Case D22

Judges: AM Donovan Ch
GR Thompson M

RK Todd M

Court:
No. 2 Board of Review

Judgment date: 18 May 1972.

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R.K. Todd (Member): These references concern assessments issued in respect of two trust estates upon the basis that the provisions of sec. 99A of the Income Tax Assessment Act should apply. The issue is whether the opinion should be formed that it would be unreasonable that that section should apply.

2. The two trusts in question were brought into existence in April 1962. The respective beneficiaries thereunder were the two sons of A. A was a man who had come to Australia after the Second World War from Europe and who had made his fortune here, involving himself in a number of business activities. In about 1956 there came to Australia one Z. He had not known A in their country of origin, but they had originally lived not very far apart from each other there. At all events, A assisted Z to establish himself in Australia and Z was grateful to him. Despite his relatively short experience of life in this country, Z apparently had managed to learn about, as he put it, ``trusts and other things'' and he formed the view that the creation of trusts in favour of the two sons of A might be a suitable way of showing his gratitude to A for the help which he had received. Accordingly, in April 1962 trusts were created in favour of the two sons, Z being the settlor and the provider of the initial capital of the trusts, namely £ 50 in each case. The trustee of the trusts was a lady named Y. Y was the settlor, and the same two sons the beneficiaries, pursuant to the provisions of two other trusts of similar import which had been created in 1958. The four trusts may be described as the Y Trusts, in the case of the two trusts created in 1958, and the Z Trusts in the case of the trusts created in 1962. In the case of the Y Trusts the initial sum settled was in each case £ 150 and the parents of the beneficiaries made no further gifts to increase the capital of those trusts. In the case of the Z Trusts, however, the parents gave to Y in her capacity as trustee of the Z Trusts a substantial parcel of shares in a family company which was at the heart of A's financial affairs. This was done, as A's accountant put it in evidence, because ``the parents wanted to make some provision for their children and I believe it was a part of a general divestment programme on which they embarked at about that time''. The intention which had been formed of making these gifts was instrumental in the decision that neither of the parents should be a trustee of the Z Trusts.

3. In the first year of income after the creation of the Z Trusts, the income of the trusts was distributed, as to nearly one-half thereof, to the beneficiaries, and the remainder was accumulated. Then, however, something of a catastrophe occurred. The Commissioner, acting upon the view that sec. 102 of the Income Tax Assessment Act applied in such a way that the parents were to be regarded as creators of the Z Trusts by reason of the gifts which they had made to the funds of the trusts, issued assessments against the trustee pursuant to that section in respect of the amounts which had been distributed. In the light of the income likely to be derived by the parents, the trustee felt that there was no alternative but to accumulate the income of the Z Trusts. This decision was wholly justified, for the experience of the years following 1962 indicates that if assessments under sec. 102 had been issued in those years tax would have been levied in the case of Mr. A at the rate (on an average over the years) of about 65 per cent. and in the case of Mrs. A of about 60 per cent.

4. An objection was, we were told, lodged in respect of each sec. 102 assessment but was subsequently withdrawn. The income of the trusts continued to be accumulated and not distributed until the income year ended 30 June 1968. A small amount of income was distributed in that year in order to ascertain the Commissioner's attitude, and once again assessments under sec. 102 issued. Again objections were lodged and were pending before the Board when in August 1970 the decision in
Truesdale v. F.C. of T. 70 ATC 4056 ; 120 C.L.R. 353

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was handed down, as a result of which the sec. 102 assessments could not stand. In the meantime assessments under sec. 99A had been issued in respect of the income which had been accumulated and which, having regard to the terms of the trust instruments, was income to which no beneficiary was presently entitled. In the case of each trust such assessments, for the years 1966, 1967 and 1968, are the subject of these references.

5. It was submitted for the trustee that, whether or not in some other year or other years a sec. 99A assessment might properly be issued in respect of each of the trusts, the position up to the end of the income year which closed on 30 June 1970, and certainly up to the end of that which closed on 30 June 1968 (being the last year of any assessment before the Board), was quite exceptional. It was said that had not the threat of a sec. 102 assessment hung over the head of the trustee, there would have been substantial distributions. As it was, the trustee had been left to steer between the Scylla of sec. 102 and the Charybdis of sec. 99A. No attack was made upon the bona fides of the Commissioner, nor could it have been made, but it was argued that he was in fact wrong in issuing the sec. 102 assessments and had by his conduct induced the trustee to take a course, namely accumulation of income, which he would not otherwise have done and which exposed him to the risk of sec. 99A assessments being issued, which they were. In aid of the argument, it was pointed out that in the case of the Y Trusts (wherein there was never any possibility of a sec. 102 assessment, no additions having been made to the capital of the trust funds) there had at all times been substantial distributions to the beneficiaries.

6. In the circumstances, I have come to the conclusion that this argument should succeed. The matters which may be taken into account in forming the opinion required to be formed for the purposes of sec. 99A(2) are wide indeed, as previous decisions of this Board have indicated. By the terms of sec. 99A(3)(c) ``the Commissioner shall have regard to such other matters, if any, as he thinks fit''. The terms of sub-secs. (1) and (2) make it clear that the opinion to be formed is an opinion to be formed year by year, the expressions in those subsections being ``in relation to any year of income'' (in sub-sec. (1)) and ``in relation to a year of income'' and ``in relation to that year of income'' (in sub-sec. (2)). It seems to me to be clear that the mode of administration of the trust is a matter that ought to be taken into consideration, and in this case I think that there was in the years under consideration, a manifest, substantial and, as it turned out, an unjustified interference with one of the criteria applicable in the administration of the trusts by the Commissioner himself. I do not say that it is certain beyond doubt that the sec. 102 assessments produced, or were alone in producing, the decision to accumulate the income of the trusts. But I do think that the likelihood that they did is so substantial that the Commissioner should have formed the opinion that it was unreasonable for sec. 99A to apply in relation to the years of income in question. Counsel for the Commissioner could only say on this aspect of the case that the dilemma in which the trustee found herself was not of the Commissioner's making but was brought about because the parents chose to resort to an artifice, namely making large gifts to trusts which had been set up with a small amount by somebody else. As so formulated this seems to me to be one ``matter'' to which regard cannot be had under sec. 99A(3)(c), and I thought his argument on this point was unconvincing.

7. In the result I consider that the objections should succeed.

8. It would seem to follow that the reasoning which I have adopted should apply in relation to the years ended 30 June 1969, and 30 June 1970, but as there may have been other facts and circumstances operating in those years I express no concluded opinion, and those years are not before us in any event.

9. I should make it clear also that the reasoning which has persuaded me in these references leaves completely open the question whether in future years, unaffected by the shadow of sec. 102, the Commissioner should form the opinion that it would be unreasonable for sec. 99A to apply. Again, other facts and circumstances may apply. I

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have deliberately confined the findings of fact in this decision to those facts which were essential to explaining the conclusion to which I have come on the limited basis which I have set out above. Many other facts were proved before us, and cogent arguments were addressed to us by both counsel, relating to what I might call the general merits of the case from the point of view of sec. 99A, but I make no comment upon them.

Claims allowed