interests of all beneficiaries.
90. Furthermore, Clause 15(a)(i) clearly contemplates a periodical exercise of the discretionary power to distribute income. While not expressly stated in the Deed of Settlement, the Deed of Variation refers to the income in each accounting period. Therefore, it could not be said to be a real and genuine exercise of the discretion to distribute income where the trustee has determined on the commencement of the Trust that all income from the trust fund must be paid or set aside for one of the beneficiaries to the exclusion of all others for an undetermined period into the future.
91. Although Mr Morganti referred me to Clause 6(z) of the Deed of Settlement which provides that a trustee may exercise all the powers and discretions contained in the deed notwithstanding that the trustees may have an indirect, direct or personal interest in the result of the exercise of any such discretion or may benefit directly or indirectly from the exercise of the discretion, that does not assist the trustee in this case. That is because the purported exercise of the discretion by Mr Lambert was for his sole benefit.
92. Having found that the purported Deed of Variation was an invalid exercise of the discretionary power set out in Clause 15(a)(i) of the Deed of Settlement, I need to determine what consequences flow from that.
93. Ms Harding submitted that the purported exercise of the discretionary power by Mr Lambert should result in the Tribunal treating Mr Lambert's entitlement to income from the
ATC 5768Family Trust as being void. Respectfully, I agree with that submission. The Federal Court of Australia (Spender J) dealt with such a case in the decision of
Ramsden v Federal Commissioner of Taxation (2004) 56 ATR 42. In that case, a corporate trustee of a discretionary family trust purported to appoint income to another trust which it was asserted was a beneficiary of the discretionary family trust. His Honour determined that the distribution to the trust was ineffective. Although the applicants contended that the decision to apply the trust fund for the benefit of a non-beneficiary was merely a violation of an equitable obligation which may be acquiesced in by the beneficiaries, his Honour disagreed. Spender J then said, at 51-52, in light of his findings that the distribution made by the trustee was ineffective:
The Commissioner has a duty to assess whether a taxpayer is a beneficiary presently entitled to income for the purposes of s 97 of the ITAA 36. Neither the Commissioner nor the Court are (sic) required to give effect to a transaction that is null and void, or otherwise legally ineffective. A trustee who acts ultra vires in making an appointment of income effects (sic) nothing. Cooper J in BRK (Bris) said at 353:"the purported resolutions were nullities and liable to be set aside ab initio by a court:"...
Trustee had no power to appoint the Adcock Trust as a beneficiary entitled to benefit from the trust provided for in the trust deed, and the trustee had no power to appoint any income in any income year to the Adcock Trust, as it was outside any class eligible to be the object of an appointment of income under the terms of the trust.
The ultra vires appointment was thus, in my view, void ab initio and a nullity, and not merely voidable following a challenge by disappointed beneficiaries.
94. It appears to me that, standing in the shoes of the Commissioner for the purposes of this review, I should not give effect to the transaction evidenced by the Deed of Variation executed by Mr Lambert. In my opinion, it is legally ineffective if it is in fact a purported exercise of the discretionary power set out in Clause 15(a)(i) of the Deed of Settlement. However, assuming I am incorrect about that, I shall go on to examine whether the Deed of Variation could be effective as an amendment of the Deed of Settlement as claimed by Mr Lambert.
95. As Ms Harding submitted, the Deed of Variation makes no reference at all to Clause 23 of the Deed of Settlement which deals with amendment of the deed itself. Objectively, if the Deed of Variation was indeed a variation of the Deed of Settlement, one would ordinarily expect that to be stated in the deed. Nevertheless, Mr Memery has provided written consent to the variation of Clause 15 of the Deed of Settlement. Given that Clause 23 of the Deed of Settlement makes that consent a requirement for the amendment of the deed, and no such consent is required under Clause 15 dealing with the distribution of income, it may be inferred that the power of amendment in that clause was being invoked.
