Federal Commissioner of Taxation v. Marbray Nominees Pty. Ltd.

Tadgell J

Supreme Court of Victoria

Judgment date: Judgment handed down 9 December 1985.

Tadgell J.

This appeal by the Commissioner of Taxation from a decision of a Board of Review raises two basic questions. The first is whether certain claims made by the respondent for deductions from its assessable income for the years 1980 and 1981 should have been allowed by the appellant. The second is whether the appellant properly assessed the respondent for income tax at all in those years.

The same questions arose before the Board of Review, which answered the first partially but substantially in favour of the taxpayer and the second wholly in favour of the taxpayer. In the result the Board cancelled the appellant's assessments for the two years in question, thus provoking this appeal. Logically, perhaps, the second question should be considered first. As will appear, however, the second raises what is for practical purposes a subsidiary matter and I shall therefore go to the first question.

The Board's decision on the first question turned appreciably on matters of fact, and particularly on the appropriate characterization of facts, as will my own. The evidence before the Board was, by consent, treated as evidence on the appeal and the respondent added a short affidavit filed here. The evidence discloses the following.

Before 1972 Mr R.P. and Mrs N.B. Alberts successfully carried on in partnership a business that involved direct selling to consumers of cosmetics and other products. In March 1972, with a view to expanding their business activities, they bought from one Smith a farm property of some 560 acres near Broadford for $47,364. The price was payable as to $10,000 within 90 days of signing the contract (upon payment of which deposit and acceptance of title the purchasers became entitled to vacant possession) and as to the residue over seven years, with interest at seven per cent per annum. Mr and Mrs Alberts farmed the property in partnership over the next three years, making losses in the first two, but a modest profit in the third, continuing their profitable direct-selling business in the meantime.

On 12 June 1975 a discretionary trust called ``The R.P. and N.B. Alberts Family Trust'' was constituted by deed of settlement. The respondent company was made trustee and Mr and Mrs Alberts and their children, then infants, were designated as beneficiaries. The trust was established, as appears from the evidence of Mr Alberts, in order to provide a vehicle for conducting all the family's income-earning activities. The direct-selling business and (it seems) some farming stock and chattels were accordingly sold by Mr and Mrs Alberts to the trustee on 1 March 1976 and the price was credited to a so-called partners' loan account in the trustee's books. By contract of sale dated 1 July 1976, the partners also sold the farm property to the trustee for $244,000. This price was the amount of a valuation provided on 24 November 1975 by the Valuer-General's office. The contract of sale was in the 1964 copyright form, but contained no terms for the payment of the price and no provision for interest. It did provide, however, that the purchaser should be entitled to vacant possession ``upon acceptance of title and payment in full of the purchase money''. Settlement of the land transaction was effected in December 1976, when Smith was paid out under the prior contract of sale between him and Mr and Mrs Alberts, and there was a transfer at their direction to the respondent. No payment was made to Mr and Mrs Alberts upon the settlement. According to the evidence of Mr Alberts, ``... when the Trust purchased the farm, there was a debt to the partnership and

ATC 4752

the loan obtained by the Trust to purchase the partnership was to be paid to the partners, but the partners in turn left the funds as a loan to the Trust''. The partners' loan account was again credited accordingly.

The purchase of the farm property by the respondent was financed as to part by a mortgage loan of $100,000 obtained by the respondent on the security of the property from the National Mutual Life Association of Australia Limited for 10 years at interest of 14 per cent per annum. The balance of the loan money remaining after the payment of the amount due to Smith and associated costs and expenses was $77,412. This was placed by the respondent on deposit at call with a merchant bank and was drawn on progressively thereafter, according to the respondent's needs.

