Case V22

PM Roach SM

Administrative Appeals Tribunal

Decision date: 15 January 1988.

P.M. Roach (Senior Member)

The assessments under review in these proceedings arise out of the derivation of income by a trustee (Fiduciary) which, in the years of income ended 30 June 1978 to 1984 inclusive, distributed the income it had derived among members of a family. It did so by crediting the amounts distributed to loan accounts. Persons who were beneficiaries of trust distributions included a married couple (``the parents'') and their children - John, born March 1961; Bernard, born December 1962; Margaret, born January 1965; and Stephen, born April 1967. It is common ground between the parties that, until such time as each child attained the age of 18 years, the assessments of income tax would lie against Fiduciary. For the applicants it was contended that, in the absence of any other income, it was not to be expected that personal income tax returns would be filed by the infant beneficiaries. Both John and Bernard came to derive other income before the close of the period. It was agreed at the hearing that the determinations to be reached in relation to Bernard should be those arising upon applying the same principles as come to be applied in relation to John.

2. In considering the table following it is to be noted that:

  • (a) the parents were also beneficiaries of the trust in some years;
  • (b) by reason of other income, the assessments of John for the 1980 to 1984 years and Bernard for the 1983 and 1984 years were amended assessments, but the figures in the table relate only to the trust income factors;
  • (c) neither John nor Bernard disclosed the receipt of trust income in the personal returns lodged by them;

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  • (d) additional tax consistently reflects 50% of the tax levied by reason of derivation of trust income for Margaret; Stephen for all years; for Bernard up to and including the 1982 year; and for John up to and including the 1981 year;
  • (e) the figures for additional tax in other years were not explained;
  • (f) the reference to 20% per annum, on the Commissioner's calculations is the amount which would have been levied by way of additional tax had additional tax been calculated at the rate of 20% per annum of tax avoided from the due date for lodgment of returns to the date of issue of the assessments creating the liability to tax. The figures appear because of a submission as to jurisdiction which was made for the Commissioner.
Year Ended 30 June         John        Bernard        Margaret       Stephen

Trust Income            x12,479.00    x12,479.00     x12,479.00     x12,479.00
Tax                       2,922.56      3,422.96       3,422.96       3,422.96
Additional Tax            1,461.00      1,711.00       1,711.00       1,711.00
20% p.a.                  3,683.00      4,313.00       4,313.00       4,313.00
                           18.4.85       18.4.85        18.4.85        18.4.85

Trust Income             14,000.00    x10,708.00     x10,708.00    xx1,000.00
Tax                       3,385.84      2,283.02       3,587.18
Additional Tax            1,692.00      1,141.00       1,793.00
20% p.a.                                2,420.00       3,803.00
                           25.2.85       18.4.85        18.4.85

Trust Income             25,600.00     18,656.00     x18,656.00    x18,656.00
Tax                      10,472.82      8,781.37       8,781.37      8,781.37
Additional Tax            5,236.00      4,390.00       4,390.00      4,390.00
20% p.a.                  7,549.00      7,549.00       7,549.00
                     xxxAA 25.2.85       18.4.85        18.4.85       18.4.85

Trust Income             25,140.00     25,140.00     xx1,000.00    xx1,000.00
Tax                      10,157.68      7,857.82
Additional Tax            5,078.00      3,928.91
20% p.a.
                     xxxAA 25.2.85       13.3.85

Trust Income             23,000.00     23,000.00     x32,807.00    x32,807.00
Tax                      10,422.76      6,732.44      15,091.22     15,091.22
Additional Tax            4,711.00      3,366.22       7,545.00      7,545.00
                     xxxAA 25.2.85       13.3.85        18.4.85       18.4.85

Trust Income             17,674.00     17,674.00
Tax                       6,711.88      7,277.72
Additional Tax            4,770.00      5,112.00

                            xxxAA 11.2.86 xxxAA 11.2.86

Year Ended 30 June          John        Bernard       Margaret       Stephen
Trust Income              9,000.00     11,000.00
Tax                       2,726.19      4,557.92
Additional Tax            1,493.00      2,207.00
                     xxxAA 11.2.86 xxxAA 11.2.86

      x     Assessment against Trustee
      xx    Non-taxable
      xxxAA Amended assessments
      ===== Transition from liability of trustee to liability of beneficiary

