IDLECROFT PTY LTD & ORS v FC of T
Judges:Spender J
Court:
Federal Court
MEDIA NEUTRAL CITATION:
[2004] FCA 1087
Spender J
These are five appeals pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (``the Administration Act''). The appeals were heard together with a further appeal, Q59 of 1999, Rural Aviation Pty Ltd as trustee for The Harris Family Trust as applicant and the Commissioner of Taxation as respondent. That appeal has, since the hearing, settled. Perhaps unfortunately, the central submissions at the hearing were based on the Rural Aviation appeal, because the issues in each of the then six appeals were substantially the same. Each appeal concerns what is known as the ``Hendon Scheme''.
2. In broad outline each applicant, who is a trustee of a discretionary trust, entered into a joint venture agreement (``JVA''), or agreements, with Westside Commerce Centre Pty Ltd (``WCC'') as trustee for the Hendon Unit Trust to develop a property in South Australia, Hendon Common. Each applicant was introduced to the scheme by its tax agent. Under the JVAs the applicants promised to fund the development. The agreed method of funding was for the taxpayers to add WCC as a beneficiary of their trusts and appoint income to WCC. Only 12 per cent of the income appointed was to be paid immediately. Each applicant represented to the respondent (``the Commissioner'') in its tax returns that WCC was presently entitled as a beneficiary to the appointed income. WCC had tax losses, so did not pay tax on the appointed income.
3. The Commissioner accepted that the appointments of income were valid, but assessed each applicant under s 169 of the Income Tax Assessment Act 1936 (Cth) (``the Tax Act'') on the basis that each applicant did not confer a present entitlement on WCC (because of the operation of s 100A of the Tax Act), such that s 99 of the Tax Act applied to make the applicants liable to tax on the appointed income, rather than WCC. Each applicant objected to the assessment on grounds that included that the income to WCC was validly appointed. The Commissioner made an objection decision accepting again that the income to WCC was validly appointed. Each applicant appealed under s 14ZZ of the Administration Act.
4. Section 14ZZ of the Administration Act relevantly provides:
``If the person is dissatisfied with the Commissioner's objection decision, the person may:
- ...
- (c) if the decision is an appealable objection decision (other than a reviewable objection decision) - appeal to the Federal Court against the decision.''
5. Idlecroft Pty Ltd (010 714 897) as trustee for the Simon John Fleury Family Trust (``Idlecroft''), on 25 March 1999 appealed against:
``The decision of the Deputy Commissioner of Taxation to disallow the Applicant's objection to the income tax assessments issued to the Applicant in respect of the years ended 30 June 1993, 30 June 1994 and 30 June 1995.''
A similar appeal was lodged by Downville Pty Ltd (010 350 393) as trustee for the McGowan Family Trust (``Downville'') in respect of the disallowance of Downville's objection to income tax assessments issued to Downville in respect of the same three tax years; Dimouth Pty Ltd (010 324 759) as trustee for the O'Connor Brothers Trust (``Dimouth'') appealed from the Commissioner's disallowance of Dimouth's objection to the
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income tax assessments issued in respect of the same three tax years; Clurnite Pty Ltd (010 548 017) as trustee for the Harper Family Trust (``Clurnite'') appealed against the disallowance by the Commissioner of Clurnite's objection to the income tax assessments issued in respect of the same three tax years; and Acamae Pty Ltd (010 030 761) as trustee for the Vieglais Family Discretionary Trust (``Acamae'') appealed against the Commissioner's disallowance of Acamae's objection to income tax assessments issued for the same three tax years.6. While each appeal refers to assessments for three named tax years, the evidence suggests that in some cases, there were appointments in only one or two of the tax years. This evidence is referred to later.
7. One of the Hendon Scheme cases was
BRK (Bris) Pty Ltd v FC of T 2001 ATC 4111 (``BRK''), which came before Cooper J. It appears that the Commissioner, in preparing for that hearing, noticed that the appointments of income might not have been valid at all, due to the nominations of WCC as a beneficiary bearing no relationship to the Wagner Trust Deed in that case. The Commissioner, in the course of that hearing, argued on the basis that in the circumstances peculiar to that case the appointments of income were invalid. Cooper J gave judgment on 2 March 2001, and found on the facts that the appointments were invalid. His Honour then dealt with the consequences of that invalidity. As a consequence of the judgment of Cooper J in BRK, the Commissioner reviewed the validity of the appointment of each applicant of income to WCC.
8. In each of these appeals, it is contended by the applicant that WCC as trustee of the Hendon Unit Trust was never properly nominated as a beneficiary of the respective trusts. The Commissioner accepts that that was the case where Idlecroft, Dimouth and Acamae were the trustees, but says that WCC was appointed a beneficiary in the Downville and Clurnite appeals. In those two appeals, the Commissioner contends that the appointments of income to WCC were made and, having regard to the concession by the applicants that the JVAs have to be regarded on the appeals as ``reimbursement agreements'' as that term is found in s 100A of the Tax Act, the consequence is that the income tax assessments issued to Downville and Clurnite must stand.
9. Idlecroft's 1994 income tax return disclosed a purported distribution to the Hendon Unit Trust of $70,000, and the 1995 income tax return disclosed a purported distribution to the Hendon Unit Trust of $61,738. Notices of assessment for the 1994 and 1995 years issued on 27 July 1998, notices of objection were lodged by Idlecroft on 21 September 1998, and a notice of disallowance of objections dated 27 January 1999 with attached reasons was issued by the Commissioner of Taxation on 27 January 1999.
10. Downville's tax return for the 1994 year listed a distribution of $299,968 to the Hendon Unit Trust. A notice of assessment issued to Downville on 24 July 1998. A notice of objection against that assessment was lodged on 21 September 1998, and a notice of disallowance to the objection dated 27 January 1999, with attached reasons for decision, was made on 27 January 1999.
11. In the case of Dimouth, its 1993 tax return disclosed a distribution of $80,432 to the Hendon Unit Trust, its 1994 tax return disclosed a distribution of $73,971 in favour of the Hendon Unit Trust, and the 1995 tax return of Dimouth disclosed a distribution in favour of the Hendon Unit Trust in the amount of $15,224. Notices of assessment for each of the 1993, 1994 and 1995 years were issued by the Commissioner on 4 August 1998. Notices of objection to the assessments were lodged on 21 September 1998, and the Commissioner disallowed the objections by letter dated 27 January 1999, giving reasons for the disallowance.
12. In the case of Clurnite, the 1993 income tax return disclosed a distribution to Hendon Unit Trust in the sum of $200,000. The 1994 income tax return disclosed a distribution to Hendon Unit Trust of $75,554 and the 1995 income tax return showed a distribution to Hendon Unit Trust of $63,056. Notices of assessment for each of the 1993, 1994 and 1995 years were issued on 4 August 1998. Notices of objection to the assessments were lodged on 21 September 1998 and disallowed by the Commissioner by letter dated 27 January 1999.