The respondent, of which Mr and Mrs Alberts were directors, carried on the direct-selling business and worked the farm property throughout the years of income ended 30 June 1977 to 30 June 1980 inclusive, and during part of the year ended 30 June 1981. On 21 March 1978 the respondent borrowed a further $60,000 from Petersville Staff Superannuation Fund. The duration of the loan was initially two years at an interest rate of 13 per cent per annum, but it was later extended to three years at interest of 14 per cent per annum, payable quarterly. The respondent was unable to provide evidence of all the terms on which the loan of $60,000 was obtained because the file of the solicitors who acted for it in the matter was unavailable. The Board of Review was not satisfied to conclude that the proceeds of the loan, or all of them at any rate, were received by the respondent. As I understand the Board's reasons for decision, it was really unpersuaded that the respondent had borrowed the $60,000 at all. The Board's reservations seem to have stemmed in part from its uncertainty, having regard to the state of the evidence, how the proceeds of the loan were put to use. The manner in which the loan moneys of $100,000 and $60,000 were used is central to the first question raised on the appeal, and I shall have more to say about it anon. At present, I wish only to say that in my opinion the evidence that was before the Board, supplemented as it was by the further evidence before me, supports the conclusion that the respondent did borrow $60,000, as well as $100,000, as I have described.

Having had some difficulties with the management of the farm property, which it is unnecessary to consider in any detail, the respondent in October 1980 sold off all but 95 acres. On settlement in January 1981, the loan of $100,000 was repaid. Toward the end of 1981 - i.e., outside the second of the two financial years with which the appeal is concerned - the respondent sold the remainder of the farm property.

In the 1980 and 1981 years of income the direct-selling business conducted by the respondent continued to be profitable but the farming operation ran at a loss. The respondent claimed that net losses on farming operations of $27,942 in the 1980 year and of $26,048 in the 1981 year were deductible from its total income in each year. The appellant disallowed each claim on the basis, according to adjustment sheets, that ``... the operations for the period are not considered sufficient to constitute the carrying on of a business of primary production for income tax purposes''. The notices of objection that were referred to the Board sought to assail that conclusion. Accordingly, its validity was an important issue before the Board and the Board found in favour of the taxpayer upon it. The appellant's first ground of appeal to this Court was that ``there was no evidence before the Board of Review upon which the Board could properly conclude that the respondent was carrying on a business of primary production in each of the years of income''. That ground, however, was expressly abandoned at the hearing of the appeal here.

The appellant had also argued before the Board that even if (contrary to his primary submission) the taxpayer did carry on a business of primary production in the two relevant years, certain of the outgoings that were said to have contributed to the loss on farming operations were not referable, or not wholly referable, to the business and were therefore not properly deductible under sec. 51(1) of the Income Tax Assessment Act. The outgoings on which attention was centred were interest on, and expenses associated with, the loans of $100,000 and $60,000 to which I have referred. In detail, these outgoings were:

                                                1980       1981
                                                  $          $
      National Mutual loan
      of $100,000
      Interest                                  12,381      8,114
      Expenses                                     390        390
      Consideration for early
        repayment                                           5,862
      Petersville loan of $60,000
      Interest                                   7,804      6,303
      Expenses                                                128
                                                ------     ------
                                                20,575     20,797
                                                ------     ------

The Board of Review allowed a deduction for the interest and expenses referable to the $100,000 loan, but not for the amount of $5,862, being consideration for early repayment claimed in the 1981 year. All claims referable to the $60,000 loan were disallowed. In his notice of appeal the appellant contended that the Board was wrong to have allowed any of those outgoings as deductions under sec. 51(1). By way, in effect, of cross-appeal the respondent contended that the Board was wrong to have disallowed any of them. Now that the appellant does not seek to challenge the Board's finding that the respondent did carry on the business of primary production in the relevant years, I understand his attitude to the outgoings referable to the $100,000 loan to be this: that they are allowable as deductions only to the extent (if at all) that they were incurred in gaining assessable income from a business of primary production or in carrying on a business of primary production for the purpose of gaining or producing assessable income; and I understand the appellant to concede that some apportionment might be appropriate to the extent that the respondent can demonstrate that the outgoings were so incurred and were not of a capital, private or domestic nature. Save to that extent, the appellant contends that none of the outgoings in question is properly deductible. It was common ground that the deductions were allowable, if at all, only under sec. 51(1).

