RYAN v FC of T

Members:
J Block DP
S Frost M

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 383

Decision date: 13 May 2008

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J Block and S Frost (Deputy President, Member)

Part A: preliminary

1. The objection decision under review in this matter is the disallowance by the Respondent of an objection by the Applicant against an amended assessment issued by the Respondent against the Applicant in respect of the year ended 30 June 1999 ("the Relevant Year").

2. The Applicant was represented by Mr Kevin Munro of Munro Lawyers, while the Respondent was represented by Ms Jennifer Davies SC and Mr Stephen Sharpley of counsel instructed by Mr Michael Donohoe of the Australian Government Solicitor.

3. The Tribunal had before it the T documents and also Supplementary T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ("the AAT Act"); the Supplementary T documents are numbered sequentially after the T documents so that a reference to "T" followed by a page number will suffice for the purposes of these reasons. The Tribunal admitted into evidence and marked as Exhibit A1 the Applicant's statement dated 21 April 2008. It may be noted that Ms Davies objected to a part of clause 10 of that statement; the Tribunal decided to accept the tender of the whole of the statement despite the objection on the basis that the content of that clause could be raised in submissions as to the weight to be attached to it.

4. It is relevant to note that it was originally contemplated that this application would be heard together with an application numbered NT2006/276 by Ryanville Nominees Pty Ltd ("the Trustee"). The Trustee was the trustee of the MRA Consulting Trust ("the Trust") established by deed ("the Trust Deed") made by Gregory Sharpe ("Sharpe") as settlor and the Trustee as the trustee of the Trust Deed on 9 December 1997. That latter application by the Trustee did not proceed and was discontinued after the Trustee was deregistered.

5. In addition to the T documents and Supplementary T documents the Tribunal was furnished with the Applicant's Statement of Facts, Issues and Contentions and the Respondent's Statement of Facts, Issues and Contentions. The Applicant's Statement of Facts, Issues and Contentions includes a number of annexures, as does Exhibit A1. The Tribunal furthermore received the Applicant's Submissions (undated) comprising 115 numbered clauses and the Applicant's Submissions In Reply dated 19 July 2007. The Respondent furnished the Tribunal with his outline of submissions and the Respondent's Supplementary Submissions ("RSS"). The Applicant furnished the Tribunal with a chronological survey of relevant events and the Respondent furnished the Tribunal with a large box file containing case reports and relevant legislation. In some cases, there was a degree of duplication in the material before the Tribunal. By way of one example only, the Trust Deed appears in the T documents and as an annexure to Exhibit A1.

Part B - the evidence of the Applicant

6. Ms Davies advised the Tribunal when the hearing commenced that she did not intend to cross-examine the Applicant on his statement (Exhibit A1). That advice was plainly furnished on the assumption that this being so, it would not be necessary for the Applicant to give oral evidence at all. However, Mr Munro elected to call the Applicant because he wished to ask him some additional questions and this led to a very brief cross-examination of the Applicant by Ms Davies.

7. In respect of Exhibit A1, clauses 1, 2 and 6 to 13 (inclusive) are included in these reasons as follows:

"On the 21^st day of April 2008, I, Michael Ryan, company director, of … in the State of New South Wales make oath and say:

Background

• 1. I am currently employed as a Quality Manager at the Anglican Church Sydney Diocesan Secretariat, a position I have held for approximately one year.
• 2. I commenced my employment with the NSW Public Transport Commission as a clerk in 1979. During the next five years, I studied accounting at Wagga Wagga TAFE and achieved the Accounting Certificate in 1986. Upon obtaining my qualification, I transferred to the Internal Audit unit of State Rail where I worked as a systems/EDP auditor for 5 years. Over the following 20 years I have been employed in varied roles including:
  • • Internal Control Manager - City Rail
  • • Management Accountant - City Rail
  • • Chief Financial Officer - Salvation Army (Eastern Territory)
  • • Financial Implementation Project Manager - Hunter Water Corporation
  • • Project Manager (Financial Systems Upgrade) Anglican Retirement Villages
  • • Quality Manager Anglican Church Sydney Diocesan Secretariat

