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WHITBY LAND COMPANY PTY LTD (TRUSTEE) v DFC of T

Judges:
Jagot J

Court:
Federal Court, New South Wales

MEDIA NEUTRAL CITATION: [2017] FCA 28

Judgment date: 30 January 2017

Jagot J

1. This case concerns the liability of a trust to income tax.

2. The applicant, referred to below as Whitby , is the trustee of a discretionary trust, the beneficiaries of which are the five children of Whitby's director, Allen Carrati. One of the beneficiaries is a minor and thus subject to a legal disability. For the tax years 2011-2014 the respondent, referred to below as the Commissioner , notified Whitby that it was liable to pay tax assessed in two different amounts, calculated by two different methods. The so-called "primary" assessments for each year calculated under ss 98 and 99A respectively of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ) were on the basis that the four adult beneficiaries were each presently entitled to equal shares totalling four fifths or 80% of the net income of the trust for each relevant year and the beneficiary who was a minor was presently entitled to a one fifth or 20% share of the net income of the trust but was subject to a legal disability. The so-called "alternative" assessments by reference to the same 80% and 20% proportions were on the basis that none of the beneficiaries were presently entitled to a share of the net income of the trust for each relevant year.

3.

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Whitby seeks declarations that the assessments, and consequential penalties imposed, are void on the ground that they are mere tentative or provisional assessments.

4. According to Whitby, because for each year the assessments impose two separate and different liabilities to income tax on it in its single capacity as a trustee, the assessments are "tentative and not an assessment of the taxpayer's liability to an amount of tax within" Pt IV of the 1936 Act (see para 19.1 of the statement of claim). This, it is said, follows from the reasoning in
Commissioner of Taxation v Futuris Corp Ltd [2008] HCA 32; (2008) 237 CLR 146 and
Commissioner of Taxation v Stokes (1996) 72 FCR 160. The penalties imposed are therefore void for the same reason, in that the Commissioner has not completed a valid assessment of liability to income tax and thus is incapable of determining Whitby's culpability for the purpose of imposition of a penalty (see paras 19.2 and 19.3 of the statement of claim).

5. According to the Commissioner, Whitby's case fails to recognise that, in the context of liability to pay income tax, a trustee is in a different position from other taxpayers in that a trustee's liability is of a "representative character". The relevant provisions under which a trustee is liable to income tax (relevantly to this case, ss 98 and 99A of the 1936 Act) envisage that a trustee might be liable to multiple assessments in respect of different beneficiaries' entitlements to a share of the net income of the trust. As such, the assessments in the present case, on the primary basis that all beneficiaries are entitled to a present share of the net income of the trust (albeit with the beneficiary who is a minor subject to a legal disability) and the alternative basis that no beneficiaries are so entitled, are comparable to assessments to two or more taxpayers in relation to the same income in the same income year, which are not liable to be set aside as tentative or provisional (
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 188, 200-203, 216-220, 228-229, 237-238).

Background

6. The impugned assessments were issued on 12 October 2015 for the 2011-2013 income years and 27 October 2015 for the 2014 income year. These assessments replaced earlier assessments for each income year. Whitby had challenged the earlier assessments including on the basis that the Commissioner's s 98 assessments were as to 20% of the net income and s 99A assessments were as to 100% of the net income. This challenge was dismissed by consent given that the Commissioner made the amended assessments which replaced the original assessments. Whitby commenced a fresh challenge under s 39B of the Judiciary Act 1903 (Cth) challenging the validity of the replacement assessments.

7. The Commissioner explained the replacement assessments for 2011-2013 in a letter to Whitby dated 12 October 2015 in these terms:

Assessments for the 2011, 2012 and 2013 income years

Following an audit of transactions undertaken by the Whitby Trust, we had issued assessments to you dated 17 April 2014 to include in your assessable income shares of the net income of the trust estate that would, on alternative bases disclosed by the available information and evidence, be correctly assessable to you.

In what was described in our letter to you of that date as one of the primary assessments (hereafter referred to as the 'section 98 assessment'), we included 20% of the net income of the trust estate in your

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assessable income, on the postulate that the amount was correctly assessable to you as a beneficiary that was presently entitled to a share of trust income was under a legal disability. In another assessment (hereafter referred to as the section 99A assessment) we had included 100% of the net income of the trust estate in your assessable income, on the postulate that no beneficiary was presently entitled to the income of the trust estate.

In proceedings commenced in the Federal Court, seeking relief under section 39B of the Judiciary Act 1903 (Cth), you have alleged that the assessments of 17 April 2014 are invalid as they are tentative and provisional. We continue to maintain that the assessments were both definitive and valid.

However, to avoid a pointless argument the assessments that have been issued to you today amend or replace the assessments of 17 April 2014. If the assessments of 17 April 2014 were invalid, these are original assessments. If the assessments of 17 April 2014 were valid, these notices affirm or amend those assessments. On any view, these are valid assessments. Please note that it is irrelevant to the validity of an assessment whether it correctly describes itself as an amended or original assessment.

In one assessment, that affirms or replaces the section 98 assessment, we have included 20% of the net income of the trust estate in your assessable income, on the postulate that that share of the net was correctly assessable to you because a beneficiary that was presently entitled to the share of trust income to which that net income corresponds was under a legal disability. In another assessment, that amends or replaces the section 99A assessment, we have included 80% of the net income of the trust estate in your assessable income, on the postulate that that share of the net income was correctly assessable to you as no beneficiary was presently entitled to the share of trust income to which that net income corresponds. These assessments are consistent with each other.

The assessments that have been issued to you today make you liable to pay tax on separate parts of the net income of the trust estate, under the authority of subsections 98(1) and 99A(4) of the Income Tax Assessment Act 1936.

You are required to make a payment in respect of the 'relevant amount of tax' contained in the assessments issued to you.

Amount payable

For each of the relevant years, and for each of the assessments, the share of trust income and tax shortfall are set out in the tables below

Replacement for section 99A assessment
Year Share of Trust Income Tax Shortfall Medicare Levy and Surcharges Total Payable
2011 $2,071,533 $932,198.85 $31,072.99 $963,262.80
2012 $4,457,578 $2,005,910.10 $66,863.67 $2,072,773.75
2013 $11,374,118 $5,118,353.10 $170,611.77 $5,288,964.85

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Replacement for section 98 assessment
Year Share of Trust Income Tax Shortfall Medicare Levy and Surcharges Total Payable
2011 $517,883 $233,047.35 $12,947.07 $245,994.40
2012 $1,114,394 $501,477.30 $38,253.79 $539,731.05
2013 $2,843,529 $1,279,588.05 $85,305.86 $1,364,893.90

Your right to object

In our opinion, the objections you have lodged against the assessments of 17 April 2014 are valid because those assessments are valid, and they will continue to apply to the assessments as amended or affirmed notified by these notices of assessment. No additional liability is imposed by these noticed. You need not, in our view, lodge further objections. The standard text regarding objections which appears below is inserted as a courtesy and for more abundant caution. If you choose to lodge fresh objections for more abundant caution, the existing objections and the fresh objections will be dealt with as one, as on any view there can be only one valid assessment in existence. Determination of the objections will occur in due course. Please note that favourable determination of either the objections may result in further or different assessments in respect of the net income of the trust estate, as the entirety of the net income must be assessed to someone.