13. Acamae, in its 1993 income tax return, disclosed a distribution to Hendon Unit Trust in the amount of $189,793. The 1994 income tax return for Acamae showed an amount of $186,428 distributed to Hendon Unit Trust, and Acamae's 1995 income tax return disclosed a
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distribution of $220,000 to Hendon Unit Trust. [ I note that the written submissions on behalf of Acamae refer to amounts of $400,000, $186,428 and $222,000 respectively.] Again, in Acamae's case, notices of assessment for each of the 1993, 1994 and 1995 were issued on 4 August 1998. Notices of objection to the assessments were lodged on 21 September 1998 and disallowed by letter of 27 January 1999.14. Each applicant in these appeals has made formal concessions, the concessions being made for the purpose of these proceedings only:
``(a) That the material filed does not discharge the onus of proof which the Applicants bear of establishing that the agreements entered into by them, which are the subject of the aforementioned proceedings, were not entered into by one or more of the parties thereto for purposes which included the purpose of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of the year of income, would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into;
(b) That the material filed does not discharge the onus of proof which, by reason of the foregoing concession, the Applicants bear, of establishing that the agreements in question were entered into in the course of ordinary family or commercial dealings;
(c) That the material filed does not discharge the onus of proof which the Applicants bear of establishing that any tax shortfall was not caused by the recklessness of a registered tax agent with regard to the correct operation of the Income Tax Assessment Act 1936 (`the ITAA 36 Act') or the regulations made thereunder;
(d) That by reason of the foregoing concessions the only issue in relation to the penalty imposed by the Commissioner of Taxation on the assessment issued to the Applicants is whether or not there was any tax shortfall upon which the penalties could have been properly imposed.''
15. It is a curious irony that each notice of objection by each applicant asserted that it did not have a liability to tax under s 99A of the Tax Act, because WCC as trustee for the Hendon Unit Trust was properly assessed on the net income of the trust under s 97 of the Tax Act, as a beneficiary of the relevant trust presently entitled to the trust income, whereas each applicant now asserts that WCC was never presently entitled to any trust income, the appointment of WCC as trustee of the Hendon Unit Trust in each case being invalid and ineffective. It is a further irony that the second reason relied on by each applicant in its notice of objection was the contention that s 100A did not apply, because the relevant JVA did not constitute a ``reimbursement agreement'', whereas there is now no argument that each JVA has to be regarded as constituting a ``reimbursement agreement''.
16. In each appeal the applicant has identified two issues. The first is whether the applicant trustee, as trustee of the relevant trust, is liable to pay tax pursuant to s 99A of the Tax Act in respect of all or any part of the amounts of income which it resolved to appoint to WCC as trustee of the Hendon Unit Trust.
17. The second issue is whether there was any tax shortfall on which the Commissioner could properly impose additional tax and penalties pursuant to Part VII of the Tax Act.
18. The Statutory Provisions relevant to each appeal is to be found in Division 6 of the Tax Act:
``Special provisions relating to present entitlement
95A(1) For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary.
95A(2) For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate.
...
Trustees
96 Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.''
19. Section 97 relevantly provides:
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``(1) Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
- (a) the assessable income of the beneficiary shall include:
- (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident;...''
20. The contention for each applicant is that in each case WCC was not a beneficiary. The Commissioner contends that WCC was a beneficiary of the trusts of which Downville and Clurnite were trustees, but was not presently entitled.
21. Subsection 99A(4) and subsection 99A(4A) of the Tax Act deal with the situation where there is trust income which has not been brought to tax under either s 97 or s 98. In each appeal the relevant provision is subsection 99A(4A), which provides:
``(4A) Where there is a part of the net income of a resident trust estate:
- (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
- (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and
- (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;
the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.''
22. It is common ground that neither 99A(4A) (b) or (c) has application in the present appeals, and so the question in each case is whether there is part of the net income of a resident trust estate that is not included in the assessable income of a beneficiary of the trust estate in pursuance of s 97. In that event, the consequence of s 99A(4A) is that ``the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate...''.
23. Section 100A of the Tax Act deals with what might be described as trust stripping. It is headed ``Present entitlement arising from reimbursement agreement'':
``(1) Where:
- (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
- (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the `relevant trust income' ) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;
the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.
(2) Where:
- (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability would, by reason that income of the trust estate was paid to, or applied for the benefit of, the beneficiary, be deemed to be presently entitled to income of the trust estate; and
- (b) that income or a part of that income (which income or part, as the case may be, is in this subsection referred to as the `relevant trust income' ) was paid to, or applied for the benefit of, the beneficiary as a result of a reimbursement agreement or as a result of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;
the relevant trust income shall, for the purposes of this Act, be deemed not to have been paid to, or applied for the benefit of, the beneficiary.
...
(5) For the purposes of subsection (1), but without limiting the generality of that subsection, where:
- (a) a reimbursement agreement was entered into at or after the time when a
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person became a beneficiary of a trust estate (whether the person became a beneficiary of the trust estate before or after the commencement of this section); and- (b) the amount (in this subsection referred to as the `increased amount' ) of the share of the income of the trust estate to which the beneficiary is presently entitled exceeds the amount (in this subsection referred to as the `original amount' ) of the income of the trust estate to which the beneficiary would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into or if an act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement had not occurred;
the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount shall be taken to have arisen out of the reimbursement agreement.
...
(8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
(9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.''
24. The operation of subs 100A(2) of the Tax Act is that the amount paid to, or applied for, the benefit of a beneficiary as the result of a reimbursement agreement, which a beneficiary would otherwise be deemed to be presently entitled to income of a trust estate, is deemed not to have been paid to or applied for the benefit of the beneficiary. The consequence is s 101 does not apply to that income, with the consequence that s 97 does not apply to it, and the further consequence is that subs 99A(4A) does apply to it. Section 100A is attracted only if there is a purpose to the agreement, the nature of which purpose is defined in subss 100A(8) and 100A(9).
25. As earlier noted, the first concession made in each appeal is that the applicant has not discharged the onus of proof which it would bear of establishing the absence of that purpose in at least one of the persons associated with the agreement. The second is that each applicant is not able to establish that the agreements in question were entered into in the course of ordinary family or commercial dealings. The third concession is that each applicant is unable to show an absence of recklessness on the part of a registered tax agent. The effect of the concessions concerning penalty is that if each applicant fails in relation to its contentions concerning primary tax, the penalty will stand and that, conversely, if the applicants win on the question in relation to primary tax, it also wins on the question of penalty.
26. As Mr David Russell QC, senior counsel for each applicant conceded:
``... where Westside Commerce Centre was presently entitled to the net income within the meaning of section 97(1), section 100A will operate on the evidence... to destroy that present entitlement with the consequence that section 99A will apply and the assessment will stand.''
