Case A50

Judges: AM Donovan Ch
JD Davies M

GR Thompson M

Court:
No. 2 Board of Review

Judgment date: 3 September 1969.

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G. R. Thompson (Member): These references, which were by consent heard together, raise for the first time before this Board consideration of sec. 99A of the Income Tax Assessment Act. This section raises questions of principle of considerable importance and of wide public interest and, accordingly, I propose in these reasons to deal on a wide basis with the import of sec. 99A before applying my reasoning to the facts of the present references.

2. Under terms of reference of 3 December 1959, the ``Commonwealth Committee on Taxation'', commonly known as the Ligertwood Committee, was constituted by the Commonwealth Government to enquire into the laws of the Commonwealth relating to income tax, and in June 1961, this Committee submitted to The Right Honourable The Treasurer a most comprehensive and erudite report embodying a large number of recommended amendments to the Income Tax Assessment Act as it then stood. In 1964, the Income Tax Assessment Act was amended very substantially to embody the major part of the recommendations made by that Committee.

3. It is relevant to note that, in its report, the Ligertwood Committee, at para. 706-714, considered the question of ``family trusts'' and recommended as follows -

``The Committee recommends -

• 1. That sec. 102 be amended -
  • (a) to apply to minor unmarried relatives instead of minor unmarried children only;
  • (b) to include contingent trusts where the income is capable of accumulation for the benefit of the minor unmarried relatives; and
  • (c) to aggregate for rating purposes multiple trusts for minor unmarried relatives.
• 2. That a new sec. 99A be inserted in the Act to provide that if a trust deed contains provisions under which the settlor may vary its terms in favour of unmarried relatives who in the year of income are under the age of 21 years, the income should be assessed at a flat rate of tax of 10% in the £ .''

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Parliament saw fit not to adopt the recommendations in that form, but instead inserted in Div. 6 a new sec. 99A in the following terms -

``(1) This section does not apply in relation to a trust estate in relation to any year of income if the trust resulted from -

• (a) will, codicil or an order of a court that varied or modified the provisions of a will or codicil; or
• (b) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate.

(2) This section does not apply in relation to a trust estate (other than a trust estate referred to in the last preceding sub-section) in relation to a year of income if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.

(3) In forming an opinion for the purposes of the last preceding sub-section -

• (a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;
• (b) if a person who has, at any time, directly or indirectly -

• (i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or
• (ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate, whether or not the right or privilege has been exercised,

  has not, at any time, directly or indirectly -

• (iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate, not being a trust estate referred to in sub-section (1) of this section; or
• (iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, not being a trust estate referred to in sub-section (1) of this section, whether or not the right or privilege has been exercised,

  the Commissioner shall have regard to that fact; and

• (c) the Commissioner shall have regard to such other matters, if any, as he thinks fit.

(4) Subject to the next succeeding sub-section, where -

• (a) there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary in pursuance of section ninety-seven of this Act or in respect of which the trustee is assessed and liable to pay tax in pursuance of section ninety-eight of this Act; or
• (b) there is a part of the net income of a trust estate that is not included in the assessable income of a beneficiary in pursuance of section ninety-seven of this Act and in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section ninety-eight if this Act,

the trustee shall be assessed and is liable to pay tax on that net income or on that part of that net income, as the case may be, at the rate declared by the Parliament for the purposes of this section.

(5) Where a body, association or fund referred to in paragraph (d), (e), (ea), (eb), (f), (g), (h), (i) or (j) of section twenty-three of this Act, or an organisation that is prescribed for the purposes of paragraph (x) of that section, has a vested interest, being an indefeasible interest, in the income or in part of the income of a trust estate, the net income or the part of the net income of the trust estate upon which the trustee is liable to be assessed and to pay tax as

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provided by the last preceding sub-section does not include so much of that net income or of that part of that net income as, in the opinion of the Commissioner, relates to the income or the part of the income of the trust estate in which that body, association, fund or organisation has such a vested interest.''

4. From the wording of the section as now enacted, it is clear that it is intended to cut a wider swathe through trusts than that contemplated by the Committee's report. It may well be said that, whereas the Committee recommended the use of the scalpel, the legislators have chosen to provide the Commissioner with a broad axe.

5. I have referred to the report of the Ligertwood Committee because of the use that was made of it in argument before the Board and to enable me to express the view that, under all the circumstances, a consideration of the Ligertwood Committee's report is only of limited assistance in seeking to discover the sense of sec. 99A.