The respondent's contention is, and before the Board was, that the borrowings of $100,000 and $60,000 respectively were made at arm's length and essentially for the purpose of enabling it to conduct its businesses; and that interest and associated borrowing expenses were incurred by it as necessary incidents of that conduct.

The balance sheets of the respondent over the years show that its working capital was minimal. The loan moneys were used, in effect, as a substitute for capital. According to Mr Alberts, what happened in relation to the balance of the $100,000 loan was that, from time to time, moneys were withdrawn from the deposit with the merchant bank and paid to the credit of the respondent's trading account with the Commonwealth Trading Bank. Drawings were made on that account for use ``in conjunction with the running of our direct-selling business, with the running of the farm and drawings made for private purposes which should be [debited] to our [partners'] loan account''. Substantially the same was done with the proceeds of the loan of $60,000.

In fact, rather more than half of the $100,000 loan, and almost three-quarters of the $60,000 loan, was debited to the partners' loan account in the books of the respondent after having been disbursed by the respondent from time to me to meet private debts of Mr and Mrs Alberts. The appellant argued that this, together with the information provided to the lenders of the purposes for which the respondent intended to use the loans, indicates that the borrowings were not in truth wholly incidental and relevant to the respondent's businesses. Rather, the appellant contends, the loans were obtained principally to meet the private purposes of Mr and Mrs Alberts; they, rather than the respondent, were the persons intended to derive the chief advantage of the loans; the interest payments and borrowing expenses incurred in respect of them were, therefore, not business outgoings but outgoings of a private or domestic nature.

In my opinion the Board of Review was right to allow the deductions that it did allow in respect of the loan of $100,000. I consider also that the deduction of $5,862 claimed in respect of the loan of $100,000, that the Board of Review disallowed, should have been allowed. I consider further that the deductions claimed in respect of the loan of $60,000 should have been allowed.

It was argued for the appellant that the debt incurred by the respondent to Mr and Mrs Alberts upon the sale of the land by them to it should not be treated as arising from a ``commercially real'' transaction. The transaction, however, unquestionably gave rise to a recoverable debt. To go further and say

ATC 4754

that the transaction, and the debt to which it gave rise, were ``real'' or ``commercially real'' or ``genuine'' does not help the analysis. Before the execution of the contract of sale between Mr and Mrs Alberts and the respondent, Mr and Mrs Alberts were the proprietors in equity of an interest in the land in fee. After the execution of the contract of sale and its completion they ceased to have that interest, transferring it to the respondent; and the respondent, having arranged to pay Smith out, also became the legal proprietor. The consideration paid or incurred by the respondent was a money sum equal to the value of the land, independently assessed. There is nothing in the evidence to suggest that so much of the purchase price as remained unpaid by the respondent to Mr and Mrs Alberts was not wholly recoverable, and everything suggests that it was. Had the respondent gone into liquidation before Mr and Mrs Alberts were paid, there is no doubt that the land would have been an asset available for the benefit of the creditors and that the debt owing to Mr and Mrs Alberts would have been provable in the winding up. That the contract of sale did not provide for interest on the debt, and that no security for the debt was taken, do not affect the validity of that conclusion. Moreover, it cannot be gainsaid that the respondent used the land in the course of its farming activities. The Board of Review found that those activities involved the carrying on of a business of primary production, and that finding was not attacked: this appeal proceeded on the footing that the finding was correct. Plainly, the respondent could not have used the land in that way without obtaining possession; and the possession it obtained was referable to the contract of sale.

There was documentary evidence before the Board of Review, prepared in fact by the appellant and ultimately tendered by the respondent by consent, that showed the bulk of the respondent's outgoings in the years in question to have been paid at the direction of Mr and Mrs Alberts to meet debts of theirs having no connection with the respondent's business. When payments of this kind were made the loan account of the partners in the books of the respondent was correspondingly reduced.