27. The applicants and the Commissioner, however, diverge as to the consequences which would follow if the appointment was invalid and ineffective as the applicants submit.
28. The applicants say that where the appointment was invalid and ineffective, s 100A simply ceases to have any possible application, while the Commissioner asserts that s 100A is still capable of operation in those circumstances.
29. There were six JVAs in total. The relevant provisions of each JVA are identical.
30. In the preamble under the heading ``Introduction'', the following appears:
``B. The Proprietor is the registered proprietor of the Land and has partly
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developed the Land as summarized in Part 5 of the Schedule. The Proprietor is trustee of the Trust described in Part 2 of the Schedule (`the Proprietor's Trust').C. Each of the Contributors is a trustee of a separate discretionary trust as set out in Column 1 of the Schedule (`the Contributor(s) Trust') and is a client of the Promoter.
D. The Contributors have the effective control over and the ownership of the Property Manager and the Project Manager's Trust.
E. The Contributors have considerable financial resources and considerable and various business experience.
F. The Contributors desire to pool their financial resources for the purposes of undertaking significant property develop- ment but in a manner designed to limit the risks of development and have decided to do so by the formation of this Joint Venture.''
31. The definition part of the JVAs includes a definition of ``Commencement Date'' as meaning the date specified in Pt 6 of the Schedule. The expression ``Development Costs'' is defined in cl 1.1.12 as follows:
``1.1.12 `Development Costs' means:-
- 1.1.12.1 all costs of the Project including contributions of every kind paid or payable to and guarantees and performance bonds required to be given to the Council and any other statutory body or authority, survey, plan approval and sealing fees, costs of road works, drainage and sewerage, costs of construction and of all other works necessary to complete the Project and all other necessary costs but excluding all holding charges (including local authority rates and land tax and interest on loans and debts) incurred in respect of the Land, or any of the Lots, or the Project;
- 1.1.12.2 all costs of and incidental to the design and supervision of construction of the Project;
- 1.1.12.3 all insurance premiums in respect of insurances effected in relation to the Project;
- 1.1.12.4 any legal and all other professional expenses, stamp duty (including in respect of this Agreement), registration fees, Council fees and the like relating to the Project or the Joint Venture (including its formation) and including those referred to in Clause 23.2;
- 1.1.12.5 any marketing and sale costs under Clause 9;
- 1.1.12.6 subject to any other provision, any other costs associated with the Project.''
32. The word ``Land'' is defined to mean the land described in Pt 9 of the Schedule. In each case the land referred to was the Hendon Common. The expression ``Westside Commerce Centre'' was defined in cl 1.1.34 to mean:
``... the aggregation of lots and land in South Australia local authority area of the Corporation of the City of Woodville of which the land forms part and which is known by that name.''
33. Clause 2.1 relevantly provided:-
``The Proprietor, the Contributors, the Project Manager and the Promoter agree to associate themselves in a joint venture from the Commencement Date upon the terms of this Agreement to carry out the Project on the condition that there shall be no more than fifteen parties to the Joint Venture.''
34. The Proprietor was defined as WCC in Pt 2 of the Schedule. The Project Manager was Astion Pty Ltd (060 572 581) (``Astion''). The Promoter was Mevton Pty Ltd (010 927 572). The summary of the development is set out in Pt 6 of the Schedule and the Contributors listed in Pt 3 of the Schedule.
35. The general objectives of the JVA are set out in Pt 3, cl 3.1 to 3.7.
36. Clause 4.1 made it clear that the Proprietor was to remain the registered proprietor and owner of the Land and Lots and the Project Manager, the Contributors and the Promoter would not, pursuant to the agreement, acquire any interest in the Land or in any of the Lots.
37. The Contributors initial entitlements under the JVA to the profits of the JV are set out in percentage terms in Column 3 of Pt 3 of the Schedule.
38. Clause 6 dealt with payment of development costs and relevantly provided as follows:-
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``6.1 On or before the Commencement Date, each of the Contributors shall:-
- 6.1.1 Cause the Proprietor to become a beneficiary of that Contributor's Trust;
- 6.1.2 Appoint, by way of appointment of income or capital or both, from that Contributor's Trust, for the absolute benefit of the Proprietor, the sum set out in Column 2 of Part 3 of the Schedule (separately and in aggregate called `the Initial Development Funds');
6.2 Each of the Contributors warrant that its respective obligations under Clause 6.1 are, and will be at the Commencement Date, within its powers as trustee of its Contributor's Trust and are, and will be at the Commencement Date, a valid exercise of those powers.
6.3 Each of the parties acknowledges that:-
- 6.3.1 The Proprietor is already subject to substantive borrowings;
- 6.3.2 Given the desire of the directors of the Proprietor to avoid further borrowing, the most appropriate method of funding the Joint Venture by the Contributors is by way of appointments of benefits from the respective Contributors' Trusts;
- 6.3.3 Whilst the Proprietor's borrowings have been from related entities, one member of the group of which the Proprietor has been part (`the Moore Group') has extensive external borrowings which are partly secured by securities granted by the Proprietor. The Moore Group is negotiating with its lenders to vary the terms of its borrowings and related securities. The thrust of the negotiations is to obtain agreement to permit the Proprietor to sell respective Lots and obtain releases of the securities over the Lots at the Proprietor's Lot Prices and to grant a moratorium against action by the lenders pending carrying out the Project by the Proprietor with funding by the Contributors.
- 6.3.4 Because of the circumstances set out in Clause 6.3.3, the preferred use of the Initial Development Funds is to pay the Development Costs, as distinct from discharging the existing debts and holding costs of the Proprietor.
6.4 Because of the circumstances set out in Clause 6.3.4:-
- 6.4.1 The Initial Development Funds may only be used by the Proprietor to pay for Development Costs unless otherwise unanimously agreed by the Contributors and the Proprietor in writing;
...
6.6 All Development Costs will be borne and paid by the Proprietor up to the Maximum Funding Amount and in the priority specified in Clause 6.9. The Project Manager, as agent for the Proprietor but subject to clauses 6.4.2.3 to 6.4.2.5 and 6.9, will abide by the directions of the Proprietor in relation to expenditure of the Initial Development Funds.
...
6.9 To the extent that Development Costs are to be incurred in respect of specific Lots, the Proprietor or the Project Manager shall give thirty days notice to the Contributors before incurring the expenditure and the Contributors may veto that expenditure. Generally, the Contributors may determine the order of Lots in respect of which specific expenditure is incurred.''
39. The JVAs relevant to the Idlecroft appeal are JVA Nos 4 and 6, and the JVAs relevant to the Clurnite appeal are JVA Nos 1, 3 and 6. The JVAs relevant to the Acamae appeal are JVA Nos 1 and 6, although the Trustee is named in the Schedule to the JVAs as Gashley Pty Ltd. The JVA relevant to Downville is JVA No 4. The JVAs relevant to Dimouth are JVA Nos 1, 3 and 6. The commencement date of JVA Nos 1 and 3 was 30 June 1993, the commencement date of JVA No 4 was 30 June 1994, and the commencement date of JVA No 6 was 30 June 1995.
