Case 9/2016
Members:S A Forgie DP
Tribunal:
MEDIA NEUTRAL CITATION:
[2016] AATA 1010
S A Forgie (Deputy President)
1. On 4 September 2015, TVKS[1]
BACKGROUND
The Trusts, their Trustees and their powers and the Beneficiaries
2. The facts that I set out in this part of my reasons are not in dispute between the parties. I make them in light of that and on the basis of the evidence. The Australian Taxation Office (ATO) audited the taxation affairs of TVKS's husband, whom I will call Martin, and relevant entities for the years of income ending 30 June 2006 to 30 June 2008. Those entities are:
(1) Archer Property Pty Ltd (Archer Property), which was the trustee for the Woodchester No. 4 Trust.
- (a) At all material times, TVKS was a General Beneficiary of the Woodchester No. 4 Trust.
- (b) Woodchester No. 4 Trust invested in residential complexes as a member of a partnership.
(2) Shee Investments Pty Ltd (Shee Investments), which was the trustee of the Bristol Trading Trust.
- (a) At all material times, TVKS was a General Beneficiary of the Bristol Trading Trust.
ATC 1041
A. Bristol Trading Trust
3. The Bristol Trading Trust was established by a deed executed on 19 May 1986 (Bristol Trust Deed). On 29 March 1989, the initial Trustee retired and was replaced by Shee Investments.[2]
A.1 Trustee's power to distribute income
4. Clause 3 of the Bristol Trust Deed provided for the distribution of the income. Clause 3(1)(a) is relevant in this case:
"The Trustees may prior to the Vesting Day at any time and from time to time during 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 the same for any one or more of the General Beneficiaries living or in existence at the time of the determination PROVIDED THAT any payment application or setting aside in favour of a General Beneficiary described in clause 1(3)(c) hereof shall on the first occasion on which a payment application or setting aside is made to or for that General Beneficiary be subject to clause 36 hereof;
- (b)-(c) …"[3]
T documents; T3 at 60–61
Clause 3(2) set out several provisions applying to the Trustee's determination under cl 3(1). Those provisions included the following:
"a determination may be made by specifying a proportion of net income of the Trust Fund or by specifying an amount".[4]
Bristol Trust Deed at cl 3(2)(c); T documents; T3 at 61
5. Various terms were defined in cl 1 of the Bristol Trust Deed. They included:
"(27A) 'Income' includes but is not limited to assessable income and Capital Gain as defined in the Tax Law;
(27B) 'Net income of the Trust Fund' includes the amount calculated as the net Income of the Trust Fund for an Accounting Period in accordance with section 95(1) of Tax Law including:
- (a) Any Net Capital Gain to be included in the assessable Income of the Trust Fund by virtue of Tax Law; and
- (b) To the extent allowable, any taxation credits available to the Trustee."[5]
T documents; T3 at 51–102 and T5 at 109–111
B. Woodchester No. 4 Trust
6. The Woodchester No. 4 Trust was established by a deed executed on 17 June 1997. By a deed executed on the following day, 18 June 1997, Archer Property was appointed as Trustee.[6]
Archer Property, the Winslow Property Syndicate and its contractual arrangements
7. Archer Property was a member of a syndicate known as the Winslow Property Syndicate (WP Syndicate). The WP Syndicate was managed by Winslow Property Syndication Pty Ltd (WPS Pty Ltd). As manager of the WP Syndicate, WPS Pty Ltd entered two contracts on 30 June 1999. Both were with Osborne Properties Pty Ltd (Osborne Properties).
8. The first was a Contract of Sale of Real Estate (Contract of Sale). Under that contract, WPS Pty Ltd agreed to purchase a property for $16,240,000 in Victoria (Victorian property) while Osborne Properties agreed to carry out improvements on the buildings situated on it. WS Pty Ltd paid a deposit of $1,000,000 on signing the contract.[8]
9.
ATC 1042
The second contract entered by WPS Pty Ltd and Osborne Properties on 30 June 1999 was an agreement to purchase a business that was operated from the Victorian property (Purchase of Business Agreement). The purchase price was $7,260,000 and the deposit was $1,750,000.[12]10. Clause 11.1 of the Purchase of Business Agreement provided that it was interdependent with the Contract of Sale in respect of the Victorian property between WPS Pty Ltd and Osborne Properties. Without limiting the generality of that agreement, cll 11.2.1 to 11.2.8 provided for certain consequences flowing from certain situations as a result of that interdependence. They included that completion of the agreements would be contemporaneous and a breach of one agreement by one or other of the parties would be regarded as a breach of the other agreement. In the event that one or the other was entitled to terminate or rescind the Contract of Sale, then that party was entitled to terminate or rescind the Purchase of Business Agreement.