6. The practical effect of the section is to apply a flat rate of 50c in the $ to the net income of the trusts to which the section is intended to apply, as an alternative to the rate that would apply in an assessment under sec. 99. In its terms, sec. 99 becomes effective only if sec. 99A does not apply. Sub-sec. (1) of sec. 99A makes it clear that the section is intended only to apply to inter vivos trusts, and sub-sec. (5) protects from the practical effect of the section trust income arising out of an indefeasible vested interest in a trust estate held by certain bodies, associations or funds specified in particular paragraphs of sec. 23, which in turn makes the income from such bodies, associations or funds exempt. I think, too, that on a proper construction of sub-sec. (4) of the section, trust income which falls for assessment under sec. 97 and 98 does not fall within the provisions of sec. 99A, although in cases where there is income from a trust, only part of which is assessable under sec. 97 or 98, the part of the income which does not so fall for assessment is a matter for consideration under sec. 99A. These are the only parts of the section that appear to apply any objective standards and, in the absence of any further limiting terms, there remains within the ambit of the section, subject only to minor limitations, the income of inter vivos trusts of a variety limited only by the ingenuity of draftsmen concerned with the constitution of trusts.

7. By sub-sec. (2) of sec. 99A, whether or not the section applies in a given case seems to depend on the Commissioner forming an opinion in each specific case and in each specific year, whether or not ``it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income''. In forming his opinion, he is required by sub-sec. (3) to take into account certain specific matters, but unfortunately the section does not indicate the manner in which he has to allow those considerations to affect his judgment. The sub-section further provides that he ``shall have regard to such other matters, if any, as he thinks fit''. The Commissioner is thus put at large in arriving at his own opinion, and it appears that he can, within extremely wide limits, apply whatever criterion of reasonableness or unreasonableness he feels appropriate. The extraordinarily difficult position in which the Commissioner is thus placed has been the subject of judicial comment in
Giris Pty. Ltd. v. F.C. of T. 43 A.L.J.R. 99 , and I refer, without quoting directly from the judgments, to the comments of the learned Chief Justice at p. 101, Kitto J. at p. 104, Menzies J. at p. 104 and Owen J. at p. 107.

8. Uninstructed by any judicial ruling on the matter, I am of the opinion that, under the provisions of the Income Tax Administration Act, the Commissioner may delegate the power to form the opinion referred to in sub-sec. (2) of the section, in which case it would appear that the delegate is similarly set at large. Again uninstructed in departmental practice, one would expect, and indeed hope, that so important and far reaching a power would be the subject of very limited delegation, for however carefully a delegate may be briefed, an exercise as subjective as that of forming an opinion within the limits or lack of limits of sec. 99A could lead to a great deal of inconsistency and uncertainty in the application of the section.

9. By the force of sec. 193 of the Income Tax Assessment Act, for the purpose of reviewing an objection against an assessment under sec. 99A, a Board of Review is endowed with ``all the powers and functions of the Commissioner in making assessments, determinations and decisions'' under the Act. Accordingly, upon review of objections to assessments under sec. 99A, the duty falls upon the Board, as a preliminary exercise before deciding whether the assessment before it should be confirmed, reduced, increased or

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varied, to form an opinion as to whether or not it would be unreasonable for the section to apply. This exercise is not the exercise of one mind but of three and, as the section stands, it appears that each member is set at large in the same manner as the Commissioner. Thus, the consideration of references relating to assessments under sec. 99A differs from that of references relating to assessments under other sections. Decisions on matters relating to other sections involve the consideration by the Board of a common set of facts upon which differing views may be held, but under sec. 99A each member appears to be at liberty to decide the preliminary question on facts which may be entirely different and unrelated to those which exercise the minds of his colleagues.

10. It may be convenient at this point to dispose of a question that was argued before the Board in the present references. Counsel for the taxpayers argued that in these cases it was open to the Board to find that the Commissioner had directed his mind to a number of immaterial circumstances and thus the formation of his opinion was invalid with the result that, as a question of law, the assessments before the Board could not be supported. As a consequence of that, it was said that the Board must either refer the matter back to the Commissioner or find that, because the opinion under sec. 99A had not been formed validly, then sec. 99 applied. The difficulties that I see in accepting this argument lie under two heads. Firstly, a Board of Review is not invested with all the powers of a court and, while a court has the power and indeed must, in some cases, refer assessments back to the Commissioner, the Income Tax Assessment Act contains no express provision empowering a Board of Review to do so, and whether it has an inherent jurisdiction to do so is, I think, open to doubt. Secondly, sec. 99 in its terms can only apply if sec. 99A does not apply, and sec. 99A in its terms can only be made not to apply by the formation of an opinion, and unless the opinion of the Commissioner has been supplanted by that of the Board, there is no basis upon which the Commissioner may assess under sec. 99.

