RK Todd DP
Administrative Appeals Tribunal
R.K. Todd (Deputy President)
This is an application for review of an objection decision in relation to the year ended 30 June 1981 (``fiscal 1981''). A similar point arises in relation to fiscal 1982, but the parties agreed that the Tribunal should proceed to deal only with fiscal 1981, leaving the later year to be resolved in accordance with the decision in this case. I refer to the evidence contained in the transcript of the oral evidence given in these proceedings and in the large number of documents tendered in evidence and marked as exhibits. I now set out my findings of fact.
2. The applicant is a young man who has been making his own way in the world. His father came as an immigrant to Australia many years ago and has succeeded in business. That business does not however interest the son, and he appears to have attempted, while remaining on good terms with his father, to escape involvement in his father's business affairs, and in the family ramifications of that business. The events which occurred were not of his making and indeed were unknown to him.
3. In fiscal 1981 the applicant was a student and had no income from employment. He said that he had received some money from his father ``in assistance towards my studies''. He said also that no part of those moneys were ever identified as coming from any trust. There was however a family trust, which I shall call the E Trust, the trustee whereof was a company which I shall identify as KN Pty. Ltd. The business of the father, whom I shall call H, was carried on by a trustee company as trustee for a unit trust. I shall call that trustee company Y Pty. Ltd., and the trust, the Y Trust. The beneficial ownership of the units was reposed in two companies. The first held the units representing H's interests, and the other, those representing the interests, at the time, of another person or persons. The company that held the units representing H's interest was KN Pty. Ltd., mentioned above as trustee of the E Trust.
4. In fiscal 1981 there was a distribution to the E Trust of an amount of $110,532, apparently from the Y Trust. The E Trust had other gross income of $83,153 and, oddly enough, ``stake winnings'' of $11,289. The investment clause was wide enough to permit this. To older minds the concept of trustee investment seems now thoroughly stretched, but in a world where tax advisers of one kind and another do such things as ``abolish'' trusts, and cheerfully torture daily the concepts embodied in the Chancellors' great gift to legal science, that should not cause too much surprise. There were expenses of $52,334, including ``training fees'' of $16,735, leaving $152,440 available for distribution. That distribution was said to be of $150,000 to a company which I shall call ``49th TS''; of $1,040 to each of RR and LR, the daughters of H's de facto wife; and of $360 to the applicant. It is upon how this came about, and more
ATC 1060particularly upon whether it in truth came about, and if it did so upon what happened thereafter, that this case chiefly depends.
5. The situation was that, having the stated sum of $152,440 available for distribution, certain persons appeared on the scene and advised H or his advisers that KN Pty. Ltd., as trustee of the E Trust, might engage in a transaction that would, without taint of illegality, reduce the burden of tax. The persons who gave the advice may be referred to as the G interests. These interests had within their corporate network the company called 49th TS referred to above. That company was in turn the trustee of a trust which I shall call the I Trust.
6. Various steps were involved in the story to this point, but it should be mentioned here that the transactions which followed involved the G interests receiving a fee for their services of $22,500 but with the remaining $127,500 of the $150,000 said to have been distributed being returned to the E Trust as a non-recoverable loan, or a loan not to be recovered. The initiation of the whole program was dependent however on the terms of the E Trust, to which I now turn.
7. Clause 3(i) of the deed of trust (Exhibit C) provided as follows:
3(i) THE Trustee may in each Accounting Period until the Vesting Day pay apply or set aside the whole or such part (if any) as he shall think fit of the net income of the Trust Fund of that Accounting Period to or for the benefit of or for all or such one or more exclusive of the others or other of the General Beneficiaries living from time to time in such proportions and in such manner as the Trustee in his absolute discretion and without being bound to assign any reason therefor, shall think fit as follows: -
- (a) By applying or setting aside for or paying to any beneficiary so much of the income as the Trustee thinks fit whether such beneficiary is or is not an infant:...
PROVIDED that any power of revocation and amendment contained in this deed shall not empower any revocation or amendment of the trusts above declared in respect of any income once applied in any manner hereunder:
AND FURTHER PROVIDED that the application or setting aside of any part of the income of the trust estate to or for the benefit of any beneficiary may be effectually made by a resolution of the Trustee that a sum out of or portion of the net income of the Trust Fund for the accounting period or a sum out of or portion of the net income as defined in Section 95 of the Income Tax Assessment Act of the Trust Fund for the accounting period be allocated to such beneficiary or otherwise dealt with for the benefit of such beneficiary And any resolution of the Trustee allocating income as hereinbefore provided shall be irrevocable and the income of the Trust Fund shall be dealt with as required by such resolution.