…

MRA Consulting Trust

• 6. The MRA Consulting Trust deed was established on 9 December 1997 with Gregory Sharpe as settlor and Ryanville Nominees Pty Ltd as trustee. Annexed hereto and marked 'A' is a copy of the Trust Deed.
• 7. Ryanville Nominees Pty Limited is now deregistered. Annexed to this Statement and marked 'B' is a copy of an ASIC company search for Ryanville Nominees Pty Limited. I was a director of Ryanville Nominees Pty Limited.
• 8. On 25 March 1999, IF Trustees Limited executed a deed to establish the MRA International Super Fund ('the Fund'). The Fund deed sets out the rules for the administration and application of the Fund. The Fund is a non-resident, non-complying superannuation fund.
• 9. On 25 March 1999, Ryanville Nominees Pty Limited as trustee for the MRA Consulting Trust ('Employer') was admitted as a participating employer of the Fund and I was admitted as a member of the Fund.
• 10. I maintain a spreadsheet for Ryanville Nominees Pty Limited on behalf of the MRA Consulting Trust, and in or about June 1999 I prepared a spreadsheet containing the transactional data from bank statements and records. I referred the spreadsheet to my accountant for the preparation of the financial statements for the Trust. It was my understanding that the distributable income was approximately $8,000 to me, and that if there was any excess, it would be directed to Ryanville Nominees Pty Limited. My accountant prepared the 'draft' financial statements for the Trust and the resolution of Ryanville Nominees Pty Ltd as trustee for the MRA Consulting Trust from the information on my spreadsheet.
• 11. In the 'draft' accounts for the year ended 30 June 1999 Ryanville Nominees Pty Limited on behalf of the MRA Consulting Trust had depreciation charges and expenditure of $150,000 by way of contribution to the MRA International Super Fund. I confirmed the accuracy of the accounts with my (then) accountant and requested my (then) accountant to prepare the income tax returns.
• 12. In or about January 2000 my accountant returned to me the financial statement and trust resolution. Annexed to this Statement and marked 'C' is a copy of the Financial Statements for the year ended 30 June 1999 for Ryanville Nominees Pty Ltd as trustee for the MRA Consulting Trust. I subsequently reviewed the 'final' accounts prepared by my accountant at the time and accepted them as a true reflection of the business activity for the financial year ended 1999.
• 13. I, as the sole director and secretary of Ryanville Nominees Pty Limited as trustee for the MRA Consulting Trust signed a resolution. Annexed hereto and marked 'D' is a copy of the trust resolution.
• 14. For the year ended 30 June 1999, after all expenses (including the $150,000 contribution described in the accounts as 'salaries and related oncosts'), Ryanville Nominees Pty Ltd made a profit of $7,890.34 and was shown in the Ryanville Nominees Pty Ltd as trustee for the MRA Consulting Trust's accounts.
• 15. On or about 9 March 2000 the MRA Consulting Trust ('Trust') lodged a return of income for the year ended 30 June 1999. Annexed hereto and marked 'E' is a copy of the return which shows the net income as $7,891 for the year ended 30 June 1999. The Trust return shows the distribution of the amount of $7,891 to me.
• 16. In or about late 2003, I spoke to Michael Quinn, my then advisor, regarding my company structures. Michael Quinn said to me in words to the following effect:

• 'Your current structure is too complex for the nature of the activities you are undertaking. You need a simpler structure, with a trading company and another entity for holding property'.

  "

8. It will be noted that as appears from clause 2 of Exhibit A1 the Applicant has some accounting expertise. Clause 10 of Exhibit A1 sets out that the Applicant prepared a spreadsheet in respect of the Relevant Year. As set out in clauses 10 and 11 of Exhibit A1, it was Sharpe (the Applicant's accountant at the relevant time) who prepared financial statements and tax returns for the Trust for the Relevant Year.

9. In his oral evidence, the Applicant said that when he prepared the spreadsheet referred to in clause 10 of Exhibit A1, he did not include the contribution of $150,000 ("the Contribution") made to the MRA International Super Fund ("the Offshore Fund"). He went on to say that he became aware of the Contribution when the financial statements were provided to him and that he approved them. In cross-examination, the Applicant said that the Trustee did not draw a cheque for the Contribution. The Applicant also said in evidence that the resolution dated 30 June 1999 referred to later in these reasons was prepared by Sharpe and approved by him, the Applicant.

Part C - the financial statements

10. The financial statements of the Trust for the Relevant Year are annexed and marked "C" to Exhibit A1. In this context:

• (a) A declaration by the directors of the Trustee (and in fact the Applicant was its sole director) reads as follows:

  " Ryanville Nominees Pty Ltd ATF MRA Consulting Trust Statement by Directors of the Trustee Company

  The directors of the trustee company have determined that the trust is not a reporting entity. The directors have determined that this special purpose financial report should be prepared in accordance with the accounting policies outlined in Note 1 to the accounts.

  In the opinion of the directors of the company:

  • (a) The Profit and Loss Account gives a true and fair view of the profit of the trust for the financial year ended 30 June, 1999.
  • (b) The Balance Sheet gives a true and fair view of the state of affairs of the trust as at 30 June, 1999.
  • (c) At the date of this statement, there are reasonable grounds to believe that the trust will be able to pay its debts as and when they fall due.

  This statement is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the Directors by:

  …"

• (b) The profit and loss account reflects as an expense, the Contribution under the head of Salaries and Related On-Costs; it also reflected a net profit for the Relevant Year of $7,890.34;
• (c) The balance sheet reflects a settlor's contribution of $10 and net assets of $10;
• (d) Note 1(a) of the "Notes to and forming part of the Financial Statements" reads as follows:

  " Note 1 - Statement of Accounting Policies

  (a) These financial statements are a special purpose financial report prepared in order to satisfy the requirements of the trust deed to prepare financial accounts. The trustees have determined that the trust is not a reporting entity.

  The statements have been prepared in accordance with the requirements of the following Accounting Standards and other mandatory professional reporting requirements:

  • AAS 1: Profit and Loss Accounts
  • AAS 2: Measurement and Presentation of Inventories in the Context of the Historical Cost System
  • AAS 4: Depreciation of Non-Current Assets
  • AAS 8: Events Occurring After Balance Date

  No other Accounting Standards or other mandatory professional reporting requirements have been intentionally applied.

  The statements are also prepared on an accruals basis from the records of the trust. They are based on historic costs and do not take into account changing money values or, except where specifically stated, current valuations of non-current assets. The accounting policies are consistent with the previous period, unless otherwise stated.

  (b) …"

• (e) The Compilation Report forming part of the financial statements reads (in full) as follows:

  "On the basis of the information provided by the Trustees of RYANVILLE NOMINEES PTY LTD ATF MRA CONSULTING TRUST, we have compiled, in accordance with APS 9 'Statement of Compilation of Financial Reports', the special purpose financial report for the period ended 30 June, 1999.

