Case R71
Judges: HP Stevens ChTJ McCarthy M
PM Roach M
Court:
No. 1 Board of Review
P.M. Roach (Member)
These references by a husband and wife as taxpayers were heard together by consent. The husband and wife were joint lessees of their residence held pursuant to a long term lease. The taxpayers were a married couple without children and testified that by their wills they had intended to ultimately benefit children of two other families. The two children were at all material times infants. Accordingly in the year 1977 solicitors were instructed to prepare a deed of settlement whereby two settlors established a discretionary trust (the ``S Trust'') to comprise property settled by the deed and other property to be subsequently acquired by the trustee. By the terms of the deed the husband taxpayer was appointed trustee of the trust and so held the trust property for the benefit of his wife, himself and the two children previously mentioned. Further, on the instructions of the husband and wife, solicitors prepared and had executed, stamped and registered an assignment of the lease of the matrimonial home from the husband and wife to the husband. There was no evidence that any document was prepared by the solicitors recording the vesting of the matrimonial home in the husband as a trustee or in any fiduciary capacity, nor was there any evidence that the solicitors were advised that the husband as assignee of the family residence was taking title as trustee.
2. After executing the assignment and before it was registered, the husband and wife both executed a document in the following terms:
``In consideration of the payment of..... Fifty thousand dollars, only ($50,000.00)
receipt of which is hereby acknowledged we, the joint lessees,....(husband)....and....(wife)....
of property comprising block 12, Section 3, division of....., in the Australian Capital Territory, situated at....., Canberra,
hereby agree to complete a transfer of the said property (subject to contract and approvals) to The
..... Trust.''
Receipts were issued by the trust to the husband and the wife, each for $25,000, but the husband
ATC 504
and wife acknowledged that no moneys passed between either of them as vendors or lenders on the one part and the husband as trustee on the other. However, they deposed to their belief that the transaction was bona fide and effective in that the interest of each of them in the unencumbered lease had a value of $25,000.3. Thereafter the wife in each year paid $3,000 to the husband by way of rent in respect of that portion of the residence used by her in the course of her own business activities. No payment was made by either the husband or the wife to the husband as trustee for any use of the property by the husband and wife for residential purposes. The husband prepared unsophisticated accounts described as a ``Capital Account'' of the trust; a savings bank account was maintained in the name of the husband as trustee; all rent from the wife was paid to that account; interest was credited to that account; and all expenses of the husband as trustee were paid from that account.
4. An assessment of income tax was raised against the husband as trustee in the year 1978 in the sum of $1,324 plus health levy of $61.12 but no further information was made available to the Board.
5. In the year of income ended 30 June 1979 the husband presented an income tax return for the trust acknowledging assessable income as follows:
$
Rent 3,000
Interest 82
-----
3,082
-----
and expenses of $931 of which, after allowing $186 for private purposes, the balance was claimed as a deduction, leaving the trust a net income of $2,337.
6. The Commissioner disallowed portion of the claim to a deduction for repairs amounting to $262 and thereon issued to the husband as trustee an adjustment sheet increasing the taxable income derived by the trust to $2,599, distributing that income to the trust beneficiaries as follows:
$
Husband 584
Wife 584
First child 584
Second child 584
Trustee 262
Fraction 1
-----
2,599
-----
7. By notice of amended assessment the Commissioner increased the taxable income of the husband from $4,493 by $584 to $5,077 and by notice of assessment assessed the taxable income of the wife at $18,736 (including $584 as derived from the trust).
8. Both husband and wife objected to the assessments. It would suffice in order to dispose of the objections and uphold the Commissioner's assessments to hold that neither objection complies with the requirements of sec. 185 in that neither objection could be described as ``stating fully and in detail the grounds on which (the taxpayer) relies''.
9. However out of deference to the taxpayers and as the point was not taken by counsel for the Commissioner, I proceed to consider the arguments as advanced at the hearing by the husband on behalf of his wife and himself as the objectors and in his capacity ``as trustee'', although in the latter capacity he was without status before the Board.
10. The husband had annexed to the income tax return of the trust a balance sheet for the trust in the following form:
``The S Trust
1979 Income tax return.
Balance Sheet, as at 30th June, 1979.
FUNDS PROVIDED $ Settlors 100.00 Loans 50,000.00 Working a/c (Comm. Bank. Aus.) 5,170.14 --------- Total 55,270.14 --------- FUNDS REPRESENTED BY: Property held, $ .... at 1977 value 50,000.00 Future provision for: Insurances 1979/80 70.00 Rates 1980 500.00 Required maintenance and repairs 4,000.00 Proposed alterations, part 700.14 --------- Total 55,270.14 ---------''
ATC 505
11. In his evidence the husband contended, and it was not disputed by the Commissioner, that maintenance of and repairs to the premises were needed and that it was necessary for him in the discharge of his duties as trustee to make such provision in that regard as he thought appropriate. In particular he relied upon the following provisions of the trust deed:
``Clause 8. Without limiting or restricting in any [way] whatsoever the powers and discretions hereinbeofre conferred upon the trustee whether in respect of the investment management or administration of the trust fund or in any other respect it is hereby declared and agreed that the trustee shall have the following powers and discretions (inter alia) -
- (xiv) To set aside out of the trust fund from time to time such sum or sums of money as may in the trustee's opinion be sufficient or necessary to meet any debt or obligation due or to accrue due including any rates and taxes.''