The issues of fact

3. In these references there is no dispute but that the tax assessed was correctly assessed. What is disputed is whether, in the circumstances, the Commissioner was entitled to impose any liability for additional tax. The case for the Commissioner is that he was entitled to do so because the circumstance that none of the assets issued until 25 February 1985 at the earliest was wholly attributable to the failure of the taxpayers (including Fiduciary) to lodge returns of income when they should have been lodged. The applicants deny that contention and contend that, in most years the returns were lodged within time and that, in fact, the returns by Fiduciary were lodged with the local office of the Commissioner as follows:

       Year ended
        30 June                               Trust return lodged

         1978                                    14 November 1978
         1979                                     31 October 1979
         1980                                    27 February 1981
         1981                                      5 January 1982
         1982                                       31 March 1983
         1983                                        18 June 1985
         1984                                        18 June 1985

4. Accordingly, the principal issue for determination in relation to these references is what finding of fact should be made as to whether or not returns of income disclosing the trust income were lodged by Fiduciary (or the beneficiary) with the Commissioner and, if so, when. The applicants bear the onus of proving their contentions but they are only required to do so ``on the balance of probabilities'' (cf. Gibbs J. in the High Court of Australia in
Jacob v. F.C. of T. 71 ATC 4192 - ``The appellant has not satisfied me that it is more probable than not that...'').

5. The Commissioner has no obligation to prove that no return were lodged with him prior to the dates he contends for, that is prior to the dates of assessment. However, in the presentation and conduct of the case, he is entitled to present evidence directed to overcoming or negating the force of evidence tendered for the applicants and, in doing so, he may seek to establish a basis for a positive finding in support of the dates he contends for. As the findings of fact must be made in light of the evidence actually presented, I now proceed to analyse that evidence.

The evidence

6. The father of the applicants gave evidence. The evidence he gave was very brief and imprecise, but I accept it. His evidence was simply to the general effect that, at the close of each tax year, he presented to his accountant all relevant material to enable the accountant to prepare income tax returns for himself and the entities with which he was concerned; that thereafter he responded to the accountant's enquiries; and that accounts and returns were finally settled in conference with his accountant.

7. The accountant also gave evidence covering a number of matters:

  • (a) He began with the relationship with the father. In that regard his evidence was to the same effect, the only difference being that, his recollection was that the information tended to be presented to him by his client around about October/November rather than in about August/September.
  • (b) He produced from the records of his firm computer printouts commencing with material relating to the trust allegedly processed on the computer as early as 29 October 1979. Corresponding entries appeared in subsequent years. He could not explain the absence of similar records for the 1978 year. He acknowledged that it would have been possible to falsify the

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    records by backdating them but I am satisfied that his evidence should be accepted that those computer records were prepared on the dates they bear. The significance of those records is that they establish that, within a few months of the close of each financial year from 30 June 1979, his firm had sufficient information to enable it to prepare trust income tax returns. Although there is no direct evidence to that effect, I think it reasonable to assume that the records produced reflect a pattern of conduct which had been followed in the previous year. As a result, I make the same finding in relation to the 1978 year as in relation to the years following.
  • (c) The accountant claimed that in the firm's files it held a typed carbon copy of the original form of return as lodged with the Commissioner and also a handwritten draft but he did not produce any such documents and elected not to seek an adjournment to enable him to obtain them. It was not suggested to him in cross-examination that those assertions were untrue.
  • (d) The accountant produced in evidence a document used by his firm and maintained by staff designed to record in relation to each client particulars of client identity, a client's ``number'' and a ``cost number'' (all typewritten) and additional information, in the instant case recorded by hand, identifying tax file number and specifying in relation to each income year the date a return was prepared for client's signature; the date on which it was dispatched for lodgment with the Commissioner; and the date upon which assessments were received. The card bore the following information:
                    RETURN                               ASSESSMENT
       Year     For Signature     LODGED      No.     RECEIVED     AMOUNT   PAID
       1978        31.10.78      14.11.78              24.4.85
       1979        30.10.79      31.10.79              24.4.85
       1980        26. 2.81      27. 2.81              24.4.85
       1981        24.12.81      5 . 1.82
       1982        30. 3.83      31. 3.83              24.4.85
       1983        23.12.83      18. 6.85
       1984        18. 6.85      18. 6.85
  • (e) The accountant claimed that there were other office records, such as costing records, which would be relevant as tending to prove that the returns were prepared. He declined the opportunity previously mentioned to seek an adjournment to produce them.
  • (f) The evidence of the accountant was that, as public officer of Fiduciary, he would have been the person to have signed each of the tax returns in question. He professed no recollection of doing so and I find the absence of any such assertion quite unremarkable.
  • (g) His further evidence was that it was the practice of his firm at all material times to have junior staff collate the returns which had been signed and which were ready for lodgment and to arrange for them to be collected by a courier service and delivered to the regional office of the Commissioner approximately twice weekly.
  • (h) His evidence also was that he did not query the Commissioner as to the non-issue of assessments because he did not see it as part of his duty to accelerate the process for the issue of debit assessments and because, in any event, he thought the non-issue of the assessments unremarkable. That was because, throughout the period in question, there was an unresolved objection on the part of each of the parents protesting against the disallowance to them of deductions in relation to sums which had initially been returned as income of the trust. His evidence was that those objections were not resolved until January 1986 or thereabouts, when the objections of the parents were allowed.