8. The notices of assessment reflect the tables in this letter, with each notice concerning the so-called "primary" assessment (that is, based on the view that all beneficiaries are presently entitled to their share with the result that Whitby's liability relates only to the 20% share of the minor) addressed to:

THE TRUSTEE FOR THE WHITBY TRUST

A/C [MINOR'S NAME]

9. By two letters to the trustee dated 27 October 2015, the Commissioner issued assessments for the 2014 tax year on the same primary and alternative basis as for the 2011-201 tax years. The assessment calculated under s 99A (on the basis that no beneficiary was presently entitled to a share of the net income of the trust) was as follows:

Year Share of Trust Income Tax Shortfall Medicare Levy and Surcharges Total Payable
2014 $14,620,560 $6,798,560.40 $6,118,704.35 $12,917,264.75

10. The assessment calculated under s 98 (all beneficiaries being presently entitled to a share of the net income of the trust, one being a minor and thus subject to a legal disability) was as follows:

Year [Minor's] Share of Trust Income Tax Shortfall Penalty Total Payable
2014 $3,655,140.00 $1,754,467.20 $1,579,020.45 $3,333,487.65

11.

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The assessments for the 2014 tax years reflect these tables, with the assessment calculated under s 98 of the 1936 Act again being addressed to:

THE TRUSTEE FOR THE WHITBY TRUST

A/C [MINOR'S NAME]

12. The letters dated 27 October 2015 (in relation to all of the assessments) also said that the Commissioner would apply Law Administration Practice Statement 2006/7 "with respect to recovery where there are primary and alternative assessments", under which:

The Commissioner intends to collect the 'relevant amount of tax' with regard to the trust's net income [or "omitted trust income" in the case of the "s 98 assessment"] as calculated by the Commissioner under the primary assessment, subject to the outcome of any dispute.

13. It is apparent from this that the Commissioner's long-standing practice has been to issue primary and alternative assessments to trustees in respect of the same income in the same year depending on the Commissioner's primary and alternative views of the relevant entitlements of beneficiaries under the trust (that is, whether they are presently entitled to the net income of the trust or not). In the reasons for decision dated 17 April 2014 in respect of the original assessments, Law Administration Practice Statement 2006/7 was described in these terms:

Practice Law Administration 2006/7 - Alternative Assessments

5.24 The Commissioner may in certain circumstances be obliged to issue two or more assessments to one or more taxpayers in respect of the same taxable income, benefit or transaction but may collect the relevant amount of tax only once. Such assessments are collectively referred to as alternative assessments (being the term derived from relevant case law).

5.25 PSLA 2006/7 employs the concept of 'primary' assessment. A 'primary' assessment is an assessment that is made in accordance with the preferred ATO view of how the tax law applies to facts as understood at the time of issued of the assessment. A primary assessment is, strictly speaking, one of two (or more) alternative assessments. However, this practice statement generally refers to an assessment as being an 'alternative' assessment where it is an alternative to the primary assessments. That is, an 'alternative' assessment is an assessment that is made in accordance with an alternative ATO view of how the law applies to the facts as understood. Both the primary assessment and the alternative assessment/s necessarily relate to the same taxable income, benefit or transaction.

14. This case, accordingly, raises an important issue of principle for the Commissioner's performance of functions under the taxation legislation in respect of the liability of trustees to income tax.

Statutory provisions

1997 Act

15. Income tax is a kind of tax-related liability under s 4-15 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act ) for the purposes of the collection and recovery of tax-related liabilities of entities under the Taxation Administration Act 1953 (Cth) (the 1953 Act ).

16. Section 960-100 of the 1997 Act defined an "entity" for taxation purposes in a manner that included a trust.

17. By s 960-100(2), the trustee of a trust was taken to be a tax "entity".

18. By 960-100(3), a legal person can have a number of different capacities in which a person does things from time to time, and in each such capacity the person was taken to be a different tax "entity".

19. By s 960-100(4), if a provision refers to an entity of a particular kind (e.g. as trustee), it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity (e.g. as an individual).

20. By s 4-1, income tax is payable by each individual and company, and by some other entities. Such entities include a trustee (s 9-1 item 11). Section 4-10 provides how the amount of income tax required to be paid is worked out.

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Section 4-15 provides how "taxable income" is worked out. Consistently with this, "taxable income" is defined in s 995-1(1) of the 1997 Act as having the meaning given by s 4-15. By s 4-10(4) of the 1997 Act, for some entities, income tax is worked out "by reference to something other than taxable income for the year". Such entities include a trustee, whose income tax liability is worked out by reference to the net income of the trust for the income year by reference to ss 98, 99, 99A and 102 of the 1936 Act (see item 6 to the table in s 9-5(1) of the 1997 Act).

1936 Act

21. The provisions of the 1936 Act relating to "assessment" are different for the 2011 - 2013 assessments and the 2014 assessments, but it is not suggested that the differences are material to the outcome of this case.

2011-2013 assessments - 1936 Act

22. At the relevant time for the 2011-2013 assessments, "Assessment" was defined in s 6(1) of the 1936 Act as:

  • (a) The ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable); or
  • …
  • (d) for any other taxpayer that is the trustee of a trust estate but excluding a taxpayer that is the trustee of a complying superannuation fund, a non-complying superannuation fund, a complying approved deposit fund, a non-complying approved deposit fund or a pooled superannuation trust - the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax (or there is no net income in respect of which the trustee is so liable) and of the tax payable on that net income (or that no tax is payable); or
  • ….

23. Section 166 provided that:

From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).