- (ii) The Trustee shall hold so much of the income of the Trust Fund as the Trustee shall not pay apply or set aside pursuant to the powers contained in paragraph (i) of this clause in trust for the persons successively described in paragraphs (a) and (b) of Clause 4 hereof as though each date on which such income becomes subject to the Trusts hereof were the Vesting Day:...''
8. Clause 1(i) and (ii) of the deed provided the following definitions:
``(i) The `Primary Beneficiary' and the `Primary Beneficiaries' shall mean the person or persons named described or defined as such in the Fourth Part of the Schedule.
[The `Primary Beneficiary' named as such in the Fourth Part of the Schedule was the applicant.]
(ii) `General Beneficiaries' mean and include -
- (a) The Primary Beneficiary...
- (b) Any body corporate wherever incorporated or resident any share in which is beneficially owned or held by any Beneficiary, or by the trustee of any trust or settlement under which any Beneficiary has any interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power of
ATC 1061appointment or revocation or to be diminished by the increase of the class to which that Beneficiary belongs and whether or not such corporation trust or settlement is in existence at the date of this Deed and which the Trustee may at any time and from time to time nominate in writing as a General Beneficiary.
- (c) The trustee (in his capacity as such trustee) of any trust or settlement in which any Beneficiary has an interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power of appointment or revocation or to be diminished by the increase of the class to which that Beneficiary belongs which the Trustee may at any time and from time to time nominate in writing as a General Beneficiary and whether or not such trust or settlement is in existence at the date of this Deed but provided that the beneficial interest in property provided by such trust or settlement shall vest within the perpetuity period applicable to the trusts of this Deed.
9. Clause 4(a) of the deed provided so far as relevant:
``4(a) As from the Vesting Day the Trustee shall stand possessed of the Trust Fund and the income thereof upon trust for such of the General Beneficiaries for such interests and in such proportions and for one to the exclusion of the other or others as the Trustee may by instrument in writing revocable or irrevocable before the Vesting Day appoint and in default of and subject to any such appointment in trust for such of the Primary Beneficiaries as shall be living on the Vesting Day as tenants in common in equal shares absolutely....''
10. The case put was that on 25 June 1981 a resolution was passed by the directors of KN Pty. Ltd. that complied with the requirements contained in cl. 3 of the E Trust Deed that there be ``a resolution of the Trustee''. The resolution that was passed did not conform with suggestions that had been made by the G interests. Its terminology is of crucial importance and it must be set out in full:
``MINUTES OF DIRECTORS MEETING HELD AT..., ON THE 25TH DAY OF JUNE, 1981PRESENT: [H] [the applicant] DISTRIBUTION OF INCOME: Resolved that the company as trustee of the E Trust in respect of the year ended 30th June, 1981 distribute the net income of the trust for that year by applying for the benefit of the undermentioned beneficiaries the following amounts and/or proportions, by crediting the same to such beneficiaries in the books of the trust, and on crediting to be held respectively for each such beneficiary.BENEFICIARY: PROPORTION: 1. Forty Ninth T.S. Co. Pty. Ltd. $150,000 (As Trustee of the I Trust) 2. The next $2,080 of distributable income (if any) as follows: - RR $1,040 LR $1,040 3. The next $17,500 of distributable income (if any) as follows: - (the applicant) $17,500 4. The next $2,080 of distributable income (if any) as follows: - JR $1,040 TN $1,040
ATC 10625. The next $16,000 of distributable income (if any) as follows: - IS $4,000 MH $4,000 JH $4,000 SH $4,000 6. The next $52,500 of distributable income (if any) as follows: - AH $17,500 LR $17,500 SH $17,500 7. The next $24,000 of distributable income (if any) as follows: - IS $6,000 MH $6,000 JH $6,000 SH $6,000 8. The balance of distributable income (if any) equally as follows: - H 25% LR 25% SH 25% (the applicant) 25% There being no further business, the meeting was closed. Signed as a correct record. [signature of H]''
11. The evidence of the passing of the resolution was less than satisfactory. The evidence of H was that:
- (i) he was in 1981 a director of KN Pty. Ltd.;
- (ii) the applicant was also a director;
- (iii) KN Pty. Ltd. ``was the trust company that derived income - or rather collected the income of (the Y Trust)'';
- (iv) the applicant was not involved in the daily business of Y Pty. Ltd.;
- (v) the applicant was not involved in the day-to-day management of KN Pty. Ltd.;
- (vi) the applicant was at all material times a student;
- (vii) when asked to do so the applicant would always sign documents that H asked him to sign and did not question H about what the documents were;
- (viii) meetings of H and the applicant as directors ``(took) place at the office over a cup of tea or anywhere''. They were ``very brief discussions'';
- (ix) the applicant regarded H as being ``the person who controlled the business'';
- (x) the signature on the resolution was that of H.