  The specific purpose for which the special purpose financial report has been prepared is set out in Note 1. The extent to which applicable Accounting Standards and UIG Consensus Views have or have not been adopted in the preparation of the special purpose financial report is set out in Note 1.

  The Trustees are solely responsible for the information contained in the special purpose financial report and have determined that the accounting policies used are consistent with the financial reporting requirements of the Trust's constitution and are appropriate to meet the needs of the Trustees for the purpose of meeting their requirements under the Trust Deed.

  Our procedures use accounting expertise to collect, classify and summarise the financial information, which the Trustees provided into a financial report. Our procedures do not include verification or validation procedures. No audit or review has been performed and accordingly no assurance is expressed

  To the extent permitted by law, we do not accept liability for any loss or damage which any person, other than the Trust, may suffer arising from any negligence on our part. No person should rely on the special purpose financial report without having an audit or review conducted.

  The special purpose financial report was prepared for the benefit of the Trustees and beneficiaries/unit holders of the trust and the purpose identified above. We do not accept responsibility to any other person for the contents of the special purpose financial report."

• (f) It will be noted then that the Contribution was reflected as an expense and deducted as such and that the net profit of the Trust, (for the Relevant Year) taking into account the Contribution, was $7,890.34.

11. Exhibit A1 also includes as an annexure the Trust's tax return for the Relevant Year; it reflects net income of $7,891. The fact that it reflects an amount of $7,891 and not $7,890.34 may have been the result of a rounding-up process.

12. The Trust passed a resolution on 30 June 1999 in respect of the distribution of its income; that resolution is also an annexure to Exhibit A1 and its content under "Income of Trust Fund", "Distribution of Income", "Beneficiaries" and "Resolved" are included in these reasons in full as follows:

Income of Trust Fund :	In accordance with the MRA Consulting Trust Deed, it was resolved to determine that for the year ending 30 June 1999, "Income of the Trust" including all amounts (including capital gains) were taken into account in calculating the net income of the Trust as defined in S95(1) of the Income Tax Assessment Act 1936.
Distribution of Income :	It was resolved to pay, apply and set aside the income of the Trust for the year ending 30 June 1999 to or for the beneficiaries in the manner and of the type as allowed under the Trust Deed.
Beneficiaries :	M Ryan $7890
Resolved :	It was further resolved that in the event of an increase or decrease in the net income of the Trust, as determined by the Commissioner of Taxation or for any reason, that such increase or decrease will be reflected in the Trust distribution applicable to:
	Ryanville Nominees Pty Ltd 100%

Part D - the origins of this case

13. In the Relevant Year, the Trustee entered into a scheme in respect of the Contribution and involving the Offshore Fund. The Applicant's evidence was that in fact the Trustee did not make any actual payment; this may be so because the amount of the Contribution was borrowed and in particular from a company in Vanuatu (and being apparently the same company as the company which figures in Re Bamford (referred to later in these reasons)).

14. The Respondent subsequently to the end of the Relevant Year and in respect of the scheme referable to the Contribution, disallowed the deduction and in addition made a determination under Part IVA of the Income Tax Assessment Act 1936 ("the Act"), resulting in an amended assessment to which the Applicant objected.

15. At a much later stage and in fact some years later, the Applicant conceded that the Contribution was not and never had been deductible. In consequence of that concession, Part IVA of the Act became irrelevant.

16. This matter turns to a considerable extent on questions referable to the Trust's income in terms of s 97 of the Act ("trust income") and its net income as defined in s 95 of the Act ("tax income") in respect of the Relevant Year.

Part E - the Trust Deed

17. The Trust Deed contains no definition of income. However, it does contain references to "net income of the Trust Fund" (and see by way of example, clauses 3.1 and 3.2(b) of the Trust Deed). At the same time the Trust Deed also contains a number of references simply to "income" (and see by way of one example only, clause 2 of the Trust Deed).

18. The Trust Deed does not therefore contain a provision that would have the effect that "income" means net income of the trust estate as defined in s 95 of the Act. As to whether such a definition would be effective in all respects may be open to doubt; by way of one example only and having regard to
Federal Commissioner of Taxation v Totledge Pty Ltd 82 ATC 4168; (1982) 12 ATR 830 and
Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd (1998) 194 CLR 328, a capital gain, which forms part of tax income might not thereby become trust income. It is unnecessary for us to decide this question because it does not arise in this case.

19. Clauses 2 and 3 of the Trust Deed (T pp 40-43) read as follows:

• 2. DECLARATION OF TRUST

• In consideration of the premises the Settlor as Settlor HEREBY DECLARES that the Trustee shall and the Trustee HEREBY DECLARES that it will henceforth stand possessed of the Trust Fund and of the income thereof upon the trusts and with and subject to the powers and provisions hereinafter expressed concerning the same.

• 3. TRUSTS OF INCOME
• 3.1 The Trustee may at any time before the expiration of any Accounting Period with respect to all or any part or parts of the net Income of the Trust Fund for such Accounting Period determine:
  • (a) To pay, apply or set aside all or any part or parts of the net income of the Trust Fund for any one or more of the General Beneficiaries living or in existence at the time of the determination;
  • (b) To accumulate all or any part or parts of the net income of the Trust Fund;
  • (c) in respect of any amount paid, applied or set aside to or for any General Beneficiary to set aside a sum which, in the opinion of the Trustee, will be sufficient to meet the obligations of the Trustee for income tax for that Accounting Period on that amount pursuant to any law which imposes income tax on the Trustee and:
    • (i) to the extent that any sum so set aside is inadequate to meet the tax actually assessed the Trustee may without prejudice to any other rights given to it by law or by this Deed resort to the income of the Trust Fund for any subsequent Accounting Period or may recover the amount of such inadequacy from any money in their hands belonging to the beneficiary in respect of whose income the assessment is issued;
    • (ii) If and whenever It shall appear to the Trustee that any provision so made was excessive the amount of the excess shall be credited in the books of account of the Trust Fund to the beneficiary In respect of whom the provision was made and shall be treated as though it had been set aside for that beneficiary in the Accounting Period in which the provision was first made;

  • PROVIDED that nothing in this paragraph shall oblige the Trustee to set aside any sum aforesaid or affect any rights of the Trustee in the event of any assessment of tax being made against it in respect of any amount so paid applied or set aside.