40. The concessions by the applicants have the consequence that each JVA has to be regarded as constituting a reimbursement agreement.
41. In the cases of Idlecroft, Acamae and Dimouth, the Commissioner accepts that the resolutions of appointment of income to WCC could not on any view fairly be authorised by the terms of the relevant trust deed: in the case of Idlecroft, by the terms of the Simon John Fleury Family Trust Deed; in the case of Acamae by the terms of the Vieglais Family
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Discretionary Trust Deed; and in the case of Dimouth by the terms of the O'Connor Brothers Trust Deed.42. However, the Commissioner asserts that the appointment of income to WCC was authorised in the case of Downville by the terms of the McGowan Family Trust Deed, and in the case of Clurnite the appointments to WCC were authorised by the terms of the Harper Family Trust Deed.
43. It is convenient to consider these contentions at this stage, because it is common ground that if the appointments to WCC are valid, s 100A applies and the assessments are not excessive.
44. Insofar as Downville is concerned, the McGowan Trust Deed relevantly defined ``the Principal'' in cl 1.8 to be the person named and described as such in the First Schedule to the deed. The person so named is Lionel Stanley McGowan. It is clear that WCC as trustee of the Hendon Unit Trust does not fall within the description of any of the classes of beneficiaries referred to in the trust deed as ``primary, secondary or tertiary beneficiaries''.
45. The Commissioner relies on the terms of cl 6 of the trust deed, which provides:
``6. Notwithstanding anything to the contrary herein contained but subject to clause 10 hereof, the Trustee shall have the power at any time or times and from time to time in its absolute discretion with or without consideration to pay, transfer, apply, set aside or accumulate the whole or any part of the Trust Fund and/or the income to any such persons, incorporated companies, trusts, charities, bodies or associations whether incorporated or unincorporated having a separate legal identity in the country or place according to ther (sic) laws of which they have been created as the Principal during his her or their lifetime shall by notice in writing to the Trustee before the Perpetuity Date appoint to be a beneficiary for the purpose of this Deed PROVIDED THAT the following shall not be appointed beneficiaries for the purposes of this Deed nor shall they be permitted to acquire a beneficial interest in the income or capital of the Trust or any part thereof-
- (a) the Settlor;
- (b) any Trustee or former Trustee except where the Trustee or former Trustee is named as a beneficiary in the First Schedule hereto;
- (c) any Trust which would, if appointed, result in the infringement of the law against perpetuities.
The expression `beneficiary', `beneficiaries', `beneficiary or beneficiaries' where used in this Deed or in the Schedules hereto shall include beneficiaries appointed pursuant to the terms of clause 6 hereof.''
46. A document headed ``Nomination of General Beneficiary'' executed by Downville on 22 June 1994 contains as recital C:
``C. Clause of the Deed makes provision for the nomination in writing by the Trustee as a General Beneficiary of the Trust, the trustees (in their capacity as such) of any trust or settlement under which any General Beneficiary is a beneficiary whether present or contingent.''
The body of the nomination reads:
The Seal of Downville Pty Ltd has been applied, and a signature, accepted as Mr McGowan's, signed over it.
47. Two things should be mentioned about this nomination. First, there is no ``General Beneficiary'' of the McGowan Family Trust. Secondly, cl 6 of the trust deed gives power to the Principal to appoint a beneficiary, and cl 6 does not confer a power on the Trustee to make such an appointment. The Commissioner nonetheless contends that there was a mere irregularity in relation to the nomination of WCC in its capacity as Trustee of the unit trust as a beneficiary of the trust. It was submitted for the Commissioner that where there is power to appoint a beneficiary, a mere irregularity in the qualification of the person as a beneficiary is not, in tax matters, a concern of the Court or the Commissioner.
48. Mr Boddice SC, senior counsel for the Commissioner referred to the observations of Mason J (as he then was), with whom the other members of the Court agreed in
Cridland v FC of T 77 ATC 4538 at 4542-4543; (1977) 140 CLR 330 at 340-341:
``The respondent's second submission is that the appellant was not an income beneficiary of the No. 2 trust in respect of the 1969 year and that he was therefore not entitled to the benefit of the averaging provisions for the succeeding year. Though it is conceded that the appellant was registered as an income beneficiary in the No. 2 trust it is argued that he was registered in breach of the provisions of the trust deed in that the assignment to him of the income unit of D.P. O'Shea was ineffective... by the terms of the trust deed the trustee was required only to account to those persons who were registered as income beneficiaries (cl. 2(c)) and that the trustee was authorized to distribute the income, in the event that he decided to distribute income instead of accumulating it, to the registered income beneficiaries and not to other persons. Non- compliance with the requirements of the trust deed antecedent to registration might give rise to some equitable claim to relief against a person who had been irregularly registered as an income beneficiary, at least at the suit of a transferor, but it could not affect the power of the trustee to pay income to a person whose name appeared in the register of income beneficiaries at the relevant time. If there be a non-compliance or an irregularity which could ground a claim to equitable relief in the present case, it is not a matter on which the respondent can rely in order to sustain his assessment.''
49. The fact that Mr McGowan signed the document ``Nomination of General Beneficiary'' over the stamp of Downville and as a director of Downville does not, in my judgment, constitute an appointment by him as Principal, nor does the document constitute a notice in writing by the Principal to the Trustee appointing WCC to be a beneficiary for the
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purposes of the McGowan Trust Deed. I reject the contention of the Commissioner that WCC was nominated as a beneficiary of the McGowan Family Trust.50. The position in relation to the Clurnite nomination of WCC as a beneficiary is more difficult. It is plain from the terms of the JVA, and in particular cl 6.1, 6.1.1, 6.1.2 and 6.2, that it was the intention to appoint WCC as a beneficiary of the Harper Family Trust, ``by way of appointment of income or capital or both'' the sums referred to in cl 6.1.2, and that it was contemplated and indeed warranted that Clurnite was empowered, pursuant to the Harper Family Trust Deed to appoint WCC as a beneficiary of the Harper Family Trust. Unlike the McGowan Family Trust Deed of which Downville was Trustee, the Harper Family Trust Deed of which Clurnite is Trustee, was a generic Trust Deed.
51. There was prepared pro forma nomination documents for the contemplated nomination of WCC as a beneficiary, and for the appointment of income to it. The pro forma nomination documents took the form of a minute of a meeting of directors to be held before 30 June of the relevant tax year, two forms of Nomination of General Beneficiaries, and a distribution minute to be executed before 30 June of the relevant tax year.