2014 assessments - 1936 Act

24. "Assessment" was defined in s 6(1) of the 1936 Act as:

  • (a) the ascertainment:
    • (i) of the amount of taxable income (or that there is no taxable income); and
    • (ii) of the tax payable on that taxable income (or that no tax is payable); and
    • (iii) of the total of a taxpayer's tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income); or
  • …
  • (d) for a taxpayer that is the trustee of a trust estate (other than a trustee to which paragraph (b) or (c) applies or the trustee of a complying superannuation fund, a non-complying superannuation fund, a complying approved deposit fund, a non-complying approved deposit fund or a pooled superannuation trust) - the ascertainment:
    • (i) of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax (or that there is no net income in respect of which the trustee is so liable); and
    • (ii) of the tax payable on that net income (or that no tax is payable); and
    • (iii) of the total of a taxpayer's tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income); or

25. Section 166 provided that:

From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of:

  • (a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and
  • (b) the amount of the tax payable thereon (or that no tax is payable); and

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  • (c) the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds).

All assessments - 1936 Act

26. Otherwise, there is no material difference between the provisions of the 1936 Act applying to the 2011-2013 assessments and the 2014 assessments.

27. By s 161 of the 1936 Act, every person must (if required) give to the Commissioner a return for a year of income. By s 161AA a full self-assessment taxpayer (defined in s 6 to include most trustees and all companies) must, in a return for a year of income, specify its taxable income or its net income for that year of income (or that it has no taxable income or net income for that year) and the amount of the tax payable on that taxable income or net income (or that no tax is payable), amongst other matters.

28. By s 167, if a person is in default in furnishing a return or the Commissioner is not satisfied with the return furnished, the Commissioner may "make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166".

29. By s 169:

Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).

30. Section 170(1) permitted the Commissioner to amend assessments in nominated circumstances.

31. Section 173 provided that:

Except as otherwise provided every amended assessment shall be an assessment for all the purposes of this Act.

32. Section 174 required the Commissioner to serve any notice of an assessment on the taxpayer, as soon as possible after the assessment was made.

33. Section 175 provided that:

The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.

34. Section 175A provided for objections to assessments.

35. Section 177 was an evidence provision which included sub-s (1), which had the effect that production of a notice of assessment was conclusive evidence of the due making of the assessment and, except in proceedings under Pt IVC of the 1953 Act (taxation objections), that the amount and all particulars of the assessment are correct.

36. Division 6 of Pt III of the 1936 Act applied to trust income. The simplified outline in s 95AAA explained that, generally:

  • (a) [the Part] has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and
  • (b) it has the result of assessing the trustee directly on any residual net income; and
  • (c) as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents or those under a legal disability.

37. Section 95(1) contained definitions for the purpose of Div 6 of Pt III. These included:

exempt income , in relation to a trust estate, means the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident.

Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements and structured orders.

net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax

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Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

38. Section 96 provided that:

Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.

39. Section 97 applied if a beneficiary of a trust estate was not under any legal disability and was presently entitled to a share of the income of the trust estate. In this event, by s 97(1)(a), the assessable income of the beneficiary included so much of that share of the net income of the trust estate as attributable to a period when the beneficiary was a resident and so much of that share of the net income of the trust estate as attributable to a period when the beneficiary was not a resident but the income was attributable to sources in Australia.

40. Section 98 applied if a beneficiary of a trust estate was under a legal disability and was presently entitled to a share of the income of the trust estate. In this event, by s 98(1), the trustee of the trust estate was to be assessed and was liable to pay tax in respect of so much of that share of the net income of the trust estate attributable to a period when the beneficiary was a resident and so much of that share of the net income of the trust estate attributable to a period when the beneficiary was not a resident but the income was attributable to sources in Australia.

41. Section 98(3) provided that:

A trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax:

  • (a) if the beneficiary is not a company - in respect of the amount of net income as if it were the income of an individual and were not subject to any deduction; or
  • (b) if the beneficiary is a company - in respect of the amount of net income at the rate declared by the Parliament for the purposes of this paragraph.

42. Section 98A concerned the assessable income of a beneficiary where s 98(3) (liability of a trustee to tax where the beneficiary had a present entitlement to a share of the net income of the trust estate and was under a legal disability). Section 98A was in these terms:

(1) Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3), the assessable income of the beneficiary who is presently entitled to that share of the income of the trust estate shall include:

  • (a) so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (b) so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

(2) Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3):

  • (a) there shall be deducted from the income tax assessed against the beneficiary the amount (in this subsection referred to as the relevant amount ) of the tax paid by the trustee in respect of the beneficiary's interest in the net income of the trust estate; and
  • (b) if the relevant amount is greater than the amount of the income tax assessed against the beneficiary - the Commissioner shall pay to the beneficiary an amount equal to the difference between those 2 amounts.

43. Section 99, concerning the liability of a trustee to be taxed at the same rate as an individual, could not apply if s 99A applies (see s 99(1)).

44. Section 99A, which the Commissioner applied in the alternative assessments, provides for certain trust income, including where all beneficiaries or a beneficiary has no present entitlement to the net income of a trust, to be taxed at a special rate. Subsections 99A(4) and (4A) thus provided that:

(4) Where there is no part of the net income of a resident trust estate:

  • (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

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  • (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
  • (c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

(4A) Where there is a part of the net income of a resident trust estate:

  • (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
  • (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and
  • (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

45. Section 100 provided for the assessable income of a beneficiary presently entitled to any of the income of a trust estate who is a beneficiary under multiple trust estates, or has multiple sources of income, and is under a legal disability, to include trust income (where the beneficiary was a resident of Australia or, if not a resident, the income was attributable to sources in Australia), but s 100(2) provided for a deduction of the income tax assessed against such a beneficiary for the tax paid or payable by a trustee in respect of that beneficiary's interest in the net income of the trust estate.

46. Section 102 concerned revocable trusts.

47. The rates for the purposes of s 98 and 99A of the 1936 Act were declared in the Income Tax Rates Act 1986 (Cth), ss 12(9) and 28, and Schedule 10.

48. In this scheme, accordingly:

(1) Section 96 excluded trustees from any liability to pay income tax upon the income of a trust estate except as provided for in the 1936 Act.

(2) Section 97 concerned the liability to tax of beneficiaries not under any legal disability who are presently entitled to the net income of a trust.

(3) Section 98 concerned the liability to tax of a trustee in respect of the share of the net income to which a beneficiary under a legal disability was presently entitled.

(4) Section 98A concerned, relevantly, the assessable income of a beneficiary with a present entitlement to a share of the net income but subject to a legal disability (with the result that the trustee would be liable to pay tax in respect of that share under s 98).

(5) Section 99 was excluded from operation if s 99 applied (which is the present case under the alternative assessments).

(6) Section 99A concerned any net income of a trust estate in respect of which no beneficiary had a present entitlement, in which event the trustee was liable to pay tax in respect of that net income.