The system employed, and the steps taken to implement it, were said on behalf of the appellant to demonstrate that the loans were taken by the respondent and applied for its private or domestic purposes so that sec. 51 could not apply. The argument was that the real advantage sought to be gained by the respondent in obtaining the loans was not primarily referable to any incident of its business, but was to afford a means whereby private debts of Mr and Mrs Alberts could be paid out of borrowed money, the cost of borrowing which was deductible in the hands of the respondent. That conclusion was said to flow from a consideration of the essential purpose for which the loans were obtained, which in turn was to be ascertained by reference to the chief use to which the loan moneys were put. The cases of
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 and
Ure v. F.C. of T. 81 ATC 4100 were cited for the appellant in support of that conclusion. Each of these decisions, and
F.C. of T. v. Ilbery 81 ATC 4661, and others in recent years, such as
Deane v. F.C. of T. 82 ATC 4112 and
F.C. of T. v. Groser 82 ATC 4478 and
F.C. of T. v. Kowal 84 ATC 4001, recognise that the deductibility of an outgoing by virtue of sec. 51(1) depends upon its factual characterization as one with an attribute recognised by the provision. In order to be deductible, the outgoing must be shown by the evidence to have been incurred incidentally and relevantly to an end described in the subsection. That evidence of the purpose or motive for the incurrence of the outgoing can be relevant to a determination of its essential character is no more than common sense. The innumerable decisions in which the exercise of characterization has been undertaken upon a consideration of sec. 51(1) do not indicate, however, that the subjective purpose or motive for the incurrence of an outgoing will necessarily override a conclusion reached from an objective consideration of the relevant facts.

It does not strike me as forced or unreal to conclude (as I do) that the respondent borrowed the money it did for the purpose of assisting it to buy the farm land, to acquire title to and possession of it and to provide what was in effect working capital to enable it to operate the farm and the direct-selling business. In order that the respondent could acquire title, it was at least necessary, on any view, that Smith be paid out; and it was also necessary that some arrangement be reached between the respondent

ATC 4755

and Mr and Mrs Alberts. The course Mr and Mrs Alberts took in allowing the respondent to have possession without paying them the whole of their debt was no doubt, on one view, a generous one; but it is easy to see why it was convenient and advantageous to them to take it. They were doing no more than realizing a capital asset in what they apparently regarded as the most beneficial way to them. What they did was to sell to a trustee that was not to pay them immediately, but was to exploit the property sold in their interests and in the interests of their children. Loans obtained by the trustee that could have been used to pay part of the purchase price were applied to pay out Smith, to provide working capital and (so far as the loans would go) to pay Mr and Mrs Alberts the debt owed to them as and when they required it to be paid.

If the respondent had borrowed money and paid it immediately to Mr and Mrs Alberts as part of the purchase price for the farm property, it is difficult to see that the expenses of the loan and interest would not have been deductible, irrespective of the use to which Mr and Mrs Alberts put it when they received it. Again, if the respondent had used the borrowed money during the two years of income in question merely as working capital for its day-to-day business expenses, paying none of it to Mr and Mrs Alberts, the expenses of the loan and interest would surely have been deductible as outgoings incurred in circumstances contemplated by sec. 51(1). The fact is that the respondent applied a substantial part of the loan moneys in discharge of liabilities antecedently incurred to Mr and Mrs Alberts in acquiring a business asset - the farm property - and in my opinion the business character of the outgoings as outgoings of the respondent, so far as they were incurred to obtain the loans and to meet the interest liabilities, is obvious. It is not to the point to say that the purpose of the acquisition of the farm property by the respondent was to confer a business advantage (including an income tax advantage) on Mr and Mrs Alberts. They were, of course, entitled to arrange their affairs as they did; and, when assessing the respondent to tax, the appellant was concerned with the respondent's business and not with theirs, taking the respondent's business as he found it.

