LEWSKI v FC of T

Judges:
Perram J

Pagone J
Moshinsky J

Court:
Full Federal Court, Victoria

MEDIA NEUTRAL CITATION: [2017] FCAFC 145

Judgment date: 18 September 2017

Perram, Pagone and Moshinsky JJ

1. The applicant was, at all material times, a beneficiary of two trusts, known as the ACE No 4 Trust (the ACE Trust ) and the Arjod Trading Trust (the Arjod Trust ). On 14 May 2013, the respondent (the Commissioner ) issued amended assessments to the applicant with respect to the years of income ended 30 June 2006 and 30 June 2007 on the basis that she was assessable to a share of the net income of the ACE Trust (for the 2006 year) and the Arjod Trust (for the 2007 year) under s 97 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ). On 5 July 2013, the applicant objected to the amended assessments. On 9 July 2015, the Commissioner decided to allow in part the applicant's objection in relation to the 2006 year, and to disallow in full her objection in relation to the 2007 year.

2. On 4 September 2015, the applicant applied to the Administrative Appeals Tribunal (the Tribunal ) for review of the Commissioner's objection decision. On 9 December 2016, the Tribunal, constituted by a Deputy President, decided to affirm the Commissioner's decision.

3. The applicant 'appeals' to this Court on a question of law pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). Although styled as an appeal, the proceeding is within the Court's original jurisdiction. In the circumstances of this case, that jurisdiction is being exercised by a Full Court: see s 44(3) of the Administrative Appeals Tribunal Act.

4.


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Although the amended assessments relate to the 2006 and 2007 years of income, some of the issues in this appeal concern the availability of carry forward losses from previous years. In particular, during the year ended 30 June 1999, the trustee of the ACE Trust, Australian Commercial Property Syndications Pty Ltd ( ACPS ), was a member of a property syndicate known as the Glendale Property Syndicate. The manager of that syndicate was Glendale RV Syndication Pty Ltd ( Glendale ). Glendale entered into two interrelated contracts on 30 June 1999: a contract of sale of real estate between Prime Life (Glendale Hostel) Pty Ltd as vendor and Glendale as purchaser (the Contract of Sale ); and a sale and purchase of business agreement (the Purchase of Business Agreement ) between Prime Life (Glendale Hostel) Pty Ltd, Glendale and Prime Life Corporation Limited ( Prime Life Corporation ). As described below, one of the issues concerns whether two amounts that were payable under those contracts were incurred on 30 June 1999, the date that the contracts were entered into.

5. The issues raised by the appeal (including those raised by a notice of contention filed by the Commissioner) can be summarised as follows:

whether the Tribunal erred in concluding that a settlement amount of $1.74 million (the Settlement Amount ) payable under the Contract of Sale and the balance of the purchase price payable under the Purchase of Business Agreement (namely a balance of $5.51 million) were not "incurred" within the meaning of s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act ) on 30 June 1999 but were incurred later (the Incurred Issue );

whether the Tribunal erred in concluding that the applicant was "presently entitled", within the meaning of s 97(1) of the 1936 Act, to a share of the income of the trust estate of the ACE Trust for the 2006 year of income and the Arjod Trust for the 2007 year of income; among other things, this requires consideration of the validity and effect of resolutions made by ACPS (as trustee of the ACE Trust) for the 2006 year and Drewvale Investments Pty Ltd ( Drewvale ) (as trustee of the Arjod Trust) for the 2007 year, including a 'variation of income' resolution made by each trustee (the Trust Resolutions Issue );

whether the Tribunal failed to apply, or misapplied, the principles governing whether the applicant should be given leave under s 14ZZK of the Taxation Administration Act 1953 (Cth) (the TAA ) to rely on grounds not in her objection (the Leave to Raise New Grounds Issue );

whether the Tribunal erred in concluding that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts by executing, on 15 December 2015, two deeds of disclaimer (the Deeds of Disclaimer ) (the Disclaimers Issue ); and

whether the Tribunal erred in rejecting the applicant's contention that a resolution made by ACPS with respect to the 2006 year was ultra vires; the applicant had contended that the resolution, in purporting to appoint the "income", rather than the "Net Income", of the trust to the applicant was not authorised by the trust deed (the Ultra Vires Issue ).

6. In brief summary, our conclusions in relation to these issues are as follows:

  • (a) In relation to the Incurred Issue, the Tribunal effectively adopted a meaning of "incurred" in s 8-1(1) of the 1997 Act that was contrary to that which has been established by legal decisions. It follows that the Tribunal's decision, insofar as it concerned whether the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, is to be set aside. Both parties approached the matter on the basis

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    that the issue would be reconsidered by this Court. We consider that both amounts were incurred upon execution of the contracts on 30 June 1999.
  • (b) In relation to the Trust Resolutions Issue, we incline to the view that, in each case, the 'variation of income' resolution was authorised by the relevant trust deed. But, whether or not the 'variation of income' resolution was authorised by the relevant trust deed, the result is the same: the applicant was not "presently entitled" to a share of the income of the trust estate of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year.
  • (c) In view of the conclusions we reach in relation to the Disclaimers Issue and the Ultra Vires Issue, it is unnecessary to determine whether the Tribunal erred in the exercise of the discretion in declining to permit the applicant to rely on grounds not in her objection. However, we make some observations, below, about the issue.
  • (d) In relation to the Disclaimers Issue, we reject the applicant's challenge to the Tribunal's conclusion.
  • (e) In relation to the Ultra Vires Issue, we reject the applicant's challenge to the Tribunal's conclusion.

7. It follows that the appeal is to be allowed. The decision of the Tribunal should be set aside and, in lieu thereof, orders made that the Commissioner's objection decision be set aside and the matter remitted to the Commissioner for redetermination according to law.

Background facts

8. The following statement of background facts is based on the findings in the reasons of the Tribunal (
TVKS and Commissioner of Taxation [2016] AATA 1010) (the Reasons ) and the documents in the Application Book filed in this Court. It will be convenient to deal, first, with the facts relating to the ACE Trust (which are relevant for the 2006 year) and then, second, with the facts relating to the Arjod Trust (which are relevant for the 2007 year).

The ACE Trust

9. The ACE Trust was established by a deed executed on 17 June 1997. By a deed executed on the following day, 18 June 1997, ACPS was appointed as trustee. The applicant was a General Beneficiary of the Trust. The applicant's husband, William Lewski ( Mr Lewski ), was the sole Specified Beneficiary.

10. By cl 2.1 of the trust deed, the Settlor declared that the Trustee would hold, and the Trustee declared that it held, the "Trust Fund and any Income or gain accruing to the Trust Fund upon the trusts and with and subject to the powers and provisions contained" in the trust deed. The "Trust Fund" was defined as meaning: the Settled Sum; all moneys, investments and property paid, transferred to, or accepted by the Trustee as additions to the Trust Fund; accumulations of Income directed or empowered to be made by the trust deed; all accretions and additions to the Trust Fund from any source; the investments and property from time to time representing the Settled Sum, money, investments, property, accumulations, accretions and additions; and any specific asset for the time being forming part of the Trust Fund.

11. "Income" was defined in cl 1.15 of the trust deed as including, but not being limited to, "assessable Income as defined in the Tax Law".

12. "Net Income" was defined in cl 1.17 of the trust deed as follows:

" Net Income " means the amount calculated as the net Income of the Trust Fund for an Accounting Period in accordance with section 95(1) of Tax Law including:

  • 1.17.1 any net capital gain included in the assessable Income of the Trust Fund by virtue of section 160ZO of Tax Law; and
  • 1.17.2 to the extent allowable, any taxation credits available to the Trustee under Tax Law including but not limited to:
    • 1.17.2.1 foreign tax credits;
    • 1.17.2.2 prescribed payment tax credits; and
    • 1.17.2.3 dividend imputation credits;


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unless the Trustee determines in respect of any Accounting Period that Net Income for that Accounting Period means the Income produced from the investment of the Trust Fund calculated in accordance with established accounting principles and trust law; ...

13. Clause 3 was headed "Allocation of Income" and cl 3.1 set out certain rules that applied for the purpose of ascertaining the Net Income of the Trust Fund. Clause 3.2.1 provided that the Trustee "must, in respect of each Accounting Period, collect, receive and get in all dividends, interest, rents and all classes of Income arising from the constituent investments and the Trust Fund, pay all costs and disbursements, commissions, fees, taxes ..., management charges and all other proper outgoings, losses and expenses ...".

14. Clauses 3.3 and 3.4 provided as follows:

  • 3.3 The Trustee may at any time before the expiration of any Accounting Period with respect to all or any part or parts of the Net Income of the Trust Fund for such Accounting Period determine:-
    • 3.3.1 to pay, apply or set aside the same to or for any one or more of the General Beneficiaries living or in existence at the time of the Determination;
    • 3.3.2 to apply the same for such charitable purposes as the Trustee may determine;
    • 3.3.3 to accumulate the same;
    • 3.3.4 in respect of any amount paid applied or Set Aside to or for any General Beneficiary to Set Aside a sum which, in the opinion of the Trustees, will be sufficient to meet the obligations of the Trustee for Income tax for that Accounting Period on that amount pursuant to any law which imposes Income tax on the Trustee and:-
      • 3.3.4.1 to the extent that any sum so set aside is inadequate to meet the tax actually assessed, the Trustee may without prejudice to any other rights given to him by law or by this Deed resort to the Income of the Trust Fund for any subsequent Accounting Period or may recover the amount of such inadequacy from any money in their hands belonging to the Beneficiary in respect of whose Income the assessment is issued;
      • 3.3.4.2 if and whenever it shall appear to the Trustee that any provision so made was excessive, the amount of the excess shall be credited in the books of account of the Trust Fund to the Beneficiary in respect of whom the provision was made and shall be treated as though it had been set aside for that Beneficiary in the Accounting Period in which the provision was first made;

      provided that nothing in this clause shall oblige the Trustee to Set Aside any sum or affect any rights of the Trustee in the event of any assessment of tax being made against him in respect of any amount so paid, applied or Set Aside.

  • 3.4 The Trustee may exercise the discretion contained in clause 3.3 after the expiration of the Accounting Period if the Commissioner of Taxation accepts that the Beneficiary in whose favour the Trustee has exercised the discretion is presently entitled to the Income in the Accounting Period to which the distribution relates. If not, the purported exercise of the discretion after the expiration of the Accounting Period is ineffective.

15. The word "Pay" was defined as including transfer, convey and assign. The words "Set Aside", in relation to a Beneficiary, were defined as including placing sums to the credit of such Beneficiary in the books of account of the Trust Fund. The term "Determination" was defined in cl 1.9 of the trust deed as meaning a determination made in any of the ways listed in cl 7.1. The definition also provided that a Determination "may be revocable or irrevocable but if not stated, the


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Determination shall be revocable". Clause 7.1.3 provided that, in the case of a corporate Trustee, a Determination in the exercise of any power, discretion or authority conferred on the Trustee by the trust deed could be made in the manner set out in cl 7.2. Clause 7.2 provided:
  • 7.2 A corporate trustee may exercise or concur in exercising any discretion or power conferred on the Trustee by a resolution of the company or of its directors or governing body or (not being a sole Trustee) by its representative appointed for the purpose of attending meetings of the Trustee.

16. Clause 3.5 of the trust deed provided that if the Trustee did not exercise the discretion contained in clauses 3.3 and 3.4, or to the extent to which the Trustee did not exercise or did not effectively exercise the discretion, "the Trustee holds the Net Income for the Accounting Period upon trust for the Specified Beneficiaries living on the last day of the Accounting Period ...".

17. Clause 3.6 set out certain provisions that applied to any Determination made pursuant to cl 3.3. These included that:

  • 3.6.2 if at the end of any Accounting Period the amounts in respect of which Determinations have been made pursuant to clause 3.3 shall exceed the Net Income of the Trust Fund for such Accounting Period, the amount of such excess shall be deducted from the amounts which the Trustee has determined to accumulate and only the balance of such amounts (if any) shall be accumulated and if any deficiency shall remain then the Trustee shall, to the extent of the deficiency, be deemed to have applied the capital of the Trust fund pursuant to clause 4;
  • 3.6.3 a Determination to pay, apply or Set Aside any amount to or for the benefit of any Beneficiary shall be irrevocable and may be effectually made and satisfied (inter alia) by a resolution of the Trustee that a sum out of or portion of the Net Income of the Trust Fund for the Accounting Period or a sum out of or portion of the Net Income of the trust estate of the Trust Fund for the Accounting Period be allocated to that Beneficiary or otherwise dealt with for the benefit of that Beneficiary or by placing such amount to the credit of such Beneficiary in the books of account of the Trust Fund or by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such Beneficiary or by paying the same over to or for the benefit of such Beneficiary in such manner and to such person on behalf of such Beneficiary as the Trustee shall think fit; ...

18. Clauses 3.8 and 3.9 of the trust deed provided:

  • 3.8 The Trustee shall hold so much of the Net Income of the Trust Fund for each Accounting Period as shall not be the subject of a Determination effectually made in relation to such Accounting Period in trust successively for the same persons and in the same proportions as the Trustee would hold the corpus of the Trust Fund pursuant to clause 4 as if the last day of that Accounting Period were the Vesting Day.
  • 3.9. Any amount set aside for any Beneficiary and any amount held by the Trustee in trust for any person pursuant to clause 3.8 shall cease to form part of the Trust Fund and at that time or upon becoming subject to such trust (as the case may be) shall be held by the Trustee on a separate trust for such person absolutely with power to the Trustee pending payment over thereof to such person to invest or apply or deal with such fund or any resulting Income of the fund or any part thereof in the manner provided for in clause 10 provided that to the extent that the Trustee as Trustee of such fund does not expressly invest, apply or deal with such fund in the manner provided for in clause 10.

19. Under cl 4, as from the Vesting Day, the trust was to be held for such charitable purposes, or for such of the Beneficiaries for their benefit, maintenance, advancement and education, as the Trustee should appoint, but insofar as it had not been disposed of, it was to be held for the Specified Beneficiary.

20. Clause 3.10 contained certain provisions that applied to any Determination made under cl 3. These included:

  • 3.10.1 A Determination to pay, apply or Set Aside any part of the Net Income may be effectually made and satisfied by:
    • ...

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    • 3.10.1.4 a resolution of the Trustee that a sum out of or portion of the Net Income or the whole of Net Income for the Accounting Period be paid, applied or set aside to or for the Beneficiary or otherwise dealt with for the benefit of the Beneficiary specified in the resolution; or
    • ...
  • 3.10.2 Any resolution of the Trustee under clause 3.10.1.4 is irrevocable and the Net Income must be dealt with as required by that resolution.

21. During the year ended 30 June 1999, ACPS as trustee of the ACE Trust was a member of a syndicate known as the Glendale Property Syndicate. The syndicate was managed by Glendale. As manager of the syndicate, Glendale entered into two contracts relating to an aged care facility known as the Glendale Aged Care Hostel situated in Glendale Court, Werribee, Victoria. The two contracts were:

  • (a) the Contract of Sale, between Prime Life (Glendale Hostel) Pty Ltd as vendor and Glendale as purchaser; and
  • (b) the Purchase of Business Agreement, between Prime Life (Glendale Hostel) Pty Ltd as vendor, Glendale as purchaser, and Prime Life Corporation.

22. Under the Contract of Sale, Prime Life (Glendale Hostel) Pty Ltd agreed to sell, and Glendale agreed to purchase, the real property on which the aged care facility was located. Prime Life (Glendale Hostel) Pty Ltd also agreed to make improvements to the existing buildings, cause a new hostel to be built, and procure the granting of 100 Approved Places in connection with the new hostel.

23. The "Price", as defined in the Contract of Sale, comprised:

  • (a) the Settlement Amount;
  • (b) the First Post Settlement Amount; and
  • (c) the Final Post Settlement Amount (as may be adjusted).

24. The "Settlement Amount", as defined in the Contract of Sale, was $1.74 million.

25. The "First Post Settlement Amount", as defined in the Contract of Sale, was $2.5 million.

26. The "Final Post Settlement Amount" was defined as meaning the sum of $12 million subject to any adjustment pursuant to special condition 9.4.

27. The sum of the three amounts (putting to one side any adjustment) was $16.24 million.

28. Payment of the "Price" was dealt with in special condition 8.1, which provided that Glendale was to pay the Price in the following manner:

  • 8.1.1 by payment of the Settlement Amount on the Settlement Date;
  • 8.1.2 by payment of the First Post Settlement Amount on 1 July 2000 or the date of issue of the Planning Permit whichever is the later date;
  • 8.1.3 by payment of the Final Post Settlement Amount on the Date of Completion.

29. The "Settlement Date" under the Contract of Sale was 31 October 1999 or such other date upon which settlement occurs.