49. These provisions disclose that the issue the Commissioner has effectively hedged in the present case by issuing alternative assessments for each year is whether any of the beneficiaries are presently entitled to the net income of the trust in the relevant years. The hedge is thus as between present entitlement of all beneficiaries on one hand - in which event Whitby's liability is only as to the 20% share of the minor (the beneficiaries otherwise being taxable on their shares under s 97) - and no present entitlement of any beneficiary on the other, in which event the Commissioner had originally assessed Whitby under s 99A as to 100% of the net income of the trust and in the replacement assessments, in order to avoid an argument about double taxation, assessed Whitby as to 80% of the net income of the trusts.

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The competing cases

Whitby's submissions

50. Whitby's case is disarmingly straightforward.

51. The Commissioner, Whitby submitted, had purported to assess it (in its capacity as trustee of the Whitby Trust) to tax twice on the "net income" of the Whitby Trust estate for each year in dispute, once under s 99A (no present entitlement of any beneficiary) and once under s 98 (all beneficiaries presently entitled but one beneficiary under a legal disability) of the 1936 Act. However, each assessment is conclusive evidence of Whitby's liability to tax for each year except in Pt IVC proceedings and each assessment separately enlivened a legal right to object against it. As a result, Whitby is left owing different debts in each relevant year in circumstances where payment of one does not abate the other, each debt is an independent debt owed to the Commonwealth and is payable to the Commissioner, and interest is accruing on each debt.

52. As Whitby put it:

The process undertaken by the respondent has left the applicant (in its capacity as trustee of the Whitby Trust) owing two income tax debts in respect of each Relevant Year. That is not an assessment process contemplated by the ITAA 1936. The structure of the assessment process, and authority (
FCT v Stokes (1996) 72 FCR 160 at 171E-F per Spender, Burchett and Hill JJ;
Re Temples Wholesale Flower Supplies Pty Limited v C of T (1991) 29 FCR 93, per Wilcox, Burchett and O'Loughlin JJ, at [98-99]), allow for only one income tax debt for one taxpayer (in one capacity) for one tax period, and for one recovery proceeding and one Part IVC challenge (If the respondent had alternative views as to which rate of tax was applicable to the net income, it was open to the respondent to assess the higher rate by one assessment and cast the onus on the applicant to prove that assessment was excessive (ss 14ZZK and 14ZZO TAA)).

53. Whitby submitted that the reasoning in Futuris supports its case in that only an assessment within the statutory description constitutes an "assessment" which engages s 175 of the 1936 Act. Tentative or provisional assessments, as Whitby characterised the present purported assessments, are not an "assessment" within the meaning of the 1936 Act and, accordingly, are liable to be declared void.

54. Whitby also submitted that the only power of the Commissioner to make an assessment of its liability to tax is in s 166 of the 1936 Act, modified as appropriate for a trustee. By analogy to an individual taxpayer the Commissioner is required, from the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, to make an assessment of:

  • (a) the amount of the net income of the trust estate under s 95; and
  • (b) the amount of the tax payable thereon (or that no tax is payable), (including whether it is reasonable that the s 99A rate rather than the s 99 rate be applied); and
  • (c) the total of the taxpayer's tax offsets.

55. According to Whitby:

determining the s 95 Net Income [(a)] and selecting the rate of tax [(b)] are each only parts of the one process [(a), (b) and (c)] leading to the imposition of a single tax liability. As Isaacs and Rich JJ in
Kuhnel & Co Ltd v Deputy Commissioner of Taxation (South Australia) (1923) 33 CLR 349 observed (at [362]) in the context of an assessment of the liability of a trustee, although the calculation may require a consideration of diverse factors (including whether the beneficiaries are or are not under a legal disability), "the amount of tax is single".

56. This, said Whitby, reflects the general statutory scheme of the income tax legislation that there is "one income, one taxpayer, one tax" (
Richardson v Commissioner of Taxation (1932) 48 CLR 192 at 212 per Evatt J; see also
Trustees, Executors & Agency Co Ltd v Commissioner of Land Tax (1915) 20 CLR 21 at 41,
R v Deputy Federal Commissioner of Taxation (SA); ex parte Hooper (1926) 37 CLR 368 at 372 to 373,
Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39 at 54-55, Stokes at 167F-168A and 168D-169F).

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57. The Commissioner's contrary contentions should be rejected because:

[a]n examination of all the provisions of the income tax statutes, which compromise four stages: substantive liability provisions, assessment provisions, collection provisions, and objections and appeals, yields for the trustee of a trust estate the same answer as the Federal Court decided in Stokes (and as illustrated by Futuris) that it yields for a personal taxpayer, being that a proper process of assessing how the substantive provisions apply to a trustee can only result at any one point in time to one income tax debt to the Commonwealth for one tax year, which debt can be collected by the Commissioner out of the trust estate pending ultimate judicial review of its correctness. (footnotes removed)

58. As such:

the Commissioner must first determine the total share of the net income that the trustee is [liable] to pay tax on (i.e. apply sections 98, 99 and 99A together), then he must work out the initial tax liability attributable to each share (by determining the rates applicable to each year). And then, in respect of that total liability, he must assess the tax offsets to which the trustee in its single capacity is entitled that reduce that initial liability to reach a final single amount. That amount, not any other amount, is to be notified to the trustee as its liability for the year. In short, Division 6 in Part III merely contains some of the substantive provisions that the Commissioner must assess in determining a trustee's ultimate liability to income tax for an income year that leads, upon notification, to a debt collectible by the Commissioner and a right of judicial review if the trustee is dissatisfied with that assessment.

59. The Commissioner's approach, of treating ss 98 and 99A of the 1936 Act as sources of a power to assess tax liability, is misconceived (see
Howey v Commissioner of Taxation (1930) 44 CLR 289). Division 6 of Pt 3 of the 1936 Act is not a source of power to make an assessment. It is a source of liability of a trustee to tax in a certain amount and at a certain rate. The applicant, Whitby, has only one relevant capacity, as trustee. It is liable to pay tax in that capacity. It is not acting in different capacities as the representative of different beneficiaries. Separate assessment processes are antithetical to the definition of "assessment" and the scheme of all the provisions under the relevant statutes. The provisions relating to tax offsets demonstrate the inconsistency. In Whitby's words:

Are the tax offsets applied arbitrarily based on the order in which the Commissioner issues the notices of assessment and wasted accordingly, bearing in mind that a trustee is not entitled to any refundable tax offsets? If not, how are the tax offsets apportioned? Notably, the single assessment process does not provide for this - and the obvious explanation for that omission is that apportionment is not necessary when one appreciates that the process contemplates a single definitive tax liability being notified to the trustee of a trust estate in a single notice of assessment for an income year.