12. The applicant in his evidence:
- (i) confirmed his lack of involvement in the day-to-day running of the business or of the management of the E Trust;
- (ii) said that he had not been aware until comparatively recent times, namely during Supreme Court litigation over his tax problems, that he had been a director of KN Pty. Ltd. in 1981, although it would appear that he had been such since October 1980;
- (iii) said that he had been unaware of the existence of the E Trust until late 1984 or early 1985, when representatives of the Commissioner began to raise questions about tax problems, and that he had not until recently been aware of the existence of KN Pty. Ltd.;
- (iv) was unable to recall a meeting on 25 June 1981;
- (v) did recall that from time to time his father asked him to sign documents;
- (vi) could not specifically recall a conversation with his father in 1981 or 1982
ATC 1063at which there was any discussion about his father or his father's business or trusts entering into transactions designed to minimise or avoid income tax.
13. A further deed of trust must now be referred to. This is the deed constituting the I Trust. That trust provided by cl. 5 thereof that the beneficial interest in the trust fund was to be divided into separate units, divided into the classes set out in the Third Schedule thereto (cl. 5(3)). The Third Schedule contained a provision that the units might be issued as ordinary units, special par units or special equity units.
14. LR, mentioned in para. 4 above, was one of the general beneficiaries. A meeting of 49th TS resolved to issue two special units to LR at a cost of $1 per unit to be paid as and when requested. A register of unit holders showed her as holding two units and a certificate showing that she holds two units was in existence. LR had signed an application for the units. KN Pty. Ltd. nominated 49th TS as a beneficiary, though not specifically as a ``general'' beneficiary.
15. The attempted distribution to 49th TS having supposedly been made, the G interests then took over. I do not propose to recite what happened in detail, partly because the complexity of what happened was as elaborate as it was artful, and partly because in the event it becomes, in my opinion, unnecessary to do so. It is enough to set out an anonymised version of Exhibit 74, which sets out the ``round robin'' pattern of the transactions. The chart which follows para. 16 below shows that there were two tangents from the circle that represents the round robin. The transactions involved in the tangent clearly enough took place in order to direct the income that had purported to be distributed into a company (P Pty. Ltd.) which was a trustee of a ``unit trading trust'' which had losses. By this means the essential thrust of the whole scheme, namely of converting taxable income into a non-taxable form and returning it, less the fee, to the H interests, was advanced.
16. It is necessary however to refer to the last transaction in the circle. CA Nominees Pty. Ltd. was a company in which the H interests acquired an interest three days before the resolution and it was so acquired for the purpose of the transaction being orchestrated by the G interests. H became a director on the same day. By a loan agreement between a G interest company called 25th S Pty. Ltd. the latter company, as trustee of a trust known as The No. 28 Corpus Trust, lent the sum of $127,500 (i.e. 150,000 less $22,500) to CA Nominees Pty. Ltd. as trustee of a trust called the H No. 2 Trust. This same amount was then lent to KN Pty. Ltd. H gave evidence that he did not understand what happened, or what was involved, between 25th S Pty. Ltd. and CA Nominees Pty. Ltd., and this is no doubt correct. One of the roles of the G interests, and thus a consideration for which the fee was paid to the G interests, was, on my view of the evidence, to avoid H having to know precisely what was going on. It was in part the price of ignorance. It was enough for H to know that somehow the $150,000 that was said to have gone out had come back (diminished to $127,500 because of the fee) in the form of a loan washed clean of any taxation liability. The chart now follows:
[Case V160 -- diagram not reproduced. See the print copy of Australian Tax Cases 1988 or call CCH Customer Support on (02) 857 1555.]