30. The Contract of Sale also referred, on the page headed "Particulars of Sale", to a deposit of $1 million. Given the definition of "Price" (referred to above), it appears that this amount was merely a deposit, rather than being an additional amount due under the contract. It was common ground before the Tribunal (as reflected in the parties' statements of facts, issues and contentions) that the deposit of $1 million was paid on 30 June 1999 and that it was incurred by Glendale on that date. It is not clear, on the basis of the materials before the Court, whether the deposit is to be treated as part of the Settlement Amount, the First Post Settlement Amount or the Final Post Settlement Amount (or as part of more than one of these amounts).

31.


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It is convenient to note at this point that, insofar as the issues before the Tribunal concerned the incurrence of outgoings under the Contract of Sale, the only outgoing in dispute was the Settlement Amount. There was no issue concerning the First Post Settlement Amount or the Final Post Settlement Amount (cf Reasons, [213]-[214]). The applicant accepted that these amounts were not incurred on 30 June 1999, but were incurred later (see the applicant's amended statement of facts, issues and contentions, [18A]).

32. Special condition 6 of the Contract of Sale was headed "Interdependence" and provided in part as follows:

  • 6.1 The Vendor and the Purchaser agree that this Contract is interdependent with the Sale and Purchase of Business Agreement and that Settlement of this Contract will take place contemporaneously with completion occurring under the Sale and Purchase of Business Agreement.
  • 6.2 Without in any way limiting the provisions of special condition 6.1 the Vendor and Purchaser agree that:
    • 6.2.1 a breach of any provision of this Contract by the Purchaser shall be deemed to constitute a breach by the Purchaser of the Sale and Purchase of Business Agreement;
    • 6.2.2 a breach of any provision of the Sale and Purchase of Business Agreement on the part of the Purchaser shall be deemed to constitute a breach by the Purchaser of this Contract;
    • 6.2.3 in the event that the Vendor is entitled to terminate or rescind the Sale and Purchase of Business Agreement then the Vendor shall be entitled to terminate or rescind this Contract; ...

33. Special condition 8.2 provided that Settlement of the contract would "take place contemporaneously with completion under the Sale and Purchase of Business Agreement". The term "Settlement" was defined as meaning "payment of the Settlement Amount by the Purchaser to the Vendor at which time the Vendor will transfer title to the Property to the Purchaser".

34. Special condition 8.3 of the Contract of Sale provided:

  • 8.3 The parties agree that the value of the Property at the date of this Contract is equivalent to the Settlement Amount (less the sum of $500,000 which the Vendor is required to spend on improvements to the Hostel under special condition 7.1) and that the First Post Settlement Amount and the Final Post Settlement Amount are payments in respect of the Vendor's obligations to construct the New Hostel and to procure the granting of the Approved Places to the Purchaser to be used at the New Hostel.

35. General condition 9.1 of the Contract of Sale incorporated general condition 12 in Table A of the Seventh Schedule to the Transfer of Land Act 1958 (Vic) ( Table A ) into the Contract of Sale. That condition provided that "[u]pon payment of all purchase and other moneys payable by the purchaser under the contract the vendor shall deliver to the purchaser such registrable instrument or instruments of transfer of the land sold as will enable the purchaser to become registered as proprietor of the land sold ...". For completeness, we note that special condition 2 of the Contract of Sale provided that general conditions 3 and 13.1 did not apply to the contract. General condition 3 is not presently relevant. General condition 13.1 (which did not apply by virtue of special condition 2) stated that "[t]he purchaser must provide the instrument of transfer required by General Condition 12 of Table A, or the assurance required by the Third Schedule (as the case may be), to the vendor or the vendor's solicitor at least 10 days prior to the settlement date".

36. Turning then to the Purchase of Business Agreement, this was an agreement for the sale and purchase of the business conducted by Prime Life (Glendale Hostel) Pty Ltd in connection with the Glendale Aged Care Hostel. It was stated in recital C to the agreement that, as an inducement to Glendale entering into the agreement, Prime Life Corporation had agreed to enter into certain covenants set out in the agreement. These covenants related to the transfer of 127 Approved Places (in connection with the hostel) to Glendale.

37.


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The agreement for the sale and purchase of the business was dealt with in cl 2.1. Clause 2.2 provided for payment of the Purchase Price (which was defined as meaning the sum of $7.26 million) as follows:
  • (a) by payment of a deposit of $1.75 million on the execution of the agreement; and
  • (b) by payment of the balance of the Purchase Price, subject to any adjustments under the agreement, on the Completion Date.

38. The "Completion Date", as defined in the Purchase of Business Agreement, was 31 October 1999, or such other date as agreed between the Vendor and the Purchaser. "Completion" was defined as meaning completion of the sale and purchase of the business as contemplated by the agreement.

39. It was common ground before the Tribunal that the deposit of $1.75 million, which was paid by Glendale on 30 June 1999, was incurred on that date. The issue concerned the balance of the purchase price (an amount of $5.51 million, putting to one side any adjustment). The applicant contended that this amount was incurred on 30 June 1999; the Commissioner contended that it was not incurred until the Completion Date, 31 October 1999.

40. Clause 3 of the Purchase of Business Agreement dealt with the transfer of the 127 Approved Places. Prime Life Corporation (defined as "Prime Life" in the Purchase of Business Agreement) held these places. Clause 3 was in the following terms:

  • 3.1 As soon as practicable after the execution of this Agreement the Purchaser will apply to the Department and seek to be granted status as an Approved Provider.
  • 3.2 From the date of this Agreement until Completion, and after Completion the parties will seek and use their best endeavours to have the Department grant the Approval.
  • 3.3 Prime Life will complete and execute the Application and cause it to be lodged with the Department as soon as practicable after the execution of this Agreement.
  • 3.4 The Purchaser agrees to complete and execute the Application and an application to become an Approved Provider and lodge it with the Department as soon as practicable after the execution of this Agreement.
  • 3.5 Prime Life agrees that subject to the Approval taking place, Prime Life will transfer the Approved Places to the Purchaser free from any Encumbrance.
  • 3.6
    • 3.6.1 Subject to clause 3.6.2, if the Department has not granted the Purchaser status as an Approved Provider by the Completion Date Prime Life agrees to hold the Approved Places on trust for the Purchaser until such time as the Purchaser is granted status as an Approved provider and the Department grants the Approval at which time Prime Life will transfer the Approved Places to the Purchaser in accordance with clause 3.5.
    • 3.6.2 The Purchaser acknowledges and agrees that Prime Life is only required to hold the Approved Places on behalf of the Purchaser in accordance with clause 3.6.1 for a period of 12 months from the Completion Date. If the Approval has not been granted in this period of time the Purchaser must immediately take action to dispose of the Property, Assets and the Approved Places to a third party who is an Approved Provider subject to that third party:
      • 3.6.2.1 being acceptable to Prime Life which acceptance shall not be unreasonably withheld where that third party is a respectable and solvent person;
      • 3.6.2.2 not being a competitor of Prime Life;
      • 3.6.2.3 signing any documentation the vendor may require in relation to the transfer of the Property, Assets and Approved Places to the third party;
      • 3.6.2.4 assuming any of the surviving obligations of the Purchaser under the Contract of Sale, PLC Management Deed or this Agreement;
    • 3.6.3 Prime Life must, if requested to do so, execute a declaration of trust setting out the terms contained in clauses 3.6.1

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      and 3.6.2 as soon as practicable after being requested to do so by the Purchaser.
    • 3.6.4 The parties and Prime Life agree to sign any document which may be required to effect any of the matters contemplated by this clause 3.6.

The "Department" was defined in cl 1.12 to mean the Department of Health and Aged Care (the Department ). "Approval" was defined in cl 1.3 to mean "the written approval by the Department to the transfer of the Approved Places from Prime Life to the Purchaser". "Approved Provider" was defined in cl 1.5 to mean "an approved provider as set out in Part 2.1 of the Aged Care Act 1997".

41. Clause 6 of the Purchase of Business Agreement dealt with completion. Completion was to take place on the Completion Date (cl 6.1). Clause 6.3 provided that, on Completion, the Purchaser "shall do and execute all such other acts and documents as are required by this Agreement to be done or executed by the Purchaser at Completion". Clause 6.4 set out certain documents and things required to be delivered by the Vendor to the Purchaser on Completion.

42. Clause 8.2 provided that the title to the Business and the Assets and the benefit of the Goodwill would pass to the Purchaser upon payment by the Purchaser of the balance of the Purchase Price.

43. Clause 11.1 of the Purchase of Business Agreement provided that the agreement was "interdependent" with the Contract of Sale. Clause 11.2 was in the following terms:

  • 11.2 Without limiting the generality of the foregoing:
    • 11.2.1 Completion of this Agreement will take place contemporaneously with settlement of the Contract of Sale;
    • 11.2.2 a breach of any provision of this Agreement on the part of the Purchaser shall constitute a breach by the Purchaser of the Contract of Sale;
    • 11.2.3 a breach of any provision of this Agreement on the part of the Vendor shall constitute a breach by the Vendor of the Contract of Sale;
    • 11.2.4 a breach of any provision of the Contract of Sale on the part of the Purchaser shall be deemed to constitute a breach by the Purchaser of this Agreement;
    • 11.2.5 a breach of any provision of the Contract of Sale on the part of the Vendor shall be deemed to constitute a breach by the Vendor of this Agreement;
    • 11.2.6 in the event that the Vendor is entitled to terminate or rescind the Contract of Sale then the Vendor shall be entitled to terminate or rescind this Agreement;
    • 11.2.7 in the event that the Purchaser is entitled to terminate or rescind the Contract of Sale then the Purchaser shall be entitled to terminate or rescind this Agreement;
    • 11.2.8 termination of this Agreement under this clause will not affect any right or claim in respect of this Agreement which arose before termination of this Agreement.

44. In addition to entering into the two contracts, on 30 June 1999 Glendale paid a syndication fee of $3 million in connection with the Glendale Aged Care Hostel. It was common ground before the Tribunal that this outgoing was incurred by Glendale on 30 June 1999.

45. On 22 December 2003, ACPS (as trustee of the ACE Trust) and the Commissioner entered into a deed of settlement in relation to ACPS's tax liability in respect of the Glendale Property Syndicate. The Commissioner accepted that, as at 30 June 1999, ACPS had a 40% interest in the Glendale Property Syndicate. In the following years, up to the year ended 30 June 2006, ACPS had a 2% interest in the syndicate.

46. On 30 June 2006, Mr Lewski, as the sole director of ACPS, executed a document headed "Resolution of Sole Director". The document comprised four resolutions of ACPS as trustee of the ACE Trust. The relevant resolutions were as follows:


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Income of the trust fund: In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2006 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust.
Distribution of trust income: It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2006 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is:
Beneficiary Amount
Roslyn Lewski 100% of income
Variation of income: It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2006 in the following manner:
Beneficiary Amount
Australian Commercial Underwriting Pty Ltd 100% of income

47. As at 30 June 2006, the financial statements for the ACE Trust showed a profit of $10,374,993. This amount was also shown as a distribution to beneficiaries.

The Arjod Trust

48. The Arjod Trust was established by a deed executed on 19 May 1986. On 29 March 1989, the initial trustee retired and was replaced by Drewvale. The trust was varied by a further deed executed on 5 December 1995. Although the trust deed generally refers to "Trustees" (plural), for ease of expression in circumstances where there was a single trustee we will refer to the provisions as though they referred to the "Trustee" (singular).

49. The applicant was a General Beneficiary under the trust. Mr Lewski, the applicant's husband, was one of the Specified Beneficiaries.

50. Clause 3(1) of the trust deed provided that the Trustee could, prior to the Vesting Day, at any time and from time to time, during any Accounting Period, with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period, determine:

  • (a) to pay apply or set aside the same for any one or more of the General Beneficiaries living or in existence at the time of the determination PROVIDED THAT any payment application or setting aside in favour of a General Beneficiary described in clause 1(3)(c) hereof shall on the first occasion on which a payment application or setting aside is made to or for that General Beneficiary be subject to clause 36 hereof; ...
  • ...

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  • (c) in respect of any amount paid applied or set aside to or for any General Beneficiary to provide and hold or retain a sum which in the opinion of the Trustees will be sufficient to meet the obligations of the Trustees for income tax for that Accounting Period on that amount pursuant to any law which imposes income tax on the Trustees and -
    • (i) to the extent that any sum so held or retained is inadequate to meet the tax actually assessed the Trustees may without prejudice to any other rights given to them by law or by this Deed resort to the income of the Trust Fund for any subsequent Accounting Period or may recover the amount of such inadequacy from any money in their hands belonging to the beneficiary in respect of whose income the assessment is issued;
    • (ii) if and whenever it shall appear to the Trustees that any provision so made was excessive the amount of the excess shall be held for the beneficiary for whom it was set aside absolutely;

    PROVIDED THAT nothing in this paragraph shall oblige the Trustees to set aside any sum as aforesaid or affect any rights of the Trustees in the event of any assessment of tax being made against them in respect of any amount so paid applied or set aside.

The word "pay" was defined in the trust deed to include transfer, convey and assign. The words "set aside", in relation to a beneficiary, were defined to include placing sums to the credit of such a beneficiary in the books of account kept by the Trustee in relation to the Trust Fund.

51. Clause 3(2) of the trust deed set out certain provisions that applied to any determination made pursuant to cl 3(1). These provisions included that:

  • (b) if at the end of any Accounting Period the amounts in respect of which determinations have been made pursuant to sub-clause (1) of this clause shall exceed the net income of the Trust Fund for such Accounting Period the amount of such excess shall be deducted from the amounts which the Trustees have determined to accumulate and only the balance of such amounts (if any) shall be accumulated and if any deficiency shall remain then the Trustees shall be deemed to have applied the capital of the Trust Fund pursuant to clause 6(1) hereof to the extent of the deficiency;
  • (c) a determination may be made by specifying a proportion of net income of the Trust Fund or by specifying an amount;
  • (d) a determination to pay apply or set aside any amount to or for the benefit of any beneficiary may be effectually made and satisfied (inter alia) by placing such amount to the credit of such beneficiary in the books of account of the Trust Fund or by drawing any cheque payable on that date in respect of such amount made payable to or for the credit or benefit of such beneficiary or by paying the same over to or for the benefit of such beneficiary in such manner and to such person on behalf of such beneficiary as the Trustees shall think fit; ...

52. The expression "Free Net Income" was defined in cl 1(27) of the trust deed as follows:

" Free Net Income " in relation to a particular Accounting Period means so much of the net income of the Trust Fund for such Accounting Period as shall not at the expiry of such Accounting Period be the subject of a valid and effective determination by the Trustees during that Accounting Period under any of sub-clauses (1), (2) or (3) of clause 3 of this Deed and includes where the Trustees have purported to make a determination to accumulate the income of the Trust Fund of that Accounting Period or any part or parts of such income and such determination is wholly or partially invalid or ineffective by reason of the law applying to any disposition of property to the Trustees to hold on the trusts of this Settlement or by reason of the law applying to the vesting of any part of the Trust Fund


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in a new trustee or new trustees hereof upon any change in the trustees of this Settlement the amount of such income or part which is the subject of such invalid or ineffective determination or the subject of the invalid or ineffective part of such determination PROVIDED THAT if prior to the end of such Accounting Period that income has been made the subject of a later valid and effective determination by the Trustees under any of sub-clauses (1), (2) or (3) of clause 3 of this Deed or is included in general words of a valid and effective determination made earlier in relation to that Accounting Period under any of those sub-clauses which effectively deals with that income it shall not be or form part of the Free Net Income; ...

53. Clauses 3(4) and 3(5) of the trust deed provided:

  • (4) The Trustees shall hold as a separate Trust Fund the Free Net Income of each Accounting Period at the expiry of that Accounting Period in trust absolutely for the same persons and in the same proportions as the Trustees would hold corpus of the Trust Fund the subject of and pursuant to the provisions of sub-clauses (2), (3) and (4) of clause 4 hereof if the Vesting Day were the same date as the date of expiry of that Accounting Period.
  • (5) Any amount set aside for any beneficiary and any amount held by the Trustees in trust for any person pursuant to sub-clause (4) of this clause shall cease to form part of the Trust Fund and upon such setting aside or becoming subject to such trust (as the case may be) shall thenceforth be held by the Trustees on a separate trust for such person absolutely with power to the Trustees pending payment over thereof to such person to invest or apply or deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in clause 6(5) hereof.

54. Clause 26 of the trust deed dealt with the Trustee's mode of acting. Clause 26(2) provided that, in the case of a sole corporate trustee, any exercise by the Trustee of any power or discretion conferred on it by the trust deed could be made in the manner set out in cl 26(4). That clause relevantly provided that every Trustee which is a corporation may exercise any discretion or power conferred on the Trustee "by a resolution of such corporation or by a resolution of its Board of Directors or governing body ...".