52. The process of nominating WCC as a beneficiary pursuant to that process and the appointment of income to it appears calculated to achieve the contractual obligations in the JVA. The nomination of WCC as a beneficiary appears regular. However, it is argued on behalf of Clurnite that the nomination of WCC was in breach of the provisions of the Trust Deed, in that on the proper construction of the Harper Family Trust Deed, the power of nomination as a General Beneficiary which reposed in the trustee did not permit the nomination of WCC as a General Beneficiary.
53. The contention by the Commissioner is that the nomination of WCC as a beneficiary of the Harper Family Trust appears regular and within the power of Clurnite. The Commissioner relies on cl 1(b)(1)(iii)A. and C., and cl 3(b) of the Harper Family Trust Deed. It is submitted on the Commissioner's behalf that the documents executed by or on behalf of Clurnite effected a nomination under cl 1(b) and an appointment of income under cl 3(b). It was submitted that equity looks to form not substance, and any slight irregularities in the forms would not invalidate the appointment.
54. It will be recalled that for the 1993, 1994 and 1995 tax years, Clurnite filed income tax returns indicating that $200,000, $75,554 and $63,056, respectively, had been appointed to WCC as trustee of the Hendon Unit Trust by Clurnite as the trustee for the Harper Family Trust, and that the notices of objection in respect of those three tax years were principally on the ground that WCC has been nominated a beneficiary of the Harper Family Trust and that the appointments of income to it meant that WCC was presently entitled to that income in each respective tax year.
55. It is necessary to refer to the documentation concerning the nomination by Clurnite of WCC as a General Beneficiary in some detail. Concerning the nomination of Astion as Trustee of the Westside Discretionary Trust as a General Beneficiary of the Harper Family Trust, the first Nomination of General Beneficiary is in these terms:
56. The nomination of WCC as a General Beneficiary of the Harper Family Trust is the subject of the second ``Nomination of General Beneficiary''. That nomination provides:
The contention in that nomination is that the circumstances outlined in Recital D qualifies WCC for nomination as a General Beneficiary of the trust. Both nominations assert that the terms of the Deed prohibit a General Beneficiary who is not a Specified Beneficiary from taking in default or failure of appointment of income or capital by the Trustee.
57. There is in evidence the minutes of two meetings of directors of Clurnite which relate to the nomination of WCC as a General Beneficiary of the Harper Family Trust. The minutes of the first of those meetings are as follows:
The minutes of the second meeting held on that day are as follows:
It is probable that the proper order of the meetings should have been the reverse of what occurred.
58. It is plain that the minutes record that Astion had the Specified Beneficiaries under the Harper Family Trust as beneficiaries of the Westside Discretionary Trust (of which Astion was trustee), and that this circumstance qualified Astion for nomination as A General Beneficiary of the Harper Family Trust. The minutes also record that Astion, a nominated General Beneficiary of the Harper Family Trust, held units in the Hendon Unit Trust of which WCC was Trustee, and that this circumstance qualified WCC for nomination as a General Beneficiary of the Harper Family Trust.
59. Notwithstanding the undoubted intention of Clurnite to appoint WCC as a General Beneficiary, and notwithstanding the explicit identification of the basis of the purported nomination, it was submitted on Clurnite's behalf that the purported nomination of WCC as the beneficiary of the Harper Family Trust pursuant to the generic Trust Deed was ineffective. This submission relies on a view of the powers of the trustee to nominate a General Beneficiary.
60. It is therefore necessary to have regard to cl 1 of the Harper Family Trust Deed:
``NOW THIS DEED WITNESSETH:-
1. In this Settlement the following terms where the context permits shall have the following meanings:-
- (a) the `Specified Beneficiary' and the `Specified Beneficiaries' mean the person or persons named and described or defined as such in the Schedule.
- (b) 1. the `General Beneficiaries' means:-
- (i) The Specified Beneficiary and the Specified Beneficiaries;
- (ii) The brothers and sisters, spouses, children and Grandchildren of the Specified Beneficiary or Specified Beneficiaries and the spouses children and grandchildren of such brothers and sisters, spouse, children and grandchildren; and
- (iii) any of the following entities whether formed in Australia or elsewhere, which the Trustees may from time to time in writing nominate as a General Beneficiary (subject to Clause 10 hereof) namely:-
- A. the Trustees (in their Capacity as such) of any trust or settlement (called an eligible Trust) under which any General Beneficiary hereinbefore referred to is a beneficiary whether present or contingent;
- B. any corporation (called an eligible corporation) at least one share in which is owned by any General Beneficiary hereinbefore referred to or by the Trustees of an eligible Trust;
- C. any other legal entity at least one share or other interest (whether present or contingent) in which is owned or held by any General Beneficiary hereinbefore referred to or by the Trustees of an eligible Trust or by any eligible corporation.
- (iv) such additional persons corporations and Trusts (if any) as are named and described or defined in the Schedule as additions to the class of General Beneficiaries;
- PROVIDED HOWEVER that:-
- (1) Any person from time to time being the Settlor The Guardian the Appointor or the Trustee or Trustees hereof or any other person or corporation settling property on the Trusts of the Settlement (herein called `an excluded person') and also
- (2) Any corporation in which and the Trustees of any Trust in or under which and any other legal entity in which any excluded
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person has any actual or contingent beneficial interest so long as such interest continues are excluded from the class of general beneficiaries-A. unless specifically included in the Schedule as a Specified Beneficiary; or B. for all purposes except as an Additional Income Beneficiary if specifically included as such in the Schedule.- PROVIDED FURTHER that the Trustees at any time and from time to time may declare in writing (subject to Clause 10 hereof and not otherwise) that any person who would otherwise be a General Beneficiary under paragraphs (i), (ii), (iii), or (iv) of this sub clause (b) shall be excluded from the class of General Beneficiaries and shall as from the date of making each declaration be modified accordingly but so that this power shall not be capable of being exercised so as to derogate from any interest to which such General Beneficiary has previously become indefeasibly entitled whether in possession or reversion or otherwise;...''
61. It was submitted on behalf of Clurnite that the indentation with respect to the proviso which appears in par 1(b)(1)(iv) suggests that the first proviso relates to subparagraph 1(b)(1)(iv) alone. However, it appears that what appears after par 2 of this proviso was intended to be the second paragraph of that proviso. The contention is that, to make sense, the first proviso excludes those persons or corporations called ``an excluded person'', and any corporation and any other legal entity in which any excluded person has an actual contingent or beneficial interest from the class of General Beneficiaries except in the circumstances referred to A. and B. It was contended that the first proviso containing those two elements was meant to qualify the whole definition and the second proviso similarly was meant to qualify the whole definition. It was accepted that this reading results in an anomaly in that there is no clause ``(b)(2)'' which might be expected from the commencement of the clause with 1(b)(1).