60. Whitby provided examples of the differences in the liability to tax depending on the different tax offsets that would apply based on its construction of the 1936 Act compared to that of the Commissioner.

61. Further, it is apparent that "where s 98 applies, the beneficiary may be assessed as well under s 98A or s 100. Sections 98B and 100 each provide for a deduction from the beneficiary's assessed liability of the tax paid or payable by the trustee. There is no equivalent provision in respect of tax assessed and for which the trustee is liable under s 99A". This, said Whitby "explodes the respondent's submission that the trustee is to be assessed really as a representative of each beneficiary in the sense of being assessed "on behalf of" each beneficiary" (contrary to
Syme v Commissioner of Taxes [1914] AC 1013 at 1020 in which the notion of secondary liability of a trustee to tax was rejected).

62. The Commissioner's approach is said to be unsupported by authority and, indeed, contrary to the reasoning in Howey, relating to the predecessor provisions to Div 6 of Pt III of

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the 1936 Act. References in decisions to trustees being taxed in a representative capacity are to be understood in light of the limitation on a trustee's liability under s 254 of the 1936 Act (to the extent of the trust assets). Thus, submitted Whitby:

The observations that a trustee is taxed in a representative capacity are made to illustrate that it is not taxed in its personal capacity, and only liable to the extent of the trust assets: s 254. They do not support the respondent's submissions that the trustee is the representative of each beneficiary in the sense of paying tax "on behalf of" the beneficiary. Nor can they, having regard to sections 98A, s 100 and the fact that sections 99 and 99A apply where there is no beneficiary who the trustee represents.

63. The Commissioner's reliance on the legislative history of the provisions does not displace the clear meaning of the statutory text (
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 at [39]). In any event, the legislative history supports Whitby's case.

64. Given that the Commissioner purported to issue two assessments to the one taxpayer for the same income year, setting out two separate and different liabilities to tax, it necessarily follows that the Commissioner, as Whitby put it:

formed only a tentative view of that taxpayer's liability to tax. The respondent has not specified one definite amount but has impermissibly broken up his method of calculation of tax into two tax liabilities for the one year in respect of the one taxpayer. The respondent has confused the assessing power - s 169 ITAA36 - with the provisions that give rise to the amounts that together with other diverse factors give rise to the one liability (sections 98 and 99A ITAA36).

65. According to Whitby, the Commissioner's splitting up of the net income into an 80% and a 20% component in the replacement assessments the subject of this proceeding does not make any difference to the fundamental problem. There is no proper single assessment as required. The reasoning in
Cadbury-Fry-Pascall Pty Ltd v Commissioner of Taxation (1944) 70 CLR 362 and
Lever Bros Pty Ltd v Commissioner of Taxation (1948) 77 CLR 78 is inapplicable for the same reasons that the Full Court distinguished those cases in Stokes. No provision of the Act in Stokes or in this case authorises the issuing of multiple notices of assessment to a trustee in different amounts in the same year.

66. Whitby also said this:

Finally, and importantly, the first set of twin assessments were not capable of standing together: one was in respect of 100% of the net income and the other was in respect of 20%, giving rise tax on 120% of the net income. That is why they were "amended or replaced". The respondent must concede that those assessments did not meet the statutory definition in s 6(1). Without altering that flawed process, he has reduced one of the twin assessments to 80% which, with the other 20% assessment, comes to 100%. So the twin assessments have a superficial life. But they cannot survive scrutiny as soon as the implications of the objection and appeal procedure, which might commence with one or both of them and in different forums, is considered[.]

67. On Whitby's case, the invalidity of the purported assessments also means that the penalties imposed cannot stand.

Commissioner's submissions

68. The Commissioner's case is that the assessments of Whitby's liability to tax are valid "having regard to the representative character of the tax liability under s 98, the purpose of that section and the scheme of Div 6 of Pt III of the 1936 Act". In the Commissioner's submission:

The current s 98 Assessments made the applicant liable to tax on one fifth of the net income of the trust estate, on the postulate that a beneficiary…presently entitled to the share of the trust income to which that income corresponded was under a legal disability in the relevant income year. The current s 99A Assessments made the applicant liable to tax on four fifths of the net income of the trust estate, on the postulate that no beneficiary was presently

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entitled to the share of trust income to which that net income corresponded. (footnotes removed)

69. The Commissioner contends that assessment of a trustee under Div 6 of Pt III of the 1936 Act is made under s 169 of the 1936 Act (Stokes at 166) and the "scheme of Div 6 of Pt III of the 1936 Act permits multiple trustee assessments (such that a trustee is made liable to tax on a particular share of the net income of a trust estate under more than one assessment), providing the assessments are made in respect of different capacities".

70. Futuris does not suggest that the assessments are tentative or provisional. In the Full Court's decision,
[2007] FCAFC 93; (2007) 159 FCR 257 at [47], the argument of "double counting" (by reason of a first and second assessment in which the latter involved quantitative overlap of amounts used in calculating the taxpayer's taxable income) was rejected on the basis of the reasoning of McHugh J in Richard Walter at 237 that the second assessment specified "that a fixed sum is definitely and not provisionally payable by a particular person". In the High Court in Futuris, as explained by the Commissioner:

the plurality (Gummow, Hayne, Heydon and Crennan JJ) held that the decision of the Full Court that the second amended assessment was neither tentative nor provisional was "plainly correct": Futuris at [52]. Their Honours quoted FCT v Stokes at first instance, stating that the "essential consideration" pointing to a tentative and provisional assessment is a failure to "specify what is the amount of the taxable income which has been assessed and what is the tax payable thereon". (footnotes removed)

71. In the present case, there is nothing tentative or provisional about the assessments, either the primary or alternative assessments. In the Commissioner's words:

There is no failure to specify the amount of taxable income which has been assessed nor the tax which is payable thereon. Nor does any correspondence touch the definitiveness of the liability imposed by the notices of the current assessments. As noted above, the applicant was advised in a letter dated 27 October 2015 that it was not required to pay the amount of tax contained in the s 99A assessment in respect of the 2015 income year. That advice is comparable to the letter in Futuris indicating that the position of the Commissioner was not to seek payment referable to the Div 19A amount, which did not alter this Court or the High Court's conclusion as to the second amended assessment not being tentative or provisional.

72. It follows, said the Commissioner, that:

The applicant's argument must fail if, as the Commissioner contends, multiple trustee assessments…are permissible under Div 6 of Pt III of the 1936 Act so long as the assessments are made in respect of different capacities.