96. Attached to a document described as the Applicant's Statement of Further Contentions which was lodged with the Tribunal and served on the Commissioner, was a Memorandum of Advice provided by Mr Ian Hardingham QC, a well-known author on the topic of the law of trusts, which Mr Lambert said supported his claim regarding the amendment of the Deed of Settlement. The problem with that is that Mr Hardingham said in his advice that he was instructed it was always the intention of Mr Lambert that the Trust would be settled with the non-discretionary income entitlement vested in him; and a discretionary power to distribute capital vested in the trustee. While no doubt Mr Hardingham is entitled to rely on the instructions given to him, the Tribunal is required to rely on the evidence produced to it in the course of the hearing. In fact, Mr Hardingham made reference to such a requirement in his memorandum.
97. Ms Harding submitted that it could not correctly be stated that it was always Mr Lambert's intention that the Trust would be settled with a non-discretionary income entitlement vested in Mr Lambert. That was because the recital to the Deed of Settlement plainly states that:
ATC 5769... AS the Settlor desires to provide for certain beneficiaries and proposes to transfer to the Trustees upon the execution of this deed the settled sum set out in the Schedule (the Settled Sum) and the Trustees have agreed to accept the Settled Sum as a trust to be known by the name specified in the Schedule
98. Logically, the execution of the Deed of Settlement preceded execution of the Deed of Variation even though both documents were executed on the same day. By executing the Deed of Settlement in its original form, at that point in time clearly the trustee took the settled sum which was held on trust for all of the beneficiaries in accordance with the terms and conditions set out in the deed. Furthermore, Ms Harding submitted that it was not Mr Lambert's subjective intention at the time of execution of the Deed of Settlement which is critical. In fact, it is what the document itself provides. I agree with that submission. Upon the execution of the Deed of Settlement, Mr Lambert must have held trust funds for the benefit of all beneficiaries in accordance with that document.
99. I should also briefly refer to Clause 21 dealing with disclosure. It appears from the Deed of Settlement that the trustee is required to disclose details of any decisions he makes to any person who may be affected by those decisions and to the Appointor and any auditor of the Trust fund. Although Mr Morganti submitted the parties affected had notice of the Deed of Variation, as Ms Harding correctly submitted, no evidence of that notice was before me on the hearing of this matter. Given the significance of the effect of the purported variation to the Deed of Settlement, particularly as far as Mrs Lambert is concerned, I would have expected some evidence of disclosure to her.
100. Although not raised in submissions by either Ms Harding or Mr Morganti, the purported Deed of Variation which was executed by Mr Lambert in his capacity as trustee of the Lambert Family Trust, appears to be solely for his benefit. This is despite the fact that Mr Hardingham in his memorandum suggested that it could not easily be said that the exercise of the power of variation benefited Mr Lambert to the detriment of all other objects. The purported variation alters a discretionary income entitlement to a non-discretionary income entitlement. In doing so, Mrs Lambert has become disentitled to have the discretionary distribution exercised in her favour as have all other members of the discretionary class. In fact, the purported variation also prevents related parties, such as children and grandchildren, from having income applied towards their maintenance, support, or education. Although I accept, as Dal Pont states in his text (at 25.15), that an amendment which prejudices or diminishes the rights of some beneficiaries does not, by itself, deny its validity, one needs to look at whether the power has been exercised bona fide of the benefit of the beneficiaries as a whole. As Dal Pont says in his text, at 25.10:
Importantly, any power of variation must be exercised properly for the purposes for which it is conferred. This is no more than an application of the doctrine of fraud on a power (as to which see [8.50] - [8.85]). Persons conferred a broad discretion to vary must therefore form an opinion based upon the correct understanding and construction of the matter to be considered. Moreover, when exercised by trustees, an amendment power attracts fiduciary proscriptions; it therefore cannot be exercised for the trustees' own benefit, but bona fide and for the benefit of the beneficiaries as a whole.
101. There cannot be any dispute that Mr Lambert is in a fiduciary relationship with the beneficiaries of the Trust. Deane J in
Kak Loui Chan v Zacharia (1984) 154 CLR 178, at 198, noted there was a wide variety of formulations of the general principle of equity requiring a person in a fiduciary relationship to account for personal benefit or gain. His Honour referred to the fundamental rule embodying two themes. He said this about the second theme, at 198 - 199:
The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually
ATC 5770misusing his position for his personal advantage.