There is, so far as I can see, no point of principle to be derived from any of the authorities on which the appellant relied upon this aspect of the case that is at all inconsistent with the conclusions I have reached. In particular, I do not consider that the present case raises what Deane and Sheppard JJ. in Ure's case described as a difficult problem, in characterizing an outgoing, of assessing ``what weight, if any, is to be given to indirect objects which a taxpayer had in mind in incurring the outgoing''. Given that the respondent taxpayer carried on the business of primary production (as the appellant now accepts) and that it did so upon the property purchased in circumstances that gave rise to an unimpeachable debt to the vendors (as I conclude), there were in truth no relevant indirect objects to be attributed to the taxpayer in borrowing the money. The taxpayer's object was, I think, merely to provide itself with funds in order to meet its business liabilities. The objects that the vendors to the taxpayer had in deciding that they would sell and that it would buy the land were, in the circumstances of this case, irrelevant. There was no sham transaction; there was no underhand, undercover or devious design which might taint the transaction. The argument of the appellant that the outgoings in question were of a private or domestic nature of the respondent should therefore fail.

The appellant advanced an additional and independent argument against the deductibility of the amount of $5,862 paid in the 1981 year as consideration for the early repayment of the loan of $100,000. The submission, which the Board of Review accepted, was that the payment was an outgoing of a capital nature and therefore outside the scope of sec. 51(1).

The early repayment of the mortgage loan of $100,000 in the circumstances I have briefly mentioned was governed by the following condition of the mortgage:

``36. Notwithstanding anything to the contrary elsewhere herein contained or implied the Mortgagor may on any interest payment date falling not less than one year after the date hereof repay to the Mortgagee the whole of the principal sum then remaining owing provided that the Mortgagor pays therewith, firstly interest to the date of payment on the amount so repaid and, secondly an amount (as consideration for the Mortgagee's agreeing to accept such early repayment) equal to interest on the amount so repaid for a period of six months

ATC 4756

at the acceptable rate of interest then payable by the Mortgagor hereunder.''

The funds with which the respondent made the repayment of the loan came from the sale of 470 acres of the farm property, contained in separate instruments of title from those for the 95 acres retained. The 470 acres were sold essentially because the horse-breeding project that the respondent had conducted was losing money. Part of the loss was no doubt attributable to the interest being incurred on the mortgage loan of $100,000 and the opportunity was taken, not surprisingly, to terminate that recurring expense. The Board of Review treated the farm property ``for practical purposes'' as the respondent's only income-producing asset, the purchase of which had been financed essentially by the loan of $100,000 which, in the absence of shareholders' funds, ``formed part of the company's fixed capital''. The Board regarded the payment of $5,862 as ``an outgoing of a capital nature because that payment was made in order to free funds from a mortgage some 5 ¾ years prior to the date on which the mortgage was due to mature in ordinary circumstances. The fact that there was a consequential saving in the future of interest outlays was simply a by-product, or side-effect, of the withdrawal of capital. That interest saving, of itself, played no part in the decision taken to make the capital repayment.''

This analysis involved a misapprehension of several facts and, in my opinion, led to a wrong conclusion. The farm property was not for ``practical purposes'' or otherwise the respondent's only income-producing asset, for the direct-selling business continued all along to be profitable. The loan of $100,000 had been used to assist not only in the purchase of the farm property but in other aspects of the respondent's business. The farm property was, of course, a capital asset, but it is not right to say that the loan of $100,000 was linked solely to that asset. It is therefore misleading to regard the repayment of the loan, and the associated incurrence of the outgoing of $5,862, simply as a necessary incident of the realization or withdrawal of the capital asset. Mr Alberts did say in his evidence (I think incorrectly) that ``the conditions of the loan as I recall were that should any part of the property be sold the loan was repayable in full''. The mortgage document did not, so far as I can see, impose any such condition, and it would presumably have been open to the respondent to have sold the 470 acres subject to the mortgage. The sale in fact enabled the respondent to repay the loan, but it was not essential that the respondent repay it upon the sale. The respondent needed the proceeds of sale to repay the loan, but it did not need them for any other purpose, so the repayment was no doubt commercially prudent in order to save future interest. Mr Alberts swore that the saving of interest was a consideration that led to the decision to make the repayment, albeit at an immediate extra cost of $5,862. The evidence does not sustain the Board's assertion that the saving of interest was merely a ``side-effect'' and that it did not influence the respondent's decision to make what the Board called ``the capital repayment''. While it is true that the decision to sell the 470 acres was essentially dictated by the fact that the retention of it was uneconomical, the outgoing of $5,862 was not, as I understand it, incurred for the purpose of allowing the sale to proceed, or as a necessary incident of the sale. The incurrence of the outgoing of $5,862 was, however, a necessary incident of the repayment of principal, and it was in my opinion incurred as a business expense of a non-capital nature.