11. Also on 30 June 1999, WPS Pty Ltd paid a syndication fee of $3,000,000. That meant that, on 30 June 1999, WPS Pty Ltd paid a total of $5,750,000 on behalf of the WP Syndicate.
B. Deductions allowed Archer Property in respect of its interest in the WP Syndicate
12. In its Profit and Loss Statement for the year of income ended 30 June 1999 (1999 Year), Archer Property disclosed income totalling $1,266,466.85 of which $1,263,795.45 was described as Syndication Fees. Of the expenses totalling $749,938.68, a sum of $562,970.00 was disclosed as Syndication Costs. In all, Archer Property had a net profit of $516,508.17, all of which was distributed to the beneficiaries.[14]
13. Archer Property reported the sum of $516,508 as the total business income of the Woodchester No. 4 Trust when it completed the Tax Return for the 1999 Year.[15]
14. On 22 December 2003, Archer Property, as trustee of the Woodchester Trust No. 4, and the Commissioner entered a Deed of Settlement in relation to its taxation liability in respect of the WP Syndicate.[17]
| Year of Income | Date of payment according to contract | Amount paid | Archer Property's interest in WP Syndicate | Amount allowed as a deduction |
| 1999 | 30 June 1999 | $5,750,000[18]
|
40% | $2,300,000 |
| 2000 | 31 October 1999 | $7,250,000[19]
|
2% | $145,000 |
| 2001 | 1 July 2000 | $2,500,000[20]
|
2% | $50,000 |
| 2006 | April 2006 | $11,500,000 | 2% | $230,000 |
| Total | $2,725,000 |
ATC 1043
Archer Property: resolutions dated 30 June 2006 regarding distribution of income of Woodchester No. 4 Trust, income returned by it and TVKS and Commissioner's assessments
A. The resolutions
15. On 30 June 2006, Archer Property made a series of resolutions as trustee of the Woodchester No. 4 Trust. It did so through its sole director, Martin. The first of those resolutions related to the income of the Trust Fund when it resolved:
| " Income of the trust fund: | In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2006 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust."[21]
|
16. On 30 June 2006, Archer Property resolved to distribute the income of the Woodchester No. 4 Trust as follows (Archer Property Resolution):
| " Distribution of trust income: | It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2006 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: | |||
| Beneficiary | Amount | |||
| … [TVKS] | 100% of income"[22]
|
|||
17. Archer Property also made a further resolution on the same day (Archer Property Further Resolution) as follows:
| " Variation of income: | It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2006 in the following manner: | |||
| Beneficiary | Amount | |||
| … [Carson Underwriting Pty Ltd] | 100% of income"[23]
|
|||
18. As at 30 June 2006, the Balance Sheet for the Woodchester Trust No. 4 showed a profit of $10,374,993.[24]
ATC 1044
B. Returns by Archer Property and TVKS and the Commissioner's assessments regarding the 2006 year
19. TVKS lodged her return for the year of income ended 30 June 2006 (2006 Year) on 20 December 2016. She declared assessable income of $9,000 but did not return any amount as a distribution from a trust.[26]
20. As trustee for the Woodchester No. 4 Trust, Archer Property prepared and lodged an income tax return in respect of the 2006 Year on 16 May 2007. It did so on the basis that it had a net income of $676,209 and carried forward losses of $11,053,152.[28]
21. By letter dated 14 October 2009, Martin asked that amendments be made to the return lodged in respect of the Woodchester No. 4 Trust as there had been an inadvertent error. Omitting consequential amendments, the main amendments Martin wished to make were:
| Lodged | Should be | ||
| "Item 5S | Net income from Business | $676,209 | $5,346,209 |
| Item 8 | Trust distributions | Nil | $4,762,412 |
| Item 13 | Total of items 5-12 | $676,209 | $10,108,621 |
| Item 17 | Net Australian Income | $676,209 | $10,108,621 |
| Item 21 | Total of Items 17 to 20 | $676,209 | $10,108,621 |
| Item 22 | Tax losses deducted | $676,209 | $10,108,621 |
| Item 23 | Total net income | Nil | Nil |
| Item 24 | Tax Losses Carried fwd | $11,053,152 | $1,620,740"[29]
|
Martin referred to a letter dated a week earlier, 7 October 2009, in which he had notified the Commissioner that the Net Income from Business shown for the Woodchester No. 4 Trust should be adjusted by $4,670,000.
