Case M45

Judges: MB Hogan Ch

P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 16 July 1980.

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Dr. P. Gerber (Member)

The facts of this reference have already been fully stated in the Chairman's decision. I gratefully adopt both his summary and conclusion and will confine myself to the barest outline of the evidence - such as it was - which has led me to the same result as my colleague.

2. The taxpayer, the trustee of a discretionary trust, made a distribution ($16,000) from income of the estate to one of the beneficiaries nominated in the Deed of Settlement. At the relevant time, the beneficiary was under a legal disability, being an infant aged 14 years. The Commissioner, having assessed the trustee on the amount, the latter objected, asserting that the amount was assessable only in the hands of the beneficiary. Alas, in vain. Hence this reference.

3. In the reg. 35(1) statement setting out the Commissioner's reasons for disallowing the objection, it is stated:

``The assessment which issued to the Trustee was correctly made pursuant to Section 98 in that the beneficiary was under a legal disability and was presently entitled to $16,000, being a share of the net income of the Trust Estate, or was deemed presently entitled to that share by operation of Section 101.''

4. The first limb of the Commissioner's reasons is based on sec. 98, which provides that:

``Where any beneficiary is presently entitled to a share of the income of a trust estate, but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual...''

The trustee attempted to meet this argument by submitting that a beneficiary who has received payment is no longer presently entitled, so that the receipt of the income of the trust estate falls to be assessed to the beneficiary either under sec. 25 or sec. 26(b) (``the assessable income of a taxpayer shall include - beneficial interests of income derived under any... instrument of trust''). Support for this proposition was sought in reliance on the various pronouncements made by Barwick C.J., Kitto and Menzies JJ. in
Union Fidelity Trustee Co. v. F.C. of T. 69 ATC 4084 ; (1969) 119 C.L.R. 177 . We

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ATC 321

were in turn invited by learned counsel for the Commissioner to find that these pronouncements were wrong and/or obiter dicta . In the circumstances of this case, I am spared the necessity of arriving at any concluded opinion on the matter, since I am satisfied that the issue is completely covered by the second limb of the Commissioner's reasons as stated in the reg. 35(1) statement, sec. 101 not being directly raised on the facts of the above case.

5. Turning to the facts in this reference, we have:

• (i) a trustee;
• (ii) of a discretionary trust; who,
• (iii) in the exercise of his discretion;
• (iv) pays income from the trust estate to a beneficiary under a legal disability.

Section 101 of the Tax Act provides:

``For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.''

In other words, where a trustee of a discretionary trust, in the exercise of his discretion, makes a payment to a beneficiary, such beneficiary is to be treated as ``presently entitled'' with all the attendant consequences. It is a statutory fiction, but one to which the Board must give effect. To play with Div. 6 requires skill, like Monopoly. This infant, having been moved from sec. 98 to 101, is told to go back to sec. 98 and take what is left of $16,000 after tax. He would have been better off to have sold Euston Station and asserted that it was acquired as a hedge against inflation. In short, it is the trustee who is to be assessed under Div. 6 rather than the beneficiary under sec. 25 and/or 26(b).

6. Before leaving this case, I feel bound to point out that the ``evidence'' in this case was left in a highly unsatisfactory state. Documents, purporting to be typed copies of (unsigned) minutes, were tendered without objection, which, when compared with the limited bank records made available, suggest a clumsily executed ``round robin'' since the so-called ``payment'' to the infant by the trustee was promptly returned to the trustee as a ``loan''. No attempt was made to demonstrate how, in these circumstances, such a ``loan'' was made. It is fair to say that the whole transaction has an air of speciousness about it. At one stage, I pointedly remarked to counsel for the Commissioner:

• Dr. Gerber: As evidence goes, it is gravely defective of course. But I take it that the facts, as stated in the documents, are not challenged?
• Miss Beazley: No.
• Dr. Gerber: So, effectively, we are going on agreed facts?
• Miss Beazley: That is correct, yes, Dr. Gerber.

It is trite to observe that a tribunal must determine the issues on the evidence before it. In this case, it would appear that little, if any, attempt was made to investigate the facts, and that we were asked to make a determination on hypotheses; to give, so to speak, a declaratory opinion. Whilst Boards of Review - unlike courts - have all the powers and functions of the Commissioner in making assessments, determinations and decisions, I think we should be very slow to embark on a frolic of our own; to look, so to speak, for a black cat in a dark room whenever the Commissioner refuses to provide a torch.

7. I am satisfied that where a trustee of a discretionary trust makes a payment to a specified beneficiary, the latter ``shall be deemed to be presently entitled to the amount paid to him'', with the result that, if the beneficiary is under a legal disability, such amount shall be assessed to the trustee as though the share so paid were the income of an individual. Since the parties submitted this matter as a reference to the Board, I am compelled to come to a decision. I confirm the assessment.