P Gerber SM
Administrative Appeals Tribunal
Dr P. Gerber (Senior Member)
The question in issue in this application is whether the applicant should be allowed deductions amounting to $3,154. The applicant was a beneficiary, along with his wife and children, of a discretionary trust, and was also a director of the corporate trustee of that trust. The claim was made in respect of the year of income ended 30 June 1983.
2. This matter proceeded on agreed facts which are set out below:
"In the matter of the request for reference to the Administrative Appeals Tribunal of the decision on the objection against the assessment for the year ended 30 June 1983, the taxpayer and the Commissioner of Taxation have reached agreement in relation to the following facts:
- (1) The corporate trustee of the J & B Smith Family Trust is Prima Donna Investments Pty. Ltd.
- (2) The J & B Smith Family Trust carries on a business of management consulting services, investment and management of rental properties.
- (3) The taxpayer was at all times a director of the corporate trustee of the J & B Smith Family Trust.
- (4) The Trustee of the J & B Smith Family Trust have [sic] absolute discretion to:
- (a) accumulate trust income;
- (b) distribute trust income to any of the beneficiaries subject to the J & B Smith Family Trust.
- (5) The taxpayer is a beneficiary of the J & B Smith Family Trust.
- (6) The trustee on 28 June 1983 exercised its discretion in accordance with cl. 3.2 of the trust deed and resolved to distribute $20,969 being the balance of income of the trust to Billy Smith (the applicant).
- (7) No other resolution as to the distribution of income of the J & B Smith Family Trust was made by the trustee for the year ended 30 June 1983.
- (8) The taxpayer's only source of income for the year ended 30 June 1983 was distributions from the following discretionary trusts:
- J & B Smith Family Trust
- F & P Smith Family Trust
- (9) The taxpayer, for the years ended 30 June 1977 to 30 June 1982 and for years subsequent to the year in question, was not in receipt of any distributions of income from the J & B Smith Family Trust.
- (10) The taxpayer was not at any time an employee of the J & B Smith Family Trust.
- (11) The items of expenditure in dispute for the year ended 30 June 1983 are:$ Motor vehicle expenses 722 Entertainment of business clients 1,597 Stationary [sic] 48 Bank interest 389 Telephone 398
Motor vehicle expenses include:$ Repairs 230 Fuel 492
Bank interest includes interest paid by the taxpayer in the year of income ended 30 June 1983 on the taxpayer's personal account which for the period 1 April 1982 to 31 July 1982 was overdrawn to the extent of $19,000. Funds were drawn on the taxpayer's personal account to on-lend interest free to the J & B Smith Family Trust.
- (12) The above expenses are claimed as deductions against the distribution received by the taxpayer from the J & B Smith Family Trust.
- (13) We adopt the information contained in the attached copies of the resolution by the trustee of the J & B Smith Family Trust and the Trust Deed of the J & B Smith Family Trust as being true and correct."
3. Clause 3.2 of the discretionary trust deed, previously referred to and executed in 1977, reads:
"The Trustee may at any time prior to the expiration of any year which ends before or upon the Perpetuity Date determine with respect to all or any parts of the Income of the Trust Fund of such year:
- (i) to pay apply or set aside the same or any part thereof for all or one or more of the Primary, Secondary and Tertiary Beneficiaries living or in existence at the time of the determination;
- (ii) to accumulate the same or any part thereof;
PROVIDED THAT if the Trustee shall not by the Thirtieth day of June have exercised its discretion to pay apply set aside or accumulate the whole or any part of such income in the manner aforesaid then the Trustee shall hold the income not so paid set aside or accumulated for that year in trust for such of the Primary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares and if there be no Primary Beneficiaries then living or in existence for such of the Secondary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares and if there be no Secondary Beneficiaries then living or in existence for such of the Tertiary Beneficiaries as are then living or in existence and if more than one
ATC 320(1) absolutely as tenants in common in equal shares."
4. In accordance with the above power, the trustee resolved to exercise its discretion in the distribution of the net income of the trust for the year ended 30 June 1983. The beneficiaries to whom income was resolved to be distributed and the amounts of that income distribution were as follows:
The first $4,160 equally to A Smith C Smith D Smith E Smith.
- The next $19,500 to E Smith.
- The balance of income, if any, to the applicant.
In fact, the applicant received some $21,000 by way of distribution in that year.
5. Against this background it is submitted that the expenditure in issue constitutes allowable deductions.
6. I am unable to perceive how the above expenditure can be said to be an outgoing incurred in gaining or producing the applicant's assessable income. At its highest, he had an expectancy to be considered as a potential recipient of trust income pursuant to the power set out above; he certainly had no right to demand a share of the trust fund.
7. In these circumstances I am not persuaded that sufficient nexus has been shown between the outgoing and the derivation of the assessable income. It is, of course, trite to point out that for an expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end (cf.
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56). In Case M36,
80 ATC 280, the facts were, for present purposes, indistinguishable from those presently before me. In giving his decision, Dr Beck (Member) noted (at p. 281):
"... if a separate decision is required from a party other than the taxpayer before income arising from the expenditure can find its way to the taxpayer, it is difficult to accept that the association, or nexus, between expenditure and income required by sec. 51 exists."
Mr Hogan and I reached the same conclusion in that case.
8. I respectfully adopt Dr Beck's view of the law and have concluded that before this kind of expenditure can be deemed to be an allowable deduction, it must be demonstrated that a claimant is presently entitled to a share of the income of the trust estate.
9. For the above reasons the decision under review is affirmed.