[Case V160 -- diagram not reproduced. See the print copy of Australian Tax Cases 1988 or call CCH Customer Support on (02) 857 1555.]
17. In support of the assessment Mr B.J. Shaw Q.C., for the Commissioner, made six principal submissions. He contended:
- (i) That the resolution purportedly passed and recorded in a minute of a meeting of directors of KN Pty. Ltd. on 25 June 1981 was not a valid or effective resolution, with the result that the default clause in the trust deed operated in favour of the applicant. If it were necessary, the applicant would be able to enforce the terms of the trust.
- (ii) Alternatively, if the resolution were found to be effective in itself, in the sense of being effectively made, the nomination of 49th TS as a beneficiary for the purpose of a distribution pursuant to the resolution was itself ineffective because 49th TS was not the trustee of a trust or settlement in which any beneficiary had an interest, whether absolute or contingent or by way of expectancy within the meaning of cl. 1(ii)(c) of the E Trust.
- (iii) In the further alternative, the transaction which took place was a sham, and the purported distribution was no more than a disguise adopted in order to present an appearance of a distribution, the fact being, as I was invited to find, that all that had occurred was that a fee had been paid to the promoter for the creation of the disguise.
- (iv) If the Tribunal were to accept that the resolution was ineffective in respect of its attempt to effect a distribution in favour of 49th TS, the following clauses which purported to distribute, in each case, ``the next $2,080'' of distributable income (if any) and so on in various amounts were not effective to pick up the $150,000 which, on this supposition, had failed effectively to be distributed to 49th TS.
- (v) If sec. 260 of the Income Tax Assessment Act 1936 (``ITAA'') were a relevant provision in the present case (the onus of establishing which, it was said, rested on the applicant), in terms of the fact that that provision ceased to apply from 27 May 1981, then that provision applied, the sole object of this whole transaction having been to relieve the liability of the applicant to pay income tax.
- (vi) If, as was contended was the better view, Pt IVA of the ITAA applied having regard in particular to the provisions of sec. 177D and 177C, the irresistible inference was that the scheme was entered into for the purpose of enabling the amount of the distribution to be not included in the applicant's assessable income. If this provision were applicable, the proper course for the Tribunal would be to remit the matter to the Commissioner for reconsideration in accordance with the direction that the provisions of Pt IVA applied. [See Case V3,
88 ATC 113.]
- (vii) A merely formal submission was made, but not argued, that the doctrine of fiscal nullity applied.
18. Before proceeding to deal with Mr Shaw's arguments seriatim, it is desirable to say, and I so find, that the critical transactions that were entered into in this case, whether viewed one by one or as a whole, were in broad terms entirely devoid of reality. They were artificial in the extreme. They are comprehensible only on the footing that it was thought desirable by the promoters, the G interests, to make the whole affair so complex as to be difficult to track down. It must be seen as the creation of promoters who had but one aim, the exaction of a fee for services the sole purpose of which was to convert, or to seem to convert, taxable income into non-taxable income, or to offset taxable income against deductions, presumably in the form of losses. Mr Pagone of counsel, who at all points conducted the applicant's case as ably as it possibly could be, did not contend to the contrary, nor in my opinion could he have. Artificial the scheme may have been, but the question remained whether it was in fact effective in causing the income in question ``to suffer a sea-change into something rich and rare''. The transactions, artificial as they may have been, were requisite for the purpose of effecting the conversion of the character of the income, but were distanced from what the H interests did in terms of resolving upon a distribution, by the E Trust, that was claimed by Mr Pagone to be effective.