  • 3.2 The following provisions shall apply to any determination made pursuant to Clause 3.1:
    • (a) The validity of any determination to accumulate income shall be conditional upon the law in force in relation to this Deed permitting the same and shall (except as provided in the next succeeding paragraph) be irrevocable;
    • (b) if at the end of any Accounting Period the amounts in respect of which determinations have been made pursuant to Clause 3.1 shall exceed the net Income of the Trust Fund for such Accounting Period the amount of such excess shall be deducted from the amounts which the Trustee has determined to accumulate and only the balance of such amounts (if any) shall be accumulated and if any deficiency shall remain then the Trustee shall be deemed to have applied the capital of the Trust Fund pursuant to Clause 6(a) to the extent of the deficiency;
    • (c) a determination to pay, apply or set aside any amount to or for the benefit of any beneficiary may be effectually made and satisfied (inter alia) by placing such amount to the credit of such beneficiary in the books of account of the Trust Fund or by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such beneficiary in such manner and to such person on behalf of such beneficiary as the Trustee shall think fit;
    • (d) The Trustee shall have an absolute discretion in the making of any determination and shall not be required to assign any reason therefor;
    • (e) in making any determination to pay apply or set aside any amount the Trustee may exclude any General Beneficiary and may determine to pay, apply or set aside such amount to or for or divide the same between one or more of the beneficiaries in such proportions and in such manner as the Trustee shall think fit;
    • (f) without limiting the ability of the Trustee to make a determination by other means the Trustee may effect a determination for the purpose of this clause by oral declaration or by written statement whether or not published to any person and a certificate by the Trustee as to any determination shall be prima facie evidence that such determination was made as and when set out in such certificate.
  • 3.3 Any income which the Trustee shall accumulate shall be and be dealt with as an accretion to the capital of the Trust Fund but the Trustee may at any time or times resort and may pay or apply the whole or any part thereof as if it were income of the Trust Fund.
  • 3.4 The Trustee 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 effectually made in relation to such Accounting Period in trust successively for the persons described in Clauses 4.1(a), (b), (c) and 4.2.
  • 3.5 Any amount set aside for any beneficiary and any amount held by the Trustee in trust for any person pursuant to Clause 3.4 shall cease to form part of the Trust Fund and upon such setting aside or becoming subject to such trust (as the case may be) shall thenceforth be held by the Trustee on a separate trust for such person absolutely with power to the Trustee pending payment over thereof to such person to Invest or apply or deal with such fund or any resulting Income therefrom or any part thereof in the manner provided for in Clause 6(e).

20. The Applicant contended that clause 3.2(d) of the Trust Deed furnished the Trustee with a discretion of a general nature entitling it to determine the income of the Trust. That contention was not well-founded. Clause 3.2 must be read in the context of clause 3.1, which gives the Trustee a power to distribute or to accumulate income.

21. Clause 7(o) of the Trust Deed (T pp51-52) reads as follows:

• 7. TRUSTEE'S POWERS

• …

  • (o) To determine whether any real or personal property or any increase or decrease in amount, number or value of any property or holdings of property or any receipt or payments from for or in connection with any real or personal property shall be treated as and credited or debited to capital or to income and generally to determine all matters as to which any doubt, difficulty or question may arise under or in relation to the execution of the trusts and powers contained in this deed and every determination of the Trustee in relation to any of the matters aforesaid, whether made upon a question formally or actually raised or implied in any of the acts or proceedings of the Trustee in relation to the Trust Fund, shall bind all parties interested therein and shall not be objected to or questioned on any ground whatsoever;

The Applicant contended that inasmuch as the Trust Deed allowed the Trustee to determine what was to be debited to capital or to income was indicative of a very wide power of determination and in particular a power that was wide enough to determine the income of the Trust in such manner as it thought appropriate.

22. The Respondent drew attention to clause 18 of the Trust Deed (T p61) which reads as follows:

• 18. ACCOUNTS AND RECORDS
• 18.1 The Trustee shall keep complete and accurate books of account and records of all receipts and expenditures on account of the Trust Fund.
• 18.2 Promptly after the close of each Accounting Period the Trustee shall prepare a written accounting report (prepared in accordance with normally accepted accounting procedures) for such period consisting of a balance sheet a statement of income and expenditure and a list of assets held at the close of such year and a copy thereof shall be furnished upon request to each of the Specified Beneficiaries. The accounting report shall include the names and addresses of all persons or firms having custody of all or any portion of the assets of the Trust Fund.

23. The Applicant in turn referred to clause 7(gg) (T p56) which reads as follows:

• (gg) Generally to exercise or concur in exercising all the foregoing powers and discretions contained in this Deed or otherwise by law conferred notwithstanding that the Trustee or any person being a Trustee or any person being a director or shareholder of a Trustee hereof (being a company) has or may have a direct or personal interest (whether as trustee of any other settlement or in his personal capacity or as a shareholder or director or member or partner of any company or partnership or otherwise) in the mode or result of exercising such power or discretion or may benefit either directly or indirectly as a result of the exercise of any such power or discretion and notwithstanding that the Trustee for the time being is the sole Trustee.