102. An example of how the second theme referred to by Deane J in Zacharia's case has been dealt with by the courts may be found in the Supreme Court of New South Wales (Kearney J) decision in
Wilson v Metro Goldwyn Mayer (1980) 18 NSWLR 730. The amending clause in the trust deed of the Metro Goldwyn Mayer (MGM) Staff Pension Fund in that case stated that the deed could be altered by deed executed by the company and trustees in any respect which would, in the opinion of the company, not prejudice any benefit secured by contributions made on behalf of any member prior to the date of alteration or amendment; or as may be necessary to enable the company or members to obtain the maximum taxation benefit in respect of the fund. The proposed amendment by the trustees and the company altered the distribution of moneys in the event of a winding up so that the benefits would be paid to the company rather than the members in that event.
103. Kearney J held that the proposed amendment could not properly be made in conformity with the provisions of the deed. His Honour then dealt with a submission regarding the question of power and whether the company could exercise the power in its own favour. The submission was that the power should not be read as creating in effect a general power of appointment in favour of the company, but rather that the company held the power subject to its fiduciary obligation. Therefore, according to the submission, the company, in attempting to exercise the power, was placed in a position of conflict of interest which rendered impossible the company to exercise the power of amendment as proposed. Although obiter dictum, Kearney J said, at 736:
In light of my conclusion on the question of construction it is unnecessary to express a final view on the issue as to the scope of the power of amendment. However, I would be inclined to regard such a power as falling within the category of powers referred to in Metropolitan Gas Co case inherent in which are fiduciary obligations precluding the company from using such power so as to benefit itself.
104. In my opinion, for the reasons submitted by Ms Harding and by the application of the fiduciary obligations which fall upon a trustee to deal with the power to vary the deed for the benefit of beneficiaries as a whole, I find that the Deed of Variation was not an effective exercise of the power to amend the Deed of Settlement. It was exercised solely for Mr Lambert's benefit. Furthermore, it would be anomalous if I were to accept that the Deed of Variation was a valid amendment of the Deed of Settlement where the obligation of the trustee to disclose details to persons who may be affected by the decision was not fulfilled. Not only is that a requirement under the Deed of Settlement, as Denis SK Ong states in his text Trusts Law in Australia (4th ed, 2012) at page 261, it forms part of a trustee's duty of care and skill in the execution of the trust.
ENTITLEMENT TO INTEREST PAYMENT DEDUCTIONS
105. For Mr Lambert to be entitled to the claimed deductions from his assessable income in accordance with s. 8-1 of ITAA 1997, he needed to prove, on the balance of probabilities, by evidence, that he borrowed moneys which he then used solely for the purpose of producing assessable income. The first problem Mr Lambert faced was that the objective evidence regarding the bank loans overwhelmingly disclosed that in the 2009 and 2010 income years, the bank lent the money to Mr Lambert in his capacity as trustee for the Lambert Family Trust. Although Mr Lambert said in evidence that this was a mistake made by the bank and that his intention was that the money be lent to him in his personal capacity, I have found that Mr Lambert has failed to discharge the onus of proving that the bank in fact made the claimed mistake.
106. It follows that I have formed the view that the bank lent the moneys which were then used for the purchase of three properties from which rental income was derived to Mr Lambert in his capacity as trustee of the Lambert Family Trust. Therefore, the liability for interest payments on the bank loans fell on Mr Lambert in his capacity as trustee. Although Mr Morganti submitted that regardless, Mr Lambert incurred a personal liability to the bank for the loans made to the Trust, that
ATC 5771submission ignores Subdivision 960-E of ITAA 1997. As that Subdivision provides, a legal person can have a number of different capacities in which that person does things. In each of those capacities, the person is taken to be different entity for the purposes of the taxation legislation. The entity which borrowed moneys from the bank was the trustee of the Lambert Family Trust. That entity would not change even if Mr Lambert ceased to be the trustee at some subsequent point in time (s. 960-100 (2)).