55. On 30 June 2007, a meeting of the Board of Directors of Drewvale took place. Present were Mr Lewski and David Lewski. Mr Lewski chaired the meeting. The Board made four resolutions, as recorded in the minutes of the meeting. The relevant resolutions as recorded in the minutes were as follows:

Income of the trust fund: In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2007 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust.
Distribution of trust income: It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2007 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is:
Australian Investment Securities Pty Ltd First $3,500,000

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Roslyn Lewski The balance
Variation of income: It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2007 in the following manner:
Australian Investment Securities Pty Ltd 100%

56. As at 30 June 2007, the financial statements for the Arjod Trust showed a profit of $6,643,498. The financial statements showed a distribution to beneficiaries of $6,643,199.

Tax returns

57. The applicant lodged her tax return for the 2006 year on 20 December 2006. She declared assessable income of $9,000. She did not return any amount as a distribution from a trust. On 25 January 2007, the Commissioner assessed the applicant's income tax on the basis that her taxable income was $9,000.

58. ACPS, as trustee of the ACE Trust, lodged its tax return for the 2006 year on 16 May 2007. It did so on the basis that it had net income of $676,209 and carry forward losses of $11,053,152.

59. By letter dated 14 October 2009, Mr Lewski requested on behalf of ACPS that its tax return for the 2006 year be amended so that, among other things, its net income was $10,108,621 instead of $676,209.

60. The applicant lodged her tax return for the 2007 year on 30 January 2008. She returned $9,500 as assessable income. She did not return any amount as a trust distribution. On 22 February 2008, the Commissioner assessed the applicant's income tax liability on the basis that her taxable income was $9,500.

61. On 27 March 2008, the applicant lodged an amended tax return for the 2007 year. In it she declared an additional amount of $40,083 as assessable income from franked dividends with franking credits of $12,000. The total assessable income returned was $61,832. She did not return any amount as a trust distribution.

62. For the 2007 year, Drewvale as trustee of the Arjod Trust lodged its tax return on 12 March 2008. It did so on the basis that it had net income of $6,643,498 and carry forward losses of $2,143,060, resulting in a net taxable income of $4,500,438.

The amended assessments

63. The Australian Taxation Office ( ATO ) conducted an audit into the affairs of Mr Lewski and associated entities. On 20 December 2012, the ATO wrote to Mr Lewski enclosing a position paper explaining the ATO's position in relation to losses of the ACE Trust in the 1999 and 2000 years "and the consequences for [the applicant] in the 2006 year". Among other things, the position paper described, and set out the ATO's position with respect to, the ACPS resolutions dated 30 June 2006. Further, on 22 January 2013, the ATO wrote to Mr Lewski enclosing a position paper explaining the ATO's position in relation to losses of the Arjod Trust in the 2000 year "and the consequences for [the applicant] in the 2007 income year". Among other things, the position paper described, and set out the ATO's position with respect to, the Drewvale resolutions of 30 June 2007.

64. On 14 May 2013, the Commissioner issued notices of amended assessment to the applicant with respect to the 2006 and 2007 years. In relation to the 2006 year, the Commissioner assessed the applicant on the basis that her taxable income was $10,117,621. This amount was determined on the basis that:

  • (a) ACPS, as trustee of the ACE Trust, did not have a tax loss for the 1999 year;
  • (b) the net income of the ACE Trust under s 95 of the 1936 Act for the 2006 year was $10,108,621; and
  • (c) the applicant should have included $10,108,621 in assessable income in her 2006 tax return as a result of being presently entitled to a share of the income of the ACE Trust pursuant to s 97 of the 1936 Act.

65.


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In relation to the 2007 year, the Commissioner assessed the applicant on the basis that her taxable income was $3,204,593. This amount was determined on the basis that:
  • (a) Drewvale, as trustee of the Arjod Trust, did not have a tax loss for the 2000 year;
  • (b) the net income of the Arjod Trust under s 95 of the 1936 Act for the 2007 year was $6,643,199; and
  • (c) the applicant should have included $3,143,199 in assessable income in her 2007 tax return as a result of being presently entitled to a share of the income of the Arjod Trust pursuant to s 97 of the 1936 Act.

The objection and objection decision

66. On 5 July 2013, the applicant objected to the amended assessments.

67. On 9 July 2015, the Commissioner allowed the applicant's objection to the following extent: ACPS (as trustee of the ACE Trust) was entitled to a deduction of $230,000 in the 2006 year in relation to the Glendale Property Syndicate; and, accordingly, an amount of $9,878,621 (instead of $10,108,621) was to be included in the assessable income of the applicant for the 2006 year, as a result of her being presently entitled to 100% of the net income of the ACE Trust. Otherwise, the objection was disallowed.

68. On 18 August 2015, the Commissioner issued to the applicant a further amended assessment for the 2006 year.

The disclaimers

69. On 15 December 2015, the applicant executed the Deeds of Disclaimer. Each was headed "Disclaimer of Entitlement to Income". One related to the ACE Trust and the other to the Arjod Trust. The terms of the disclaimer in relation to the ACE Trust were as follows:

I understand and acknowledge that I am one of the beneficiaries of the ACE No 4 Trust ( ACE No 4 ).

I hereby disclaim and reject absolutely any entitlement I have to any interest whatsoever that I may have now or in the future or have had at any time since 1 July 2005, to any income, capital or gift at all from ACE No. 4.

This disclaimer takes effect on and from 1 July 2005.

70. The Deed of Disclaimer with respect to the Arjod Trust was in similar terms:

I understand and acknowledge that I am one of the beneficiaries of the Arjod Trading Trust ( Arjod ).

I hereby disclaim and reject absolutely any entitlement I have to any interest whatsoever that I may have now or in the future or have had at any time since 1 July 2006, to any income, capital or gift at all from Arjod.

This disclaimer takes effect on and from 1 July 2006.

The Tribunal decision

71. On 4 September 2015, the applicant lodged with the Tribunal an application for review of the Commissioner's objection decision.

72. The issues before the Tribunal were identified in the following documents filed by the parties:

  • (a) the applicant's amended statement of facts, issues and contentions dated 5 March 2016; and
  • (b) the Commissioner's statement of facts, issues and contentions dated 11 February 2016.

73. In relation to the ACE Trust, the applicant stated in her amended statement of facts, issues and contentions that ACPS had prepared its tax returns on the basis that: it was a 40% member of the Glendale Property Syndicate in 1999; the syndicate had incurred outgoings in the 1999 year pursuant to the Contract of Sale and the Purchase of Business Agreement; and as a result of deductions that ACPS was entitled to claim based on those outgoings, ACPS was entitled to claim carry forward losses. The applicant contended as follows:

  • (a) Insofar as the Contract of Sale was concerned, the amounts incurred in the 1999 year were the initial deposit of $1 million (which was not in dispute) and the Settlement Amount of $1.74 million. The

    ATC 20037

    applicant accepted that the further amounts payable under the Contract of Sale (namely, the First Post Settlement Amount and the Final Post Settlement Amount) were not incurred in the 1999 year.
  • (b) In relation to the Purchase of Business Agreement, the amount incurred in the 1999 year was the whole of the Purchase Price, namely, the deposit of $1.75 million (which was not in dispute) and the balance of $5.51 million, subject to any adjustment.

74. The applicant raised two contentions in the Tribunal that had not been included as grounds in her objection. These contentions were as follows:

  • (a) First, the applicant contended that the Deeds of Disclaimer were effective to render the applicant not presently entitled to any of the income from the ACE Trust or the Arjod Trust in the relevant years.
  • (b) Secondly, it was contended that, in purporting to distribute "income" rather than "Net Income", the ACPS resolution for the 2006 year was ineffective. As a consequence, the applicant was not presently entitled to the net income of the trust and the Specified Beneficiary ought to have been assessed instead of the applicant.

75. As these issues had not been included in the applicant's grounds of objection, one of the issues for the Tribunal was whether the applicant should be given leave pursuant to s 14ZZK of the TAA to rely on these contentions.

76. On 9 December 2016, the Tribunal decided to affirm the Commissioner's objection decision. We now provide an overview of the Reasons of the Tribunal as they pertain to the issues raised on appeal. It will be convenient to summarise the salient conclusions of the Tribunal in the order that the issues are to be considered on the appeal, rather than in the order set out in the Reasons.

77. Two of the issues before the Tribunal are not relevant for the purposes of the appeal. Those issues were: whether the Commissioner was out of time to amend the assessments of the applicant for the 2006 and 2007 years; and whether the shortfall interest charge for the 2006 and 2007 years should be remitted either in whole or in part. Those aspects of the Reasons can be put to one side.

Whether carry forward losses were available to ACPS in its capacity as trustee of the ACE Trust in the 2006 year

78. The Tribunal considered, at [190]-[215] of the Reasons, whether carry forward losses were available to ACPS in its capacity as trustee of the ACE Trust in the 2006 year. This issue turned on whether certain outgoings relating to the Glendale Property Syndicate were incurred during the year ended 30 June 1999. The Tribunal set out s 8-1(1) of the 1997 Act and discussed relevant authorities, including
Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 ( Raymor );
Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 ( Woolcombers );
Federal Commissioner of Taxation v Malouf (2009) 174 FCR 581 ( Malouf ); and
Commissioner of Taxation (Cth) v Citylink Melbourne Ltd (2006) 228 CLR 1 ( Citylink ). The Tribunal concluded that the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were not incurred on 30 June 1999. After describing, at [207]-[211], aspects of the Contract of Sale and the Purchase of Business Agreement, the Tribunal reasoned as follows:

  • 212. Having regard to the Purchase of Business Agreement as a whole, I have concluded that the liability to pay the balance of the purchase price arose on the Completion day and not on the signing of the contract. That was the day on which [Prime Life (Glendale Hostel) Pty Ltd] would deliver what it was required to deliver. Until that date, it was not known whether the Contract of Sale would proceed. As each contract stated, a breach of one was a breach of the other and, if either the [Glendale Property Syndicate] or [Prime Life (Glendale Hostel) Pty Ltd] was entitled to terminate or rescind the other, it was

    ATC 20038

    entitled to rescind that contract as well. If, for example, an insolvency event occurred in relation to [Prime Life (Glendale Hostel) Pty Ltd], the [Glendale Property Syndicate] would be entitled to terminate the Contract of Sale provided that it followed a specified process. That would mean that the [Glendale Property Syndicate] could terminate the Purchase of Business Agreement as well.
  • 213. Clause 8 of the Contract of Sale specifies the time at which the three amounts are payable by the [Glendale Property Syndicate]. Its 40% share of the deposit of $1m has been allowed by the Commissioner as a deduction for the 1999 Year for that was incurred on the signing of the contract on 30 June 1999. The Settlement Amount was to be paid on 31 October 1999 or such other date on which settlement occurred. The First Post Settlement Amount was payable on 1 July 2000 or on the date of the issue of the Planning Permit, whichever was the later. Payment of the Final Post Settlement Amount was payable on the Date of Completion which would occur 14 days after the date on which the Certificate of Completion was issued. A "Certificate of Completion" was defined in cl 1.12 to mean a certificate of completion issued by architects confirming that, in their opinion, the building had generally been completed in accordance with the relevant plans, fixtures, fittings and furnishings and an Occupancy Permit had been issued by a registered Building Surveyor.
  • 214. If the Planning Permit were not granted, the [Glendale Property Syndicate]'s liability to pay the First Post Settlement amount would never arise. Until the Planning Permit was issued and 1 July 2000 had arrived, the [Glendale Property Syndicate]'s liability to pay the First Post Settlement amount did not arise. Until that time, the [Glendale Property Syndicate]'s liability was contingent upon that event's occurring. It was not a liability incurred under the Contract of Sale. Its liability to pay the Final Post Settlement Amount was necessarily contingent for it did not arise until there was first a Planning Permit, then the construction works and, finally, a Certificate of Completion. That could not occur until after 1 July 2000.
  • 215. For these reasons, I do not accept [the applicant]'s position that, by reason of its interest in the [Glendale Property Syndicate], that [ACPS] was entitled to further deductions arising from the Contract of Sale or the Purchase of Business Agreement.

    (Footnotes omitted.)

Whether the ACPS Further Resolution and the Drewvale Further Resolution were effective in preventing the applicant from being presently entitled to a share of the income of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year

79. The Tribunal considered the effect of the 'Further Resolutions' (that is, the 'variation of income' resolutions) made by ACPS with respect to the 2006 year (as set out at [46] above) and Drewvale with respect to the 2007 year (as set out at [55] above) at [141]-[160] of the Reasons. The applicant contended that the effect of the Further Resolutions was that the income of each trust was distributed to an entity other than the applicant. The applicant submitted that the intention of the Trustee, in each case, was clear: it was to distribute the amount to Australian Commercial Underwriting Pty Ltd ( Australian Commercial Underwriting ) or Australian Investment Securities Pty Ltd ( Australian Investment Securities ) (as the case may be) if any amounts were disallowed as deductions, or added to the assessable income of the trust, by the Commissioner. In the alternative, the applicant contended that, in each case, the 'distribution of trust income' resolution was contingent upon the Further Resolution and was thus ineffective, relying on
Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1995) 130 ALR 415 ( Walsh Bay ) and
Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490. The Commissioner, on the other hand,


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submitted that the Further Resolutions were ineffective. After considering the authorities, the Tribunal concluded that, in each case, the 'distribution of trust income' resolution exhausted the Trustee's power to distribute and there was nothing left to be distributed by the Further Resolutions. The Tribunal's reasons were as follows:
  • 154. I have gone back to the Resolution and Further Resolution made by each of [ACPS] and [Drewvale] and looked at them together and in their context. In each case, the trustee has adopted a format of first identifying the income, then distributing the income (what is described as the Resolution) and then providing for what is to occur if there is a variation in the income (Further Resolution). Neither Resolution is expressed to be subject to a contingency. In so far as the Further Resolution can be read as providing for a contingency, it is a contingency that may, or may not, occur. If it were to occur, it would relate to the distribution to be made on 30 June 2006 in the case of the [ACE Trust] and 30 June 2007 in the case of the [Arjod Trust] but that would come about in some later year of income when the Commissioner had issued his assessments. Whether the contingency could occur is open to some doubt for the Further Resolution in each instance is predicated, in part, upon the Commissioner's disallowing any amount as a deduction and not distributing that amount. The power of distribution does not rest with the Commissioner but with the trustees.
  • 155. Mr Broadfoot [counsel for the applicant] urges me to find that the intention of each Resolution and Further Resolution is that [Australian Commercial Underwriting] and [Australian Investment Securities] were intended to be the ultimate beneficiaries in the case of any disallowance by the Commissioner of a deduction or inclusion of a further amount in the trusts' assessable income. I do not read them in that way. In making the Resolution, [ACPS] and [Drewvale] have clearly intended to distribute the whole of the income of the relevant trust in the manner indicated. Even if it could be said that their interest in the distribution were intended to be defeasible if the Commissioner made certain decisions, [the applicant] and, in the case of the [Drewvale] Resolution, [Australian Investment Securities] and [the applicant] were intended as at 30 June 2006 and 30 June 2007, as the case might be, to enjoy possession and benefit of the income distributed. It was vested both in interest and in possession at that date by the relevant Resolution.
  • 156. That could not be changed by the Further Resolution for, in so far as the events to which it referred might occur in the future, [Australian Investment Securities] and [the applicant] remained in possession and enjoying the benefit of the income. The attempt by the Further Resolution to deem the distribution to have been made otherwise than it was from 30 June 2006 or 30 June 2007 cannot change what was in practical terms the result. There was nothing in either Resolution that indicates that the beneficiaries named were not free to use and spend the distribution as they would. It only has to be expressed in that way to show that [ACPS] and [Drewvale] had exhausted their powers to distribute when they made their first Resolutions. There was nothing left to be distributed in the Further Resolutions so neither could stand but each of the Resolutions was effective in making the distribution to [the applicant] and [Australian Investment Securities] in the proportions shown on their face.
  • 157. In reaching this conclusion, I have not had regard to [Mr Lewski]'s evidence regarding his intentions in making the Resolutions and Further Resolutions. As said in Segelov, the rules of construction of contracts apply also to the interpretation of trusts. That means that, if the trustee's intention is sought, it must be found

    ATC 20040

    in the words that trustee has chosen to express that intention amplified by the facts known to the parties. This view was also expressed by Mason J in Codelfa Construction Pty Ltd v State Railway Authority of New South Wales.

    (Footnote omitted.)