11. Principally for these reasons I prefer the view expressed by counsel for the Commissioner that a Board is seized with the entire issue and standing as it does in the place of the Commissioner, it must deal with the whole matter de novo and form its own opinion as to whether or not sec. 99A should apply. In reaching that conclusion, I am painfully aware of one of its consequences. In the event that a Board of Review decides in these or in any other case involving sec. 99A that it would be unreasonable that the section should apply, then sec. 99 comes into effect and the Board is faced with the task of making an assessment under that section, a task for which, administratively, it is illequipped.

12. Having expounded at some length some of the inherent difficulties of sec. 99A, one must turn to the realities of the situation and do the best that one can to reach a proper decision in the references before the Board and other similar references yet to be heard. As I have sought to indicate, the operation of sec. 99A depends upon the formation of an opinion as to whether it would be unreasonable to apply the section, and the persons charged with the responsibility of forming that opinion are given extraordinary liberty in setting their own criterion of reasonableness. This is an entirely subjective exercise which, if misapplied, or if the basis upon which the opinion has or will be formed is not promulgated, could lead to an undesirable degree of uncertainty in the minds of the taxpaying public.

13. The Commissioner has, I think, made a noble attempt to give some guidance on this matter in his Public Information Bulletins, and the method he has adopted is to set out, inter alia, a number of hypothetical circumstances relating to trust property and income and to indicate what his attitude would be in each of those circumstances. I do not intend any criticism of the Commissioner when I say that the circumstances to which he refers do not, and I do not suppose were intended to, cover the whole field envisaged by sec. 99A. To attempt to do so would be like undertaking the Herculean task of cleaning the Augean stables, for if each and every current circumstance were set out, it is in the nature of things that new circumstances would be created by those whose role it is to use their ingenuity to soften the tax blow.

14. For that reason, it is my intention, until better instructed, to adopt a broader and perhaps more philosophical approach. Thus, I set out a number of propositions (not necessarily in any order of merit) that I consider to be proper and convenient to take into account when exercising what Barwick C.J.,

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in the Giris case (supra), referred to as ``a legislative discretion''.

• 1. The Revenue should be protected against tax avoiding devices.
• 2. The interests of taxpayers generally should be protected.
• 3. The right of the subject to make legitimate and reasonable arrangements relating to family and business matters should be protected.
• 4. Arrangements which are for the good of the public generally should not be discouraged.
• 5. Trusts which arise out of the exercise of a public duty should not be penalised.

1. Protection of the revenue -

This first proposition needs no lengthy exposition. It accords with my understanding of a clear policy of the Income Tax Assessment Act, and indeed of all taxing statutes. In the Income Tax Assessment Act, it finds its highest point in sec. 260.

2. The interests of taxpayers generally -

This principle is, I think, complementary to the first principle, for it is trite to say that each successful tax avoiding scheme results in a proportionate increase in the tax burden to be borne by all other taxpayers. In taking into account this principle, it would, I think, be relevant to consider whether the type of arrangement under consideration in any particular case is wide-spread or increasing in its incidence. The discretion could then be exercised to discourage practices which are causing the tax burden to fall unevenly on taxpayers within a particular class.

3. Protection of legitimate and reasonable family and business arrangements -

The right of an individual to deal with his own property and to arrange the affairs of his family and his business in any way that he sees fit, subject only to the restrictions imposed by statute or common law, is, I think, well entrenched in the sociological, political and legal structure of the Australian community. It seems to me that it would be inappropriate to use a discretion under a taxing statute to discourage the exercise of that right except in cases where such an exercise is to the detriment of the community at large.

4. Arrangements for the good of the public generally -

One can readily envisage arrangements which fall for consideration under sec. 99A being of such a kind that, if such arrangements were discouraged, the springs of charity might tend to dry up. An example of such an arrangement would be a voluntary trust established inter vivos for the maintenance or education either of an infant or of a person of full age who is, say, mentally defective to the extent that he is under legal disability. The purpose and effect of such a trust could be to prevent the beneficiary from becoming a charge on the State. I would regard it as inappropriate, in the absence of any countervailing consideration, to use the discretion under sec. 99A to discourage such a charitable exercise.

5. Trusts arising out of the exercise of a public duty -

Under this head I would include the administration of trusts such as those imposed upon trustees in bankruptcy by the Bankruptcy Act or those imposed upon officers of the court by order of the various courts. Under the broad terms of sec. 99A these fall for consideration and it seems to me that, to the extent to which the discretion under sec. 99A would be exercised to the detriment of such trusts, the purposes of the statute or the order under which the trusts come into being would be frustrated.