107. Therefore, I find that the entity for taxation purposes which borrowed moneys for the purchase of the investment properties was, in effect, the Lambert Family Trust.
108. In the event that I am wrong about the entity which borrowed moneys from the bank which were used for the purpose of producing assessable income in the 2009 and 2010 income years, I have also examined the legal effect of the Deed of Variation executed by Mr Lambert. Because the Deed of Settlement is a document designed to establish a discretionary trust, it created problems for Mr Lambert who was aware that he needed to demonstrate that he had a present entitlement to the distribution of income from the Lambert Family Trust in order to claim the deduction for bank expenses and interest payments.
109. The Deed of Variation was either an attempt by the trustee to exercise the discretionary power set out in Clause 15 of the Deed of Settlement (as is stated in the Deed of Variation) or it was an attempt to amend that deed. If it was an attempt to exercise the discretionary power set out in Clause 15, I have found that it was invalid. That power was intended to be exercised periodically and upon real and genuine consideration. The once and for all exercise of that power does not satisfy that requirement. Therefore, as Ms Harding submitted, if that was the basis upon which the Deed of Variation was made, Mr Lambert's entitlement to income from the family trust was void. In those circumstances, I have found that if the Deed of Variation was a purported exercise of the discretionary power set out in Clause 15 of the Deed of Settlement, then it is legally ineffective.
110. If the Deed of Variation was an attempt to vary the Deed of Settlement pursuant to Clause 23, I have found that it was not an effective exercise of the power to amend. Clause 23 is not mentioned in the Deed of Variation nor was the power exercised bona fide for the benefit of the beneficiaries as a whole. It was exercised solely for the benefit of Mr Lambert who was under a fiduciary obligation to deal with the power to vary the deed for the beneficiaries as a whole.
111. Given my findings regarding the effect of the Deed of Variation, the necessary conclusion that I have reached is that the distributions Mr Lambert said he received by way of rental income earned by the Trust must necessarily have been as a consequence of the exercise of discretion under Clause 15 of the Deed of Settlement. It follows that Mr Lambert had no more than a mere expectancy of receiving income from the Trust from time to time as he was not presently entitled to the income of the Trust when the expenditure was incurred. He was not entitled to a deduction for interest expenditure in the 2009 and 2010 income years because there is insufficient nexus between the outgoings and the derivation of the assessable income.
ADMINISTRATIVE PENALTY ISSUE
112. On 17 February 2011 the Commissioner wrote to Mr Lambert on completion of a review of his 2010 income tax return. Attached to the letter was a document which summarised the review outcomes for the 2009 and 2010 income years. Included in that summary was a liability to pay an administrative penalty in the 2009 income year in the amount of $3780.65 and in the 2010 income year, $9375.75. The reasons for the decision also explained why Mr Lambert was liable to a shortfall penalty.
113. Under the cover of a letter dated 18 August 2011, Mr Morganti, on behalf of Mr Lambert, lodged a notice of objection against the assessments for the years ended 30 June 2009 and 30 June 2010. The first paragraph of that letter states:
... as tax agent (Tax Agent No. ...) of Rodney John Lambert ("the Taxpayer"), objects against the income tax amended assessment for the year ended 30 June 2009
ATC 5772("the amended assessment" and "the 2009 year" respectively) dated 30 June 2009 and the income tax assessment for the year ended 30 June 2010 ("the assessment" and "the 2010 year" respectively) dated 30 June 2010 made by the Deputy Commissioner of Taxation ("the Commissioner"), and the ensuing administrative penalty imposed (emphasis added).
114. However, in the second paragraph, after stating that the taxpayer requested that the amended assessment be adjusted to reflect the original assessment for the 2009 income year and that the assessment for the 2010 income year be amended to reflect the taxable income returned by Mr Lambert in his tax return, Mr Morganti said:
... Consequently, as a result of the aforementioned adjustments we expect there to be no administrative penalty or shortfall interest charge payable by the Taxpayer as there will be no shortfall amount.
115. In his concluding paragraph, Mr Morganti said:
Accordingly, we object against the amended assessment and assessment pursuant to section 175A of the Income Tax Assessment Act 1936 ("ITAA 1936") and Part IVC of Taxation Administration Act 1953 ("TAA 1953"). ...
