ADMINISTRATIVE APPEALS TRIBUNAL - TAXATION APPEALS DIVISION

TRIBUNAL CASE 117

P M Roach, Senior Member

8 August 1987 -

Senior Member, P M Roach The question in these references is whether, in relation to the year of income ended 30 June 1980, the Commissioner should have assessed a young man as liable to pay income tax in the sum of $5826.79 or $2806.32 or, alternatively, some other figure greater than the latter but less than the former.

2 On 22 January 1982 the Commissioner issued assessments of income tax to a trustee in relation to two trusts (the Alpha Trust and the Beta Trust), and to an individual who was a beneficiary presently entitled to the income of both of those trusts. The assessments all related to the year of income ended 30 June 1980. At that date the individual was in his 18th year. The assessments of taxable income (as distinct from assessments of tax) were in accordance with the return of income lodged by the individual. By that return of income it had been disclosed that he had derived an income of $6292 from the Alpha Trust; $5352 from the Beta Trust; and $735 by way of dividends - a total of $12,379. The Commissioner assessed the trusts as liable for tax in sums of $2961.64 and $2519.19 respectively. The Commissioner further assessed the individual to tax of $5826.79, but in calculating the amount due to be paid, gave credit (subject to an unexplained factor of $0.60) for the tax assessed against the two trusts. In doing so, the Commissioner applied rates of tax (47.07 per cent) provided for by the Income Tax Rates Amendment Act 1980 as applicable to that level of income derived by certain persons under the age of 18 years, rather than the lower standard rates of tax. It is that action which is objected to. It is claimed that, in the circumstances, the Commissioner should have exercised discretions vested in him to remit so much tax as exceeded the $2806.32 which would have been due had "standard" rates of income tax been applied. The difference is $3020.47. The questions to be determined revolve around contentions as to whether or not the "exaction" of the higher rate of tax would involve "serious hardship" for the taxpayer. To determine whether such "serious hardship" existed at any relevant time, it is necessary to consider the personal history of the taxpayer and of the trusts. As the individual referred to has died since those assessments were raised and objection made, I shall refer to him as "the deceased".

3 The deceased was born in 1962. He was one of several children born into the family of a married couple. Shortly before the birth of the deceased the father caused a company (Developments) to be incorporated and, shortly after the birth of the deceased, his father caused another company (Fiduciary) to be incorporated. The father was at all material times governing director of Fiduciary. Then, as a later deed records, the paternal grandfather of the deceased made a gift to Developments to the intent that the gift should enure to the benefit of the mother of the deceased and her then children. That was followed, so the same deed records, by an application by Fiduciary for shares in Developments on account of, inter alia, the deceased.

4 In the mid-1960s a deed of rectification was entered into with a view to overcoming problems which had arisen in giving effect to matters previously planned. As a result of that deed, the Alpha Trust came into existence with Fiduciary as trustee. The deed was in fairly conventional terms and provided that the trustee would hold the trust fund upon trust for the deceased should he survive "the distribution date": cl 2. The distribution date, subject to a "Royal Life clause", was to be 31 December 1990 or such earlier date as the trustee determined: cl 3.

Clause 7 provided:

"(1) The trustees shall until the beneficiary shall attain the age of 21 years or the beneficiary's earlier death either in their discretion apply the whole or such part as they think fit of the income of the trust fund for or towards the maintenance education board lodging or otherwise for the benefit of the beneficiary in such manner as the trustees think fit and accumulate the surplus (if any) or they shall in their discretion accumulate the whole of such income and in either case shall invest such surplus (if any) and the resulting income thereof as herein provided to the intent that the accumulations be added to the capital of the trust fund and follow the destination thereof with liberty nevertheless for the trustees at any time or times to resort to the accumulations of any preceding year or years and apply the same or any part thereof for the maintenance education board lodging or benefit of the beneficiary. For the purposes of this clause a year shall mean a period of one year ending on a 30th day of June."

5 Later in the same year the Beta Trust was established by similar documentation. It provided, inter alia, that:

"(9) The trustee may if it thinks fit purchase any land and dwelling for use by the beneficiary as the beneficiary's home and may from time to time as it thinks fit effect repairs renovations alterations or extensions to any such dwelling."