24. The Applicant contended (incorrectly in our view) that the Trust Deed empowered the Trustee to determine the trust income in such manner as it thought fit; (that contention was made also as set out previously in relation to clause 7(o) (referred to at para 21 above) of the Trust Deed).

25. The Respondent drew attention to clause 7(h) of the Trust Deed (T pp49-50) reading as follows:

• (h) To pay out of the Trust fund or the income thereof all costs, charges and expenses incidental to the management of the Trust Fund or to the exercise of any power authority or discretion herein contained or in carrying out or performing the trusts hereof which the Trustee may at any time incur including all income tax or other taxes payable in respect of the Trust Fund, costs in any way connected with the preparation and execution of these presents and all moneys which the Trustee may be required to pay as settlement, gift, stamp or revenue duties in respect of the Trust Fund or on these presents;

In terms of clause 7(h), the Trustee was empowered to pay all costs and charges incurred in the management of the Trust.

PART F - THE INCOME OF THE TRUST

26. It is important to remember that in respect of the Relevant Year the Trustee did in fact determine the income of the Trust. That determination was made pursuant to financial statements referred to previously in these reasons and having regard also to the resolution dated 30 June 1999 (referred to henceforth as "the resolution") a part of which was quoted in these reasons at para 12 above.

27. In respect of the Relevant Year the financial statements make it abundantly clear that the income of the Trust (and thus the trust income) was $7,890.34. That that was its income is demonstrated by the content of the resolution and in particular, its content under the heads of "Income of Trust Fund" and "Distribution of Income". The resolution under the head of "Income of Trust Fund" does indeed set out that the income of the Trust had been calculated so as to include "all amounts (including capital gains) were taken into account in calculating the net income of the Trust as defined in sub-s 95(1) of the Income Tax Assessment Act 1936". There was during the hearing some considerable debate as to the meaning given to that part of the resolution taking into account its grammatical infelicities. We do not believe that we need deal with it in detail, although we agree that it is difficult to comprehend.

28. The Applicant contended that the effect of the resolution and in particular its reference to s 95 of the Act, was that the relevant income in respect of the Trust was its tax income. On that basis, so the Applicant contended, the trust income was $157,890. That contention cannot be accepted if only because it requires the Tribunal to treat the Contribution as if it had not been recorded as an expense and as if the financial statements did not reflect it as an expense against the gross income of the Trust.

29. As set out previously in these reasons, the Trust Deed did not empower the Trustee to make such a determination and in fact, as the resolution and the evidence of the Applicant demonstrates, the Trustee did no such thing. The Trustee determined that the income was $7,890.34 and awarded it to the Applicant. When the Contribution deduction was disallowed because of action taken by the Respondent, the trust income, as distributed pursuant to the resolution, did not by some sleight of hand alter and increase by $150,000. Put succinctly, and as contended by the Respondent, such a determination was and would always have been entirely beyond power.

30. The resolution then went on under the head of "Distribution of Income" to resolve that the Applicant would receive a distribution of $7,890. Under this head, there was accordingly only one beneficiary presently entitled, and that was the Applicant in respect of the whole of the trust income. There was no distribution to any other beneficiary and so there was no other beneficiary who had a present entitlement.

31. It is important to emphasise that it is clear, having regard to the financial statements, the resolution and the Trust's tax return, that the Trustee regarded the trust income as being $7,890.34 (rounded up to $7,891 in the tax return) and that it resolved to distribute all of that income to the Applicant.

32. Although there is a reference in the resolution to s 95 of the Act, it is not in our opinion possible to contend, as did the Applicant, that the Trustee was distributing its tax income. That this is so is borne out by the content of the resolution under the head of "Resolved", which sought, apparently, to debit or credit the Trustee with any "increase or decrease" as referred to therein. Whatever the content of that convoluted paragraph was designed to achieve, it is abundantly clear that it did not have any effect and certainly not the effect (for which the Applicant contended), that the Trustee thereby obtained a present entitlement. Apart from any other considerations, it applied (assuming it had any meaning, which is doubtful) in futuro and contingently on the happening of an event which might or might not occur. As to why it also catered for a decrease to be deducted in the manner set out and as to how that decrease, if any, would operate is incomprehensible.

33. As to what is meant by a present entitlement, we refer with approval to clause 8 of RSS, which reads as follows:

• B. No present entitlement
  • 8. The concept of present entitlement in section 97 is a present vested right to demand and receive payment of what has been received by the trustee as income and is legally available to be distributed:
    Dwight v FCT 92 ATC 4192 at 4200;
    Harmer v FCT (1991) 173 CLR 264;
    FCT v Whiting (1943) 68 CLR 199;
    FCT v Totledge Pty Ltd (1982) 12 ATR 830.

34. In the course of closing submissions, Mr Munro contended that the Trustee did receive a distribution and thus did have a present entitlement. When asked what that distribution might be, he said that the additional 34 cents forming part of the net income was not included in the amount of $7,890 distributed to the Applicant. When asked why in such event it had to follow that the Trustee became presently entitled of that amount, he said that this was so because "it had to go somewhere". Leaving aside the fact that an amount of 34 cents must be regarded as de minimis, it does not take account of the fact that there are provisions in the Trust Deed as to default beneficiaries; see clause 3.4 of the Trust Deed (quoted previously in these reasons).