15. On the foregoing broad bases, it seems to me to be possible to distinguish in particular cases those in which it would be proper to invoke the deterrent effect that can arise by the exercise of the discretion one way or the other. It must be said immediately that cases which fall under only one of the foregoing principles would be rare indeed, for in most cases under other categories there will be an element of tax avoidance. The process of forming the opinion that one is obliged to form will involve the difficult, but perhaps not impossible, task of weighing the merits of each case to decide whether they fall on the side of those practices that ought to be discouraged because of the preponderance of undesirable elements or on the side of those which ought not to be discouraged because they produce a desirable social result.

16. The enquiry leading up to this decision is akin, I think, to the type of enquiry that is necessary to decide questions under sec. 26(a) of the Income Tax Assessment Act, where a dominant purpose requires to be

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ascertained. A wide survey and close scrutiny of all the surrounding circumstances, including, but not by any means limited to, an examination of the terms of any relevant instrument, the manner in which those terms have been or are capable of being implemented, the circumstances under which the trust is called into being, the overall effect achieved or sought to be achieved upon the tax affairs of all parties directly or indirectly affected by the trust and the manner in which the arrangement is administered, would be called for. This enquiry should, I think, furnish the mind in such a way that the scale will fall either on the side of practices which ought to be discouraged or on the side of those which ought not to be the subject of any deterrent.

17. Since the present cases, and indeed all cases under sec. 99A, require the use of ``the uncertain and crooked cord of discretion'' rather than ``the golden and straight mete wand of the law'', I have expatiated rather more than is usual in these reasons in an attempt, as far as possible, to remove uncertainty from my decision.

18. In the case of the references immediately before the Board, there are two important factors to be taken into consideration. Firstly, it is clear from the evidence that the effect of the trusts in the year of income under review was to split the income derived from the conduct of a business four ways with a consequent loss to the Revenue as compared to the revenue that would have been generated if the machinery of the trusts had not been used. The other matter requiring consideration is the contention on behalf of the managing director of the trustee company who, when asked what was sought to be achieved by the trusts, said: ``I was trying to set up something that would be beneficial to the children and for (B) and (S) (my two girls) if anything happened to myself or my wife....''

19. Thus we have set up two propositions, one of which, on the principles I have discussed, ought to be discouraged, and the other that ought to be protected. Which, in this case, is the more weighty consideration?

20. The first proposition is, I think, self evident and calls for no discussion. The taxpayer's contention requires closer scrutiny. The desire of a parent to arrange his affairs in such a way that, upon his demise, his children are adequately provided for is a reasonable and proper sentiment and, if the arrangements that he makes are similarly reasonable and proper, I see no reason why they should be discouraged in any way.

21. The director, in this case, could have achieved his stated purpose in a number of ways. He could, for instance, have made appropriate provision in his will, which is a method that would certainly have called for no comment at all. It may, however, have attracted some contribution to the Revenue upon his demise. He could have settled upon his children some or all of the shares that he held in the company which was the proprietor of the business. This, likewise, would be unremarkable, but, of course, it would involve a trust in favour of his children in which he would be the settlor. There would be certain tax consequences which he might have regarded as being adverse. He could, apart from making suitable provision in his will, have abided the majority of his children, when gifts inter vivos of such shares would have been appropriate to achieve his aim. In due course, they also may have involved a contribution to the Revenue in the form of Gift Duty. These are but some of the methods open to the taxpayer which carry all the hallmarks of reasonableness to my mind. The course chosen by the director, however, impresses me as being somewhat reminiscent of a Heath Robertson invention. If the dominant effect sought to be achieved was that so simply and understandably expressed by the director, it could have been achieved by a very simple means, but instead of that a method remarkable for its complexity was devised. It does not require a high degree of insight to recognise that the effect of this invention is to cause the flow of income derived by the proprietor of the business to be diverted round the provisions of the Income Tax Assessment Act relating to income from trusts created by a parent in favour of children, and to be capable of being delivered through any number of four faucets in such quantities as the controller of the mechanism may dictate. The result of this is to enable the incidence of tax relating to income from the source, the business, to be manipulated. This, in itself, is, I think, undesirable.

22. Looking at the terms of the deeds of settlement in question in closer detail, one can also detect as one of the purposes of the

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settlements, by the joint effect of Clauses 1A(2) and 2A, and attempt to transmogrify the income of the business into capital which is capable of being distributed in that form to the director and his wife to the exclusion of the children. If these terms are effective, the trust is capable of being administered in such a way that the director and his wife ``get the lot'' and both the children and the taxgatherer are left lamenting.

23. Applying these facts to the principles that I have enunciated, it appears to me that the whole arrangement, including the trusts, is designed to be more effective as a tax avoiding device than as a legitimate and reasonable arrangement for the welfare of the infant beneficiaries of the trusts.

24. For these reasons, I find that it is not unreasonable that sec. 99A should apply to the trust estates in question, and I would uphold the Commissioner's assessments.

Claim disallowed