Shee Investments: resolutions dated 30 June 2007 regarding distribution of income of Bristol Trading Trust, income returned by it and TVKS and Commissioner's initial assessments
A. The resolutions
22. On 30 June 2007, Shee Investments made a series of resolutions as trustee of the Bristol Trading Trust. It did so through its sole director, Martin. The first of those resolutions related to the income of the Trust Fund when it resolved:
| " Income of the trust fund: | In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2007 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust."[30]
|
23.
ATC 1045
On 30 June 2007, Shee Investments resolved to distribute the income of the Bristol Trading Trust (Shee Investments Resolution):| " Distribution of trust income: | It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2007 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: | |||
| … [Isaacs Investments Pty Ltd]
… [TVKS] |
First $3,500,000
The balance"[31] |
|||
24. Shee Investments also purported to make a further resolution (Shee Investments Further Resolution) in the following terms:
| Variation of income: | It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so as to include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2007 in the following manner: | |||
| … [Isaacs Investments Pty Ltd] | 100%"[32]
|
|||
25. As at 30 June 2007, the Balance Sheet for the Bristol Trading Trust showed a profit of $6,643,498.[33]
B. Returns by Shee Investments and TVKS's returns and the Commissioner's initial assessments regarding the 2007 year
26. TVKS lodged her return for the year of income ended 30 June 2007 (2007 Year) on 30 January 2008.[35]
27. On 27 March 2008, TVKS lodged an amended return for the 2007 year. In it, she declared an additional amount of $40,083 as assessable income from franked dividends with franking credits of $12,000. Rather than $9,500 shown as allowances, directors fees and the like shown in her initial return for the 2007 year, TVKS returned a figure of $9,000. The total assessable income was returned as $61,832. She did not return any trust distribution.[38]
28. For the 2007 year, Shee Investments prepared and lodged its income tax returns on 12 March 2008.[39]
The Commissioner's audit
29. The Commissioner conducted an audit of Martin and associated entities which focused primarily on the years of income ending 30 June 1999 to 2009 inclusive. An Amended Audit Management Plan (AAM Plan) was prepared as at 13 October 2011. It set out the scope and process of the audit. The AAM Plan noted that, as part of the Preliminary Risk Review, the Commissioner had asked Martin on 27 January 2009 for full details of all of the entities with which he was associated. Martin
ATC 1046
was asked to provide financial statements in relation to each entity he named. In a response dated 27 April 2009 by Pitcher Partners on his behalf, Martin named the Woodchester No. 4 Trust and the Bristol Trading Trust as discretionary trusts for his benefit and/or members of his family.[41]30. On 18 August 2009, the Commissioner wrote to Martin care of Pitcher Partners advising that it intended to conduct an audit of his income taxation affairs and those of his controlled entities.[42]
31. On the following day, 11 November 2010, the ATO wrote to Pitcher Partners:
" Income Tax: Request for consent to extension of time to amend In relation to audit of … [Martin] Income Tax years: Years ended 30 June 1999 to 2008
We refer to the telephone conversation between our David McConnell and yourself and the authorisation for you and Pitcher Partners Advisors Pty Ltd on behalf of … [TVKS] in relation to the examination of the income tax affairs of … [Martin] and associated entities. We now enclose a consent to request for extension of time to amend …[TVKS's] assessment for the year ended 30 June 2006.
Please return the signed and dated consent to this office by Friday 19 November 2010. In the absence of receipt of the signed and dated consent by 19 November 2010, we will need to consider other options to protect the position of the Commissioner of Taxation, such as the issue of an amendment to … [TVKS's] assessment for the 2006 year.
…"[44]
Exhibit 4
32. Ultimately, TVKS signed four consents that began with the words:
"In accordance with subsection 170(7) of the Income Tax Assessment Act 1936, … TVKS hereby consents to the request by the Commissioner of Taxation to an extension of the period within which the Commissioner may amend the assessment for the year ended 30 June … under subsection (1) of section 170 of the Income Tax Assessment Act 1936.