The attribution to an outgoing of the nature of capital on the one hand or revenue on the other again involves an exercise in characterization. A price to be paid for the surrender of a capital asset will ordinarily be regarded as attributable to capital account because, in the general course of commerce, the benefit to be derived from the surrender is appropriately to be treated as a charge on capital. If, however, an outgoing is fairly to be seen as a loss or an expense necessarily incidental to the continuing conduct of the business, and not as providing an accretion to fixed capital, it will ordinarily be inappropriate to charge it to capital account.

If in this case the sum of $5,862 had been paid as a price, in effect, to rid the respondent of a burdensome capital asset, then I should agree that the outgoing should be a charge on capital and non-deductible:
Mallett v. Staveley Coal & Iron Co. Ltd. (1928) 2 K.B. 405 at p. 422. As it is, I consider that the evidence reveals the payment of $5,862 to have been incurred in order to rid the respondent of a recurring obligation to pay interest upon a debt

ATC 4757

that was part of the expenses of conducting the business as a whole, rather than to rid it of a proportion of the farm property - a capital asset. I have carefully considered the cases relied on by counsel for the appellant, including especially
Arizona Copper Co. Ltd. v. Smiles (1891) 3 T.C. 149; Mallett's case (supra);
Anglo-Persian Oil Co. v. Dale (1932) 1 K.B. 124 and
W. Nevill & Co. Ltd. v. F.C. of T. (1936-1937) 56 C.L.R. 290, together with the decisions referred to in them, and others. Having done so, I cannot see that the outgoing of $5,862 satisfies any of the requirements for an expenditure of a capital nature recognised by the authorities.

All the deductions in dispute were in my opinion allowable because they were what can compendiously be called business expenses of the respondent covered by sec. 51(1). They were expenses incurred in connection with the loans of $100,000 and $60,000 the proceeds of which were used for business purposes, both for the primary production side of the respondent's business and for the direct-selling operation. Upon the appeal to this Court, however, the appellant raised a point that was not taken before the Board of Review. It was, in effect, that the respondent's two notices of objection did not attribute any of the expenses to the direct-selling operation, but grouped them all under the heading ``Primary Production Loss''. Counsel argued that the expenses referable to those proportions of the loan moneys as were applied to the direct-selling operation were therefore not allowable because sec. 190(a) of the Income Tax Assessment Act limits the respondent to reliance on the grounds stated in his objection. It is true that the notices of objection make no reference to any expenses claimed as a deduction for the purposes of the direct-selling operation. This is perhaps explained (although not necessarily justified) by the fact that the respondent's income tax returns treated all the relevant expenses as farm expenses. The farm expenses claimed in each year's return extended beyond those associated with the two loans and were, of course, comprehensively disallowed on the footing (according to the adjustment sheets) that no business of primary production was carried on. In making his assessments the appellant added back in each year the amount claimed as a ``loss from primary production''. The notice of objection for each year was evidently designed to deal with the added assessable income and to explain why it was contended that the addition to the income as returned should not have been made. So far as is relevant, the ground was the same for each year (except for the amount of the deduction claimed) and read as follows:

``Primary Production

         Loss           [$27,942 for 1980]
                        [$26,048 for 1981]

These are expenses, losses and outgoings within the meaning of Section 51(1) of the Income Tax Assessment Act to the extent that they were incurred in gaining and producing assessable income, and are necessarily incurred in carrying on work for the purpose of gaining and producing such income, are allowable deductions and were not losses or outgoings of capital, or of a capital, private or domestic nature, nor were they incurred in relation to the gaining or production of exempt income.