Whether the applicant should be given leave to rely on additional grounds not in her objection

80. The Tribunal considered whether the applicant should be given leave to rely on the Deeds of Disclaimer at [46]-[61] of the Reasons. The Tribunal set out the parties' submissions and referred to cases on s 14ZZK of the TAA, including
Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148 ( Lighthouse Philatelics );
Gilder v Federal Commissioner of Taxation (1991) 22 ATR 872; and
McLean v Commissioner of Taxation (1996) 66 FCR 106. Ultimately, the Tribunal refused the applicant leave to rely on the Deeds of Disclaimer. Its reasoning for this conclusion was as follows:

  • 57. Unlike the case of McLean and Dean, the grounds of objection as originally made were not drafted in terms that were sufficiently broad to encompass an objection based on [the applicant]'s having disclaimed the benefit of the distributions. Unlike that case, the factual basis that existed when the original grounds of objection were made may have changed through [the applicant]'s own actions. The grounds on which [the applicant] seeks to rely are based on an assumption that her actions have in fact changed that factual basis.
  • 58. Whether or not the interests of justice require me to give [the applicant] leave in those circumstances led me to consider whether or not her actions did in fact change that factual basis. I have done that later in these reasons where [I] set out my findings regarding [the applicant]'s delegation of responsibility for her financial affairs to her husband, [Mr Lewski]. I have found that she has done so without fetter upon his powers to act on her behalf. In addition, I have set out the course of events taken by the ATO. Even if I were to assume that [Mr Lewski] knew nothing of the distributions to [the applicant] before the ATO issued its position papers in December 2012 and January 2013, I have found that is the latest time at which [Mr Lewski] would have been aware that the ATO regarded distributions to [the applicant] as taxable income in her hands. Despite that knowledge and despite having unfettered authority as her husband in relation to her financial affairs, [Mr Lewski] took no action on behalf of [the applicant] to disclaim those distributions. He took no action as her tax agent after his appointment in that role on 26 May 2014. [The applicant] took no action until 15 December 2015 when she executed the disclaimers and attached them to her witness statement of the same date in these proceedings.
  • 59. If effective, the disclaimers would have retrospective effect so that [the applicant] would be regarded as never having received the distributions. That would mean that the disclaimed income would be taxable in the hands of the trustees, [ACPS] and [Drewvale], under either ss 99A or 99 of ITAA36. They would not be taxable in the hands of the default beneficiaries for their entitlements would only arise from 15 December 2015 when [the applicant] executed the disclaimers. The default beneficiaries would have no entitlements in the 2006 Year and the 2007 Year. This is consistent with the conclusion reached by Tamberlin J in Nemesis Australia Pty Ltd v Federal Commissioner of Taxation.
  • 60. Whether or not the Commissioner will be able to recover from [ACPS] or [Drewvale] is not a matter on which I can make a finding. Despite that, it remains an open question and not one that can be answered by saying that the Commissioner should have issued alternative assessments to the trustees and to [the applicant]. The Commissioner is entitled to assess tax on the basis of the affairs of a taxpayer as they stand at a particular time while being aware that, in some circumstances, a taxpayer may change those affairs quite legitimately by disclaiming an entitlement. Until that time, the Commissioner is entitled to assume that affairs are as they seem and is not required to issue alternative assessments to cover all possible courses of action that might be taken by a taxpayer.

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  • 61. As I set out below, the law relating to disclaimers limits the circumstances in which they may be made. To permit [the applicant] to extend the grounds of her objection so that she may rely on the disclaimers would, for the reasons given in the previous paragraph, prejudice the Commissioner in carrying out his statutory functions to administer the taxation laws. It would do so in circumstances in which [the applicant], at least through [Mr Lewski] and her advisers, has been aware of the distributions for at least three years and, until December 2015, has taken no steps to execute disclaimers, to raise the distributions as a ground of objection or to pursue it in her application for review lodged in September 2015. In the course of its investigations, the ATO has conducted its investigations on the basis of the distributions as made by the trustees and [Mr Lewski], to whom [the applicant] has delegated responsibility for her affairs, has been fully aware of their progress. It would be not be in the interests of justice to give [the applicant] leave to extend the grounds stated in the objection decision which itself reflected the grounds of objection she had previously made. In none of them has she touched on the issue of disclaimer and, as I have already indicated and for the reasons I set out in the following section, [the applicant] has no basis on which she can make out the objection.

    (Footnote omitted.)

81. The Tribunal considered, at [99]-[107], whether the applicant should be given leave to expand her grounds of objection to include the ground that the ACPS resolution, in referring to "income" rather than "Net Income", was ineffective to distribute income to the applicant. After setting out the parties' submissions, the Tribunal refused the applicant leave to rely on this additional ground. Its reasoning on this issue was as follows:

  • 104. In making a taxation objection, a taxpayer must comply with s 14ZU of the TA Act. Section 14ZU(c) provides that it must "state in it, fully and in detail, the grounds that the person relies on." As Northrop J said in McLean and Dean:

    "The purpose of the statement of grounds is obvious. It is to direct the attention of the Commissioner to the questions raised. ..."

  • 105. In this case, it seems to me that the grounds of objection are too widely cast to draw in the ineffectiveness of the Resolution. On the contrary, the whole tenor of her objection assumes that the Resolution was effective. For that reason, I consider that [the applicant] requires leave under s 14ZZK to extend the grounds on which she relies.
  • 106. The Commissioner had no reason to consider whether he should be looking to [ACPS]'s liability as the trustee under s 99A of ITAA36 rather than [the applicant]'s liability as the beneficiary. He had no reason to consider whether he should issue an assessment to [ACPS] at an earlier stage. The fact that he may still do so as it would be an original assessment does not remove the prejudice that he may face in gathering the tax. Issuing an assessment is one thing and collection another. Although I am not suggesting that it was deliberate, the way in which [the applicant] presented her grounds not only did not disclose the questions that she raised, it obscured them. The Commissioner has been prejudiced by that. In view of that, I have concluded that it would ... not be in the interests of justice to give [the applicant] leave to extend the grounds stated in her objection.

    (Footnote omitted.)

Whether the Deeds of Disclaimer were effective to prevent the applicant being presently entitled to the trust income in the relevant years

82. Although the Tribunal decided not to give the applicant leave to rely on the Deeds of Disclaimer, it nevertheless went on to consider, at [62]-[98] of the Reasons, whether they were effective to prevent the applicant being presently entitled to the net income of the ACE Trust for the 2006 year and the Arjod Trust for the 2007 year. The Tribunal considered this issue on the assumption that the respective resolutions of the trusts for the 2006 and 2007 years had been validly made: see Reasons, [62]. The Tribunal, at [63]-[75], referred to the evidence concerning the management of the


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applicant's finances and taxation affairs. The Tribunal referred next to cases concerning the right of a donee to disclaim a gift, including
Federal Commissioner of Taxation v Ramsden (2005) 58 ATR 485 ( Ramsden );
JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VR 891 ( Broomhead ); and
Re Applicant and Federal Commissioner of Taxation (2008) 73 ATR 675. The Tribunal also referred to
Sargent v ASL Developments Ltd (1974) 131 CLR 634 ( Sargent ) and
NIML Ltd v Man Financial Australia Ltd (2006) 15 VR 156 ( NIML ), in relation to the attribution of the knowledge of an agent to a principal. At [95]-[98] of the Reasons, the Tribunal concluded that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts:
  • 95. Although the amount of their income may not exceed the threshold amount at which income tax is payable so that the amount of income tax is nil, income tax is payable by each individual and company. A person may choose to put responsibility for organising their affairs in the hands of another. On the evidence, I am satisfied that, within a couple of years of their marriage, [the applicant] placed responsibility for all of her financial affairs in the hands of her husband, [Mr Lewski]. At all times, she has been adamant that she has not wanted anything to do with those financial affairs. [Mr Lewski] has given evidence to the same effect. Certainly, she has signed documents and authorisations but I accept the evidence of both [the applicant] and of [Mr Lewski] that she has done so without question and solely on the basis of his asking her to do so. On the basis of their evidence, I am satisfied that [the applicant] gave unfettered authority to [Mr Lewski] to handle all of her financial affairs. He acted as her agent in relation to them. I note that [the applicant] has also said that she does not want anything to do with the ATO and does not want to be involved in any form of dispute with it but that cannot be seen as a fetter upon the scope of his authority as her agent. She cannot avoid any liability she may incur as a taxpayer by making such a proviso. It is a proviso that may find its place in a domestic family relationship but it is not a proviso that can limit the scope of authority that she has conferred upon [Mr Lewski].
  • 96. I also find that [Mr Lewski] acted as [the applicant]'s tax agent from, at the latest, 26 May 2014 when she signed an authority directed to him to act on her behalf in respect of her dealings with the ATO. This authority was given in terms that are much more limited than those in which she had already conferred upon him in his position as her husband. Her doing so at that time does not detract from the scope of that broader authority which has dated from a time shortly after their marriage in 1979.
  • 97. Acting within the scope of the unfettered power that [the applicant] conferred on [Mr Lewski] shortly after their marriage in relation to her financial affairs, I find that she had conferred actual authority on him to act as he thought appropriate in relation to those affairs. Therefore, if I apply the approach taken by Mason J in Sargent, I find that [Mr Lewski]'s knowledge of her affairs is attributed to her. Even if he was not aware of the distributions made to her under the [ACE Trust] in the 2006 Year and under the [Arjod Trust] in the 2007 Year at some earlier time, [Mr Lewski] was made aware of them in the ATO's position papers dated 20 December 2012 and 22 January 2013. His knowledge would, as I said, be attributed to her. Despite knowing that and despite knowing that the ATO was continuing its investigations in 2013 and had sought an extension of the time in which it could issue amended assessments to [the applicant], [Mr Lewski], and so [the applicant], did nothing to disclaim the distributions at all. Only on 15 December 2015 did [the applicant] disclaim both distributions. By then, seven or eight years had passed since the distributions had been made and at least two or three years since [Mr Lewski], and so she, had knowledge. Neither did anything to disclaim the distributions whether in the objections lodged in her name against the amended assessments for the 2006 and 2007 Years or in the subsequent applications for review of the reviewable decisions or by any other means. I am satisfied that the

    ATC 20043

    passage of such a period of time is consistent with an intention by [the applicant] not to disclaim her interests in those distributions. It is also consistent with an implied acceptance of those distributions. Therefore, I am satisfied there were no valid disclaimers.
  • 98. If I follow the approach taken by Stephen J, with whom McTiernan ACJ agreed, I reach the same outcome. I would find that [the applicant]'s actions in authorising [Mr Lewski] to act on her behalf in relation to all of her financial matters places in him in the position of acquiring, at first hand, all knowledge of the relevant facts. By doing that, [the applicant] deprived herself of obtaining that first hand knowledge. In that context, [Mr Lewski]'s actions, or inactions, in relation to [the applicant]'s financial affairs are binding upon her. As the relevant actions or inactions were undertaken by [Mr Lewski] at a time when he realised that distributions had been made to [the applicant], she is bound by them in relation to whether she may now disclaim the distributions. For the reasons I have given in the previous paragraph, too much time has passed for her to do this. [Mr Lewski]'s inaction in relation to the lodgement of objections and applications for review in her name, leads me to find that he has accepted the distributions. His actions and inactions are binding upon [the applicant].

    (Footnotes omitted.)

Whether the ACPS resolution was ineffective to appoint Net Income to the applicant

83. Although the Tribunal decided not to give the applicant leave to contend that the ACPS resolution, in referring to "income" rather than "Net Income", was ineffective, the Tribunal nevertheless went on to consider this issue at [108]-[140] of the Reasons. The Tribunal set out the parties' submissions and then referred to cases on the interpretation of contracts and trust instruments, including
Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431 ( Segelov ) and
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104. The Tribunal also referred to
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347 ( BRK ) and
Turner v Turner [1984] Ch 100 ( Turner ). The Tribunal rejected the applicant's contention that the ACPS resolution was ineffective on the ground that it purported to pay, apply and set aside the "income", rather than the "Net Income", of the trust. The Tribunal's reasoning was as follows:

  • 135. As Mr Broadfoot submitted, the case of BRK underlines the principle that a trustee must exercise the powers conferred by the Trust Deed in accordance with that deed and the terms in which the powers are expressed. In doing so, the trustee must apply his or her mind to the exercise of those powers and of any discretion imposed in him as pointed out in Turner.
  • 136. The definition of "Net Income" in s 1.17 draws in s 95(1) of ITAA36 and so is a sum that is determined after taking into account not only the Trust Fund's income but also have regard to most allowable deductions. The power of distribution given by cl 3.3 is drafted in terms of that Net Income but it is clear from a reading of the Trust Deed as a whole that the power of Distribution is intended to relate to either the whole of the Net Income or a part or parts of that Net Income as Net Income. It does not refer to the individual components taken into account in assessing Net Income under s 95(1). That is not altered by specific references to "Income" in clauses such as cll 3.6.4 and 3.10.3.2. Each is using the word as a descriptor of that part of the Net Income that has been distributed. Clauses 3.6.2 and 3.10.6 provide for the situation in which Determinations made under cl 3.3 exceed the Net Income for that Accounting Period. They provide first for the reduction of distributions made for accumulation and, if that should not bring them back to the amount of the Net Income, to apply the capital of the Trust Fund. Those clauses do not point to an intention that the Trustee be able to distribute an amount beyond the Net Income in any Accounting Period. Rather, they are machinery provisions that provide for a situation in which the Trustee has made a determination that exceeds the Net Income.

    ATC 20044

  • 137. The determination made by [ACPS] on 30 June 2006 before it distributed the income, was not made under cl 1.17 but as an addendum to the definition of "Income" in cl 1.15. Clause 1.17 permitted [ACPS] to determine in respect of the particular Accounting Period that the Net Income is the income produced from the investment of the Trust Fund calculated from the investment of the Trust Fund according to established accounting principles and trust law. That is not what the determination did. Instead, it described with particularity what was to be understood by the word "Income" when [ACPS] made the [ACPS] Resolution distributing that Income.
  • 138. That said, the Determination must be understood in the context of the Trust Deed under which it was made. The only power of distribution conferred by that Trust Deed was to be found in cl 3.3. That power referred to the "Net Income" of the Trust Fund and the exercise of the power in the form of the Determination to "Income" but I do not think that difference leads me to conclude that [ACPS] exercised its power invalidly when seen in context. That context includes its Balance Sheet for the 2006 Year as well as the Resolution as to what was included in [ACE Trust]'s income for that same year.
  • 139. The Balance Sheet shows a figure of $10,374,993 as the "Profit Earned This Year" (Profit). The same figure is shown as the "Distributions to Beneficiaries". At a practical level, it is clear that [ACPS] distributed not the Income as defined in cl 1.17 but the Profit, being the net income determined according to accounting principles and trust law earned for that year. [ACPS]'s intention to do that is apparent from the Distribution it made when it determined that, for the 2006 Year, the income included all amounts (including capital gains) taken into account in calculating the net income of the trust. In making the [ACPS] Resolution, [ACPS] distributed 100% of that amount to [the applicant].
  • 140. For these reasons, I have concluded that the [ACPS] Resolution was not an invalid exercise of power by reason of referring to "Income" and not "Net Income".

The appeal to this Court

84. The applicant appeals to this Court from the entire decision of the Tribunal. The notice of appeal sets out the following questions of law:

    Incurrence of amounts under the contracts

  • 1. Was 40% of the $1.74m "Settlement Amount" paid under the Contract of Sale (as that term is used in the Tribunal's reasons to refer to a contract for the sale of land entered into on 30 June 1999) on 31 October 1999 incurred on 30 June 1999, within the meaning of section [8-1] of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ), by Australian Commercial Property Syndications Pty Ltd ... ( ACPS ) (as trustee for the ACE No 4 Trust ...) and in its capacity as a 40% member of a syndicate managed by Glendale RV Syndication Pty Ltd (the Glendale Syndicate ))?
  • 2. Was the 40% of the [$5.51m] balance of the "Purchase Price" paid under the Business Purchase Agreement (as that term is used in the Tribunal's reasons to refer to a contract for the sale and purchase of an aged care hostel business) on 31 October 1999 incurred on 30 June 1999, within the meaning of section [8-1] of the ITAA 1997, by ACPS (in its capacity as a 40% member of the Glendale Syndicate)?
  • 3. Did the Tribunal give adequate reasons for concluding that neither the Settlement Amount nor the Purchase Price were not incurred as at 30 June 1999?
  • Whether the ACE No 4 Trust Resolution conferred a present entitlement to any income of the trust estate for the 2006 income year

  • 4. Did the Tribunal make an error of law by refusing (at [106] of the reasons below) to grant the Applicant leave pursuant to section 14ZZK of the Tax Administration Act 1953 (Cth) ( TAA 1953 ) to argue that the purported resolution made by ACPS dated 30 June 2006 for the income year ending 30 June 2006 was invalid by reason of being ultra vires?

    ATC 20045

  • 5. Was the purported resolution made by ACPS dated 30 June 2006 for the income year ending 30 June 2006 invalid by reason of being ultra vires?
  • Whether the distribution resolutions made by the ACE No 4 Trust for the 2006 year and the Arjod Trading Trust for the 2007 year were ineffective to confer a present entitlement

  • 6. Did the resolutions dated 30 June 2006 made by ACPS for the income year ending 30 June 2006 and dated 30 June 2007 made by Drewvale Investments Pty Ltd ( Drewvale Investments ) as trustee of the Arjod Trading Trust ... for the income year ending 30 June 2007 fail to confer a present entitlement in the Applicant in respect of a share of the income of each respective trust estate?
  • Effectiveness of Disclaimers

  • 7. Did the Tribunal make an error of law by refusing (at [60-61]) to grant the Applicant leave pursuant to section 14ZZK of the TAA 1953 to argue that her deeds of disclaimer dated 15 December 2015 in respect of distributions from the ACE No 4 Trust from 1 July 2005 and the Arjod Trading Trust from 1 July 2006 respectively were effective?
  • 8. Were the deeds of disclaimer dated 15 December 2015 signed by the Applicant effective to disclaim her entitlement to distributions from the ACE No 4 Trust and the Arjod Trading Trust from 1 July 2005 and 1 July 2006 respectively?