6 Under both trusts the trustee had the statutory powers conferred by s 43(1) of the Trustee Act 1926 (NSW), which provided:

"43(1) Where any property is held in trust for a person who is for the time being an infant for any interest whatsoever, whether vested or contingent, and whether absolute or liable to be divested, the trustee may at his sole discretion pay to the parent or guardian, if any, of the infant, or to the person with whom the infant is for the time being residing, or otherwise apply the whole or any part of the income of the property, for or towards the maintenance education or benefit of the infant."

7 Thereafter Fiduciary acquired assets and, for many years, managed them in the interests of the deceased and of his brothers and sisters under similar trusts established for their benefit. One asset acquired was a shareholding in Developments: the company which owned the substantial residential property which constituted the family residence in which the deceased then resided. So matters continued until the close of the year of income ended 30 June 1976. The trust funds grew and, for the most part at least, income not distributed to the deceased where it was held for him and used to his advantage. The latter account was the source of moneys from which shares were acquired which were later to generate the income by way of dividends returned by the deceased.

8 In the mid-1970s the father separated from his wife and left the matrimonial home, leaving his children in the care of his wife. The father remarried following the dissolution of his first marriage. Having left the original family home, the father purchased a new residence. As a result of these major changes in the father's domestic circumstances, changes followed in the administration of the trusts. These changes were attested to by the solicitor and by the accountant who acted throughout in relation to family matters. Neither the father (as the person making the decisions) nor the mother (as the person controlling the place of residence of the deceased) gave evidence. I accept the evidence of the solicitor and of the accountant so far as it goes. It establishes that the essence of the father's decision was that the deceased and his brothers and sisters would now be supported only (or principally) by the trusts which existed for their benefit. In consequence, instead of income being accumulated as in the past, it was to be applied under new arrangements. What was proposed by the new arrangements was that:

(a) the costs incurred in the maintenance of the residence owned by Developments and occupied by the mother and her children would be apportioned to each child and paid from their trust income;

(b) $1200 per month, paid by the father to the mother to provide for the maintenance of the children and herself, would be apportioned and charged to trust income; and

(c) other expenses relating to the deceased - school fees and clothing, medical and recreational expenses - would be charged against the trust income of the deceased.

9 In the working out of those proposals it commonly happened that the father, in the first instance, bore the expense and then recouped his outlay by later claims against the trustee, effecting the recoupment by journal entries in the records of Fiduciary. In some instances, recoupment was not effected in the same year as the expense to which it related. Even so, the proposals were not always smoothly implemented. The solicitor and accountant both gave evidence that they were frequently called on by the mother to use their best endeavours to persuade the father to advance moneys needed in the maintenance of the household. They instanced her requests as being for money to avoid disconnection of services, such as electricity and telephone; and for the provision of funds to enable items such as petrol to be purchased. It is not possible to make any detailed findings in this regard, particularly as neither parent gave evidence. Nor is the evidence entirely consistent, for it is also said that staff were employed in and about the running of the home and the maintenance of its grounds and in some minor, but probably unsuccessful, enterprises of the mother. Nor is it suggested that the moneys provided were inadequate, but rather only that payments by the father were sometimes late because of the considerable demands on his time by reason of his commercial responsibilities.

10 So far as the application of trust income by Fiduciary is concerned, the charges actually made in the two years ended 30 June 1981 can be summarised as follows:

	Year ended	Year ended
	30/6/1980	30/6/1981
	$	$

Skiing expenses	339.80	1,495.57
Clothing	152.70	1,588.13
Golf club fees	25.00	-
Rent	1,197.93	-
Car expenses	-	2,506.65
Scuba diving course	-	224.00
Miscellaneous	-	41.83
Recoupments by (father)
School fees	2,057.95	2,339.45
Allowance	1,000.00	960.00
Clothes, medical and ski holiday	1,242.50
Car expenses and clothes	-	367.00
Share of maintenance of children paid to (mother)	3,434.86	2,289.91
Rent	-	1,586.02

	9,450.74	13,398.58

11 From the foregoing it is clear that the revenues of the year of income ended 30 June 1980 ($12,379) were insufficient to provide fully for the amounts debited in that year to trust income ($9450) and for the tax ($5826) claimed by the Commissioner as the tax due on that same trust income. On the other hand, it is to be noted that the records of the trustee showed that, at 30 June 1980, the capital of the Alpha Trust relating to the deceased stood at $10,303 and that of the Beta Trust at $2741; and that the accumulated income stood at $72,470. The evidence also establishes that, had the capital accounts in the two trusts been revalued, the figures recorded would have been very much higher.