This extension of time ends on …."[45]
T documents; T40 at 539
33. The dates on which TVKS signed consents in this form in relation to both the 2006 and 2007 years. The dates on which she did so, the years in respect of which she did so and those to which the time was extended were:
| Date of consent: | Year(s): | Time extended to: |
| 15 November 2010 | 2006 | 1 July 2011[46]
|
| 16 June 2011 and 27 June 2011 | 2006 | 24 December 2011[47]
|
| 23 November 2011 | 2006 and 2007 | 1 October 2012[48]
|
| 18 July 2012 | 2006 and 2007 | 31 March 2013[49]
|
34. On 20 December 2012, the ATO sent Martin a Position Paper setting out the Commissioner's position in relation to the losses of the Woodchester No. 4 Trust in the 1999 and 2000 years. That paper also addressed the consequences for TVKS in the 2006 Year. The ATO invited Martin's comments and views. The period under audit was 1 July 1998 to 30 June 2009.[50]
35. The ATO followed its paper with a further Position Paper in relation to the losses of the Bristol Trading Trust in the 2000 year and the consequences for TVKS in the 2007 Year. It was dated 22 January 2013 and again invited Martin's comments.[51]
36. On 19 February 2013, TVKS signed two further consents. One related to the 2006 Year and the other to the 2007 year. Both consented to the Commissioner's request for an extension of time within which he might amend the assessment. TVKS consented to an extension of the time until 31 May 2013.[52]
37. In a letter dated 1 May 2013, the ATO wrote to Pitcher Partners regarding the audit of Martin and associated entities and the
ATC 1047
adjustments to TVKS's income for the 2006 and 2007 Years. The letter noted Pitcher Partners' responses to the Position Papers and advised that the Commissioner's position had not changed. Reasons for his reaching that conclusion were attached to the letter. The Commissioner did not impose any penalties on TVKS in respect of the tax shortfall for those two years. Shortfall Interest Charges (SIC) would be charged on the additional tax she owed and was calculated from the date the additional tax was originally due until the day before the amended assessments were issued. The Commissioner remitted the SIC in part.[53]The amended assessments issued on 14 May 2013
38. The Commissioner issued notices of amended assessment to TVKS on 14 May 2013 in respect of both the 2006 and 2007 years.
(1) In relation to the 2006 Year, the Commissioner did so on the basis that TVKS's taxable income was $10,117,621.[54]
T documents; T49 at 603 He determined that amount on the basis that:
- (a) Archer Property, the trustee of Woodchester No. 4 Trust, did not incur a tax loss under s 36-10 of Income Tax Assessment Act 1936 (ITAA36) for the 1999 year;
- (b) the section 95 net income of the Woodchester No. 4 Trust for the 2006 Year was $10,108,621;
- (c) TVKS is presently entitled to 100% of the net income of Woodchester No. 4 Trust; and
- (d) Division 6 of ITAA36 applies to include in TVKS's assessable income the corresponding share of the Woodchester No. 4 Trust's net income under s 95 of that legislation (section 95 net income).[55]
T documents; T49 at 605 and see Martin’s request for amendment dated 14 October 2009 at [21] above and the Commissioner’s Position Paper at T documents; T45 at 553–569 (2) In relation to the 2007 Year, the Commissioner did so on the basis that TVKS's taxable income was $3,204,593.[56]
T documents; T50 at 607 and the Commissioner’s Position Paper at T documents; T46 at 571–585 He determined that amount on the basis that:
- (a) Shee Investments, the trustee of the Bristol Trading Trust, did not incur a tax loss under s 36-10 of ITAA36 for the 2000 Year;
- (b) the section 95 net income of the Bristol Trust for the 2007 Year was $3,143,510;
- (c) TVKS is presently entitled to 100% of the net income of the Bristol Trading Trust; and
- (d) Division 6 of ITAA36 applies to include in TVKS's assessable income the corresponding share of the Bristol Trust's section 95 net income.[57]
T documents; T50 at 609. Under the terms of the SIPL Resolution, all but $3,500,000 of the income of the Bristol Trust was distributed to TVKS. The Bristol Trading Trust’s Balance sheet showed a profit of $6,643,498 and that amount as being distributed to the beneficiaries. The Commissioner took into account a carried forward tax loss of $299 from the 2006 year. (3) Shortfall interest charge (SIC) was charged for the 2006 Year in the amount of $2,653,872.11 and for the 2007 Year in the amount of $590,856.05.
Objection
39. On 5 July 2013, TVKS objected to the amended assessments.
TVKS's authorisation
40. TVKS signed a document dated 26 May 2014 to the effect that she:
"… [TVKS] hereby authorize my husband (and Tax Agent) … [Martin] to act on my behalf in respect of my dealings with the Aust. Tax Office.