116. In the objection set out in the ATO Objection form - for tax professionals, which was attached to Mr Morganti's letter of 18 August 2011, under Section D - Objection details, which asks the person completing the form to provide details of the decision being objected to, is the following entry:
ATO review letter disallowing certain deductions and imposing administrative penalty or (17 February 2011, ATO reference ...);...
117. However, in stating the reasons for objection, Mr Morganti made no mention of the administrative penalty.
118. In the Notice of Objection Decision dated 21 December 2011, the Commissioner did not mention the administrative penalty. However, in the Reasons for Decision in respect of both income years in question, the Commissioner said:
As a result of your objection being disallowed, your tax shortfall amount will not change, therefore there will be no recalculation either in part of (sic) in full to the administrative penalty that was imposed for the 2009 and 2010 financial years.
119. My attention was also drawn to a letter Mr Morganti wrote to the ATO which is undated. I infer from the fact that the letter refers to a request for further information dated 19 March 2012 that the letter was written after the Commissioner issued his Objection Decision. Mr Morganti set out in some detail the reasons why he submitted a shortfall penalty should not have been imposed on Mr Lambert.
120. In closing submissions Ms Harding referred to the Commissioner's letter of 19 March 2012 in which he said:
If your client wants to object to the assessments of shortfall penalty, you will need to lodge a valid Notice of Objection, which sets out the grounds of the objection to the penalty.
121. Ms Harding then submitted that because Mr Lambert's Statement of Facts, Issues and Contentions made no mention of an application in respect of any Objection Decision on penalty, that matter was not before the Tribunal. She also pointed out that Mr Lambert's application for review before the Tribunal does not indicate that the administrative penalty was in issue.
122. Section 14ZU of the Administration Act explains how taxation objections are to be made. It provides:
A person making a taxation objection must:
- (a) make it in the approved form; and
- (b) lodge it with the Commissioner within the period set out in section 14ZW; and
- (c) state in it, fully and in detail, the grounds that the person relies on.
123. The questions which arise in respect of this issue are whether Mr Lambert complied with s. 14ZU of the Administration Act and, if the answer to that is in the negative, what consequences flow from a failure to comply.
ATC 5773There can be no question that Mr Lambert, or at least Mr Morganti on his behalf, lodged a taxation objection in the prescribed form (NAT 13044) on or about 18 August 2011. However, in the reasons for objection section, Mr Morganti did not provide any details of the grounds on which Mr Lambert relied in respect of the administrative penalty objection despite having referred to the imposition of an administrative penalty in the objection details section. Therefore, it cannot be said that he complied fully with the statutory requirements set out in s. 14ZU for lodging an objection. Although Mr Morganti referred to his undated letter to the ATO, it does not assist him because by that time, the Commissioner had already issued his Objection Decision. The question then which I need to resolve is the effect of that non-compliance.
125. The first thing to note is that the Acts Interpretation Act 1901 (the Interpretation Act) deals with compliance with forms at s. 25C which provides:
Where an Act prescribes a form, then strict compliance with the form is not required and substantial compliance is sufficient.
126. The problem in this case is not whether the correct form has been used, but rather, what consequences follow where a matter specified in the legislation is required to be entered on the form has not been entered. Rather than attempt to define the requirement as directory or mandatory, it appears that the correct approach is to examine the legislation in detail in order to determine the purpose underlying the statutory requirement. The High Court of Australia made that clear in
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355. The majority (McHugh, Gummow, Kirby and Hayne JJ) said, at 390 - 391:
In our opinion, the Court of Appeal of New South Wales was correct in
Tasker v Fullwood (71) in criticising the continued use of the "elusive distinction between directory and mandatory requirements" (72) and the division of directory acts into those which have substantially complied with the statutory command and those which have not. They are classifications that have outlived their usefulness because they deflect attention from the real issue which is whether an act done in breach of the legislative provision is invalid. The classification of a statutory provision as mandatory or directory records a result which has been reached on other grounds. The classification is the end of the inquiry, not the beginning (73).... A better test for determining the issue of validity is to ask whether it was a purpose of the legislation that an act done in breach of the provision should be invalid. This has been the preferred approach of courts in this country in recent years, particularly in New South Wales (74). In determining the question of purpose, regard must be had to "the language of the relevant provision and the scope and object of the whole statute" (75).