12 Sadly the deceased did not live long enough to enjoy fully all of these things. He died in the course of his 22nd year, having been grievously injured in a car accident some little time after the assessments in question issued.

13 In 1984 the contentions between the parents of the deceased arising from their divorce were finally resolved when a deed of settlement under the Family Law Act was entered into. That deed acknowledged that gifts and settlements by the father in favour of his wife and their children had exceeded $1,500,000. It also provided for the settlement on the wife, or for application to her use, of more than a further $700,000; and at the same time acknowledged that by reason of trusts such as have been mentioned in relation to the deceased, the children of the marriage were already fully and adequately provided for financially.

14 On 30 April 1980 the Income Tax Assessment Amendment Act 1980 (No 19 of 1980) became law, and thereby the Parliament introduced to the Act Div 6AA - "Income of Certain Children". By Income Tax (Rates) Amendment Act (No 22 of 1980), the Parliament provided for special rates of income tax on the income of "prescribed persons" as defined by Div 6AA. It was provided that the Division was to apply for the year of income ended 30 June 1980 and all subsequent years: s 102AB. It was to apply to "prescribed persons", being persons under the age of 18 years on 30 June 1980 who were not "excepted persons": s 102AC(1). A person would be an "excepted person" if at 30 June 1980 he was married; engaged in a full-time occupation; fell within certain categories specified by reference to the Social Security Act, or was a person who, by reason of a permanent disability, was unlikely to be able to engage in a full-time occupation: s 102AC(2). It is acknowledged that the deceased at the material time was not an excepted person; and that he was a prescribed person. Section 102AD defined "eligible taxable income" by reference to "eligible assessable income". Section 102AE defined "eligible assessable income" as "so much of the assessable income of the person of the year of income as is not excepted assessable income". Section 102AE(2) identified what would otherwise have been assessable income as excepted assessable income "to the extent to which" it was:

(a) employment income or business income;

(b) derived from the investment of property transferred to the minor in respect of:

• loss of parental support;

• personal injury, disease or impairment;

• workers compensation;

• criminal injuries;

• the death of another being paid under a policy of life assurance or out of a provident, benefit, superannuation or retirement fund;

• or by an employer of a deceased person;

• out of a public fund established and maintained exclusively for the relief of persons in these circumstances; or

• pursuant to a decree of dissolution or annulment of marriage recognised as valid in Australia under the Family Law Act or similar.

(c) arising from investment of property inherited or transferred to the minor by another beneficiary within three years of the death of the deceased; or acquired as beneficial owner of a "verifiable" prize in a legally authorised conducted lottery; and

(d) assessed under s 92, 97or 100 of the Act or which, in the opinion of the Commissioner, represented accumulations of excepted assessable income.

Section 102AG made similar provision identifying "excepted trust income". It is not contended that any portion of the assessable income derived by the deceased constituted exempt assessable income or exempt trust income.

15 The case for the applicants is put on the basis that the tribunal should grant relief by applying either or both of the two remaining sections of the Division; namely ss 102AHand 102AJ.

16 Section 102AH(1) provides that:

"Where it is established to the satisfaction of the Commissioner that, in relation to income derived during a year of income by a prescribed person, or by a trustee on behalf of a prescribed person, under arrangements entered into before 26 July 1979 …, the Commissioner may grant … a rebate of tax of such amount (if any) as the Commissioner considers fair and reasonable, not exceeding [the] additional amount [payable by virtue of the application of the Division]."

The power to grant such a rebate is hedged about by conditions, the foremost of which is that there will be no entitlement to a rebate "unless it is established to the Commissioner's satisfaction that the tax payable in respect of that income under this Act, apart from this section and section 102AJ, is greater than the tax that would have been payable in respect of that income if the parent of the prescribed person who has the higher taxable income (or in the case where the parents have equal taxable incomes, the father) had been liable to pay tax", and the taxable income of that parent had been increased by the aggregate of the incomes of his children (or of trustees for the children) being income to which the Division applies that was derived under arrangements made before 26 July 1979.