    (Footnotes omitted.)

85. The grounds relied upon by the applicant are sufficiently indicated in our consideration, below, of the appeal issues.

86. The Commissioner contends that the decision of the Tribunal should be affirmed on grounds other than those relied on by the Tribunal. The grounds set out in the notice of contention are as follows:

  • 1. The 'Settlement Amount' was not incurred on 30 June 1999 because, under the Contract of Sale, liability to pay the 'Settlement Amount' was not due until 'Settlement' and delivery of a registrable transfer.
  • 2. Further and alternatively, the 'Settlement Amount' was not incurred on 30 June 1999 because:
    • a. under the Contract of Sale, 'Settlement' was to take place contemporaneously with completion under the Business Purchase Agreement; and
    • b. under the Business Purchase Agreement, 'Completion' was dependent upon further performance by the vendor and upon the happening of events which were under the control of neither party.
  • 3. The balance of the 'Purchase Price' was not incurred on 30 June 1999 because, under the Business Purchase Agreement, liability to pay the balance was not due until 'Completion' after further performance by the vendor and the happening of events which were under the control of neither party.
  • 4. Further and alternatively, the balance of the 'Purchase Price' was not incurred on 30 June 1999 because:
    • a. under the Business Purchase Agreement, 'Completion' was to take place contemporaneously with settlement of the Contract of Sale; and
    • b. under the Contract of Sale, 'Settlement' was not due until delivery of a registrable transfer.
  • 5. Even if there had been valid disclaimers of the gifts, the disclaimers had no operation or effect for the purposes of s 97(1)(a)(i) of the Income Tax Assessment Act 1936. The disclaimers did not alter or remove:
    • a. the fact that the applicant was on 30 June 2006 or on 30 June 2007 (as the case requires) presently entitled to income of the trust estate; or
    • b. the consequence that pursuant to s 97(1)(a)(i) all or part (as the case requires) of the net income of the trust estate was included in the applicant's assessable income for that year of income.

87.


ATC 20046

The issues raised by the notice of appeal and the notice of contention have been summarised at [5] above. We will address the issues in the following order, which reflects the way the parties dealt with the issues in oral submissions:
  • (a) the Incurred Issue;
  • (b) the Trust Resolutions Issue;
  • (c) the Leave to Raise New Grounds Issue;
  • (d) the Disclaimers Issue; and
  • (e) the Ultra Vires Issue.

Consideration

The Incurred Issue

88. This issue may be stated as: whether the Tribunal erred in concluding that the Settlement Amount payable by Glendale under the Contract of Sale and the balance of the purchase price payable by Glendale under the Purchase of Business Agreement were not "incurred" within the meaning of s 8-1(1) of the 1997 Act on 30 June 1999 but were incurred later. The issue arises in circumstances where: Glendale entered into the contracts in its capacity as the manager of the Glendale Property Syndicate; ACPS as trustee of the ACE Trust was a member (as to 40%) of the Glendale Property Syndicate as at 30 June 1999; the ACE Trust claimed carry forward losses in the 2006 year on the basis that it was entitled to a deduction in the 1999 year as to 40% of the relevant amounts; and (subject to the other issues to be considered on the appeal) the applicant was entitled to 100% of the net income of the ACE Trust for the 2006 year.

89. Section 8-1 of the 1997 Act (as applicable to the 1999 year) relevantly provided:

  • (1) You can deduct 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.
  • (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; ...

90. The predecessor provision, considered in some of the cases discussed below, was s 51(1) of the 1936 Act. The differences between that provision and s 8-1 are not material.

91. In Citylink, Crennan J (with whom Gleeson CJ, Gummow, Callinan and Heydon JJ agreed) referred (at [91]) to the observations of Dixon J in
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179. In that case, Dixon J noted that the words of the income tax legislation give rise to particular difficulties when a transaction takes more than a year to complete, because it is the words of the section (which may not apply comfortably to certain economic or commercial practices), rather than general principles, which contain the test for deductibility (at 199, 206-207). Crennan J then observed that the infinite variety of factual situations that have fallen to be considered since New Zealand Flax have led to continuing elucidation of the test for deductibility and how it applies to different facts.

92. The applicable principles were set out by Crennan J in Citylink at [122]-[125] as follows:

  • 122 New Zealand Flax concerned the deductibility of interest payments payable in the future. In considering the test for deductibility, Dixon J said:

    "To come within [the] provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected."


    ATC 20047

    It has long been recognised that an outgoing may be "incurred", but not "discharged", in the relevant year of income. In Federal Commissioner of Taxation v James Flood Pty Ltd Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ considered commercial and accounting practice and the test for deductibility and said of s 51(1):

    "The word 'outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word 'incurred', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement."

    (Emphasis added.)

    The Court went on to say "outgoings" could only have been "incurred" if "in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them".

  • 123 In Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation, Barwick CJ said a liability could only be treated as having been "incurred" within the meaning of s 51(1) if it had "'come home' in the year of income", yet his Honour recognised that a liability could be qualified as a deduction if it falls due in the year of income, but may be paid later.
  • 124 In Coles Myer Finance Ltd v Federal Commissioner of Taxation Deane J, agreeing with the majority, stated:

    "[T]he weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a 'loss or outgoing' which is 'incurred' within the meaning of that subsection notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled. (Footnotes omitted.)"

  • 125 Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future. His Honour recognised that on some facts it would be apparent that a condition giving rise to a theoretical contingency could be treated, for practical purposes, as certain to be satisfied.

    (Footnotes omitted.)

93. Three decisions of the Full Court of this Court were the focus of submissions in the present appeal in respect of the Incurred Issue. They were, in chronological order, Raymor, Woolcombers and Malouf.

94. In Raymor, the respondent was a supplier of goods including copper tubing. It entered into agreements for the purchase of copper tubing from a supplier. The agreements, which were in similar terms, provided for the sale by the supplier to the respondent of a specified quantity and quality of copper tubing, the delivery of the copper tubing and the payment of the purchase price. The purchase price was payable upon execution of each agreement. The price was, however, subject to variation, taking into account movement in the Australian copper price at the date of delivery. The relevant agreements were entered into in June 1984 and June 1985 and the purchase price stipulated in each agreement was paid in those months. Delivery under the June 1984 agreement started in July 1984 and continued for several months. Delivery under the June 1985 agreement started in July 1985 and continued for several months. In the 1985 and 1986 years of income, the price of copper rose from time to time so that, pursuant to each agreement, further amounts became payable by the respondent to the supplier under the rise and fall clause. These amounts were shown as part of the respondent's costs of stock and were allowed as a deduction in the years of income in which they were paid. They were not in dispute. The


ATC 20048

dispute concerned the respondent's claim for deductions under s 51(1) of the 1936 Act for the purchase price (before adjustment) under the June 1984 agreement in the 1984 year of income, and the purchase price (before adjustment) under the June 1985 agreement in the 1985 year of income.

95. The Full Court (Davies, Gummow and Hill JJ) held that when the respondent bound itself to pay the purchase price shown in each agreement, it then incurred that amount as an outgoing, notwithstanding that the price could be varied under the rise and fall provisions in each agreement. It was further held that payment of the price was strictly irrelevant to the time at which the outgoing was incurred. The Court said (at 97):

... at the point of time at which the respondent bound itself as a party to each of the contracts, and so became committed to pay the amount shown in each contract to [the supplier], it incurred the respective amount, notwithstanding that its obligation could be increased or reduced under the rise and fall provisions of the contract: cl 8. Payment thereafter was strictly irrelevant to the time at which the outgoing was incurred. It merely operated to discharge in the year of income the outgoing already incurred in that year. In this sense it is strictly incorrect to speak of the payment here in question as a prepayment. A presently existing obligation had arisen and had been discharged.

96. Their Honours also said (at 101):

Once, however, it is appreciated that an outgoing may be deductible notwithstanding that it may be defeasible, there can be no logical reason why an outgoing pursuant to a contract may not be deductible notwithstanding that the ultimate price payable upon delivery of the goods the subject of a contract may be varied upwards or downwards to reflect the increased cost of the goods. If the price increases, as it did in each of the years in question, the additional amount incurred on delivery will be deductible in the year in which delivery occurs. If it decreases, the amount credited or refunded to the purchaser will form part of the proceeds of business of the trader in the same way as would an exchange gain which results in a lesser amount of Australian dollars becoming payable for stock.

97. In Woolcombers, the taxpayer, a wool trader, entered into a number of forward contracts to purchase wool from woolgrowers. The purchase price in most cases was fixed at the time of the contract. However, in some cases, the purchase price was variable. In all of the contracts, payment was due a certain number of days after delivery, and property in the wool was to pass to the taxpayer upon payment. In the 1988 year of income, the taxpayer claimed as a deduction under s 51(1) of the 1936 Act its estimated liability under the forward contracts entered into during that year. The Full Court (Beaumont, French and Foster JJ) held that the primary judge's analysis of the effect of the contractual provisions, namely that an accrued obligation or present liability was imposed on the taxpayer by a definite contractual commitment, was correct (at 573). It followed that an "outgoing" was "incurred" within the meaning of s 51(1) of the 1936 Act in the 1988 year of income. The Full Court referred (at 574) to a submission by the Commissioner that, because delivery of the wool was a condition precedent to the performance of the taxpayer's obligations, no present liability to make a payment accrued until after the wool was delivered, that is, in the 1989 year. The Full Court considered that the cases relied upon by the Commissioner were distinguishable, with each case depending upon "the true interpretation of the particular language of the contract" (at 574-575). After noting that the Commissioner also relied on the 'force majeure' provisions of the contracts as indicating that no liability to pay the purchase price accrued to the taxpayer until delivery, the Full Court said it had difficulty accepting this submission, especially as a term to similar effect would ordinarily be implied in contracts of that kind in any event. Their Honours said (at 575):

In our view, much will depend upon the particular circumstances of the case at hand. If the defeasibility takes the form of a contingency such as drought or a similar frustrating event which ordinarily would be implied as a matter of business efficacy, it is


ATC 20049

difficult to argue that by reason of the existence of this contingency, no liability to pay the price has accrued.

98. In Malouf, which bears some factual similarly to the present case, the taxpayer was the purchaser under a contract for the sale and purchase of a retirement village. Upon entering into the contract (during the 1999 year of income), the taxpayer paid a deposit. The taxpayer was required to pay the balance of the purchase price in the sum of $33.25 million (the residue ) upon settlement. Under the terms of the contract, settlement was not to occur until the vendor had completed Stage 1 of the contracted development work and upon the vendor being in a position to deliver a transfer of land. The primary issue in the appeals was whether the residue payable on settlement was "incurred" at the time the contract was entered into by the taxpayer (and so incurred during the 1999 year of income).

99. The findings of fact made by the primary judge, which were not disputed on appeal, included the following:

  • • The contract provided for a deposit of $6.5 million, which was paid during the 1999 year of income, and payment of $33.25 million on settlement if a retirement village was constructed in accordance with what were described as 'Plans A'. The residue was to be reduced by $6 million if the development was completed in accordance with what were described as 'Plans B'.
  • • At the time the contract was entered into, the land was vacant and had an agreed value of $2.5 million.
  • • A town planning permit existed for the construction of buildings in accordance with Plans B. That planning permit was subject to 24 conditions and was due to expire on 8 October 1999.
  • • No town planning permit had been obtained for the construction in accordance with Plans A, on which the contract price of $39.75 million was based. No building contract had been entered into.
  • • On the settlement date, the vendor was obliged, on payment of the residue, to deliver to the purchaser a registrable instrument of transfer and make the certificate of title available for registration.

100. The Full Court (Sundberg, Jessup and Middleton JJ) considered in some detail the earlier Full Court decisions in Raymor and Woolcombers. In relation to Raymor, the Full Court considered the terms of the arrangements in that case to be materially different from those of the contract under consideration (at [33]). In relation to Woolcombers, the Full Court considered the contract terms in that case to be of a similar nature to those before the Court on appeal, but said that much will depend upon the true interpretation of the particular language of the contract and upon the nature of the contractual arrangements (at [45]). The Full Court concluded that the pecuniary liability was not incurred at the time of entering into the contract, but would only be incurred at settlement. Their Honours said (at [48]-[50]):

  • 48 Looking then to the contract before us in the appeal, the obligations of the vendor were to bring the development to Stage 1 completion. The taxpayer was then obliged to pay the residue on settlement. The major portion of the value which the taxpayer obtained under the contract related to a development which did not exist at the time the contract was entered into by the parties. Not even the preferred planning permit was in existence which would give rise to the increased value of the land by reason of any development. The contract was not an unconditional agreement subject to defeasance by unforeseen events. The taxpayer's obligation to pay under the contract was dependent upon further performance by the vendor, and upon the happening of events which were anticipated but were under the control of neither party.
  • 49 The fact is that with the executory contract before the primary judge, the liability to pay was not due until settlement and delivery of a transfer and title to the land. The focus of the contract so far as imposing an obligation on the taxpayer was to pay at settlement. The nature of the contract, involving the sale of land, whilst not decisive, is of relevance in applying established and well recognised legal and jurisprudential principles to the operation of the contract, as recognised by the primary judge.

    ATC 20050

  • 50 The passages referred to above of Deane J in
    Coles Myer 176 CLR 640 (and adopted by Crennan J in
    Citylink 228 CLR 1) do not suggest any different analysis. The pecuniary liability must be actually incurred. It then may not matter that the amount is not payable until some future time, or may be defeasible or contingent. By operation of the contract in this appeal, the pecuniary liability was not incurred at the time of entering into the contract, but would only be incurred upon settlement.

101. In the present case, the applicant submits that the Reasons of the Tribunal demonstrate that it wrongly thought that deductions were being sought for the First Post Settlement Amount and the Final Post Settlement Amount payable under the Contract of Sale. The applicant also submits that: the Tribunal did not provide adequate reasons for its conclusion that the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were not incurred on 30 June 1999; the Reasons at [212] suggest that the Tribunal thought the possibility of a future breach or insolvency prevented amounts being incurred; if the possibility of a future breach or insolvency is reason to conclude that an amount payable under a contract cannot be incurred on entry into the contract, no amount payable in the future would be able to be incurred on entry into any contract; and the Tribunal misunderstood or misapplied the applicable principles.

102. The Commissioner accepts that the Tribunal failed to appreciate that the applicant's claim under the Contract of Sale was limited to the Settlement Amount. Further, the Commissioner accepts that, in its analysis of the two contracts, the Tribunal misconstrued some of the provisions of the contracts. The Commissioner relies on grounds 1 to 4 of the notice of contention to uphold the decision of the Tribunal on the issue of whether the relevant amounts were incurred on 30 June 1999.

103. In our view, the Tribunal at [212]-[215] of the Reasons (set out above) effectively adopted a meaning of the term "incurred" in s 8-1(1) of the 1997 Act that was contrary to that which has been established by legal decisions: cf
Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12-13 per Davies and Beazley JJ, with whom Hill J agreed; approved in
Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315 at [200] per Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ. In particular, the Tribunal relied on the fact that, under the Contract of Sale, the Glendale Property Syndicate was entitled to terminate the contract if an insolvency event occurred in relation to Prime Life (Glendale Hostel) Pty Ltd as a basis for concluding that "it was not known whether the Contract of Sale would proceed" (Reasons, [212]). However, the cases discussed above do not suggest that, without more, this type of contingency is enough to conclude that an outgoing is not incurred upon execution of a contract. Further, the reasons set out by the Tribunal at [213]-[214] of the Reasons were directed to the First Post Settlement Amount and the Final Post Settlement amount under the Contract of Sale, rather than the Settlement Amount. It was not explained why the Settlement Amount was not incurred upon execution of the Contract of Sale (apart from the reason given in [212], referred to above). Insofar as the balance of the purchase price under the Purchase of Business Agreement was concerned, the Tribunal said that this amount was incurred on the Completion Date (31 October 1999) because that was the day on which Prime Life (Glendale Hostel) Pty Ltd "would deliver what it was required to deliver" (Reasons, [212]). But the fact that Prime Life (Glendale Hostel) Pty Ltd was required to deliver certain things, including a registrable transfer, on the Settlement Date was not determinative. Insofar as the Tribunal relied upon the interdependence of the Purchase of Business Agreement with the Contract of Sale, we refer to the matters discussed above in relation to the Tribunal's reasoning regarding the Contract of Sale.

104.


ATC 20051

It follows that the Tribunal's decision, insofar as it concerned whether the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, is to be set aside. It is appropriate in the circumstances for the issue to be reconsidered by this Court. The parties approached the matter on this basis.