19. I now go to consider each argument.
(i)The resolution of 25 June 1981
As to this, Mr Pagone argued that the question was not whether a resolution was passed in
ATC 1067terms of the law relating to corporations. The question was rather whether something had occurred corresponding to the words ``applying or setting aside'' in the deed of trust. There had been such a distribution, he said, in relation to 49th TS upon the assumption that it could properly be regarded as a beneficiary, and in relation to RR and LR, and to the applicant. Mr Shaw's argument was that the word ``resolution'' was to be given its ordinary meaning in the context of a company's operations bearing in mind that the trustee was a company. I am prepared to accept Mr Pagone's argument on this point to the extent of accepting as the appropriate meaning of the word ``resolution'' that give, amongst many others, by the Shorter Oxford Dictionary of ``The act of resolving or determining;anything resolved upon; a fixed determination''. But the critical question here is whether such an act occurred having the required quality. It was apparently recognised, correctly, that the resolution required the attention of the two directors. H and the applicant. The purported resolution contains an assertion that the applicant was present, but nothing else in the evidence suggests that the matter came to his attention. The best that H could do was to say that he did recall a meeting being held, but as to such meetings he said: ``It could happen, for instance, that my son is called in for a cup of coffee, he maybe pass by and I just mention it, then that is then recorded... [The] company's secretary or the accountant... puts it into the form of a minute and it is then submitted for my signature''. H said also that he guarded his reputation ``very, very zealously. I have been in this business... since 1954 and I have never put my signature to anything that is not correct''. He said that he would never sign a document if it was not correct: ``People keep diaries and the company keeps minutes and that is the purpose of it, I would imagine, I do not know''
I accept H's evidence only to the extent that I accept that he had an honest belief that the meeting took place. It might conceivably have been enough that the two directors had agreed notwithstanding that there was no actual meeting at which both were physically present, but I should have thought it clear that in such circumstances both would have had to sign. The difficulty is that the applicant's evidence, as set out in para. 11 above, was such that I am not at all persuaded that the matter came to his notice. It is not just a matter of his not being able to remember. It is more positive than that. He had not even been aware that he was a director of the company in 1981 until recently, and had not known of the existence of the E Trust until recently. How can it be concluded that a director of a company attended a meeting of directors and approved a resolution when not only did he not know that he was a director, but did not even know of the company's existence? Bearing in mind the onus cast upon a taxpayer by sec. 190(b) of the ITAA. I feel unable to conclude that the alleged resolution was a valid or effective resolution in terms of the deed of trust. with the result that the default clause must be held to have operated. In the light of this the applicant became entitled, that is to say ``presently'' entitled, in terms of the ITAA.
(ii) In case I should be in error in relation to the question of the effectiveness of the resolution. the alternative position must now be considered, namely whether the nomination of 49th TS as a beneficiary was effective. For this purpose reliance has to be placed on cl. 1(ii)(c) of the deed (see para. 8 above). LR being one of the general beneficiaries, the question here comes down to whether LR had an interest in the I Trust ``whether absolute or contingent or by way of expectancy''. Mr Pagone's argument was that the deed of trust of the E Trust envisaged that a distribution might be made to a body such as 49th TS as trustee for a trust whereunder the interest in question was merely contingent. The terms of the trust should not, he said, be construed narrowly. Mr Shaw's argument was that there having been an issue of two special units for a payment of $1 each that had not then been exacted. what there was was a possibility that the trustees might apply some of the net income of the trust to the holder of a special par unit. That being so, the question was whether in those circumstances LR had an interest in the trust whether absolute or contingent or by way of expectancy. In his submission it was only as an interest ``by way of expectancy'' that LR's putative interest could qualify, that it did not so qualify. and that the issue of the special units was ``simply formal'' in the course of the whole scheme that was being carried out. In my opinion Mr Pagone's submission on this point should be accepted if one looks at this particular transaction in isolation. I consider that an
ATC 1068interest by way of expectancy was created. Mr Shaw's submission here seems to me really to be that this particular transaction was a formality in the sense of being a transaction having no reality and thus, as I understand the argument, a sham. I am about to deal with a more general argument about sham, and I content myself here with saying that if there should be consideration of whether the transaction involving LR be a sham, it should be so considered in relation to the wider argument. Viewed in isolation, it should be seen as one having the effect for which Mr Pagone contended.
(iii) I now turn to what would be a critical point in the case if the resolution were regarded as effective, namely Mr Shaw's submission that the whole of what was arranged was a sham, within the principles enunciated in a number of authorities, but in particular in
Snook v. London and West Riding Investments Ltd. (1967) 2 Q.B. 786;
Albion Hotel Pty. Ltd. v. F.C. of T. (1964-1965) 115 C.L.R. 78; and
Scott v. F.C. of T. (1966) 40 A.L.J.R. 205. In Snook at p. 802 Diplock L.J. said:
``As regards the contention of the plaintiff that the transactions between himself. Auto Finance and the defendants were a `sham', it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the `sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see
Yorkshire Railway Wagon Co. v. Maclure (1882) 21 Ch.D.309. C.A. and
Stoneleigh Finance Ltd. v. Phillips  2 Q.B. 537), that for acts or documents to be a `sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a `shammer' effect the rights of a party whom he deceived. There is an express finding in this case that the defendants were not parties to the alleged `sham'. So this contention fails.''