8. In presenting the case for the applicants, the accountant did not put forward any documents purporting to be the income tax returns (or copies of them, or copies of any

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version of them, or of any schedules thereto). The documents exhibited before the Tribunal as copies of the relevant trust returns were tendered in evidence at the opening of the case by the Commissioner by consent. As so tendered, they were typewritten in form and bore no dates or representations of signatures suggesting that, in those respects, they reproduced the format of any originals. Further, as the documents were so presented, they incorporated the financial accounts and copies of Trust resolutions.

9. In cross-examination, the accountant asserted that his first knowledge that the Commissioner claimed not to have received the returns came with a telephone call from the Sydney office of the Commissioner. That was followed by a visit, by arrangement, by an officer of the Commissioner to the office of the accountant for the express purpose of obtaining ``copies'' of the returns said to have been lodged. In expectation of that visit, the accountant had fresh copies of the forms of return engrossed and they were delivered to the officer of the Commissioner on the occasion of his visit. Why that course was preferred to photocopying was not explained. The financial statements were not enclosed. The reason for that, according to the accountant, was that the officer sought nothing more than copies of the ``returns'' - a reference to the printed forms as completed. Questions as to the evidence of lodgment were not discussed and no reference was made to the existence of the lodgment record card. The accountant did not dispute the suggestion from the Commissioner's representative that those matters occurred on 7 December 1983.

10. The accountant acknowledged that he received in due course a letter from the Commissioner dated 27 February 1984 relating to the Trust, stating:

``It will be necessary to forward as soon as possible, details of income statements for the trust in respect of the years ended 30 June 1978 to 1982 in accordance with the computerised ledger, to this office, located on the 8th Floor, Centrepoint Building, 100 Market Street, Sydney 2000.''

And he did not dispute receiving a formal demand dated 27 March 1984 whereby, in exercise of the powers conferred by the Act, the Commissioner required production at his Sydney office of:

``details of income statements for the trust in respect of the years ended 30 June 1978 to 1982.''

His evidence was that these were not the only occasions upon which he had known the Commissioner to have lost the returns lodged with him.

11. The applicants also called in support of their case the office supervisor from the accountant's office. She was a careful and precise witness and I accept her evidence without hesitation. She deposed to the office practices which had operated since she joined the office in June 1982 as a 20-year-old. In 1986 she was promoted to office supervisor. She described precisely and clearly the practices of the office which had been deposed to by the accountant. Her evidence was particularly significant, however, in that she was able to say of the 1979 entries on the lodgment record that they were in the handwriting of the lady who had been her predecessor as office supervisor. I am persuaded by her evidence that the 1979 entries were made contemporaneously with the events they record; and that a ``system'' did exist as described and was maintained as claimed. By reason of that ``system'', I am satisfied on the balance of probabilities that the other handwritten entries were also made contemporaneously.

12. The final witness to be called was John. He gave evidence that he had known nothing whatsoever of the Trust or of any entitlement to income from the Trust until such time as the first amended assessments were raised against him in February 1985. In assessing that evidence, I have regard to the circumstance that he was a clerk in the employ of the accountant and has since come to be qualified as an accountant. None the less, I accept his evidence, and I do so even though at the date of hearing his general comprehension of what had occurred remained quite imprecise. Indeed, the only points made precisely by his evidence were his unawareness of the Trust and of any income entitlements from it. He also acknowledged two letters dated 27 March 1985 requesting amendments of his 1983 and 1984 income tax returns to include the income distributions in question. The letter which he signed stated (inter alia):

``I was not previously aware that I was in receipt of this income and I request that no

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penalties be imposed from my failure to include the income in my original return.''