…"[58]
T documents; ST11 at 691
Commissioner's decisions on TVKS's objections
41. On 9 July 2015, the Commissioner gave notice that he had allowed her objection in part in relation to the 2006 year. He allowed that part of her objection relating to the calculation of the net income of Archer Property as trustee of the Woodchester No. 4 Trust. The Commissioner disallowed TVKS's objection in full in relation to the 2007 year. This meant that:
(1) Archer Property was entitled to a deduction of $230,000 in the 2006 year in relation to the Winslow Property Syndicate; and
(2) the amount of $9,878,621 was included in TVKS's assessable income in the 2006 year as a result of her being presently entitled to 100% of the net income of the Woodchester No. 4 Trust.[59]
T documents; T2 at 33–34 and 36–37
42. On 18 August 2015, the Commissioner issued to TVKS a further amended assessment for the 2006 year.[60]
Disclaimer of entitlement to income
ATC 1048
43. On 15 December 2015, TVKS executed, as deeds, two documents each of which was headed "Disclaimer of Entitlement to Income". Each was in the same terms with one relating to Woodchester No. 4 Trust and the other to the Bristol Trading Trust:
"I understand and acknowledge that I am one of the beneficiaries of the … [Woodchester No. 4 Trust/Bristol Trading Trust].
I hereby disclaim and reject absolutely any entitlement I have to any interest whatsoever that I may have now or in the future or have had at any time since 1 July 2005, to any income, capital or gift at all from … [Woodchester No. 4 Trust/Bristol Trading Trust].
This disclaimer takes effect on and from 1 July 2005."[61]
Exhibit E; Attachments 1 and 2.
THE ISSUES
44. The first set of issues arises from s 14ZZK of the Taxation Administration Act 1953 (TA Act). It requires TVKS to show that the amended assessment issued for each of the 2006 and 2007 years is excessive. Omitting references to franking assessments, which are not relevant in this case, that section provided at the relevant time that:
"On an application for review of a reviewable objection decision:
- (a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the objection decision to which the decision relates: and
- (b) the applicant has the burden of proving that:
- (i) if the taxation decision concerned is an assessment … - the assessment is excessive; or
- (ii) …
- (iii) in any other case - the taxation decision concerned should not have been made or should have been made differently."
45. The consequence is that TVKS has the burden of proving her position with respect to each of the following issues:
(1) Should TVKS be given leave to:
- (a) rely on the disclaimer of her entitlements by deeds of disclaimer dated 15 December 2015 attached to her witness statement bearing the same date?
- (i) If leave is given, whether the deeds of disclaimer are effective to prevent TVKS's being presently entitled to the net income of the Woodchester No. 4 Trust for the 2006 Year and for the Bristol Trading Trust for the 2007 Year.
- (b) contend that, in purporting to distribute the Income of the Woodchester No. 4 Trust for the 2006 Year to TVKS, the Archer Property Resolution was ineffective as the trust deed only permitted Archer Property to distribute "Net Income".
- (i) If leave is granted, whether the Archer Property Resolution was ineffective to appoint the Net Income to TVKS with the consequence that she does not have any present entitlement to income from the Woodchester No. 4 Trust in the 2006 Year.
- (2) Whether the Archer Property Further Resolution and the Shee Investments Further Resolution were effective in preventing TVKS from being presently entitled to a share of the income of the Woodchester No. 4 Trust for the 2006 Year or the Bristol Trading Trust for the 2007 Year.
- (3) Whether the Commissioner was out of time to issue amended assessments to TVKS in either or both of the 2006 and 2007 years:
- (a) Whether the Commissioner's power to issue amended assessments under s 170(7) of ITAA36 predicated on his having commenced an examination of her affairs when he requested TVKS's consent to extend the limited amendment time.
- (b) Whether the Commissioner had commenced that examination.
(4) Whether carried forward losses were available to Archer Property in its capacity as trustee of the Woodchester No. 4 Trust in the 2006 Year.
ATC 1049
(a) That issue depends on the amounts that were incurred pursuant to two contracts entered on 30 June 1999. One was for the sale of land and construction of a residential complex and the other for the sale of a residential complex.- (b) If the amounts were incurred under those contracts, the parties agree that they were incurred on revenue account and not on capital account.
(5) Whether the shortfall interest charge imposed in respect of the 2006 Year and the 2007 Year should be remitted in whole or in part.
ISSUE 1(a): Should TVKS be given leave to rely on the disclaimers of her entitlements?