In Scott at p. 279 Windever J. said:
``... But it is not enough to say that a fund governed by the provisions of a deed such as that we have here could be a superannuation fund within the meaning of the Act. For it to be so in fact the parties concerned must have intended that the deed should take effect and operate according to its tenor; that a fund should be set up subjected to the trusts of the deed; and that Associated Provident Funds should as trustee be bound to carry out those trusts. On the other hand, if the scheme, including the deed, was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, then the words of the deed should be disregarded. It was urged for the appellant Associated Provident Funds that it is a real company and that the deed was really executed by it: and that, it was said, is the end of the question. But it is not. A disguise is a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction...''
Mr Shaw's submission was that in this case the real transaction that was intended was that which H contemplated when he entered into the arrangement with the G interests, and the documents were not intended to evidence real transactions, something expressly conceded by H in relation to the loan agreement between CA Nominees Pty. Ltd. and 25th S Pty. Ltd. H admitted that on his part the document was never intended to lead to any obligation on the part of CA Nominees Pty. Ltd. to repay any part of the $127,500 there purportedly dealt with to 25th S Pty. Ltd. H's answer when this
ATC 1069was put to him was ``Well, it looks like being part of the whole exercise, yes''. That sum has never been repaid and I am completely satisfied that it will never be repaid and that it was never intended to be.
Pausing at that point, if everything had in fact been done that was said to have been done I might still have had some difficulty with Mr Shaw's argument on this point, for there can be difficulties in the ``sham'' argument if it is not possible to predicate that there is, to use Windeyer J.'s words, a false front concealing a real transaction. But the realities of what in fact occurred here are such that I am satisfied that there were no relevant real transactions at all, not even as planned. H agreed in cross-examination that the proposition that had been put to him was, as he understood it, that if he distributed $150,000 to a company associated with the G interests, those interests, would arrange for $127,500 to be repaid to the H interest. But the evidence is that while documentation was drawn up accordingly, the payments necessitated by the ``round robin'' were not made.
While a settlement day was appointed:
- (a) Exhibit 76 indicates that on 26 June 1981 25th S Pty. Ltd. as trustee lent CA Nominees Pty. Ltd. $127,500 and that the E Trust paid $22,500 across to this account;
- (b) Exhibit 12 indicates that $150,000 was paid into the CA Nominees Pty. Ltd. account on 26 June 1981 as an opening entry;
- (c) Exhibit 15 indicates that on 26 June 1981 49th TS received $150,000. The only possible explanation is that what 49th TS received was received from CA Nominees Pty. Ltd.:
- (d) Exhibit 12, the bank statement of Y Pty. Ltd., shows a payment out of $22,500 on 26 June:
- (e) the source of funds for the payment to 49th TS was $22,500 from Y Pty. Ltd. and $127,500 from 25th S P/L via CA Nominees Pty. Ltd.:
- (f) the $127,500, as to all but $500, appears to have been sourced through a loan transaction between B Pty. Ltd. and P Pty. Ltd. as shown on the ``round robin'' chart:
- (g) on the balance of probabilities the H interests provided no more than $22,500. Otherwise the scheme was funded by the G interests, with the E Trust paying nothing, and never being intended to pay anything:
- (h) the setting up of CA Nominees Pty. Ltd., an H interest company, to receive the ``loan'' was as contrived as was the purported distribution to 49th TS, with the findings set out above involving the conclusion that the latter did not even occur.
It follows in my opinion that the planned, or supposedly planned, transactions that were said to have been contemplated in fact, at critical points, did not take place. In my opinion I should find, as I do, that the purported distribution to 49th TS was a sham.