73. Multiple trustee assessments under Div 6 of Pt III of the 1936 Act in different capacities are permissible, submitted the Commissioner, for a number of reasons. For one thing, trustee assessments differ from ordinary assessments of taxable income in that the liability created by s 98 is of a representative character, "such that the assessment for liability should be regarded as in substance made in respect of the beneficiary rather than the trustee". For another:

…s 98 itself envisages that a trustee is liable to tax in different representative capacities: each of subsections (1), (2), (2A) and (4) impose liability on the trustee on behalf of distinct beneficiaries.

74. The Commissioner also relied on the enactment history of s 98. The Commissioner explained the relevance of this history as follows:

The predecessor provision to s 98 was s 31(2) of the Income Tax Assessment Act 1922 (Cth) ( 1922 Act ). The Explanatory Memorandum to the Income Tax Assessment Bill 1935 explained the alterations to consolidate and amend the 1922 Act, which saw s 31(2) become ss 98 and 99 (those sections have since been amended, but the point of the amendment remains evident). Section 31(2) of the 1922 Act provided:

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A trustee shall be separately assessed and liable to pay tax in respect of that part of the income of the trust estate which if the trustee were liable to pay tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after allowing all the deductions under this Act, except the deduction under section twenty-four, and
  • (a) which is proportionate to the interest in the trust estate of any beneficiary who is under a legal disability; or
  • (b) to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof.

In
Howey v Federal Commissioner of Taxation (1930) 44 CLR 289 ( Howey ), the High Court found that s 31(2) did not provide for individual taxpayer rates to apply in respect of income assessed to the trustee, despite the funds being applied for the benefit of the individual beneficiaries under a legal disability. Justices Rich and Dixon explained the limitation as follows (at 293-294):

Even if the assumption be correct which both the Commissioner and the appellant make, that sec. 31(2) governs the matter, it could not, in our opinion, result in separate assessments upon him in respect of each beneficiary. We think sec. 31(2) means that "that part of the income of the trust estate" should be included in the one assessment which falls under para (a) or para (b) of the sub-section, or partly under one para and partly under the other. This assessment should be made upon the trustee "separately." We do not think the word "separately" in sub-sec. (2) requires a discrimination between portions of that part of the income of the trust estate which answers the alternative description contained in paras (a) and (b). The separation which it contemplates is a separation between the assessment of the taxpayer in respect of such income in his capacity of trustee, and assessments made upon him otherwise.

The Ferguson Royal Commission [Commonwealth of Australia, Third Report of the Royal Commission on Taxation (1934) at 122-3 [712]] recommended that s 31(2) be amended to overcome the effect of this reasoning in Howey, stating (emphasis added):

Where the beneficiary is presently entitled but subject to a legal disability … he is not generally in a position to receive the income or to compel the trustee to pay it to him. His share of the income should therefore be taxed in the hands of the trustee ; but as the amount of his share is definitely ascertainable, it should be taxed at the rate appropriate to the share, so that if there is other income of the estate held in trust for other beneficiaries, or to which no one is presently entitled, the share in question should, for the purposes of assessment, be treated as severed from that other income. This appears to have been the Commonwealth practice under the present Section till recently … but expressions in the judgment of two Judges … in Howey's case (44 CLR 289) would indicate that the separation of such a share for the purposes of assessment is not justified under the Section as presently framed. We recommend that it should be clearly provided that such interests be separated, and the tax on each interest assessed to the trustee.

This recommendation was adopted. As originally enacted, ss 98 and 99 were as follows:

98. Where any beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual, and were not subject to any deduction other than the concessional deductions which would have been allowable to the beneficiary if he had been assessed in respect of that share, and the statutory exemption.

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99. Where there is no beneficiary presently entitled to any part of the income of a trust estate, or where there is a part of that income to which no beneficiary is so entitled, the trustee shall be assessed and liable to pay tax on the net income of the trust estate, or on that part of that net income as the case may be, as if it were the income of an individual, and were not subject to any deduction other than the statutory exemption.

Section 98 as amended made it clear that the trustee could be assessed in respect of each share of the s 95 'net income' of the trust estate referable to a beneficiary under a legal disability. The words "separately assessed" found in s 31(2) of the 1922 Act are not replicated in s 98. However, it is clear from Howey (at 294) that the separation contemplated under former s 31(2) was a separation of the tax assessed to trustee in his capacity as trustee from the tax otherwise assessed to the trustee, including as a taxpayer in his own right, and not a separation as to the tax assessable in respect of the various shares of the net income of the trust to which the beneficiaries were entitled. The rewritten provisions clearly separated the sections that imposed a tax liability on a presently entitled beneficiary not under a legal disability (s 97) and those relating to the trustee in the capacity of trustee (ss 98-99).

Section 98 contemplates that, for example, two assessments could issue to a trustee regarding the same income year for differing amounts, one pursuant to s 98(1) where a beneficiary is a minor; and another under s 98(2A) and (3) where a different beneficiary is a non-resident at the end of the income year. As the emphasised portion of the passage from the Ferguson Royal Commission quoted above made clear, the assessments under s 98 were, in substance, assessments of the relevant beneficiary which were issued to the trustee in a representative capacity for convenience of payment. To the extent a trustee is also assessed in a representative capacity pursuant to s 99A, a different taxpayer to the taxpayer in respect of which the trustee is made liable under s 98 is represented by the assessment. (footnotes removed)

75. The Commissioner submitted further that the function of a trustee's liability under s 98 is a form of withholding on behalf of various beneficiaries including a beneficiary subject to a legal disability (s 98(1)). This is reinforced by ss 98A and 100 which provide for the assessable income of beneficiaries if s 98 is engaged. The provisions expressly contemplate the Commissioner issuing different assessments to the trustee and the beneficiary in respect of the same income. Subsections 99A(4)(b) and (4A)(b), which make it a precondition of a trustee's liability to be assessed and pay tax on the net income of a trust estate that the trustee is not liable to be assessed and pay tax on that part of the net income of a trust estate under s 98, also discloses that a trustee may be liable to multiple assessments.

76. In the Commissioner's words:

Having regard to the representative character of the liability under s 98 and the provisions of Div 6 of Pt III contemplating multiple trustee assessments, the respondent submits that the appropriate analogy in respect of multiple trustee assessments made in those different representative capacities is not multiple assessments of the same taxpayer for the same income year for the same income pursuant to s 166, of the kind that was found to be tentative in FCT v Stokes, but with the issuance of alternative assessments to different taxpayers in relation to the same income. Assessments issued alternatively to two or more taxpayers in relation to the same income year and the same items of income are not liable to be set aside as tentative or provisional: Richard Walter at 188, 200-203, 216-220, 228-229, 237-238.