PART G - THE LAW AND CASE AUTHORITIES

35. Mr Munro is aware of a recent decision of the Tribunal in
Re Bamford and P & D Bamford Enterprises Pty Ltd in its capacity as the Trustee of the Bamford Trust and Commissioner of Taxation [2008] AATA 322 ("
Re Bamford"). In
Re Bamford the Tribunal dealt inter alia with a question of how an excess of tax income over trust income must be dealt with having regard to the judgements of the Federal Court in
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 ("Zeta Force") and
Richardson v Commissioner of Taxation (1997) 80 FCR 58 ("Richardson"). We include clauses 17 to 22 of
Re Bamford as follows:

• 17. The judgement of Sundberg J in Zeta Force is of such importance that we include its content under the following heads:
  • (a) The accounts and returns (pp72)
  • (b) The Tribunal's corrections (p73)
  • (c) Division 6 (pp73-74)
  • (d) That share of the net income of the trust estate (pp74-75)

  • …

  • THE ACCOUNTS AND RETURNS

  • Until 17 November 1990 Lockwood Valley Pty Ltd as trustee of the Fenwick Family Trust ("the family trust") held 30 per cent of the units in the Independent Poultry Trust (No 2) ("the unit trust"). On that date its units were redeemed as part of a settlement among the unitholders. The initial profit and loss account of the unit trust for the period to 17 November 1990 showed a net profit of $965,545 and an interim distribution to the family trust of $289,663. A subsequent adjustment for a bad debt recovery increased the unit trust's net profit, and the interim distribution to the family trust was correspondingly increased to $291,484. The accounts of the unit trust for the year ended 30 June 1991 showed a net profit of $908,221, of which $291,484 had been distributed to the family trust. However the income tax return of the unit trust showed a net income of $1,335,554 and the family trust's share of the net income as $421,994. The difference between the unit trust's net income ($1,335,554) and its accounting income ($908,221) was principally attributable to an amount of $435,035 prepaid by the trustee in the 1990 year and deductible in that year for net income purposes but not until the 1991 year for trust accounting purposes. The distribution made by the unit trust to the family trust in respect of the 1990 year included an untaxed amount referable to the prepayment. Only the adjustment of $435,035 was attributed by the trustee of the unit trust to the period up to 17 November 1990. The family trust's share of that amount was $130,510.

  • The return of income of the family trust for the year ended 30 June 1991 disclosed income of $289,633 from the unit trust and net income of $191,037. The trustee of the family trust appointed the distributable income as to $5,000 to a member of the Fenwick family and the balance to the applicant. The applicant's return of income disclosed income from the family trust of $186,037 and net income of $185,892. The Commissioner determined the net income of the family trust for the year ended 30 June 1991 to be $421,915, made up of $291,484 (the amount distributed by the unit trust) and $130,431 (the prepayment share). In consequence he increased the applicant's taxable income by $130,431.

  • THE TRIBUNAL'S CORRECTIONS

  • The Commissioner had increased the applicant's taxable income by $130,431, which was said to be the difference between the share of accounting profit and the amount returned by the family trust ($291,484) and its share of net income as shown in the unit trust's return of income ($421,915). The Tribunal pointed out that neither figure was correct. In fact the family trust's return showed income of $289,663 (rather than the amended figure of $291,484). The share of net income shown in the unit trust's return was in fact $421,994. The difference between the income returned by the family trust ($289,663) and its share of the net income disclosed in the unit trust's return ($421,994) was $132,331.

  • The Tribunal computed the family trust's share of the unit trust's net income as follows:

    
    

    $ 291,484 × $1,335,554 = $428,632

    $908,221

  • The net income of the family trust was thus increased by $138,969 ($428,632 less the amount returned of $289,663) to $330,006 ($191,037 as returned plus $138,969). The applicant's share of that amount was calculated as follows:

    
    

    $ 223,053 × $330,006 = $322,771

    $228,053

  • The $228,053 figure was the distributable income of the family trust for the year, and the $223,053 resulted from deducting from the distributable income the $5,000 distributed to the Fenwick beneficiary.

  • As a result of using some incorrect figures and relying on the allocation of net income in the unit trust's return of income, the Commissioner had included $316,468 in the applicant's amended assessment as the share of net income of the family trust. It was common ground before me that the Tribunal's figure ($322,771) is the correct one.

  • It will be apparent from the Tribunal's computation of the family trust's share of the net income of the unit trust that it allocated to the family trust that proportion of the net income as $291,484 is of $908,221. As I have said, the main question in the appeal is whether this "proportionate" calculation is the method contemplated by s 97.

  • DIVISION 6

  • Section 95(1) defines "net income" in relation to a trust estate as:

    "the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions …. "

  • Except as provided in the Act, a trustee is not liable to pay income tax upon the income of the trust estate: s 96. Section 97(1) provides, so far as material, that:

    "Where a beneficiary of a trust estate who is not under any disability is presently entitled to a share of the income of the trust estate:

    • (a) the assessable income of the beneficiary shall include:
      • (i) that share of the net income of the trust estate … "

  • Section 98(1) provides in part that:

    "Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of:

    • (a) … that share of the net income of the trust estate …

    • …

    as if it were the income of an individual and were not subject to any deduction."

  • In the situations to which it applies s 99 subjects the trustee to tax on the net income of the trust estate, or part of that income, as if it were the income of an individual. It is sufficient to set out sub-s (3):

    "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 as if it were the income of an individual who was a resident and were not subject to any deduction."

  • Section 99 does not apply where s 99A applies. In the situations to which it applies s 99A subjects the trustee to tax on the net income of the trust estate at the rate declared by Parliament. It is sufficient to set out sub-s (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."