62. It was submitted on behalf of Clurnite that par 1(b)(1)(iii)A does not authorise the appointment of WCC as a General Beneficiary, because, it was said the General Beneficiary must be ``hereinbefore referred to'', which requires a reference in pars (i) and (ii). The Schedule to the Harper Family Trust contains the following:
``5. Specified Beneficiaries: GEOFFREY HARPER 25/5/49
LINDA DESRA HARPER 20/3/56
SCOTT GREGORY GEOFFREY
HARPER 4/12/77
DESRA JEWEL HARPER 14/7/79
KRYSTLE JOY HARPER 28/3/84
ROBERT GEOFFREY HARPER 12/12/68
KATHLEEN CLAIRE HARPER 19/2/71
6. Additional Members of the Class of General Beneficiaries:
NIL''
63. It is said that construction of the expression ``hereinbefore referred to'' is reinforced by the separate inclusion of references to ``an eligible Trust'' in par B and reference to ``an eligible corporation'' in par B and ``eligible Trust'' and ``eligible corporation'' in par C.
64. I am not satisfied that it was the intention of the Settlor to restrict the possible General Beneficiaries to those in which any of the natural persons was a present or contingent beneficiary. In any event, Astion is said to be a trustee of a trust in which the Specified Beneficiaries are beneficiaries, and so it seems
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to me that it was competent for Astion to be nominated a General Beneficiary of the Harper Family Trust, pursuant to cl 1(b)(1)(iii)A. In my opinion, WCC was eligible to be nominated as a General Beneficiary by the operation of cl 1(b)(1)(iii)C.65. The submission by Clurnite is that the expression ``other legal entity'' in par C refers to a legal entity of a type other than a company or trust (``which strictly speaking is not an entity at all''). It was said that as a result, par C would not include as a beneficiary a corporation in which an eligible corporation held a share. It was submitted further that even if the contrary view is preferred, a trust in which an eligible trust holds a unit could not be appointed under the paragraph, because a trust is not a legal entity.
66. I think the intention of the Settlor was to give a very wide power of nomination of beneficiary to the trustee, and it was competent for Clurnite to appoint, as a General Beneficiary, a trustee of a trust in which an eligible trust holds a unit.
67. It is plain from the entirety of the material I have set out above that it was the intention and desire of Clurnite that WCC be a beneficiary of the Harper Family Trust. Detailed steps were taken to effect the nomination of WCC as a beneficiary. The Trust Deed on its face does not, to me, indicate that WCC is clearly outside the scope of the power of the trustee to appoint a General Beneficiary. Clurnite believed it had appointed WCC as a beneficiary and appointed income to it over three tax years.
68. The applicant in each appeal bears the burden of proving that the assessments are excessive: s 14ZZO(b) of the Administration Act. In
FC of T v Dalco 90 ATC 4088 at 4093; (1989-1990) 168 CLR 614 at 624 (``Dalco''), Brennan J (as he then was) with whom Mason CJ, Deane and Dawson JJ agreed, approved the following statement of Mason J in
Gauci & Ors v FC of T 75 ATC 4257 at 4261; (1975) 135 CLR 81 at 89:
``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.''
69. Deane J in Dalco said at ATC 4094; CLR 626:
``In a case where the only issue between a taxpayer and the Commissioner is whether a particular item of income which the Commissioner has treated as assessable income of the taxpayer was derived by the taxpayer or by someone else, the onus which the Act imposes upon the taxpayer will commonly be discharged if the taxpayer establishes, on the balance of probabilities, that the relevant income was derived by the other person.''
70. In the case of the Harper Family Trust, I am not satisfied that the nomination of WCC as a General Beneficiary was ineffective. The consequence is Clurnite, not having shown that the appointments to WCC were invalid, it is common ground that the requirements of s 100A were met and that the assessments to Clurnite must stand.
71. That conclusion is sufficient to dispose of the Clurnite matter, but if I be wrong in that conclusion, it is necessary to consider the position of Clurnite along with the other four applicants in respect of whom the nomination of WCC as a beneficiary was invalid.
72. I proceed now on the basis that in each appeal the position is that the nomination of WCC as a beneficiary was ineffective, and that the appointment of income to it was therefore a nullity and liable to be set aside ab initio by the Court:
Re Cavill Hotels Pty Ltd [1998] 1 Qd R 396 at 402;
Turner v Turner [1984] Ch 100 at 111; and BRK at ATC 4119 par 15.
73. The entitlement of beneficiaries to the unappointed income is to be determined by the terms of the relevant distribution minutes and the default of appointment provisions of the relevant trust instruments. The minutes in the respective appeals take the form of an appointment of the balance of net income to other beneficiaries. The residual income provisions of any distribution minute will not apply to any amount set aside for WCC: see the observations of Cooper J in BRK at ATC 4122 par 40.
74. The default of appointment provisions of each trust instrument are drafted explicitly to operate within the year of income, in my opinion. The consequence is that the default
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beneficiaries under those provisions will be presently entitled for the purposes of the Tax Act.75. It is convenient to refer to the provisions of the Harper Family Trust Deed by way of illustration in respect of each of the appeals. Clause 3(e) of the Harper Family Trust Deed provides:
``Subject to the provisions of Clause 29 hereof the Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to the end of such Accounting Period pursuant to paragraph (b) of this Clause in Trust successively for the persons described in paragraphs (a), (b) and (c) of Clause 4 hereof as though the last day of such Accounting Period were the Vesting Day.''
76. Clause 4(a) provided that if there was default in the appointment of income:
``if one Specified Beneficiary is named or described in the Schedule in Trust for such Specified Beneficiary absolutely and where two or more Specified Beneficiaries are so named or described in trust for such Specified Beneficiaries as tenants in common in equal shares absolutely provided always that the children (if any) of any Specified Beneficiary who dies before the Vesting Day shall take as tenants in common in equal shares the share which such deceased Specified Beneficiary would have received had he or she survived to the Vesting Day and the children of any deceased child (who dies before the Vesting Day) of any such Specified Beneficiary shall take (and in turn the descendants of any such children who die before the Vesting Day shall take the share calculated per stirps which that deceased would have taken) as tenants in common in equal shares the share which such deceased child would have received had he or she survived to the Vesting Day;''
77. The consequence is that each of the default beneficiaries were presently entitled, as at 30 June of the relevant year, in equal shares as tenants in common. On the assumption that WCC was not presently entitled because it was not validly appointed as a beneficiary, the question is whether any other beneficiary became presently entitled to that income, either by force of the terms of the distribution resolution or the default of appointment provisions of the Trust Deed. In that event the Trustee would not be liable to be assessed.
78. In my opinion the default of appointment provisions operate within the year of income. In the case of the Harper Family Trust the terms of cl 3(b) of the Trust Deed make it clear that the Trustees shall distribute the income of the trust ``prior to the expiration of each Accounting Period'' in its absolute discretion and in default of such determination upon trust for the beneficiaries successively referred to in cl 4(a), (b) and (c).