Justice Brennan in Richard Walter emphasised that the power to assess is not limited to cases in which the Commissioner is in a position to make a positive finding of fact, noting "the Commissioner is not required to determine on the balance of probabilities that one person rather than another is the person subject to the tax liability in respect of the particular

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income": at 201. Thus, it is "immaterial" to the validity of an exercise of the power to assess one taxpayer that the Commissioner believes it is possible that another person is liable to tax in respect of the particular income. If it were otherwise, not only would this "substantially erode the Commissioner's ability to recover tax", but contrary to the intention of s 177(1), the way would be opened to litigating liability to tax outside the procedures for objection, review and appeal: at 201.

…

Consistent with Richard Walter, in the case of uncertainty as to a beneficiary's present entitlement to a share of the net income of a trust estate and thus as to the operation of s 97, the Commissioner may issue an alternative assessment to a trustee under s 99A in respect of that income. The position in respect of alternative assessments issued to a trustee under ss 98 and 99A should be no different. It would be incongruous if the Commissioner could not adopt, and give effect to, by issuing assessments, the same alternative premises as in the ss 97/99A case, merely because of the circumstance that the trustee rather than the beneficiary is liable in a representative capacity to pay tax in respect of one beneficiary's share under s 98. (footnotes removed)

77. According to the Commissioner, Whitby's reliance on
William Kuhnel & Co Ltd v Deputy Commissioner of Taxation (SA) (1923) 33 CLR 349 at 362 is misplaced in that:

That case concerned the application of provisions of the Income Tax Assessment Act 1915-16 (Cth) and the Income Tax Assessment Act 1915-18 (Cth) to the War-Time Profits Tax Assessment Act 1917-18 (Cth), the former provisions being construed by Isaacs and Rich JJ in the same manner as Rich and Dixon JJ subsequently construed s 31(2) of the Income Tax Assessment Act 1922 (Cth) in Howey. As explained above … , s 98 of the 1936 Act was intended to overcome the effect of their Honours' construction of the former s 31(2) in respect of the separation of shares of trust income.

78. The Commissioner also submitted that even if all of his submissions above are rejected, Whitby's application should be rejected because the replacement assessments are capable of standing together in that (consistently with Cadbury at 381-382, Lever Bros at 82 and Stokes at 172-173), as:

The s 99A assessments only apply to that part of the net income of the trust that does not fall within s 98. The current assessments concern distinct portions of the net income of the trust estate and stand on their own.

79. Finally, as the Commissioner put it:

The issue of the s 98 Assessments and the s 99A Assessments does not "objectively demonstrate doubt" as to the applicable rate of tax, as the applicant contends, in reliance on s 166 and the incorrect assumption that the respondent regards one of the two assessments for each income year as "wrong"… Instead, the assessments relate to separate liabilities and depend on the share of the net income of the trust estate on which the applicant is liable to tax.

…

Nor has the respondent simply "split up the net income into an 80% component and a 20% component"… The applicant was assessed and made liable to tax under s 98 only on so much of the share of the net income of the trust estate for which there was a presently entitled beneficiary … under a legal disability. The applicant was assessed and made liable under s 99A in the event the remaining four beneficiaries were not presently entitled to a share of the net income of the trust, and in that case only in respect of the whole of the net income minus [the minor beneficiary's] one fifth share.

The applicant has not been assessed to different and inconsistent tax liabilities in respect of different and alternative amounts of the net income of the Whitby Trust. There is no overlap between the portions of the net income of the trust estate covered by the assessments.

Conclusions

80. For the following reasons, I find the Commissioner's submissions more persuasive than those of Whitby, despite also

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considering it appropriate to acknowledge that it seems to me that all of the arguments ultimately reduce to the first point below. That is, if (as Whitby contends) the Commissioner was making an assessment of the taxable income of the trustee under s 166 of the 1936 Act then Whitby's submissions, to the effect that there may be only one such assessment to it for each tax year, should be accepted. If, as the Commissioner contends, the Commissioner was making an assessment of the liability of Whitby to pay income tax under ss 98 and 99A of the 1936 Act, as required by s 9-5(1) item 6 of the 1997 Act, by reference to the net income of the trust in exercise of the power under s 169 of the 1936 Act, then it seems to me that Whitby's case fails at the outset, and the Commissioner's submissions must be correct. The same propositions would also govern the outcome of Commissioner's alternative case based on consistency of the primary and alternative assessments having regard to Cadbury and Lever Bros.

81. First , it may be accepted that ss 98, 99 and 99A do not themselves vest in the Commissioner a power to make an assessment but are the source of a trustee's potential liability to assessment and payment of tax (see, for example,
Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 at 11-12). That said, s 166 is not the only power to make an assessment. Section 166 is concerned with the making of an assessment on the "taxable income" of any taxpayer. Under the 1997 Act, the liability of a trustee in that capacity to income tax is not worked out by reference to "taxable income" (s 4-10(4)). By operation of s 9-5 item 6 of the 1997 Act, the liability of a trustee to pay income tax is worked out by reference to the net income of the trust for the income year, under the process established by ss 98, 99 and 99A of the 1936 Act. This is the basis of the observation of the Full Court in Stokes at 166F that an example of the exercise of the power of assessment in s 169 includes the assessment of a trustee under ss 98 or 99A of the 1936 Act. To the same effect, see
Prestige Motors Pty Ltd v Commissioner of Taxation (1993) 47 FCR 138 at 141D-F). In Stokes at 172-173, moreover, the Full Court explained the decisions in Cadbury and Lever Bros, in which multiple assessments had been made in respect of the same taxpayer in a single tax year, as authorised by provisions which enabled separate and independent assessments, each of which were assessments under s 169.

82. Given that:

(1) s 166 of the 1936 Act is concerned with the assessment of "taxable income", the amount of tax payable on the taxpayer's "taxable income", and the total of the taxpayer's tax offset refunds;

(2) "taxable income" is defined in s 995-1(1) of the 1997 Act as having the meaning given by s 4-15 of that Act;

(3) s 4-15 of the 1997 Act identifies generally how to work out "taxable income", but s 4-10(4) provides that, for some entities, income tax for the year is worked out by reference to something other than "taxable income";

(4) by item 6 of the table to s 9-5(1) of the 1997 Act and s 4-10(4), income tax is payable by a trustee not by reference to "taxable income" but by reference to the "net income of the trust for the income year" under ss 98, 99 and 99A of the 1936 Act;

(5) s 169 of the 1936 Act vests in the Commissioner the power to make an assessment of tax payable where, under the 1936 Act, any person is liable to pay tax, without any mention of "taxable income"; and

(6) ss 98, 99 and 99A make a trustee liable to pay tax based on the "net income of the trust estate" by reference to the status of the beneficiaries,

I am unable to accept the fundamental premise of Whitby's case that the assessments of it are an exercise of power under s 166 (as opposed to s 169) of the 1936 Act. Whatever else the Commissioner might be doing in respect of the liability of a trustee to pay income tax, he is not assessing the "taxable income" of the trustee within the meaning of s 4-15 of the 1997 Act and thus, it seems to me, s 166 of the 1936 is not engaged.