12. Accordingly, having made provision in the balance sheet in purported discharge of that obligation, the husband ``decided'' that there was no income of the trust which could be assessed against any person and he recorded that decision in an annotation to the balance sheet in the following terms:
``The trustee exercises discretion in making no distribution of income for the 1978/9 year. This will permit savings to be expended on the greatly overdue maintenance and repair of the Trust property. Funds available are barely adequate for work necessary, now, and the small additional sum designated as towards future alterations is a contingency sum for immediate work and may not be available as intended.''
13. Therein lay the fundamental error on the part of the taxpayers. It appears that the husband and wife believed that the obligations between the trustee and the beneficiaries created by the Deed could prevail over the Commissioner's obligation, cast upon him by statute, to levy tax upon the income of the trust by raising appropriate assessments pursuant to the provisions of the Income Tax Assessment Act. The errors of the husband as trustee were further compounded by not realising -
- (a) that the deed of trust specifically prohibited the accumulation of income; and
- (b) that the obligation created by the quoted clause related to the ``trust fund'', which by definition could not comprise any accumulation of income.
14. However, as my colleague Mr. McCarthy has pointed out, just as the taxpayer's reading of the Deed of Settlement was selective, so too was the reading of it by the Commissioner, who appears to have overlooked the provisions of cl. 17 which provide:
``17. Notwithstanding anything to the contrary hereinbefore expressed or implied no discretion or power by this settlement conferred on any person or on the trustee shall be exercised and no provisions of this settlement shall operate so as to confer or be capable of conferring any benefit on the settlor (sic) or the trustee or any person (notwithstanding that he be otherwise within the description of beneficiaries) who has paid money or transferred property to the trustee to be held on the trusts created by this Deed of Settlement, as from the time when any such latter person pays money or transfers property aforesaid.''
15. It appears that if those terms are given their full effect the taxpayer husband could never have been a beneficiary of the trust, and it is also possible that his wife may never have been entitled to benefit as a beneficiary of the trust for she had transferred property to the trust and had paid money to the trust. It is therefore possible that the children are the only named beneficiaries entitled to benefit pursuant to the trust and that they may call upon the trustee to account to them for the entire income of the trust since the date of settlement. In addition they might call on the trustee to account for the benefits of rent-free residence in the trust property which he has enjoyed since its acquisition.
16. On the other hand the taxpayer might succeed in persuading a Court exercising equitable jurisdiction that cl. 17 is to be so construed as to allow the taxpayers to benefit pursuant to the trust; or persuade such a Court that the Deed should be rectified to make it accord with the original intentions of the settlors and the trustee and the current belief of the trustee; or that for some reason the transfer of the residence to the trust should be set aside; or
ATC 506
that the apparently wide powers conferred by cl. 19 whereby the Deed may be amended might be exercised to achieve the objectives of the trustee; or that the trustee should be relieved from accountability for any breaches of duty there may have been on his part as a trustee.17. As it is beyond the power of this Board to resolve such problems I say no more of them.
18. By the express terms of the deed of trust the net income of the trust to the 30th day of June in each year was payable -
``To all or any one or more of the beneficiaries or such of the issue of the beneficiaries as shall then be living as the trustee in its (sic) absolute discretion determines...
PROVIDED HOWEVER that if the trustees (sic) shall not have exercised such discretion in respect of the whole or any part of such net income at any annual accounting period ending on the 30th day of June then such of the beneficiaries as shall be living at the expiration of such accounting period shall share equally in such whole or such part of such net income and be entitled to be paid the whole thereof in equal shares.''
As there was no resolution by the trustee as to the distribution of income between beneficiaries it follows that subject to my comments in para. 14 to 17 hereof, the four named beneficiaries were equally entitled to the net income of the trust and, as $584 is less than 25% of the net income of the trust in the year in question, neither the assessment against the husband nor the assessment against the wife is excessive.
19. Counsel for the Commissioner raised in the course of argument an alternative contention that in all the circumstances the husband did not hold title to the property in any fiduciary capacity, but rather as a beneficial owner. I find no merit in the argument, but having found in favour of the Commissioner for reasons already given, I do not comment further.
20. For the foregoing reasons I disallow the objections of both taxpayers and uphold the Commissioner's assessments.
Claims disallowed
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