105. The Commissioner submits that the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were not incurred on 30 June 1999. The Commissioner's submissions can be summarised as follows:

  • (a) The obligation to pay the Settlement Amount was not incurred on 30 June 1999 because the liability to pay that amount was not due until Settlement and delivery of a registrable transfer: Malouf at [49]. At 30 June 1999, there was a promise to pay the Settlement Amount at Settlement. The promise remained executory until Settlement occurred. Until that time there was no pecuniary liability on the part of the Purchaser to pay the Settlement Amount.
  • (b) The conclusion that the obligation to pay was not incurred until 31 October 1999 does not depend on whether the contract required payment of the Settlement Amount following the delivery of title by the Vendor. Rather, the conclusion depends on the character of the promise to pay at Settlement as remaining executory until Settlement occurred. Whether considered in terms of special condition 8.1.1, the definitions in special condition 1, or general condition 12 of Table A, the Purchaser's obligation to pay at Settlement was contemporaneous with the Vendor's obligation to deliver the registrable transfer.
  • (c) The cases on specific performance relied upon by the applicant (
    Adderley v Dixon (1824) 1 Sim & St 607, 57 ER 239 at 240;
    Dougan v Ley (1946) 71 CLR 142 at 150;
    Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 at 151;
    ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615 at 630) do not assist the applicant. If a purchaser refuses to complete an executory contract to buy land, the vendor is not entitled to sue for the purchase money as a debt. Rather, the vendor is entitled to sue for specific performance or for damages for loss of the bargain:
    McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 475-476.
  • (d) The obligation to pay the Settlement Amount was not incurred on 30 June 1999 for the further reason that Settlement under the Contract of Sale was made contemporaneous with Completion under the Purchase of Business Agreement and Completion was dependent upon further events, as discussed below.
  • (e) The obligation to pay the balance of the purchase price under the Purchase of Business Agreement was not incurred on 30 June 1999 because the liability to pay the balance was dependent upon further performance by the Vendor and the happening of events which were under the control of neither the Vendor nor the Purchaser: Malouf at [48]. The liability to pay was dependent upon, among other things: the application to be made by the Purchaser under Part 2.1 of the Aged Care Act 1997 (Cth) to become an Approved Provider being approved by the Secretary of the Department; the application to be made by Prime Life Corporation under Div 16 of Pt 2.2 of that Act for the transfer of the Approved Places to the Purchaser being made, and that application being approved by the Secretary of the Department; and the transfer of the Approved Places by Prime Life Corporation to the Purchaser if that Approval was forthcoming. The promise to pay remained executory until Completion occurred.
  • (f) The mechanism in clauses 3.6.1 and 3.6.2 of the Purchase of Business Agreement involved Prime Life Corporation - not the Vendor - holding the Approved Places on trust. The mechanism depended on the happening of events that were under the control of neither the Vendor nor the Purchaser, namely Prime Life Corporation making the application for the transfer of the Approved Places and the Secretary of the Department not refusing to approve the Purchaser as an Approved Provider and not

    ATC 20052

    refusing to approve the transfer of the Approved Places. In oral submissions, senior counsel for the Commissioner submitted that the mechanism in clauses 3.6.1 and 3.6.2 did not deal with a situation where the Secretary of the Department refused to grant Approved Provider status to the Purchaser before the Completion Date. In this scenario, it was submitted, the contract would be frustrated and the Purchaser would not be obliged to complete on the Completion Date. (In response to a question from the Court, the Commissioner made clear that he did not submit that a trust as contemplated in cl 3.6.2 could not arise: T82.)
  • (g) The obligation to pay the balance of the purchase price under the Purchase of Business Agreement was not incurred on 30 June 1999 for the further reason that Completion under the Purchase of Business Agreement was made contemporaneous with Settlement under the Contract of Sale, and Settlement was not due until delivery of a registrable transfer.
  • (h) The obligations to pay in the present case are relevantly the same as in Malouf. While in the present case there were two interrelated contracts whereas in Malouf there was only one contract, the Full Court's analysis of the taxpayer's obligation to pay is apposite in this case.

106. However, for the reasons that follow, we consider that both the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred upon execution of the contracts on 30 June 1999.

107. As set out above, an outgoing may be incurred if it is definitively committed to and presently existing, notwithstanding that it may be theoretically defeasible or possibly contingent:
Coles Myer Finance Ltd v Commissioner of Taxation (Cth) (1993) 176 CLR 640 at 670-671 per Deane J, cited with approval in Citylink at [124]-[125]. Where an amount is payable under a contract, determining whether and, if so, when the amount is incurred requires reference to "the true interpretation of the particular language of the contract": Woolcombers at 575, applied in Malouf at [45]. Further, much will depend upon the nature of the contractual arrangements, which involves looking at the circumstances of the particular case: Malouf at [45].

108. In this case, the provisions of the Contract of Sale demonstrate that the Settlement Amount was required to be paid on 31 October 1999 and was definitively committed to on 30 June 1999. There was no obligation on the Vendor to deliver an instrument of transfer prior to any obligation to pay coming into existence: see special condition 8.1 and general condition 12 in Table A. Nor was there any condition precedent requiring the Vendor to take any action before there was an unqualified obligation to pay the Settlement Amount. It is important to distinguish the Settlement Amount from the two other amounts payable under the contract, namely the First Post Settlement Amount and the Final Post Settlement Amount. Unlike those amounts, the obligation to pay the Settlement Amount was not referable to the obtaining of planning approval or the completion of building works. In this sense, the outgoing in issue (namely, the Settlement Amount) was materially different from the outgoing in issue in Malouf. Further, the fact that the transaction in question involved the sale and purchase of real property, while a relevant aspect, does not of itself require the established principles to be applied in a particular way. The issue in such a case remains whether the outgoing is definitively committed to and presently existing, which is to be determined by reference to the true interpretation of the particular language of the contract.

109. The terms of the Purchase of Business Agreement demonstrate that payment of the balance of the purchase price under that agreement was definitively committed to on 30 June 1999: see clauses 2.2, 6.4, 8.2 and the definitions of "Completion" and "Completion Date". There was no obligation on the Vendor to deliver anything to bring the payment obligation into existence. Clause 2.2 was expressed in unconditional language and imposed an obligation to pay the balance of the


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purchase price (see [37] above). The obligation was to make payment on a fixed date; and upon such payment being made, title to the Business and the Assets and the benefit of the Goodwill would pass to the Purchaser (cl 8.2) (see [42] above).

110. Neither approval of the Purchaser as an Approved Provider nor approval of the transfer of the Approved Places from Prime Life Corporation to the Purchaser was a condition for payment of the balance of the purchase price. The obligation to pay the balance of the purchase price was not expressed to be conditional upon these matters. Further, we do not accept the Commissioner's submission that, if the Secretary of the Department refused the Purchaser's application for Approved Provider status before the Completion Date, the contract would be frustrated, this being outside the range of circumstances contemplated by cl 3.6.1 (set out at [40] above). We think the better view is that the words "has not granted" in cl 3.6.1 are capable of covering a situation where the application has been refused (as well as a situation where it is still being considered). This construction is open on the ordinary meaning of the words used. Further, this construction gives the provision a sensible operation in circumstances where, for example, a refusal is open to review or there is the potential for a new application for approval to be made. Accordingly, we do not accept the submission that, in the circumstance that the Secretary of the Department refused to grant Approved Provider status to the Purchaser before the Completion Date, the contract would be frustrated.

111. As we have concluded that both the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, the interdependency of the two contracts does not provide a basis to conclude that either outgoing was not incurred until a later point in time. Finally, we note for completeness that Taxation Ruling TR94/24 - Income tax: taxation amounts received by retirement village owners from incoming residents does not affect the above analysis. That ruling (now withdrawn) provided (in paragraph 7) that certain expenditure incurred by the owner in acquiring or developing a retirement village was considered to be expenditure of a revenue nature and "[a]ccordingly, a deduction will be allowed for that expenditure in the year in which it is incurred". The ruling did not, however, address the time at which the outgoing was incurred.

The Trust Resolutions Issue

112. This issue may be stated as: whether the Tribunal erred in concluding that the applicant was "presently entitled", within the meaning of s 97(1) of the 1936 Act, to a share of the income of the trust estate of the ACE Trust for the 2006 year of income and the Arjod Trust for the 2007 year of income.

113. The trust resolutions, by ACPS as trustee of the ACE Trust for the 2006 year and by Drewvale as trustee of the Arjod Trust for the 2007 year, are set out at [46] and [55] above. The resolutions are relevantly in similar terms. In each case, there was a resolution described as 'distribution of trust income' that resolved to pay, apply and set aside the income of the trust for a particular beneficiary or beneficiaries (in the 2006 year, 100% to the applicant; in the 2007 year, the first $3.5 million to Australian Investment Securities and the balance to the applicant). (We put to one side for present purposes whether, in appointing "income" rather than "Net Income", the ACPS resolution was ineffective: this is the Ultra Vires Issue, to be discussed below.) Further, in each case, there was a 'variation of income' resolution broadly to the effect that, should the Commissioner disallow any amount as a deduction or include any amount in the assessable income of the trust, there would be a deemed distribution of such amount or amounts to a different beneficiary or in a different proportion (in the 2006 year, 100% to Australian Commercial Underwriting; in the 2007 year, 100% to Australian Investment Securities).

114. The applicant contends that the resolutions were either effective in accordance with their terms - given the fact that the Commissioner subsequently did deny that the trustees were entitled to carry forward losses - to confer a present entitlement on Australian Commercial Underwriting and Australian Investment Securities, or (more probably) ineffective to confer a present entitlement on


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any of the named beneficiaries because the proviso (ie, the 'variation of income' resolution) involved a contingency. It follows, the applicant contends, that the applicant was not "presently entitled" under s 97(1) of the 1936 Act to a share of the income of the trust estate of the ACE Trust in the 2006 year or the Arjod Trust in the 2007 year.

115. The Commissioner supports the Tribunal's analysis, to the effect that: the trustees intended to distribute the whole of the income in the manner indicated in the 'distribution of trust income' resolutions; the beneficiaries had interests vested in interest and in possession at the date of the relevant resolutions; the attempt to deem otherwise could not change that result; and the trustees had exhausted their powers to distribute and there was nothing left to distribute.

116. In the 2006 and 2007 years, s 97(1) of the 1936 Act relevantly provided that "where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate" the assessable income of the beneficiary includes "so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident". In Walsh Bay, Beaumont and Sackville JJ (with whom Jenkinson J agreed) said (at 427) that, in order for a beneficiary of a trust to be "presently entitled" to a share of the income of a trust within s 97(1) of the 1936 Act, it is necessary to show, as the High Court held in
Harmer v Commissioner of Taxation (Cth) (1991) 173 CLR 264 at 271, that:

(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.

117. In Walsh Bay, Beaumont and Sackville JJ explained (at 427-428):

A vested interest is one where the holder has an "immediate fixed right of present or future enjoyment":
Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496, per Griffith CJ. In relation to land, an estate is vested in possession where there is a right of present enjoyment, as where A has a life estate or fee simple estate in the land. An estate is vested in interest where there is a present right of future enjoyment. Thus where T holds in trust for A for life and then in trust for B in fee simple, B's equitable fee simple estate is vested in interest during A's lifetime. The estate will vest in possession on A's death: Glenn v Commissioner, at 496; Dwight v FCT, at FCR 192.

An estate is contingent if the title of the holder depends upon the occurrence of an event which may or may not take place: E H Barr, Cheshire's Modern Law of Real Property (11th ed, 1972), p 241. However, the mere fact that an estate will not fall into possession until the regular determination of a prior estate does not make the first estate contingent. As stated in C Fearne, Contingent Remainders and Executory Devises (10th ed, 1844), vol 1, p 216:

It is not the uncertainty of ever taking effect in possession that makes a remainder contingent; for to that, every remainder for life ... is and must be liable; as the remainder-man may die ... before the death of the tenant for life. The present capacity of taking effect in possession, if the possession were to become vacant, and not the certainty that the possession will become vacant before the estate limited in remainder determines, universally distinguishes a vested remainder from one that is contingent.


ATC 20055

For these reasons it is said that before a beneficiary is entitled to a vested interest two things must occur:
  • (a) his identity must be established;
  • (b) his right to the interest (as distinguished from his right to possession) must not depend upon the occurrence of some event.

(See Cheshire's Modern Law of Real Property, p 42.)

The distinction between a vested but defeasible interest and an indefeasible interest is stated by Fearne (vol 2, p 30) as follows:

A defeasible interest is an interest that is subject to be defeated by the operation of a subsequent or mixed condition.

An indefeasible interest, or an absolute interest as opposed to a defeasible interest, is one that is not subject to any condition.

There is also a distinction between a contingent interest and a defeasible interest. The latter is a vested interest, which is liable to be divested by a supervening event. This distinction is not always easy to apply. For example, the rule of construction in
Phipps v Ackers (1842) 9 Cl & Fin 583; 8 ER 539, is that:

where a settlor makes a gift to A if A fulfils in the future some condition, and to B if A does not fulfil that condition, his intention is to make to A an immediate gift of the property including its income, of which, however, A is liable to be divested if and when the condition becomes impossible of fulfilment:
Re Kilpatrick's Policies Trusts [1966] Ch 730 at 764, per Diplock LJ.

118. An initial question to be addressed is the construction of the 'variation of income' resolutions made by ACPS for the 2006 year and Drewvale for the 2007 year. In each case, there is some difficulty in making sense of the words "and not distribute that amount so disallowed as a deduction". These words relate back to the words "should the Commissioner of Taxation". At first blush, the words appear to contemplate the Commissioner distributing an amount to a beneficiary, which does not make sense. However, we think it is tolerably clear that the words were concerned with a scenario where the Commissioner disallows a deduction claimed by the trust and, as a consequence, the amount of that deduction is not available in calculating the amount distributed to the beneficiary or beneficiaries. Likewise, we think it is tolerably clear that the words "or so include in the assessable income in accordance with the above appropriation" were concerned with a scenario where the Commissioner decides that an additional amount is to be included in the assessable income of the trust and, as a consequence, that additional amount is included in calculating the amount distributed to the beneficiary or beneficiaries.

119. Another question to be addressed is whether, in each case, the making of the 'variation of income' resolution was authorised by the relevant trust deed. In considering whether the resolutions were authorised by the relevant trust deed, the provisions of each trust deed are to be construed consistently with the principles that apply to the construction of contracts:
Byrnes v Kendle (2011) 243 CLR 253 at [59] per Gummow and Hayne JJ; at [102]-[105] per Heydon and Crennan JJ; Segelov at 447 per Gleeson JA (Meagher and Leeming JJA agreeing). In relation to the resolution made by ACPS, the trust deed for the ACE Trust provided that the Trustee could, at any time before the expiration of any Accounting Period, and with respect to all or part of the Net Income of the Trust Fund for that Accounting Period, determine to "pay, apply or set aside the same" to or for any General Beneficiary (cl 3.3, set out at [14] above). "Pay" was defined as including transfer, convey and assign. "Set Aside", in relation to a Beneficiary, was defined as including placing sums to the credit of such Beneficiary in the books of account of the Trust Fund. These definitions do not exclude the possibility of income being distributed on alternative bases. (The word "apply" was not defined.) A number of the provisions relating to the distribution of trust income contemplated adjustments, of one type or another, being made after the end of a particular Accounting Period: see clauses 3.3.4 and 3.6.2. In light of these provisions, and in the absence of an express


ATC 20056

provision to the contrary, we incline to the view that it was open to the Trustee of the ACE Trust, before the expiration of an Accounting Period, to determine to distribute all or part of the Net Income of the Trust Fund on alternative bases; for example, to resolve to distribute the income to X, but provide that if certain events happen, then the income is distributed to Y. An amount cannot, of course, be distributed more than once. A distribution once made cannot be unmade, but a resolution can be made in terms which are contingent upon events so that its distribution is determined by reference to those events which have occurred.

120. In relation to the 'variation of income' resolution made by Drewvale, the trust deed for the Arjod Trust provided that the Trustee could, at any time and from time to time during the Accounting Period, and with respect to all or part of the net income of the Trust Fund for such Accounting Period, determine to "pay apply or set aside the same" for any one or more of the General Beneficiaries (cl 3(1)(a), set out at [50] above). The word "pay" was defined as including transfer, convey and assign. The words "set aside", in relation to a beneficiary, were defined as including placing sums to the credit of such beneficiary in the books of account kept by the Trustee in relation to the Trust Fund. Again, these definitions do not exclude the possibility of distributions being made on alternative bases. (The word "apply" was not defined.) As with the ACE Trust, a number of provisions relating to the distribution of trust income in the trust deed for the Arjod Trust contemplated adjustments being made after the end of a particular Accounting Period: see clauses 3(1)(c) and 3(2)(b). In light of these provisions, and in the absence of an express provision to the contrary, we incline to the view that it was open to the Trustee of the Arjod Trust, before the expiration of an Accounting Period, to determine to distribute all or part of the net income of the Trust Fund on alternative bases, as described at [119] above.