  • "THAT SHARE OF THE NET INCOME OF THE TRUST ESTATE"

  • In the ensuing discussion I put earlier authorities aside. I return to them later to determine whether they require me to depart from the conclusion I reach under this heading.

  • The words "income of the trust estate" in the opening part of s 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument. That the words have this meaning is confirmed by the use elsewhere in Div 6 of the contrasting expression "net income of the trust estate". The beneficiary's "share" is his share of the distributable income.

  • Having identified the share of the distributable income to which the beneficiary is presently entitled, s 97(1) requires one to ascertain "that share of the net income of the trust estate". That share is included in the beneficiary's assessable income. The expression "net income of the trust estate" in par (a)(i) has the meaning given it by s 95(1) - taxable income as opposed to distributable income. The words "that share" in par (a)(i) refer back to the word "share" in the expression "a share of the income of the trust estate", and indicate that the same share is to be applied to an income amount calculated according to a different formula (taxable income as opposed to distributable income). Since the income amount may differ according to which formula is applied, the natural meaning to give to "share" where it appears for the second time is "proportion" rather than "part" or "portion". When Parliament wanted to convey the latter meaning, as it did in ss 99 and 99A, it used the word "part".

  • The contrast between the expressions "share of the income of the trust estate" and "that share of the net income of the trust estate" shows that the draftsman has sought to relate the concept of present entitlement to distributable income, and not to taxable income, which is, after all, an artificial tax amount. Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate.

  • That construction of s 97(1)(a) seems reasonably clear to me, although it may, as I have indicated, result in unfairness to beneficiaries. Had the legislature intended a beneficiary to be assessed on no more than the amount of the distributable income to which he is presently entitled, it could easily have said so. Section 97(1)(a)(i) would have read along the lines:

    "Where a beneficiary … is presently entitled to an amount of the income of the trust estate, the assessable income of the beneficiary shall include so much of that amount as does not exceed the net income of the trust estate."

  • …

  • 18. In Zeta Force the relevant resolution reflected a distribution of $5,000.00 to a member of the Fenwick family and the balance to the taxpayer in that case (Zeta Force). It will be noted then that there was an award of a specific amount and also an award of the residue. Sundberg J held that the additional income (being the excess of tax income over trust income) was to be taxed in the hands of the taxpayer (Zeta Force) on its proportion of the additional income. The judgment is silent as to what occurred in relation to the member of the Fenwick family to whom $5,000.00 was awarded, but the Tribunal considers it reasonable to accept having regard to the judgement that he or she too would have been liable for tax on his or her proportionate share of the additional income. This indeed was the basis on which tax was assessed to the taxpayer in Wensemius and the Tribunal does not believe that its decision in Wensemius was incorrect. Mr Young contended that in relation to a specific amount beneficiary an assessment of his or her proportion of the additional income should be made against the trustee under ss 99 or 99A of the Act; there does not appear to us to be any basis for that contention.
  • 19. Put succinctly, the effect of the judgment in Zeta Force is that it is necessary in the first instance to ascertain in relation to the beneficiaries presently entitled, their shares of trust income and then to attribute any excess of tax income over trust income to them in accordance with the same proportion. There is nothing in those words which would suggest that the word "share" is confined to a share which is expressed as a fraction or percentage and it is our view that they are equally apposite to an award which is expressed as an amount. Zeta Force makes it clear that the fact that a beneficiary is presently entitled to a share of the trust income results in his or her being liable for tax on the same share of the tax income.
  • 20. It is also relevant to note that Sundberg J in Zeta Force referred specifically to the judgment of Merkel J in Richardson's case at pages 81 and 82 in the following terms:

  • …

    Merkel J acknowledged that the problem with his solution is that it gives a different operation to the phrase "share of the net income of the trust estate" depending on whether the distributable income is less or more than the taxable income. He referred to s 15AAA of the Acts Interpretation Act 1901 and to the principles of construction considered in cases such as
    Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 which, in his opinion, justified his differential approach. At 183-184 his Honour said:

    "Notwithstanding the anomaly created by the legislative requirement, its purpose is clear. The relevant statutory provisions are not clear and unambiguous. In these circumstances the court will prefer a construction that gives effect to the statutory purpose rather than one which defeats it. However, to give effect to the statutory purpose, different approaches to the operation of s 97(1) and in particular to the meaning of a "share" for the purposes of s 97(1) need to be adopted depending on whether the trust income is less or greater than the trust's assessable income. I am satisfied that the authorities to which I have referred warrant that approach, particularly when it is necessary to avoid capricious, arbitrary and clearly unintended consequences.

    …

    The approach I have adopted to the operation of s 97(1) ensures that those entitled to the trust income, including the trustee in respect of "income" to which no beneficiary is presently entitled, bear their commensurate "share" of the tax liability in respect of the trust's income."

    His Honour then acknowledged that his conclusion differed from that adopted by Hill J, but noted that in Davis no submission had been made against the proportionate view. Nor had the differential approach been put to or considered by Hill J. Merkel J did not refer to Richard Walter.

    Merkel J's remarks were obiter, since he held the Administrative Appeals Tribunal had erred in law in failing to give real and genuine consideration to the effect of s 97, in that it had arrived at its conclusion that the distributable income and the taxable income were the same without any evidence to support it: at 177 and 180. His Honour remitted the matter to the Tribunal for it to determine the distributable income. The observations his Honour made about the proportionate and quantum approaches to s 97 were made since, in his view, it would almost certainly be necessary for the Tribunal to consider the application of s 97, and it might be assisted in that task if his Honour set out his views on the operation of the section.