83.

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Accordingly, and in common with the provisions considered in Cadbury and Lever Bros, I would characterise ss 98, 99 and 99A as provisions under which a trustee may be liable to pay tax. Section 169 is a power to make an assessment of the amount of tax so payable, that amount not being referable to the concept of "taxable income" under s 166 but to the provisions of ss 98, 99 and 99A as applicable in the circumstances.

84. Second , while it is true that Whitby had only one relevant capacity (as the trustee of the trust), the scheme embodied in the relevant provisions which makes a trustee liable to tax, ss 98, 99 and 99A of the 1936 Act, contemplate that a trustee will be assessed and liable to pay tax in respect of the different beneficiaries depending on the status of the beneficiary. Otherwise, by s 96, a trustee is not liable to pay income tax upon the income of the trust estate.

85. Third , and as a result of the second proposition above, the position of a trustee in this context is different from that of an individual or corporate taxpayer who is liable to be assessed and pay income tax on that person's taxable income for the year. For this reason, the strictures of "one income, one taxpayer, one tax" on which Whitby relies are not engaged by the statutory scheme in respect of the liability of a trustee to tax.

86. Fourth , it does not necessarily follow that because the Commissioner has made assessments against Whitby based on different postulates - all beneficiaries are presently entitled to a share of the net income but one is a minor and no beneficiaries are presently entitled to the net income - the assessments are necessarily "tentative and provisional" such that they cease to be an assessment at all. As the Commissioner said, the assessments specify the amount of tax income assessed and the amount of tax payable thereon. Nothing in the evidence otherwise undermines the definite character of the liability imposed. It is merely that one set of assessments assume a present entitlement of the beneficiaries and the other set assumes no such present entitlement. As noted, it is the underlying uncertainty about the operation of the trust which the Commissioner has hedged by the making of the alternative assessments, but the net income of the trust and tax payable thereon are clearly specified under each assumption. The correspondence from the Commissioner also discloses that it is the so-called "primary" assessments which the Commissioner considers reflect the correct assumption, the "alternative" assessments performing a protective function lest the Commissioner's view about the operation of the trust be incorrect.

87. Fifth , Whitby's case that the Commissioner must apply, relevantly, ss 98 and 99A together to determine the trustee's tax liability in respect of all shares of net income for the trust estate before assessing any offsets to that single total liability, thereafter making a single assessment on the trustee, would have an incongruous effect. It is clear that the Commissioner may hedge his bets in respect of the tax payable in respect of one amount of income in that the Commissioner may make an assessment against more than one person in respect of the same income (Richard Walter). Yet Whitby's approach would require the Commissioner to make a potentially binding decision (depending on the timing of the making of the assessment) as to whether or not a trustee might be liable to pay tax on trust income depending on the contestable fact of the existence or non-existence of a present entitlement of a beneficiary to a share of the net income.

88. Sixth , it is not apparent that the mere fact that ss 98B and 100 provide for a deduction from the beneficiary's assessed liability of the tax paid or payable by the trustee, whereas s 99A does not, undermines the Commissioner's argument. Nor do the observations in Syme on which Whitby relies seem material. It may be accepted that the trustee is assessable and liable to pay tax in that capacity and not as a representative of the beneficiaries. The Commissioner's point is that under the statute, the trustee is assessable and liable to pay tax in respect of the net income of the trust by reference to the status of the beneficiaries and their present (or otherwise) entitlements to shares in that net income.

89.

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Seventh , the legislative history tends to support the Commissioner's position. The Commissioner's submissions in this regard, summarised above, indicate the legislative intention to overcome the decision in Howey. The submissions to the contrary for Whitby do not appear to confront the fact that the legislative changes which introduced ss 98 and 99A were intended to overcome the effect of Howey. Rather, Whitby's submissions pre-suppose that the legislative changes were intended to preserve the effect of Howey.

90. Eighth , the cases on which Whitby particular relies do not concern the operation of ss 98A and 99 of the 1936 Act. Stokes, for example, concerned an individual taxpayer and three alternative assessments under s 166 in circumstances where, as the Full Court said at 172F-G, there was no provision which authorised:

…a liability to tax separately and distinct from the ordinary liability to pay tax on taxable income as assessed under s 166. None of the present assessments could be supported as an assessment under s 169.

91. As also noted, the Full Court in Stokes at 166F characterised assessments of a trustee under ss 98 or 99A of the 1936 Act as assessments under s 169.

92. Ninth , the analogy which the Commissioner seeks to draw between the assessment and liability to pay tax of a trustee in respect of the shares of beneficiaries to the net income of a trust estate and the making of assessments of different taxpayers for the same income has some force. In the present case, the Commissioner, as it was said the Commissioner must in Richard Walter at 200, has taken a view of the facts and made assessments for each year based on that view (the so-called "primary" assessments). The so-called "alternative" assessments are not for the purpose of double recovery (as referred to in Richard Walter at 201) but are protective. By analogy to the observations at 201 of Richard Walter the uncertainties which are the inevitable companions of the operations of complex trust instruments should not "substantially erode the Commissioner's ability to recover tax". The difficulties to which such concurrent liabilities may give rise, relied upon by Whitby, were not seen as a sufficient reason to lead to a different result in Richard Walter (see at 201-202) and the same conclusion applies in the present case.

93. Tenth , the fact that the approach which Whitby says the Commissioner must take and that which the Commissioner has taken involve different tax offsets is not a sufficient reason to adopt Whitby's construction. I am not persuaded that the statutory scheme precludes the approach the Commissioner has taken or, of necessity, renders that approach tentative or provisional in the sense that the assessments are no assessments at all.

94. It remains to be said that it must follow from the reasons above that I am persuaded by the Commissioner's case irrespective of the argument that the consistency of the two sets of assessments by reason of the 80% and 20% split is determinative, based on Cadbury and Lever Bros. If I am incorrect in this regard, then I would nevertheless, and for the same reasons as above, accept that part of the Commissioner's case based on Cadbury and Lever Bros.

95. For these reasons I consider that the application should be dismissed, with costs.


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