Decision impact statement
Yazbek v Commissioner of Taxation
 FCA 39
2013 ATC 20-371
(2013) 88 ATR 792
(2013) 209 FCR 416
Venue: Federal Court of Australia
Venue Reference No: NSD 1471 of 2012
Judge Name: Bennett J
Judgment date: 31 January 2013
Appeals on foot: No
Decision Outcome: Favourable to the Commissioner
Impacted AdviceRelevant Rulings/Determinations:
Beneficiary of a Trust
Section 170 ITAA 1936
|This decision has no impact for ATO precedential documents and Law Administration Practice Statements.|
Outlines the ATO's response to this case which concerns whether an individual was a 'beneficiary of a trust estate' during the 2005 income year and, if so, whether the Commissioner had a 4 year period to issue an amended assessment under s 170 ITAA 1936.
Brief summary of facts
The taxpayer (an individual) was an object of a family discretionary trust during the 2005 income year. The taxpayer was not entitled to any of the income or capital of the trust and did not receive any distribution of income or capital from the trust during the relevant year.
The taxpayer objected to an amended assessment issued by the Commissioner which increased the taxpayer's liability by including an additional amount in his assessable income. The increase in assessable income was unconnected with the family discretionary trust. The Commissioner disallowed that objection and the taxpayer sought a review of that decision by the Administrative Appeals Tribunal (AAT).
The issue of whether the Commissioner was out of time to amend the taxpayer's assessment (because it had been made more than two years after the day on which the original assessment had been made) was heard by the AAT as a preliminary question.
Generally, the Commissioner may issue an amended assessment to an individual for an income year within two years after the day the original assessment was issued: item 1 of the table in subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936). However, the Commissioner has four years within which to issue an amended assessment 'if the individual is a beneficiary of a trust estate at any time in that year...' - provided the trust is not a small business entity for the relevant year (which it wasn't) and the trustee is not in their trustee capacity a full self-assessment taxpayer for that year (which they weren't): item 1(d) of the table in subsection 170(1).
The AAT determined that the Commissioner had power and was within time to issue the amended assessment. The taxpayer appealed that decision in the Federal Court.
Issues decided by the court
1. Did the Court have jurisdiction to hear the application for review?
The Court held that it had jurisdiction to hear the application for review pursuant to paragraph 5(1)(f) of the Administrative Decisions (Judicial Review) Act 1977.
2. Was the taxpayer a 'beneficiary of a trust estate' within the meaning of item 1(d) of the table in subsection 170(1) of the ITAA 1936?
The Court held that the common usage of the term 'beneficiary' includes any person for whose benefit the trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms. It therefore includes the potential object of a discretionary trust. This accords with the decision of Lindgren J in Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 which was followed by Stone J in Colonial First State Investments Ltd v Commissioner of Taxation (2011) 192 FCR 298.
The Court then looked at whether a different conclusion was warranted in respect of item 1 of the table in subsection 170(1) given its statutory context. The Court held that no different conclusion was warranted and that the issue was determined by reference to the common meaning of 'beneficiary'. Further, there was nothing in paragraph 1(d) of item 1 that qualified what was meant by 'beneficiary' in that context. The Court rejected the taxpayer's argument that the four year period provided for by paragraph 1(d) of item 1 only applied where the subject matter of the amendment was linked to the taxpayer's status as a beneficiary of a trust estate.
The taxpayer in part contended that mischievous taxpayers could conceivably include all Australian residents or specific public figures as beneficiaries to deny them the benefit of the two year amendment rule.
However, in conclusion, her Honour stated at  that:
I do not accept that there is an absurdity said to flow from the Tribunal's construction that would mean that the ordinary meaning should be displaced. It is not an absurd construction that Parliament intended to increase the time limit for amending an assessment of a "beneficiary" in the ordinary sense of the word where the "risk" to the taxpayer is that the taxpayer will be called on to pay amounts that are lawfully due ...'
Therefore, the Court concluded that the AAT's decision that the Commissioner was within time to issue the amended assessment was correct.
ATO view of Decision
The decision accords with the ATO's view of the operation of subsection 170(1) of the ITAA 1936.
Consistently with the decision in Kafataris v Commissioner of Taxation, it confirms that the term 'beneficiary' means any person (or entity) for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms.
As such, a four year period of review applies to a taxpayer who is a beneficiary of a trust, except where the trust is a small business entity in the relevant year of income (or where the trustee of the trust, in that capacity, is a full self-assessment taxpayer). This is the case even if the amendment is made for a reason unrelated to the trust.
Where it is available, a four year period of review will apply equally to both ATO and taxpayer initiated amendments.
The decision is expected to have limited practical consequences. The Commissioner does not intend to change his current compliance approaches, which for individual taxpayers, involves seeking to complete compliance action and amend assessments (if relevant) in most instances within two years.
However, in more complex cases involving an individual who is a beneficiary of a trust for which a four year period of review applies, compliance action for that individual may generally take place over that period. Such cases may arise, for example:
- in audits of high wealth individuals and family groups (whether or not the individual received a distribution from the trust in that income year), particularly where there is a close familial relationship between the beneficiary and the trust, the beneficiary is actively involved in the administration of the trust and / or the beneficiary is able to influence the distribution of income or capital from the trust; or
- where there is an adjustment to the taxable income of the individual emanating from compliance action in respect of the trust; or
- in other circumstances involving complexity, including complex audits relating to claims for work-related expenses which cannot be concluded within two years.
Implications for ATO precedential documents (Public Rulings & Determinations etc)
Implications on Law Administration Practice Statements
Income Tax Assessment Act 1936
Administrative Decisions (Judicial Review) Act 1977
Kafataris v Deputy Commissioner of Taxation
(2008) 172 FCR 242
2008 ATC 20-048
73 ATR 531
Gartside v Inland Revenue Commissioners
 UKHL 6
 AC 553
Colonial First State Investments Ltd v Commissioner of Taxation
(2011) 192 FCR 298
 FCA 16
2011 ATC 20-235
81 ATR 772
Commissioner of Taxation v Ramsden
 FCAFC 39
(2005) 58 ATR 485
2005 ATC 4136
Commissioner of Taxation v Ryan
(2000) 201 CLR 109
 HCA 4
43 ATR 694
2000 ATC 4079