  • 21. In
    Cajkusic v Commissioner of Taxation (2006) 155 FCR 430 ("Cajkusic"), the Full Court referred with approval to the judgment of Zeta Force; see paragraph 22 at page 436 reading as follows:

  • …

    • [22] First, it does not follow that, because the instrument pursuant to which a trust estate is constituted spells out that the trustee has an absolute discretion as to what receipts are treated as income and what outgoings are treated as outgoings against that income for the purposes of determining the income for s 97 purposes - the distributable net income - you can define your way out of the application of the 1936 Act. Liability for tax on the s 95 "net income" will fall where the 1936 Act intends it to fall. In other words, if there is no s 97 income - no distributable net income - to which any beneficiary is presently entitled, then liability for the tax on any s 95 "net income" will fall on the trustee under s 99 or s 99A of the 1936 Act. On the other hand, if there is any s 97 income to which beneficiaries are presently entitled, then any s 95 "net income", whether it is greater or smaller than the distributable net income, will fall to be taxed in the hands of those beneficiaries in proportion to their respective shares of the s 97 income: see
      Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 and the cases there referred to.

  • …

  • 22. Zeta Force was also referred to with approval by Finkelstein J in
    Richardson v Commissioner of Taxation 2001 ATC 4058 ("Richardson 4058"); see para 9 of that judgment. Zeta Force was furthermore referred to in
    Commissioner of Taxation v Pilnara Pty Ltd (1999) 96 FCR 82 ("Pilnara"); we refer in this context to page 102, para 70 reading as follows:-

  • …

    • [70] Should the result of an inquiry reveal that there is attributable income which is to be included in the computation of "net income" under s 95 of the Act in a year of income, there would arise a discrepancy between the result of the computation of "net income" and the calculation of the income to which a beneficiary could be presently entitled pursuant to the provisions of the trust deed. That problem has been the subject of a number of decisions in this Court, the most recent of which is the decision of Sundberg J in
      Zeta Force Pty Ltd v Commissioner of Taxation (Cth) (1988) 84 FCR 70.

  • …

36. Although Mr Munro referred repeatedly and at length to
Cajkusic v Commissioner of Taxation 2006 ATC 4752; (2006) 155 FCR 430 ("Cajkusic") and in particular to the application to the High Court for leave to appeal against the judgment of the Full Federal Court, we do not believe that that judgment or the application for leave is in any way relevant to the facts of this matter.

37. In this matter, the Trustee calculated the trust income of the Trust for the Relevant Year and awarded it to the Applicant. In the result and in consequence of the amended assessment, the tax income was increased by an amount of $150,000 and more particularly because a deduction in respect of the Contribution was disallowed. In accordance with Zeta Force, that additional amount must be taxed to the only beneficiary who had a present entitlement and that is the Applicant. We have previously referred to clause 8 of RSS; we refer also with approval to clause 14 of RSS as follows:

14. That resolution was ineffective to confer any present entitlement in Ryanville Nominees Pty Ltd for the purposes of s 97. It had no present vested right to an amount from the net income of the Trust Fund that the trustee could legally distribute as at 30 June 1999. At best, it was a form of contingent entitlement, dependant on events that may or may not later occur. As at 30 June 1999 Ryanville Nominees Pty Ltd had no right to demand payment of any ascertainable amount from the trustee and might never have any such right.

Part H - penalty

38. In this matter, penalty was assessed under s 226K of the Act at 25 percent reduced through the operation of s 226Y of the Act to 20 percent.

39. In fact the penalty assessment may have been generous in that an assessment under s 226L at 50 percent might well have been competent in that there was a scheme as defined and the Applicant did not have an arguable case. That there was a scheme as referred to in s 226L cannot be doubted and indeed, the Applicant made no attempt whatsoever to suggest that there was not.

40. Mr Munro contended that the penalty should be reduced because there had been a delay caused by the Respondent. He referred in this context to the chronology furnished by him. He contended also having regard to s 226K of the Act that the scheme was entered into not by the Applicant but by the Trustee. Neither contention has any merit. The scheme was entered into by the Trustee in its capacity as trustee of the Trust and in circumstances where the Applicant was its only director; (a similar contention was rejected in Re Bamford; see clause 28(b) of that decision). There may have been delay but there was no basis for a suggestion that the delay was caused by the Respondent or that it was in any way relevant. The deregistration of the Trustee was a delaying factor which was attributable to the Applicant.

41. Mr Munro contended that the Applicant received bad advice at the time of the resolution and that he could have procured the award of all of the income to the Trustee rather than himself. Whether or not that is so, in fact it did not occur, and it is hard to see why such a contention is in any way relevant.

42. We can see no basis upon which the penalty can or should be reduced.

Part I - summary and conclusion

43. The Trust Deed did not equate trust income and tax income. Apart from any other considerations trust income or tax income, like net income, could not (despite allegations to the contrary on behalf of the Applicant) be calculated otherwise than net of deductions for all relevant costs and expenses.

44. The trust income of the Trust for the Relevant Year was $7,890.34 while the tax income was $157,890.34. This is so simply by adding the amount of the Contribution. The trust income was not, as Mr Munro contended, $157.890.34. The financial statements were not (assuming that this is a relevant factor at all, which is doubtful) in any way erroneous. They disclosed trust income of $7,890.34. The Applicant was the only beneficiary with a present entitlement and must therefore be taxed on the excess.

45. The penalty assessed is in all the circumstances appropriate.

46. The objection decision under review must be affirmed.