79. It was contended by the Commissioner prior to the hearing of these appeals that the taker in default provisions operated only after the end of the relevant income year, relying for support for that contention on some observations of Cooper J in BRK at ATC 4121 par 38. In the course of oral submissions, however, Mr Boddice SC for the Commissioner indicated that, having regard to the provisions of the Trust Deeds, that point is not pressed in these appeals.
80. In my opinion there is no difficulty in establishing a class of default beneficiaries referred to in cl 4(a) of the Harper Family Trust Deed and the Schedule, nor is there any difficulty in establishing the class of default beneficiaries in the Acamae appeal, or in the Downville appeal having regard to cl 3.2 and the Schedule of the McGowan Family Trust Deed, nor any difficulty in the Dimouth appeal having regard to the class of default beneficiaries referred to in cl 3(b) of the O'Connor Brothers Trust Deed.
81. In the Idlecroft appeal, there is no difficulty in establishing the class of default beneficiaries referred to in the first Schedule and cl 1(i) to (iv) of the second Schedule of the Simon John Fleury Family Trust Deed. It is accepted by counsel for Idlecroft that some difficulty might be encountered in identifying the class of beneficiaries referred to in cl 1(v) of the second Schedule.
82. The expression ``the beneficiaries'' is defined in Clause 2 as the persons mentioned in the first and second Schedules to the Trust Deed. The expression ``the financial year'' means the year ending on 30 June of each year. The first Schedule to the Trust Deed refers to Simon John Fleury, the wife of Simon John Fleury, Judith Mary Fleury, and the child of
ATC 4863
Simon John Fleury, Steven Glenn Fleury, as beneficiaries.83. The second Schedule defines a number of other classes of beneficiaries including any other child, adopted child, grandchild or remoter issue of Simon John Fleury, the spouses of any children and any other child, adopted child, grandchild or remoter issue of Simon John Fleury, members of the household of Simon John Fleury and Judith Mary Fleury including their mother, father, brothers, sisters, uncles, aunts, nephews, nieces and spouses of those persons, the parents, grandparents, brothers, sisters, uncles, aunts, nieces, nephews, cousins and spouses of Simon and Judith Fleury and by cl (v):-
``(v) Any Company in existence at the Vesting Date incorporated in any Country throughout the World, the shares in which are owned by any one or more of the aforementioned is a beneficiary present or contingent or any trust or trusts in existence at the Vesting Date under which any one or more of the aforementioned is a beneficiary present or contingent.''
84. For Idlecroft it was contended that if there were uncertainty such that the gift over failed, the consequences would be the failure of that aspect of the trust, with the further consequence that there would be a resulting trust in favour of the Settlor. It was submitted for Idlecroft that it is not necessary for the Court to determine which of these propositions represents the true position, and it was said that it was not possible for the Court to do so in a way which would be binding on all the beneficiaries. Ultimately, if the Trustee is not able to obtain agreement from all the beneficiaries, they being suri juris, as to their respectful rights to the income it will be necessary to approach the Supreme Court pursuant to s 96 of the Trusts Act 1973 (Qld) for a definitive determination of the position.
85. In the view I take of the matter, notwithstanding the potential breadth of cl (v), as a matter of practical reality at the time when the default of appointment provisions are to operate, that is to say within the year of income, it seems to me that the default beneficiaries under those provisions are certain, and those default beneficiaries will be presently entitled for the purpose of the Tax Act and in the ordinary course as a consequence of s 97(1) of the Tax Act the default beneficiaries being presently entitled to a share of the net income of a trust estate, that income is assessable in the hands of the beneficiary. Section 99A does not apply to income to which a beneficiary is presently entitled, unless a provision such as s 100A applies.
86. It was argued for the Commissioner in each appeal that the Trustee's decision to apply the trust fund for the benefit of the non- beneficiary was merely a violation of an equitable obligation and the Trustee, as legal owner, was entitled to apply the trust assets as it saw fit, although that rendered it liable to an action for breach of trust. The Commissioner was so bold as to submit that no beneficiary is ``presently entitled'' to trust income, even when there has been invalid appointment of income, in circumstances where the Trustee ``has validly contracted that income away to third parties''.
87. While a decision to apply the trust fund for the benefit of a non-beneficiary is a violation of an equitable obligation which may be acquiesced in by the beneficiaries, and the Trustee as legal owner was able to apply the trust assets as it thought fit, although that rendered it liable to an action for breach of trust at the suit of any beneficiary who objected, the relevant question is who is ``presently entitled'' to the income in question. A person can be presently entitled notwithstanding that a Trustee is in breach of trust.
88. In
FC of T v Whiting (Trustees of Estate) (1943) 7 ATD 179; (1942-1943) 68 CLR 199 (``Whiting''), the question was whether the Commissioner was right in assessing the executors under s 99 of the Tax Act on the whole net income of a trust estate, or whether he should have assessed that sum or some part of it to the beneficiaries under s 97 of the Tax Act. As Latham CJ and Williams J at ATD 182; CLR 214 said:
``... The answer to the question depends upon whether the beneficiaries during the year of income were presently entitled to the income, or any part of it, within the meaning of s. 97.''
Their Honours at ATD 182; CLR 214-215 took the view that the better view of the words ``presently entitled'' was that they applied only when a beneficiary is entitled to immediate payment of a share of the income of a trust estate. And later [ATD at 183]:
ATC 4864
``... when the Act speaks of a beneficiary being presently entitled to a share in income, it refers to the right of a beneficiary to obtain immediate payment, rather than to the fact that a beneficiary has a vested interest.''
89. In this particular case, the contractual obligation of each Trustee was to make WCC a beneficiary and appoint the trust income to WCC as a beneficiary of the relevant trust; it was not simply an obligation to pay to WCC whatever amount was the net income of the trust. In my opinion, this is not a case where the Trustee ``has validly contracted away the net income of the trust.''
90. The Commissioner points to a passage in the judgment of the Latham CJ and Williams J in Whiting at ATD 183; CLR 216:
``A beneficiary who has a vested right to income (as in this case) but who may never receive any payment by reason of such right, is entitled to income, but cannot be said to be `presently entitled' as distinct from merely `entitled.' Indeed, it is difficult to see how he can be entitled at all to income which must be applied in satisfaction of some prior claim: See Allhusen v. Whittell (1867) L.R. 4 Eq. 295, at p. 303.
Thus, in order to ascertain whether such a present right exists, it is necessary to look at the state of the administration of the trust estate.''
91. However, in my opinion, a payment to a non-beneficiary does not fall within ``income which must be applied in satisfaction of some prior claim''.
92. In my opinion when an appointment of income fails, the default beneficiaries under trust instruments such as the present have a present entitlement in the year of income and that present entitlement exists notwithstanding that the Trustee may have appointed income to a non-beneficiary thinking that it was a beneficiary, or indeed may have invested the net income of the trust estate on a slow racehorse.