The business carried on is the breeding of Appaloosa Horses and we were primary producers within the meaning of Section 6(1) of the Income Tax Act carrying out primary production meaning production resulting directly from (a) cultivation of land and (b) maintenance of animals for the purpose of selling them or their bodily produce including natural increase.

The market for these Horses continued to be very depressed during the year and sales were restricted.''

The question now arising is whether the ground so stated is sufficient to allow the respondent to justify the deductions under sec. 51(1) on the footing that some of the outgoings incurred were, as to a proportion of them, not incurred as primary production expenses, but as expenses of the other arm of the respondent's business. I leave to one side the question whether sec. 190(a) places the Commissioner of Taxation, as an appellant to this Court from a decision of a Board of Review, in the privileged position of being entitled to rely on it here, although he did not rely on it before the Board of Review. The view I take of the merits of the matter renders a discussion of that question unnecessary, for in my opinion the respondent's evidence and argument before the Board of Review and in this Court did not travel outside the ground stated in the notices of

ATC 4758

objection. Although the relevant ground in each notice is headed ``Primary Production Loss'', it was not strictly necessary that the respondent should demonstrate that it carried on a business of primary production as such in order to succeed in obtaining deductions under sec. 51(1). It was sufficient to demonstrate that it was carrying on a business or operation in the course of which it incurred the outgoings and that sec. 51(1) applied to them. In its return the respondent described the nature of its business as ``trust'' and nowhere in terms did it describe itself as carrying on a business of primary production. It did, however, include separate accounts for its operation conducted on the farm land, which it referred to as ``primary production'', and in respect of which it claimed a business loss. The question whether the respondent carried on a business of primary production was raised by the appellant in his adjustment sheet issued with each assessment and the clear implication was that the appellant was not satisfied that sec. 51(1) applied to the expenses for which deductions were claimed. In the first paragraph of its ground of objection for each year, under the heading ``Primary Production Loss'', the respondent plainly raised its contention that sec. 51(1) did apply to the expenses claimed. The second paragraph did go on to assert in effect that the business was one of primary production, but that did not constitute a necessary part of the ground so much as a provision of particulars. The essential ground stated was that sec. 51(1) applied and it would have been sufficiently stated without the addition of the second paragraph. Section 190(a) of the Act does not require that a taxpayer be limited, in making good the grounds stated in his objection, to any particulars provided in addition to the grounds properly so-called. I am of opinion, therefore, that this point fails.

The remaining question for decision is whether the net income of the respondent in each year was assessable in the hands of the respondent as income to which no beneficiary was presently entitled in terms of sec. 99A of the Income Tax Assessment Act. The appellant assessed the respondent as though sec. 99A applied, but the Board of Review held that it did not apply and cancelled the assessments. The answer to the question depends upon the proper construction of the deed constituting the trust of which the respondent is trustee.

By the deed the respondent held the trust fund (i.e., a settled sum of $100 and relevant additions, which in the event included the property sold to it by Mr and Mrs Alberts), together with accumulations of income which it was empowered to determine to make, on the trusts therein expressed. By cl. 3(1) the respondent was empowered, before the expiration of any accounting period, to determine to deal in various ways with the income for the period, including paying, applying or setting it aside for any of the general beneficiaries (as defined) or accumulating it. Subclauses (3), (4) and (5) of cl. 3 provided as follows:

``(3) Any income which the Trustees shall accumulate shall be and be dealt with as an accretion to the capital of the Trust Fund but the Trustees may at any time or times resort thereto and may pay or apply the whole or any part thereof as if it were income of the Trust Fund.

(4) The Trustees 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 persons described in sub-clauses (1) (2) (3) and (4) of clause 4 hereof.

(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.''