The composition of those words was not his. The letter was written at the same time as the first of the objections was prepared. The amended assessments issued nearly a year later, following the disallowance of earlier objections.

The findings of fact

13. I now turn to address the question as to whether returns of income were lodged by the trust in terms which disclosed the derivation of taxable income and its distribution to beneficiaries in accordance with the assessments before me. I commence by dismissing as unreasonable the possibility of loss of the first five of the seven returns by couriers in course of delivery. (The accountant acknowledged that he hand-delivered the returns for the last two years to officers of the Commissioner in Sydney.) That being so, the question resolves itself into an issue as to whether the documents were received by the Commissioner but in some way lost by him or whether the returns were never despatched from the office of the accountant.

14. I have no evidence before me as to the Commissioner's practices in the matter of recording the receipt of documents or of controlling their subsequent use and storage. Further, that is not a matter about which I should speculate. The way was open to the Commissioner to establish those practices by evidence and he has not done so in this instance. To that extent, the case stands in contrast to the course of evidence followed in Case U131,
87 ATC 767. In that case the issue was whether a request to the Commissioner to refer on for independent review his decision to disallow an objection was within time. It was an issue of critical importance because, under no circumstances, could the short and strictly limited period allowed for the purpose be extended. When the case was called on for hearing, no evidence was presented for the applicant. Even so, the Commissioner presented several witnesses with a view to positively establishing that the request for reference was delivered out of time.

15. On the other hand, in these references I do have evidence of office practices in relation to the office of the accountant to the applicants; and I have no evidence of the office practices of the Commissioner. That persuades me that, if the few records produced in evidence before me are in themselves true, contemporaneous records, it is more probable than not that the returns would have reached the office of the Commissioner.

16. On the question as to whether the computer printout and the lodgment record are contemporaneous records, I am persuaded that they are; and that the latter record was made systematically and accurately. Accordingly, I conclude that, in all cases, the trustee did lodge the relevant returns and provide the relevant information to the Commissioner on or about the date recorded as date of lodgment in the lodgment record.

17. In so far as a separate issue arises in relation to John for the years of income ended 30 June 1980 to 1984 I find that, when he did prepare and lodge his personal income tax returns for those years, he did not disclose the receipt of any income from the Trust and that his reason for not doing so was that he had no knowledge of the existence of the Trust or of any entitlements he had by reason of any distribution of dividends whether by way of credit to a loan account with Fiduciary or otherwise. In view of the course agreed on as to Bernard, no finding as to his actions or state of mind is called for.

Liability for additional tax

18. The Act makes provision for penalties by way of additional tax to be imposed upon those persons who fail to make returns when they should and upon those persons who, in making returns of income, omit to disclose all the income they have received. Those obligations were provided for in Pt VII - ``Penalty Tax'' - of the Act. Part VII was repealed by sec. 152 of the Taxation Laws Amendment Act 1984 (No. 123 of 1984) "with effect from the fifty-sixth day after the day on which this Act receives the Royal assent. That amending Act was assented to on 19 October 1984 and the new Pt VII took effect from 14 December 1984 - some months before any assessments issued against either Fiduciary or the other applicants. Both the present Pt VII and the provisions it repealed provided for additional tax equal to double the tax avoided unless the Commissioner, in exercise of a discretion entrusted to him, exercised that power and reduced the obligation in additional tax. The

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Commissioner purported to exercise the discretion so conferred and thereby to reduce additional tax and levied the amounts of additional tax referred to previously. In the proceedings before the Tribunal, the applicants claimed that the imposition of additional tax is unlawful and, by the terms of their objections, also seek a review of the Commissioner's exercise of discretion in the matter of remitting additional tax.

19. It was submitted for the Commissioner that, in so far as the additional tax levied did not exceed the rate provided for in calculations limiting the authority of the Tribunal (sec. 193(2)), the Tribunal had no power to effect any review of the additional tax so imposed. If the submission was only intended to mean that there is no power to substitute some other, or in particular lesser, amount by way of additional tax for the amount levied, I agree. However, if it was intended to mean that the Tribunal had no power to find the imposition of additional tax to be unauthorised at law, I reject it. In my view, there is no jurisdictional limitation or constraint which will prevent the Tribunal from deciding in appropriate cases that the imposition of additional tax against the trustee was in all instances excessive and wholly so. Accordingly, having found that the trustee was not out of time in lodging its returns of income, the Tribunal will hold that the trustee was not liable to any additional tax, and the Tribunal will so order.