17 As no evidence has been presented before me which would enable me to determine the taxable income of either parent or of the income to which the Division applies of other children of those parents, there is no foundation for the application of s 102AH or for the granting of any rebate pursuant to that section.

18 The second submission of the applicants is based upon s 102AJ which provides:

"102 AJ(1) In any case where it is established to the satisfaction of the Commissioner that-

(a) the tax that, apart from this section and apart from section 265, would be payable by a person in respect of a year of income exceeds the tax that, apart from section 265, would be payable by the person in respect of that year of income if this Division had not been enacted; and

(b) for any reason, the exaction of the full amount of tax that, apart from this section and apart from section 265, would be payable by the person in respect of that year of income would entail serious hardship, that person is entitled, in his assessment in respect of that year of income, to a rebate of tax of such amount, not exceeding the amount of the excess referred to in paragraph (a), as the Commissioner considers reasonable.

"(2) A reference in subsection (1) to tax payable by a person shall be read as including a reference to tax payable by a trustee of a trust estate in pursuance of section 98 in respect of a share of a beneficiary of the net income of the trust estate.

"(3) …"

19 I am satisfied that it would be proper to grant a rebate in whole or in part of the excess tax if I am satisfied that it should be found that, at the relevant time, "the exaction of the full amount of tax … would entail serious hardship …" to the deceased.

20 As the section makes provision for the rebate to which a person is entitled to be made "in his assessment in respect of that year of income", I am satisfied that "serious hardship" is not to be measured by reference to events or circumstances occurring after the date of assessment. Section 265 of the Act already makes provision in that regard. It operates to provide for the granting of relief from payment of tax, regardless of any interval of time which may have passed between the assessment of tax liability and the granting of relief. Further, despite the reference in s 102AJ(1) to "the exaction" of the tax - a phrase somewhat inappropriately taken up from s 265 - I am satisfied that the benefit of s 102AJ is to be available in appropriate cases, whether or not any action is threatened or contemplated by the Commissioner with a view to enforcing payment of the tax. I am further of the view that, in as much as the rebate is to be made in the making of the assessment, it is the Commissioner's obligation to have regard to all of the circumstances of the taxpayer up to the date of the assessment. Having regard to those considerations I am satisfied that the question of "serious hardship" is to be addressed as of January 1982.

21 I next take into account that it is not any "hardship" which will satisfy the requirements of the section. It must be of such a degree of severity as to merit description as being "serious hardship". However, the section only requires that it should be such a deprivation or burden as would constitute a "serious hardship" in an infant of the age of 17 years and, more particularly, "serious hardship" for the deceased.

22 I next observe that, in my view, the "hardship" in question is financial hardship and not physical hardship and not social hardship. Like the concept of poverty, the concept of hardship is relative: cf Maughan v FCT (1942) 66 CLR 388; 2 AITR 365 (the Boys Brigade case) concerned with poor and underprivileged boys of Sydney residing in some of the worst slum areas of the city; and Lemm v FCT (1942) 66 CLR 399: "Poverty is a relative term. There are degrees of poverty less acute than abject poverty or destitution, but poverty nevertheless." Viewed only from that standpoint, and ignoring for the moment the place of s 102AJ in relation to the Division and the Act, I am not persuaded that, at any time prior to the issue of the assessments, the circumstances of the deceased were such that the issue of the assessment and the exaction of the tax caused him "serious hardship". There is no evidence before me suggesting that he was at any time deprived in relation to the provision of shelter, nourishment or clothing. Furthermore, his health was provided for and he was well provided for educationally. Over and above those basic matters, at least so far as money can provide, he was well provided for in the way of recreation and entertainment. If, as a consequence of the breakdown in the matrimonial relationship between his parents he suffered, his suffering was not financial.

23 As I have already indicated, the question of "severe hardship" is not to be determined by reference to some standard or norm within the community and applied in this instance without regard to the person of the deceased. It may be that he did not enjoy in unlimited degree the financial privileges which could have been available to him within his family; or enjoy such privileges to the same degree as some other members of his peer group, but even taking the most liberal view of that aspect of the matter, I am not persuaded that a financially privileged 17-year-old schoolboy, such as the deceased, suffers "severe hardship" financially only because he is not as privileged as some others and does not have all the financial privileges which might have been his had a matrimonial breakdown not occurred.