121. Assuming that each of the 'variation of income' resolutions was authorised by the relevant trust deed, the next question is whether the applicant was "presently entitled" within the meaning of s 97(1) of the 1936 Act to a share of the net income of the relevant trust estate (that is, 100% of the net income of the ACE Trust for the 2006 year, and 100% of the net income of the Arjod Trust above $3.5 million for the 2007 year). In concluding, at [154]-[157] of the Reasons, that the applicant was presently entitled, the Tribunal treated the 'distribution of trust income' and the 'variation of income' resolutions as distinct and sequential. However, we do not consider it correct to treat the resolutions in this way. In the case of the ACPS resolutions, the two resolutions were made at the same time: they were set out in a single document signed by the sole director of the company. In the case of the Drewvale resolutions, the two resolutions were made at about the same time, at a meeting of the Board of Directors. In both cases, the resolutions were interdependent in that both resolutions dealt with the same subject matter - the distribution of the income of the trust for a particular year of income - with the latter resolution varying, in certain circumstances, the distribution made by the former resolution. In light of these matters, it is artificial to treat the two resolutions (namely, the 'distribution of trust income' resolution and the 'variation of income' resolution) as separate and sequential for the purposes of deciding whether the applicant was "presently entitled". Rather, the two resolutions should be read together for the purposes of deciding this question. There does not appear to be any issue between the parties that, if the two resolutions are read together, the distribution to the applicant was contingent: it depended on the occurrence of an event that may or may not take place (namely, the Commissioner disallowing a deduction or including an additional amount in assessable income). It follows that, assuming that each 'variation of income' resolution was authorised by the relevant trust deed, the applicant was not "presently entitled" to a share of the net income of the trust estate of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year.

122. Although we incline to the view that each 'variation of income' resolution was authorised by the relevant trust deed, as the matter is not free from doubt we will also consider the position on the alternative basis that each such resolution was not authorised. If this is the correct analysis, a question of severance arises: can the invalid


ATC 20057

'variation of income' resolution be severed, leaving in place the 'distribution of trust income' resolution? The common law principles regarding ultra vires legislation and subordinate legislation may be applied by analogy. In the context of legislation, the common law rule is that "[n]o severance could be effected unless an inference that the provisions are not to be interdependent can be positively drawn from the nature of the provisions, from the manner in which they are expressed or from the fact that they independently affect the persons or things within power in the same way and with the same results as if the full intended operation of the legislation had been valid":
Bank of New South Wales v Commonwealth (1948) 76 CLR 1 at 370 per Dixon J. The common law position as regards subordinate legislation is substantially the same:
Harrington v Lowe (1996) 190 CLR 311 at 329 n 50, citing
Owners of the SS Kalibia v Wilson (1910) 11 CLR 689 at 713. Alternatively, analogy may be found in the principles regarding severance of an uncertain contractual provision. In that context, whether an uncertain provision can be severed "depends on the intention of the parties to be gathered from the instrument as a whole":
Whitlock v Brew (1968) 118 CLR 445 at 461, citing
Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60 at 72; see also
United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618 at [90]. In the present case, for the reasons given above, we consider the two resolutions (that is, the 'distribution of trust income' resolution and the 'variation of income' resolution) to be interdependent: both resolutions dealt with distribution of the income of the trust for the same year, with the latter resolution varying the distribution made by the former. Thus, if the correct analysis is that the 'variation of income' resolution was invalid, whether legislative or contractual principles are applied by analogy, we do not consider severance to be available and both resolutions would fail. It follows that, on this analysis, the applicant was not "presently entitled" to a share of the net income of the trust estate of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year.

123. In summary, whether or not the 'variation of income' resolution was authorised by the relevant trust deed, the result is the same: the applicant was not "presently entitled" to a share of the income of the trust estate of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year. In our respectful opinion, for the reasons indicated above, the Tribunal erred in its approach to this question and its decision, to this extent, should be set aside.

Leave to Raise New Grounds Issue

124. This issue concerns whether the Tribunal failed to apply, or misapplied, the principles governing the grant of leave to rely on new grounds under s 14ZZK(a) of the TAA. That provision provides that, on an application for review of an objection decision, "the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates". At the hearing before the Tribunal, the applicant sought to rely on two grounds that were not stated in her objection. The first concerned the Deeds of Disclaimer. The second involved the contention that the ACPS 'distribution of trust income' resolution was ineffective on the basis that it purported to appoint "income" rather than "Net Income" to the applicant. The Tribunal refused the applicant leave to rely on the additional grounds.

125. The principles applicable to an application to rely on grounds additional to those stated in an objection were considered by the Full Court of this Court in Lighthouse Philatelics. That case concerned s 190(a) of the 1936 Act, which provided that, in proceedings under the relevant Part on a review before the Tribunal or on appeal to a court, "the taxpayer shall, unless the Tribunal or court otherwise orders, be limited to the grounds stated in his objection". Neither party to this appeal suggested that there is any relevant distinction between s 190(a) of the 1936 Act, as considered in Lighthouse Philatelics, and s 14ZZK(a) of the TAA. The Full Court (Lockhart, Burchett and Hill JJ) said (at 150) that the words of s 190(a) were, on their face, "wide and unambiguous". Noting that they empowered


ATC 20058

the Tribunal or the court, as the case may be, to relieve a taxpayer from the constraint of the subsection, their Honours said: "Unless there is something in the legislative history or context which requires a departure from the literal meaning of the words, they should be given effect to." After describing the legislative history of the provision, including the 'mischief' to which it was directed, the Full Court rejected the Commissioner's submission that s 190(a) did not permit the taxpayer to raise entirely new grounds in total substitution of those originally raised (at 155-156). Their Honours said (at 156):

... the whole statutory background leads to the conclusion that the natural meaning of the words used should be given effect to. The amendment to s 190(a) introduced by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth) was of a remedial kind and thus must be construed in accordance with well-established principles relating to ameliorating legislation. It follows that the Tribunal or the court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and "excessive" for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process.

The decision whether to allow an amendment ought to be made on the same considerations of justice upon which such decisions are regularly made in litigation. It was in the past a reproach to the law that the real issues in taxation appeals could be refused a hearing for a defective objection, and Parliament has legislated to remove that reproach; an amendment under s 190 should not be considered with reluctance, but on its merits.

126. It is common ground on this appeal that these are the applicable principles. Further, the applicant accepts that, in applying these principles, one should have regard to the current approach to the power of amendment in litigation, as stated in
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175, rather than the more permissive approach reflected in
Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146. Subject to adjustments to reflect the particular context (ie, an application for review of an objection decision), the considerations referred to by the High Court in Aon are, in our view, relevant in determining an application for an order under s 14ZZK(a). In Aon, Gummow, Hayne, Crennan, Kiefel and Bell JJ said that "[f]actors such as the nature and importance of the amendment to the party applying cannot be overlooked" (at [102]). Matters to be weighed against a grant of leave to amend include "the extent of the delay and the costs associated with it, together with the prejudice which might reasonably be assumed to follow and that which is shown" (at [102]). Further, "[m]uch may depend upon the point the litigation has reached relative to a trial when the application to amend is made" (at [102]). Their Honours also said, in relation to the discretion to permit an amendment, that "[i]nvariably the exercise of that discretion will require an explanation to be given where there is delay in applying for amendment" (at [102]).

127. In relation to whether the applicant should be given leave to rely on the Deeds of Disclaimer, the Tribunal took into account the fact that the passage of time might affect the Commissioner's ability to recover any tax payable by the trustees if the Commissioner were to assess the trustees on the basis that no beneficiary was presently entitled to the income of the ACE Trust as at 30 June 2006 or the Arjod Trust as at 30 June 2007 (Reasons, [60]-[61]). At [61] of the Reasons, the Tribunal considered whether it would be in the interests of justice to give leave in circumstances where the applicant had, at least through her husband and her advisers, been aware of the distributions for some years and taken no steps to execute disclaimers, raise the matter as a ground of objection, or pursue it in her application for review when it was lodged in September 2015.

128. In relation to whether the applicant should be given leave to contend that the ACPS 'distribution of trust income' resolution was ineffective on the basis that it purported to appoint "income" rather than "Net Income" to the applicant, the Tribunal expressed the view that: the Commissioner


ATC 20059

would be prejudiced as he had not had reason, at an earlier stage, to consider assessing ACPS as the trustee under s 99A of the 1936 Act; and, although the Commissioner may still be able to issue an assessment to ACPS, he may nevertheless be prejudiced due to an inability to recover the tax.

129. The Commissioner submits that the applicant has not shown any error in the Tribunal's exercise of the discretion in the sense of
House v The King (1936) 55 CLR 499 at 504-505.

130. In view of the conclusions we reach below in relation to the Disclaimers Issue and the Ultra Vires Issue, it is unnecessary to determine whether the Tribunal erred in the exercise of the discretion. However, we make the following observations. First, the Tribunal does not seem to have, but should have, considered the nature and importance of each of the additional grounds, the reasons for not raising the issue earlier, the adequacy of the explanation given and the effect that a grant of leave would have on the hearing: cf
Ramsden v Federal Commissioner of Taxation (2004) 56 ATR 42 at [67] per Spender J (the issue did not arise on appeal).

131. Secondly, at [60]-[61] of the Reasons, the Tribunal suggested that there was an "open question" as to whether the Commissioner could recover any tax sought from the trustees if they were to be assessed and that granting leave to rely on the Deeds of Disclaimer could "prejudice the Commissioner in carrying out his statutory functions". While it is appropriate, and necessary, to take into account prejudice in the conduct of the proceeding before the Tribunal (for example, the Commissioner's ability to gather relevant evidence or to test the evidence may be prejudiced by a late amendment), we doubt that an inability to issue an assessment against another taxpayer or an inability to recover tax from another taxpayer should weigh heavily against a grant of leave. This would seem ordinarily to be outside the range of considerations referred to by the High Court in Aon, as adapted to the present context. The same point applies in relation to the application for leave to contend that the ACPS 'distribution of trust income' resolution was ineffective.

132. Thirdly, the contention that the ACPS 'distribution of trust income' resolution was ineffective on the basis that it purported to distribute "income" rather than "Net Income" to the applicant raised a question of construction. The contention was raised in December 2015, when the applicant's initial statement of facts, issues and contentions was filed in the Tribunal proceeding. This was several months before the hearing date. It is difficult to see how the Commissioner, who dealt with the issue in his responding statement of facts, issues and contentions, was prejudiced by the contention being raised.

133. Finally, we note that the Tribunal proceeded on the basis that, if the applicant's contention regarding the ACPS 'distribution of income' resolution was correct, this would result in ACPS as trustee being liable to tax under s 99A of the 1936 Act. However, the position would have been that ACPS held the Net Income for the 2006 year upon trust for the Special Beneficiary, Mr Lewski (clause 3.5 of the trust deed).

The Disclaimers Issue

134. This issue may be stated as: whether the Tribunal erred in concluding that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts by executing the Deeds of Disclaimer.

135. The Deeds of Disclaimer, executed by the applicant on 15 December 2015, are set out at [69] and [70] above. The Tribunal's conclusion that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts appears at [95]-[98] of the Reasons. The Tribunal found, at [95], that the applicant had given "unfettered authority to [Mr Lewski] to handle all of her financial affairs" and that "[h]e acted as her agent in relation to them". Based on those findings, the Tribunal concluded, at [97], that: Mr Lewski's knowledge of the applicant's financial affairs was attributed to the applicant; even if Mr Lewski was not aware of the distributions made to the applicant by the ACE Trust in the 2006 year and the Arjod Trust in the 2007 year at some earlier time, he was made aware of these distributions by receipt of the ATO's position papers dated 20 December 2012 and 22 January


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2013; this knowledge was to be attributed to the applicant; despite this knowledge, Mr Lewski (and so the applicant) did nothing to disclaim the distributions until 15 December 2015; by then, seven or eight years had passed since the distributions had been made and two or three years had passed since Mr Lewski (and so the applicant) had knowledge of them; and the passage of such a period of time was consistent with "an intention by [the applicant] not to disclaim her interests in those distributions" and with "an implied acceptance of those distributions".

136. The applicant's submissions on appeal in relation to this issue can be summarised as follows:

  • (a) There was no challenge to the evidence of the applicant, corroborated by that of her husband, her solicitor and her accountant, that the applicant had no actual knowledge of the existence of the trusts, the distributions or the assessments until 28 October 2015.
  • (b) There was no evidence to support a conclusion that the scope of any authority that the applicant had conferred upon Mr Lewski as agent to deal with financial affairs extended to conferring upon him authority to dispose of her property, for no consideration, and without her knowledge.
  • (c) The Tribunal's reliance on the failure by Mr Lewski, as the applicant's husband, to disclaim on her behalf any interest arising under the trusts in this case, imports acceptance of the proposition that, as an agent with authority to manage her financial affairs, Mr Lewski had authority to dispose of the applicant's property, for no consideration, without her knowledge, and notwithstanding that the property might be valuable and that it might be in her best interests for the property to be retained. The evidence relied on by the Tribunal to support its conclusions as to the scope of Mr Lewski's authority is identified at [63]-[66] of the Reasons. At its highest, it establishes that the applicant trusted her husband to take responsibility for the family's financial affairs. It was not open on that evidence to conclude that the husband's authority extended to enabling him, as agent for his wife, to dispose of valuable property belonging to her, such as by disclaiming an equitable interest under a trust, for no consideration and without her knowledge. The Tribunal's decision is also contrary to the approach of the law, which is to recognise and protect the interests of spouses who by reason of a relationship of trust, and in particular marriage, or emotional dependence, leave financial decisions to the other spouse: see
    Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at [21], [73].
  • (d) The Tribunal relied, at [97]-[98], on Sargent to justify a conclusion that Mr Lewski's failure to disclaim the gifts was to be imputed to the applicant. It was erroneous to equate the circumstances of that case, which concerned the authority of a solicitor in a conveyancing transaction to bind the client by action or inaction, with the circumstances of the present case. The fact that a solicitor acting in a conveyancing transaction may by action or inaction affect the client's rights is a consequence of the usual incidents of the solicitor/client relationship and conveyancing practice. The decision in Sargent depended on this: see at 649 per Stephen J (with whom McTiernan ACJ agreed), and 658-659 per Mason J. There is no analogy between the fact that a solicitor engaged in a conveyancing matter may by inaction affect his or her client's rights, and the situation where a husband is trusted by his wife to deal with a family's financial affairs.
  • (e) In any event, the authorities show that actual knowledge by a beneficiary of the existence of a gift to be disclaimed is required before a court will conclude that the failure to disclaim within any given period amounts to implied acceptance. As a matter of principle, any transfer of property to a person vests even before he or she knows of the transfer, "subject to his right when informed of it to say, if he pleases, 'I will not take it.' When informed of it he may repudiate it ...":
    Standing v Bowring (1885) 31 Ch D 282 at 288, quoted by Latham CJ in
    Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394 at 402.

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  • (f) The right of a donee to disclaim a gift arises "when he becomes aware of a gift made to him":
    In the Will of Hamilton [1913] VLR 460 at 465, approved in Broomhead at 930-931. Full knowledge and intention are required:
    Lady Naas v Westminster Bank Ltd [1940] AC 366 at 396, 400. In
    Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347 at 1349, the Full Federal Court stated that "[a] beneficiary may disclaim an entitlement on its coming to his or her knowledge". None of those passages suggests that knowledge of a third party may be attributed. This is confirmed in Broomhead: see at 932.
  • (g) The decision in Broomhead was approved by the Full Federal Court in Ramsden at [53]. That case supports the view that actual knowledge of a beneficiary is required, and it is as from the time at which actual knowledge is obtained that the court will consider whether delay in disclaiming has the consequence that the disclaimer is ineffective: Ramsden at [59]-[60]. These paragraphs show that actual knowledge is necessary, although such actual knowledge may be able to be inferred in some cases on the basis that the probabilities are that the taxpayer's advisers made the taxpayer aware about the existence of the property that could be disclaimed. Here, the applicant and her husband, solicitor and accountant all gave unchallenged evidence that established that the applicant did not have the requisite knowledge until 28 October 2015. Thereafter, she acted promptly to disclaim.

137. Contrary to the applicant's submission that, at its highest, the evidence establishes that the applicant trusted her husband to take responsibility for the family's financial affairs, we consider that it was open to the Tribunal, on the evidence, to find that the applicant had given "unfettered authority to [Mr Lewski] to handle all of her financial affairs" and that "[h]e acted as her agent in relation to them" (at [95]). These findings reflect the general tenor of the applicant's witness statement in the Tribunal. They are also consistent with, if not supported by, the applicant's own evidence that she had no knowledge of the existence of the trusts, the distributions or the assessments until 28 October 2015.