127. A good example of how the courts have dealt with this problem may be found in the High Court of Australia decision in
Adams v Lambert (2006) 228 CLR 409 which was a matter dealing with a deficient bankruptcy notice. The Court (Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon and Crennan JJ) said, at 420:
To describe an error or a deficiency in a bankruptcy notice as involving a failure to meet a requirement made essential by the Act is to state a conclusion reached after a consideration of the legislative purpose and an evaluation of the significance or importance of the error or deficiency in the circumstances of the case. That question is not answered by observing that there has been a failure to meet a requirement.... Furthermore, as noted earlier, the fact that the requirement is expressed by the use of the term "must" is not conclusive. How otherwise might a requirement as to form be expressed (40)?
128. Division 3 of the Administration Act deals with taxation objections. The first section in that division is s. 14ZU which appears to require use of an approved form; lodgement with the Commissioner within a specified time; and to state fully and in detail the grounds relied upon. The purpose of the s. 14ZU (b) and (c) requirements appears from a reading of the Commissioner's statutory obligations following the lodgement of a taxation objection. Section 14ZY provides that, subject to objections
ATC 5774against the Commissioner's failure to make a private ruling, which is not relevant to this proceeding, if a taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to allow it, wholly or in part; or to disallow it. That decision is referred to as an objection decision and the Commissioner must cause to be served on the person written notice of the Commissioner's objection decision.
129. Where a person is dissatisfied with the Commissioner's objection decision, the person may apply to the Tribunal for review of the decision or appeal to the Federal Court against the decision (s. 14ZZ). On an application for review of an objection decision or in proceedings on appeal to the Federal Court against an objection decision, the applicant or appellant is limited to the grounds stated in the taxation objection to which the decision relates unless the Tribunal or Court otherwise orders (s. 14ZZK and s. 14ZZO).
130. The problem for Mr Lambert is that the objection lodged on his behalf with the Commissioner does not state the basis or grounds upon which the administrative penalty imposed on him should be remitted. Without a reasonably detailed statement setting out the grounds upon which the objection was made, not only can the Commissioner not provide a decision by reference to the grounds claimed, the Tribunal or Court conducting the review or appeal is confined to the objection decision and the grounds stated in that decision. Without knowing the grounds on which the taxpayer intends to argue for the remission of an administrative penalty, it cannot be fair for the Tribunal to make an order expanding the grounds stated in the notice of objection. Even if I were to accept the grounds to be those stated in Mr Morganti's letter to the ATO written sometime after 19 March 2012, it cannot be said that the Commissioner has had adequate notice that those matters were to be the subject of Mr Lambert's application to the Tribunal. Furthermore, Mr Lambert had not lodged with the Tribunal any evidence supporting the grounds stated in that letter.
131. In this case, Mr Morganti lodged Mr Lambert's notice of objection under the cover of a letter dated 18 August 2011. As I have already mentioned above, in that letter Mr Morganti simply said that he expected there to be no administrative penalty or shortfall interest charge payable by the taxpayer because there would be no shortfall amount, presumably on his argument. That quite likely explains why the Commissioner, in his Objection Decision, set out the passage I have quoted in  above.
132. Given that background, I find that Mr Lambert's application to the Tribunal did not include an application to remit the administrative penalty decision unless the Tribunal were to find that the deductions claimed by Mr Lambert in the 2009 and 2010 income years should be upheld. Given that I am of the view that Mr Lambert was not entitled to claim the deductions, I find that there are no grounds upon which I can embark upon an enquiry into the remission of the administrative penalty in each of the income years in question.
133. I find that the Commissioner correctly disallowed Mr Lambert's objection in respect of the 2009 and 2010 income years in his Objection Decision made on 21 December 2011. I affirm that decision.