Clause 4 provided:

``4. As from the Vesting Day the Trustees shall stand possessed of the Trust Fund and the income thereof -

  • (1)...
  • (2) insofar as any part of the Trust Fund shall not have been disposed of in accordance with sub-clause (1) of this

    ATC 4759

    clause if one Specified Beneficiary is named or described in the Schedule then if such Specified Beneficiary shall be living on the Vesting Day in trust for such Specified Beneficiary absolutely and if more than one Specified Beneficiary are so named or described in trust for such of the Specified Beneficiaries as shall be living on the Vesting Day as tenants-in-common in equal shares absolutely provided that any child living on the Vesting Day of any Specified Beneficiary who shall have died before the Vesting Day shall take (and if more than one as tenants-in-common in equal shares) the share which such deceased Specified Beneficiary would have taken if he had been living on the Vesting Day and any child living on the Vesting Day of any child who shall have died before the Vesting Day of any such deceased Specified Beneficiary shall take (and if more than one as tenants-in-common in equal shares) the share which such deceased child would have taken if he had been living on the Vesting Day and the descendants living on the Vesting Day of any of such lastmentioned child or children who shall die before the Vesting Day shall take per stirpes the share which such deceased child or children would have taken if he or they had been living on the Vesting Day;
  • (3)...
  • (4)...''

The respondent purported to make determinations, pursuant to cl. 3(1), of the income of the trust for the 1980 and 1981 years. It was common ground, however, that the determinations were made out of time and that each was therefore ineffectual. The question before the Board of Review and before me was whether cl. 3(4) applied in those circumstances automatically to direct the respondent to hold the net income for each of the 1980 and 1981 years ``in trust for the persons described'' in cl. 4(2). The expression ``accounting period'' was defined to mean, in effect, each period of 12 months ending on 30 June in each year. The ``Vesting Day'' was defined (in the absence, as was the case, of any other day or date specified or appointed by the trustee) to mean 30 June 2020. The ``Specified Beneficiaries'' were defined (in the circumstances) to be the children of Mr and Mrs Alberts.

The argument for the respondent, which was accepted by the Board of Review, was that the combined effect of cl. 3(4) and 4(2) was that, in default of any effective determination by the respondent to the contrary, the respondent held the net income for each relevant year for the specified beneficiaries, being the three children of Mr and Mrs Alberts, as tenants-in-common in equal shares. The contrary argument for the appellant, both before the Board of Review and before me, was that it is impossible to tell before the arrival of the Vesting Day whether any and which of the specified beneficiaries would be ``living on the Vesting Day'' in terms of cl. 4(2). The appellant's argument involved saying that ``the persons described'' in cl. 4(2) were those described therein who were living on that day; and that until that day it could not be said that any person had a present entitlement to income in terms of sec. 97 or 98 of the Income Tax Assessment Act.

The competing arguments are to be resolved by a determination of what is meant in cl. 3(4) by the expression ``the persons described'' in cl. 4(2). Plainly, I think, ``the persons described'' in cl. 4(2) are the persons who answer the description of ``Specified Beneficiaries'' at the time cl. 3(4) operates. Clause 3(4), when read with cl. 3(5), is evidently designed to render the net income to which it applies subject to a separate and specific trust apart from the trusts on which the trust fund (as defined) is to be held. Clause 3(4) is obviously intended to be capable of operation upon the net income of the trust fund from year to year, save in so far as that income is not the subject of a determination pursuant to cl. 3(1) to pay or apply it or to set it aside or accumulate it. Clause 3(4) and (5) could not so operate if the expression ``persons described'' in cl. 3(4) were construed to mean, in effect, ``the Specified Beneficiaries who shall be living on the Vesting Day''. Clause 3(4) is not concerned at all with the factual position on the Vesting Day. It is concerned to identify individuals, alive at the time it operates, by reference to their description in cl. 4 and not by reference to their condition on the Vesting Day.

It follows that, in accordance with the deed, the respondent held the net income of the trust in each of the two years in question on trust for

ATC 4760

the specified beneficiaries. The Board of Review was in my opinion right to conclude that the assessments pursuant to sec. 99A were unjustified and to direct that they be cancelled.

I take the opportunity to say that, since there were two objections referred to the Board of Review on two decisions of the Board, each of which was impugned, there should in strictness have been two appeals to this Court. There might have been a different result on appeal in respect of each decision, in which case the order on the appeal would have been different for each. As it is, the appropriate order is simply that the single appeal is dismissed with costs, to be taxed.

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