(iv) I have found the question of the construction of the effect of the resolution, upon the supposition that, contrary to what I have found, it was an effective resolution in general terms, given that it be found to have been ineffective in its attempt to effect a distribution in favour of 49th TS, the most difficult part of the case. Mr Pagone's argument was that if the first ``line'' of the resolution failed, as I have found it does, the remaining dispositions took effect. In other words, the provision in each ``line'' referring to ``The next (dollars) of distributable income (if any) as follows'' was effective to cope legally with the fact that the $150,000 expressed as being distributable to 49th TS did not, effectively, need to be distributed thus increasing the size of the distributable amount of $152,040. The provision in the deed of trust making the applicant entitled in default only came into play if the trustee had not exercised the discretion to distribute income. Mr Shaw on the other hand said that the words ``the next'' were not apt to confer any entitlement upon the other beneficiaries named therein in respect of the $150,000 referred to in line I which had, on the thesis under discussion, simply failed as a disposition. In semantic terms, Mr Shaw's argument is attractive, but what we are seeking to discover is the meaning and intendment of the resolution. On the whole, if I had had to decide the matter, I would have accepted Mr Pagone's submission on this point, with the result that the applicant would have been entitled to a distribution of about $27,050. As Mr Pagone said, it must have been known approximately how much there was to distribute, and the resolution must have been contemplating the occurrence of some event the
ATC 1070occurrence of which might lead to uncertainty as to the initial distribution.
I do not regard this provision as being relevant. It ceased to apply after 27 May 1981 (sec. 260(2)). I am satisfied that by that date the matter had been discussed and, probably, agreed upon in principle, but there was no ``contract, agreement or arrangement made or entered into'' until after that date.
If the provisions of sec. 260 had been relevant, it is my opinion that they would have been applicable. The sole object of the purported distribution was to relieve the liability to pay tax. It is a curious fact that the onus of establishing that sec. 260 of the ITAA, rather than Pt IVA which replaced it, applied rested on the applicant. In my opinion Pt IVA would not have applied, a question to which I now go.
This provision does not in my opinion apply at all comfortably in a trust situation, especially where there are numerous beneficiaries who might take. Depending on the terms of the decision made by the trustee about distribution, various consequences might flow. In this case, who is in terms of sec. 177C the taxpayer who would have had the assessable income included as part of that taxpayer's assessable income? The answer to this would depend on the decision made by the trustee. The crucial questions here, as Mr Pagone said, are whether the applicant, as the taxpayer, had a benefit in connection with the scheme, and whether he would have obtained such a benefit but for the annihilating effect of sec. 177F. In this case, I do not see how the conclusion can be drawn under sec. 177D that the scheme here entered into was entered into for the purpose of enabling the applicant to obtain a tax benefit. Who was to benefit could not be supposed, although it is clear enough that some person or persons was to benefit. The failure of the scheme has left the applicant presently entitled by default, but it does not flow from that that he was the taxpayer who was to obtain the tax benefit. I refer to what I said under (v) above at the end of the reference to sec. 260, and add the comment that, assuming that I am right that sec. 260, if it had still been in existence, would have applied but that Pt IVA does not, it is ironic that the born-again, or what came to be the born-again, sec. 260, so often found wanting in times past, was put to sleep only to be replaced by a provision the greater complexity of which can give rise in some circumstances to problems at least as great as those that occurred in relation to its predecessor.
20. More generally, Mr Pagone made a good deal of the fact that the applicant had been assessed although:
- (i) he had not received one cent of the $150,000;
- (ii) he did not know that he was a beneficiary under the trust or entitled thereunder;
- (iii) the trustee did not know that he was obliged to make any payment to the applicant (that is to say until the assessment issued);
- (iv) the trustee did not in fact pay anything to the applicant.
21. The applicant, it was said, was being assessed simply because his name appeared in the default clause. It was pointed out that there were two distinct phases in the scheme, namely the ``H phase'' and the ``G phase''. The H phase required the distribution of an amount of money that would otherwise be taxable, and the receipt of another amount of money in a non-taxable form. The G phase had to ensure that the amounts received were converted from taxable amounts to non-taxable amounts. The applicant was in no position in these proceedings to support the G phase of the scheme. But it was that phase which brought about the alleged non-payment of tax on the distribution to 49th TS.
22. In the event, these submissions do not, in the light of the findings and conclusions which I have set out above, need to be ruled upon. It is enough to say that I agree with Mr Shaw's contention that if the applicant is liable for the tax because of the operation of the default clause it is because he is entitled to the income in respect of which the tax is assessed. If he is entitled to the income he may demand it for the purpose of paying the tax. It is of course presumably unthinkable that those who got him into this situation without his knowledge will not get him out of it. They probably will not thank those who placed temptation in the way, for the temptation to be tax free seems hard to resist, even by a person like H, who both by his
ATC 1071own account and my own assessment of him is a man who has worked hard and is jealous of his reputation.
23. In all the circumstances the objection decision under review must be affirmed.