138. Having found that the applicant had given her husband unfettered authority to handle her financial affairs and that he acted as her agent in relation to them, we consider that it was open to the Tribunal to conclude that the applicant was taken to have known of the distributions when Mr Lewski obtained knowledge of them. In NIML, Nettle JA, as his Honour then was, with whom Buchanan JA and Bongiorno AJA agreed, said at [38]-[40]:

  • 38 ... We are concerned here with the law of agency, and whatever may be the law relating to notice in cases of liability for knowing receipt of trust property and knowing involvement in breach of trust, the law of agency, as it is stated in Bowstead [& Reynolds on Agency (17th ed, 2001), Art 97], is that:
    • (1) A notification given to an agent is effective as such if the agent receives it within the scope of his actual or apparent authority, whether or not it is subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal his knowledge from the principal.
    • (2) The law imputes to the principal and charges him with all notice or knowledge relating to the subject matter of the agency which his agent acquires or obtains while acting as such agent.
    • (3) Where an agent is authorised to enter into a transaction in which his own knowledge is material, or where the principal has a duty to investigate or make disclosure, the knowledge of the agent may be attributed to the principal whether it was acquired in connection with the agency or not.
  • 39 For present purposes, the second of those rules may be put aside. The extent of its application is uncertain and in this country its scope of operation appears limited to instances where it is the duty of the agent to

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    communicate knowledge to the principal [Sargent at 658-659 per Mason J]. Generally speaking, the idea seems to be that, where there is a duty to communicate, the consequent probability of communication is so strong that the fact of communication will be presumed (except in case of fraud). ...
  • 40 The first and third rules are applicable. The juridical basis of the first rule is the subject of debate. The better view may be that it exists to prevent the "monstrous injustice" that a principal should have the advantage of what his agent knows without also the disadvantage of it. But however that may be, it is in effect a corollary of the idea that, once a principal constitutes an agent as agent for the purposes of receiving notice, the agent becomes the principal's alter ego for that purpose. So, therefore, notice to the agent is effective as notice to the principal whether or not the agent actually communicates the notice to the principal.

    (Footnotes omitted.)

139. In the current edition of Bowstead, namely Watts P and Reynolds FMB, Bowstead & Reynolds on Agency (20th ed, 2014), the relevant 'rules' are set out in Arts 94 and 95. We note that the rule corresponding to the second rule set out above is expressed in less absolute terms: "The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority" (art 95(1)). This revised formulation accommodates the flexibility that is required, given the different legal contexts in which the principles of attribution may operate.

140. In Sargent, one of the issues was whether the vendors in the third appeal before the High Court, the Turnbulls, had lost the right to rescind a contract for the sale of land. In the case of the Turnbulls, certain material facts (relevant in demonstrating that the right to rescind had been lost) were known, not by the Turnbulls, but by their solicitor. The question (as framed by Stephen J, with whom McTiernan ACJ agreed) was whether "this knowledge on the part of their solicitor will operate so as to attract to the acts of affirmation the irrevocability of an election" (at 648). Stephen J considered that the answer to this question could be approached in either of two ways and with the same result. Stephen J continued (at 648-649):

Election as between inconsistent contractual rights does not call for any conscious choice as between two sets of rights, it being enough that there should be intentional and unequivocal conduct together with knowledge of the facts giving rise to the legal rights. There need not, therefore, be a consciously "choosing mind", as there must, in fraud, be a "wicked mind". Now where, as in this case, a vendor employs a solicitor to attend to the carrying out of the legal aspects of a sale he necessarily authorizes that solicitor to attend to all the usual aspects of conveyancing practice; that authority will here extend to the obtaining of the necessary planning certificate and the solicitor's knowledge, gained from that certificate, may properly be imputed to his clients since it was acquired both for the purpose of that transaction and in the course of it (Bradley v. Riches; Re Philip-Stephan Photo Litho and Typographic Process Co. Ltd.; Dixon v. Winch; Ayrey v. British Legal and United Provident Assurance Co. Ltd.).

Again, where a vendor so arranges matters that his solicitor undertakes on his behalf the carrying out of a conveyancing transaction as a whole he thereby not only authorizes his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at first hand knowledge of relevant facts, at the same time depriving himself of the opportunity of acquiring such first hand knowledge. If any such steps taken by the solicitor happen to constitute acts of affirmation of the continued existence of the contract they will be binding upon the client (Provincial Insurance Co. of Canada v. Leduc). If they be unequivocal and are performed at a time when the solicitor has himself acquired knowledge of facts giving rise to a right to rescind the contract the client will, without the need to attribute to him the knowledge of his solicitor, be bound by those acts of affirmation as on an election; the duly authorized conduct of the solicitor, who has acquired the relevant


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knowledge, will, without either conduct or knowledge on the client's part, constitute an effective election not to rescind the contract (Hough v. Guardian Fire and Life Assurance Co. Ltd.; Ayrey's Case).

(Footnotes omitted.)

On the facts of the case, Stephen J considered that there had been an irrevocable election to affirm the contract. In a separate judgment, Mason J, after noting that in the case of the Turnbulls a question arose as to whether the knowledge of a solicitor is to be attributed to his client, said (at 658-659):

As against a third party the law imputes to a principal knowledge gained by his agent in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal, under such circumstances that it is the duty of the agent to communicate it to the principal. In the words of James L.J. in Vane v. Vane, "the actual knowledge of the agent through whom an estate is acquired is ... equivalent to the actual personal knowledge of the principal". In my view this principle applies to information acquired by a solicitor in the course of acting for his client in a conveyancing matter (Dixon v. Winch). The solicitor is to be regarded as the alter ego of the client and the rights of the other party to the contract cannot be made to depend upon the diligence or lack of diligence exhibited by the solicitor in his dealings with his client.

(Footnotes omitted.)

141. In considering whether the knowledge of the agent is to be imputed to the principal, it is necessary to consider the context of the particular legal issue that gives rise to the question: see Bowstead & Reynolds (20th ed, 2014) at [8-208], p 541. In the present case, the particular legal issue concerns the acceptance of a trust distribution. In Broomhead, McGarvie J said that the general principles which apply to the making and acceptance of gifts, apply where the gift is of a beneficial interest made by way of declaration of trust (at 930). By extension, those general principles also apply to a distribution of trust income by the trustee of a discretionary trust. As stated by McGarvie J in Broomhead, positive acceptance by the words or conduct of a donee is not necessary to complete a gift; acceptance may be presumed unless the donee disclaims the gift (at 930). Ordinarily, a gift vests in the donee before he or she knows of it, subject to the donee's right when informed of the gift to repudiate or reject it:
Standing v Bowring (1885) 31 Ch D 282 at 288; Broomhead at 930. In Broomhead, McGarvie J held that the test for whether a beneficiary is entitled to disclaim is "whether in the circumstances he has accepted by words or other conduct or has remained silent for so long that the proper inference is that he has determined to accept the interest" (at 931). This statement was approved by the Full Court of this Court (Lee, Merkel and Hely JJ) in Ramsden at [53]. When the particular legal issue is so identified, it does not seem inapposite to apply the principles for attribution of knowledge discussed by the High Court in Sargent. Although the issue in that case concerned the loss of a right to rescind and, in particular, whether the vendors were taken to have made an irrevocable election to affirm the contract, the question whether a donee is to be taken to have accepted a gift, or an object of a discretionary trust is taken to have accepted a distribution, is broadly similar.

142. Here, the applicant had handed over all of her financial affairs to Mr Lewski. It was within the scope of Mr Lewski's authority to receive knowledge of the relevant trust distributions. We consider that Mr Lewski was under a duty to inform the applicant of the distributions as they were material transactions that affected her financial position (including her potential liability to tax). There is no question that Mr Lewski was aware of the distributions, as he either made or participated in the making of the relevant resolutions. (He was also informed of the distributions by way of the ATO position papers in December 2012 and January 2013.) Neither the applicant, nor Mr Lewski on her behalf, took any step to disclaim the distribution before 15 December 2015. In these circumstances, and taking into account the particular legal context, we consider the conclusion that the applicant was taken to have had knowledge of, and to have accepted, the gifts before 15 December 2015 to be consistent with the cases and principles discussed above.

143.


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For these reasons, we reject the applicant's challenge to the Tribunal's conclusion that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts. In light of this conclusion, it is unnecessary to consider whether, as the Commissioner contends (in paragraph 5 of his notice of contention), even if there had been valid disclaimers, the disclaimers had no operation or effect for the purposes of s 97(1)(a)(i) of the 1936 Act. We note that a contrary view was accepted by the Full Court of this Court in Ramsden at [30], but the issue was not in dispute in the appeal (see [25]). See also
Nemesis Australia Pty Ltd v Commissioner of Taxation (2005) 150 FCR 152 at [50], where a contrary submission by the Commissioner was accepted.

Ultra Vires Issue

144. This issue may be stated as: whether the Tribunal erred in rejecting the applicant's contention that the 'distribution of trust income' resolution made by ACPS with respect to the 2006 year was ultra vires. In the proceeding before the Tribunal, the applicant had contended that this resolution, in purporting to appoint the "income", rather than the "Net Income", of the trust to the applicant, was not authorised by the trust deed. The issue arises in the following way. By the 'distribution of trust income' resolution (see [46] above), ACPS resolved to pay, apply and set aside "the income of the trust, as defined in the deed" for the year ended 30 June 2006 to or for the benefit of the applicant. However, cl 3.3 of the trust deed (set out at [14] above) provided that the Trustee may, at any time before the expiration of any Accounting Period, "with respect to all or any part or parts of the Net Income of the Trust Fund for such Accounting Period" determine to "pay, apply or set aside the same to or for any one or more of the General Beneficiaries". "Net Income" had a particular definition in the trust deed (see [12] above).

145. The Tribunal, at [135]-[140] of the Reasons, rejected the applicant's contention. The Tribunal, at [139], said that ACPS had distributed "not the Income as defined in cl 1.17 but the Profit, being the net income determined according to accounting principles and trust law earned for that year". The Tribunal considered that ACPS's intention to do this was apparent from its determination that the income of the trust included all amounts (including capital gains) taken into account in calculating the net income of the trust (ie, the 'income of the trust fund' resolution).

146. The applicant's written submissions on the appeal can be summarised as follows:

  • (a) The Tribunal was correct to find, at [139] of the Reasons, that the trustee distributed income according to accounting principles and trust law. The trustee's intention to do this was consistent with the evidence of Mr Lewski. Contrary to the Tribunal's conclusion, however, it follows from the fact that the amount sought to be distributed was the amount to be determined by reference to accounting principles and trust law that ACPS was not attempting to, and in fact did not, effectively resolve to distribute "Net Income" as defined in the trust deed. Accordingly, the resolution was ultra vires and of no effect to confer a present entitlement on the applicant: cf BRK at [15], applying
    Re Cavill Hotels Pty Ltd [1998] 1 Qd R 396 at 402 and Turner at 111.
  • (b) The Tribunal reached its ultimate conclusion on this issue by reference, at [130] of the Reasons, to
    Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402 and the principle that "[a] court will strain against interpreting a contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning can be given to it consonant with other provisions in a contract" (at 411). The effect of clauses 3.3 and 3.5 of the trust deed in this case is that where there is an ineffective resolution, there is a default settlement on trust for Mr Lewski as the Specified Beneficiary. Finding that the ACPS 'distribution of trust income' resolution was ultra vires does not make the trust instrument nugatory: it

    ATC 20065

    ensures that the assets of the trust are applied according to the terms of the trust. The consequence in this case is that Mr Lewski ought to have been assessed, and the applicant was not presently entitled.

147. In the Commissioner's written submissions on the appeal, he submitted that, contrary to the applicant's submissions, the trustee could distribute the net income according to accounting principles and trust law. This was because, it was submitted, the definition of "Net Income" expressly authorised the trustee to determine that "Net Income" meant income calculated in accordance with established accounting principles and trust law. Implicit in these submissions was a contention that the trustee (ACPS) had made a determination, pursuant to the last paragraph of the definition of "Net Income", that the Net Income for the year ended 30 June 2006 was the income produced from the investment of the Trust Fund "calculated in accordance with established accounting principles and trust law".

148. This contention was responded to in the applicant's reply submissions. By these submissions (as amended during oral submissions), the applicant submitted that: the applicant's objection noted specifically that no such determination had been made (ie, a determination under the last paragraph of the definition of "Net Income"); the Commissioner's reasons for the objection decision accepted specifically that no determination had been made by ACPS that trust income and net income should not be the same; the case proceeded on the basis that no determination had been made; and the Commissioner did not suggest otherwise to any of the applicant's witnesses.

149. Extracts from the transcript of the hearing before the Tribunal show that: in opening the Commissioner's case (after the applicant's witnesses had completed their evidence), counsel for the Commissioner submitted that the balance sheet of the ACE Trust for the 2006 year was "consistent with a determination of income in accordance with accounting principles in trust law, given that it shows a distribution of the net profit to beneficiaries ..."; in closing submissions, counsel for the Commissioner submitted that the balance sheet of the ACE Trust showed a distribution of accounting net profit to beneficiaries, which was "consistent with a determination by the trustee that net income was the income calculated in accordance with established accounting principles and trust law"; and, in closing submissions, counsel for the applicant objected to the Commissioner's submission on the basis that the Commissioner's statement of facts, issues and contentions had not suggested that the trustee had made a determination that Net Income was to be income calculated in accordance with established accounting principles and trust law.

150. We do not read [137]-[139] of the Reasons of the Tribunal as containing a finding to the effect that ACPS made a determination, pursuant to the definition of "Net Income" in the trust deed, that the Net Income for the year ended 30 June 2006 was the income produced from the investment of the Trust Fund "calculated in accordance with established accounting principles and trust law". In circumstances where no such determination was in evidence, no witness gave evidence that such a determination had been made, and the Commissioner did not positively contend that such a determination had been made, it is unsurprising that the Tribunal did not make such a finding.

151. Proceeding on the basis that ACPS did not make a determination pursuant to the definition of "Net Income" as described above, the question remains whether the 'distribution of trust income' resolution was ultra vires. Contrary to the applicant's submissions, we consider the correct construction of the 'distribution of trust income' resolution to be, as the Tribunal in substance decided, that the Trustee resolved to pay, apply and set aside the Net Income of the trust. In circumstances where there are two open constructions, one of which results in validity and one of which results in invalidity, it is in accordance with established principle to prefer the construction that preserves validity:
Langston v Langston (1834) 2 Cl & Fin 194 at 243; 6 ER 1128 per Lord


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Brougham LC, approved in
Fell v Fell (1922) 31 CLR 268 at 275 per Isaacs J;
Meehan v Jones (1982) 149 CLR 571 at 589 per Mason J; see also
In re Baden's Deed Trusts [1969] 2 Ch 388 at 400, 402;
Inland Revenue Commissioners v McMullen [1981] AC 1 at 14. Here, we consider the construction that the Trustee resolved to pay, set aside and apply the Net Income of the Trust Fund to be, at least, an open construction. First, the 'distribution of trust income' resolution should be read in the context of the immediately preceding resolution (the 'income of the trust fund' resolution). This referred to "the net income of the trust". It is open to infer that, in referring to "the income of the trust" in the 'distribution of trust income' resolution, the Trustee was intending to refer again to the net income of the trust, having referred to this in the immediately preceding resolution. Secondly, the 'distribution of trust income' resolution referred to "the income of the trust, as defined in the deed", but the words "the income of the trust" were not defined in the trust deed (cf the word "Income"). This raises a question as to which defined term ("Income" or "Net Income") the Trustee was intending to refer. Thirdly, although of less weight, we note that the 'distribution of trust income' resolution used the word "income" with a lower case rather than an upper case first letter. This may suggest that the trustee was not intending to pick up the defined term "Income". (In referring in this paragraph to the trustee's intention, we refer to its objectively ascertained intention: see the cases referred to at [119] above; see also
City of Subiaco v Local Government Advisory Board (2011) 184 LGERA 200; [2011] WASC 322 at [49]-[52] per Edelman J.) For these reasons, we consider it to be, at least, open to construe the resolution as referring to the Net Income of the trust. As this construction preserves the validity of the resolution, it is to be preferred.

152. Accordingly, we consider that the Tribunal was correct to reject the applicant's ultra vires contention, and we reject the applicant's challenge on appeal to that conclusion.

Conclusion

153. For the reasons given above, the appeal is to be allowed. It would seem to follow that the Commissioner should pay the applicant's costs of the appeal. We will make an order to this effect, but also provide that if either party seeks a variation of the costs order, the party may give written notice within seven business days. In that event, we will make directions for the filing and service of written submissions on costs, with a view to determining the issue on the papers.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The decision of the Administrative Appeals Tribunal made on 9 December 2016 at Melbourne be set aside and, in lieu thereof, it be ordered that:

  • (a) the objection decision of the respondent with respect to the 2006 and 2007 years of income be set aside; and
  • (b) the matter be remitted to the respondent for redetermination according to law.

3. Subject to paragraph 4, the respondent pay the applicant's costs of the appeal, to be taxed if not agreed.

4. If either party seeks a variation of the costs order in paragraph 3, the party shall give written notice to the Court and the other party within seven business days. Directions will then be made for the filing and service of written submissions on costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


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