Additional tax levied against the individuals

20. I have accepted John's evidence that he knew nothing of any declaration of trust by Fiduciary; knew nothing about being named as a contingent beneficiary of the trust; knew nothing of any derivation of income by Fiduciary; knew nothing of a decision by Fiduciary to distribute any trust income to him; and knew nothing of Fiduciary holding to his credit amounts ``distributed'' pursuant to any such resolutions.

21. As an individual, John was liable to make a return of his income, and to penalties by way of additional tax, if he should omit from his return any of his assessable income for the year.

22. The case for the Commissioner is that the obligation to pay additional tax on the part of John in relation to the years of income ended 30 June 1979 to 1984 (inclusive) arose because he omitted to disclose the trust income to which he was entitled.

Although the penalty is imposed ``by way of additional tax'', and is collected via the machinery of assessment, the section is clearly a penal provision (
Richardson v. F.C. of T. (1932) 48 C.L.R. 192 at p. 215;
F.C. of T. v. Trautwein (1936) 56 C.L.R. 211 at p. 217;
Re Dymond (1959) 101 C.L.R. 11 at p. 21). Clearly, if John is held to have omitted assessable income from his return, he is liable to pay additional tax. The question for determination in view of the findings of fact I have made is whether a person can be said to have ``omitted'' assessable income from his return when he did not know, and could not have known as a result of any act of his, that he had derived any assessable income.

23. That John was one of those persons who might benefit under the trust was entirely due to actions on the part of others as to which he was in a state of total ignorance. Following upon the declaration of trust, Fiduciary immediately assumed the responsibilities of a trustee to John. Those responsibilities it could not shed. Those responsibilities were no less because John had no knowledge of them. Upon the determination to distribute income to John, John became entitled to the benefits of the distribution but only if he chose to accept them. No such choice could be made until such time as he learned of the existence of the Trust and the passing of the resolution. That knowledge did not come to him until the assessment came to his notice and his enquiries led to discovery of his entitlement. In my view the amounts in question did not become his ``income'' until he assented to the status of being a beneficiary and to accept the distributions. Prior to that date it could not be said that he ``omitted'' any income from his returns.

24. I find support for the view I have taken of the matter in the decision of a Full Bench of the Federal Court of Australia (
North Coast Grazing Pty. Limited v. F.C. of T. 87 ATC 4553) where, although dealing with a quite different dimension of the problem, in finding in favour of the applicant, said:

``If, in the face of these considerations, there remains a doubt whether nevertheless the subsection does not extend to a case such as the present, there is a further consideration. Accepting that in modern

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times the rule of strict construction of penal statutes has lost much of its importance (see
Beckwith v. The Queen (1976) 135 C.L.R. 569 at pp. 576 and 578), it would turn it on its head to construe sec. 226(2) (which is a penal provision: see
D.T.R. Securities Pty. Limited v. D.F.C. of T. 87 ATC 4156 dealing with sec. 207) in the manner contended for, thereby enlarging, to cover cases not clearly stated to be within it, a provision which allows an administrative officer, without anything approaching a hearing, to require the payment of a very substantial penalty by a citizen. It is still true to answer, when the Court is asked to take such a step, that there is an `established principle of statutory interpretation requiring strict construction of a penal statute':
Smith v. Corrective Services Commission (N.S.W.) (1980) 147 C.L.R. 134 at p. 139.''

25. If anyone ought be answerable for any loss there may have been to the revenue, it ought be the trustee which failed through its officers to make the beneficiaries aware of their status and entitlements and thereby make them aware of their fiscal responsibilities.

26. In my view, in such circumstances, it cannot be reasonably said that John is a person who has omitted from his return any assessable income. Accordingly, in my view, the impositions of additional tax against John are to be set aside.

27. As to Bernard, it was agreed that, although he gave no evidence, the determination in relation to Bernard's applications should be such determination as would be proper upon the application of the same principles as are to be applied in the case of John. Accordingly, the order will be that the impositions of additional tax against Bernard as an individual be also set aside.

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