93. It remains to consider the possible application of s 100A of the Tax Act.
94. Where the Court has found in all the appeals bar Clurnite that the purported appointments to WCC were invalid and ineffective (and on the basis that my conclusion in relation to Clurnite is wrong) it is submitted on behalf of the applicants that in such circumstances, s 100A simply ceases to have any possible application.
95. According to the Commissioner's reasons, s 100A is an anti-tax-avoidance provision introduced to counter trust-stripping schemes. It also seeks to catch the diversion of trust income to beneficiaries who are liable to pay little or no tax and who, themselves, divert the income in some tax-free form to a third party who was intended to take the benefit of the trust income.
96. The effect of s 99A is that a presently entitled beneficiary who would otherwise be assessed on trust income would be deemed not to be presently entitled to the income of the trust, and the trustee will be assessed at a penal rate of tax, if s 100A applies.
97. The contention of the Commissioner is that where the appointments are found to be invalid, and the applicant has demonstrated that there were beneficiaries presently entitled to the income, the issue is whether that present entitlement of such persons ``arose out of the reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, that reimbursement agreement for the purposes of s 100A''.
98. Each applicant contends that there is no relevant connection between the present entitlement of the default beneficiaries and the reimbursement agreement. It was submitted that the present entitlement of the default beneficiaries arose by operation of the relevant provisions of the Trust Deed. It was submitted:
``On no reasonably arguable view of the matter could it be submitted that the present entitlement of the default beneficiaries arose out of or arose by reason of any act, transaction or circumstances which occurred in connection with or as a result of the reimbursement agreement, as alleged by the Commissioner of Taxation.''
99. The Full Court of the Federal Court in
FC of T v Prestige Motors Pty Ltd as trustee 98 ATC 4241; (1998) 82 FCR 195 (``Prestige Motors'') considered the operation of s 100A at ATC 4257; FCR 215-216:
``The consequences of the application of s 100A are set out in subs (1). The subsection postulates that, apart from the operation of the section, there is a beneficiary `presently entitled to a share of the income of the trust
ATC 4865
estate'. The reference to the word `income' is to the trust law income of the relevant trust estate:
Taylor & Anor v DFC of T 69 ATC 4072; (1969) 123 CLR 206;
Davis & Anor v FC of T 89 ATC 4377; (1989) 86 ALR 195 (FCA/Hill J) at ATC 4403; ALR 229-230....Where s 100A(1) of the ITAA applies, for example because a body which pays little or no tax is presently entitled to a share of the income of a trust estate by reason of a reimbursement agreement, it treats the beneficiary for all purposes of the ITAA as not presently entitled to that income. The consequence is that the trustee of the trust is assessed and liable to pay tax pursuant to s 99A of the ITAA. As has previously been explained, s 99A imposes upon the trustee in respect of income to which no person is presently entitled a special rate of tax equivalent to the highest marginal rate.
Section 100A(7) provides that a reference in s 100A, in relation to a beneficiary of the trust estate (that is, the beneficiary who is presently entitled), to a reimbursement agreement is to be read:
`... as a reference to an agreement... that provides for the payment of money or the transfer of property to... a person or persons other than the beneficiary...'
(Emphasis added)
The word `agreement' is given the widest definition in s 100A(13). It includes arrangements and understandings. These can be informal, express or implied, and need not be enforceable or even intended to be enforceable. The only exclusion from the definition is 'an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.''
100. The concessions of the applicants indicate that the JVAs have to be regarded as reimbursement agreements. The Commissioner contends that subs 100A(5) (set out earlier) deems that there is a requisite connection between the reimbursement agreement and the present entitlement of the default beneficiaries; and in any event, as a matter of fact, the present entitlement arose by reason of an act, transaction or circumstance which occurred in connection with or as a result of the reimbursement agreement.
101. The Commissioner contends that under s 100A(5) the question is what would be the present entitlement of the takers in default be, or be reasonably expected to be, if the reimbursement agreement had not been entered into. This, the Commissioner contends, requires each applicant to prove that the identified beneficiaries probably would have received or could reasonably be expected to have received the trust income if there was no reimbursement agreement, and this requires the applicant to prove that it would have appointed the income to the same beneficiaries, or that it would have defaulted in appointing the income to anyone at all, thus allowing those beneficiaries to take by default. There was no evidence led by the applicant on this matter and so it cannot satisfy the onus of proof that lies on it.
102. I accept that the subsection simply applies a ``but for'' nexus test, and that the applicant has not discharged the onus which lies on it to prove what is required by s 100A(5)(b) to take the amount of entitlement of the default beneficiary as not having arisen out of the reimbursement agreement.
103. Moreover, in my view, the factual connection between the reimbursement agreement and the present entitlement of the default beneficiaries required by s 100A of the Tax Act, in my opinion has been demonstrated. The Full Court in Prestige Motors said at ATC 4259-4260; FCR 219:
``... the mere fact that s 100A can be characterised as a specific anti-avoidance provision does not demonstrate that it should be given a narrower approach than its ordinary meaning and grammatical sense suggest. It is clear from Cooper Brookes v FC of T that a specific anti-avoidance provision (there s 80C of the ITAA) can be given its literal meaning if to do so gives effect to the intention of the legislature, although the literal interpretation will not be adopted if it results in an operation which is capricious and irrational: at ATC 4299-4300; CLR 310-311, per Stephen J; at ATC 4306; CLR 321 per Mason and Wilson JJ. Of course, as we have said, this is consistent with s 100A being construed with an eye to the mischief it was designed to remedy:
FC of T v Radilo Enterprises Pty Ltd 97 ATC 4151 at 4155; (1997) 72 FCR 300 at 305, per Lee J.''
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104. It is apparent that the Parliamentary intention was that s 100A have a very wide scope, catching not only those present entitlements which arose out of a reimbursement agreement, but also those which arose by reason of any act, transaction or circumstance that occurred in connection with a reimbursement agreement.
105. The Commissioner contends:
``... Parliament has plainly intended that a present entitlement to income which is associated in any way with attempted tax avoidance on that income in an uncommercial arrangement (i.e. with a reimbursement agreement) is to be destroyed for the purposes of the Act. Parliament underscored the width of the words used by, without limiting their generality', extending them further under subsec 100A(5)...''
106. Here, one act in connection with the reimbursement agreement was the purported appointment of the income to WCC. Through a ``circumstance'' (the circumstance being that WCC was not in fact nominated as a beneficiary), the appointment of income to WCC had the result that the default beneficiaries became presently entitled to the income appointed to WCC.
107. In my opinion, the present entitlement of the default beneficiaries arose out of, or was connected with, the purported appointment of trust income to a company which was contemplated to be a beneficiary of the relevant trust in the operation of the reimbursement agreement, but which nomination was ineffective.
108. In my judgment, the present entitlement of the beneficiaries comes within s 100A(1). It follows that, in my opinion, for the above reasons, each of the appeals must be dismissed with costs.
THE COURT ORDERS THAT:
1. Each of the appeals be dismissed, with costs.
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