24 In my view that leaves one further question to be considered. Division 6AA was introduced with a view to imposing a higher rate of tax upon persons such as the deceased, in circumstances defined by the Division. Had he lived, the deceased might have argued that, having had to bear the entire cost of his own support from his own resources by force of circumstances wholly beyond his control, it would be "severe hardship" for him to require him to pay a higher rate of tax than would be exacted had he been 18 years of age rather than 17, or an "excepted person", or if the income had not been "eligible assessable income". Such an argument calls for a consideration of Div 6AA relative to the Act (and the Rating Acts).

25 The Division only applies to persons who have not reached the age of 18 years within the year of income. The age of 18 years is that recognised by the law as marking entry to adulthood. It is an age by which many, but not all, are independent of their parents. It is also an age up to which some are financially dependent upon their parents. Even before the age of 18 years some have married, establishing the nucleus of a future family and they are treated as "excepted persons". So too are those in full-time occupations and those suffering substantial personal disabilities.

26 As to income, it is classified as not being "eligible taxable income" if it is the product of employment or business; or of the investment of moneys arising by way of compensation for disability or deprivation; or flowing from inheritance or insurance following the death of another; or from "windfall' gains, such as lottery wins; or pursuant to a decree of dissolution of marriage, or equivalent.

27 However, even when those considerations would not relieve the infant from the tax, two further matters have to be considered. Section 102AH would have allowed the granting of a rebate to the deceased had he been the child of poor parents with low taxable incomes, although it would not have assured the rebate to him had his parents been wealthy persons with low taxable incomes. Alternatively, s 102AJ on grounds of "special hardship" might be satisfied if it was established that the infant taxpayer had been forced to rely upon his own financial resources and, only by reason of his infancy, made liable to pay a greater amount in tax than would have been the case if he had been of 18 years or more. That in some respect would seem to have been the situation of the deceased. Although residing in the home of his mother, the financial support which, prior to 1976 had been forthcoming from his father, was no longer provided as before. To that extent it could be said that he was forced to be self-reliant in such a way as would have been the case had both parents died in poverty. But, of course, that was not the case. Both parents were alive and they were liable to maintain the deceased as a child of marriage who had not attained the age of 18 years, although only "according to their respective financial resources": s 73 of the Family Law Act. The Family Court was empowered to make provision for the deceased in that regard, but only after taking into account: "(c) the income, earning capacity, property and other financial resources of the child; (d) the financial needs of the child; and (e) the manner in which the child is being, and in which the parties to the marriage expected the child to be, educated or trained" ( Family Law Act s 76).

28 Upon the evidence before me there is no indication that any such maintenance order was ever sought (except perhaps in a formal sense) or made, although I note that the fact that a decree nisi had been granted during 1976 indicates that the Family Court was then satisfied that proper arrangements in all circumstances had been made for the welfare of all the children of the marriage who had not attained the age of 18 years (Family Law Act s 63). Further, with the limited evidence before me as to the circumstances of the parents, I do not attempt to consider what order (if any) the Family Court might have made.

29 However, having considered the evidence placed before me, I am not persuaded that the deceased was ever in a condition of not having available to him the parental support which might reasonably have been expected. As the figures show, his father did in fact provide substantially financially for the deceased, even though he later sought to recoup, and did recoup from Fiduciary - which he controlled - such expenses as he had incurred. (It is unnecessary to consider whether or not either trust authorised Fiduciary to make such payments to the father.) In short, I am not persuaded that the father had totally abandoned his parental responsibilities or that he had been relieved of them by Order of the Family Court, or equivalent.

30 Accordingly, although it would seem that the full cost of providing for the financial support of the deceased was provided out of the resources of the deceased, I am not satisfied that the imposition of the special rate of tax constituted "severe hardship" for the deceased, even though it exposed him to a liability in tax greater than that which would have obtained had his circumstances differed only in that he had been a few months older.

31 Accordingly, I confirm the determination of the Commissioner upon the objection.