The submissions
46. Mr Broadfoot, now of senior counsel submitted that TVKS should be granted leave to rely on the deeds of disclaimer as she had been, until recently, unaware of the existence of the trust distributions, the trusts or the notices of assessment. Her husband did not tell her about the trust resolutions or the amended assessments issued to her. TVKS cannot be said to have acted with wilful blindness because she has left all of the family's financial affairs to her husband while she raised their children and now cares for their grandchildren. Her actual knowledge of the distribution is required. Only when she became aware of them and advice was sought did she become aware that she could disclaim the distributions. Once she had become aware, she acted reasonably promptly.
47. On behalf of the Commissioner, Mr Linden of counsel submitted that leave should not be given. His first submission focused on the prejudice to the Commissioner arising from TVKS's delay in making the disclaimers. If effect were to be given to the disclaimers, the Commissioner's ability to recover tax from either or both of Archer Property and Shee Investments would be prejudiced. Their liability would arise on the disclaimed income under s 99A of ITAA36 in the 2006 Year for Archer Property and in the 2007 Year for Shee Investments. That is eight or nine years since the income was derived and there is no evidence that either has retained funds sufficient to meet any such liability. Liability would not fall on the default beneficiaries in that period as their entitlement would only arise after the 2006 Year in the case of Archer Property and 2007 in the case of Shee Investments.
48. Mr Linden also submitted that regard should be had to the context in which TVKS made her disclaimers. Part of that context was formed by the eight years that had passed since the Archer Property Resolution was made and the nine since the Shee Investments Resolution was made. In that time, TVKS had variously authorised her husband, Martin, Pitcher Partners and Mr Young to act on her behalf first in relation to the objections she lodged against the amended assessments and then in relation to the application to the Tribunal. Relying on her statement, Mr Linden submitted that she chose not to acquaint herself with her husband's business activities or the family's financial affairs.
49. Mr Linden also relied on a second basis in support of his submission that TVKS's disclaimers were ineffective. That basis was that TVKS had already received the benefit of the distributions.
The authorities: scope of power under s 14ZZK(a)
50. I have looked first to the scope of my power under s 14ZZK(a). It is expressed in terms that suggest that Parliament intended that it be an unfettered power. Every statutory power, however, is implicitly fettered in that it must be exercised within the boundaries set by the enactment conferring it. Those boundaries are found within that enactment where they are either expressly stated or identified by reference to the subject matter of the enactment under which the decision is made as well as from its object and underlying policy.[62]
51. The boundaries within which the power granted by s 14ZZK of the TA Act have been considered by the Full Court of the Federal Court in Lighthouse Philatelics Pty Ltd v Commissioner of Taxation[63]
ATC 1050
"… The Commissioner cannot be said to be confined in the course of considering the Taxpayer's 'objection' to the matters raised by the taxpayer in that 'objection'. He has an obligation to administer the Act and may determine to allow the objection for grounds totally unrelated to those raised by the taxpayer, if that be the correct course, just as he could form the view, based on a reconsideration of the matter, that the assessment should be confirmed for reasons which he had not previously considered. His task is to ensure that the correct amount of tax is paid, 'not a penny more, not a penny less'."[65]at 155; 154; 714–715; 263; 4948 (1991) 32 FCR 148 ;(1991) 103 ALR 156 ;22 ATR 707 ;25 ALD 257 ;91 ATC 4942
52. The Court and the Tribunal were in a different position for they were precluded by what was then s 190(a) of ITAA36 from going beyond the taxpayer's grounds of objection unless they permitted otherwise. That provision is now found in s 14ZZK(a) of the TA Act. Speaking of it in its earlier form, the Full Court said:
"… [t]he whole statutory background leads to the conclusion that the natural meaning of the words used should be given effect to. The amendment to s 190(a) … was of a remedial kind and thus must be construed in accordance with well-established principles relating to ameliorating legislation. It follows that the Tribunal or the court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and 'excessive' for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process.
The decision whether to allow an amendment ought to be made on the same considerations of justice upon which such decisions are regularly made in litigation. It was in the past a reproach to the law that the real issues in taxation appeals could be refused a hearing for a defective objection, and Parliament has legislated to remove that reproach; an amendment under s 190 should not be considered with reluctance, but on its merits.
One further comment may be made. To refuse to allow the amendment of the grounds of objection on the basis that the failure to claim deductions otherwise properly allowable was a mistake of the taxpayer's accountant would involve an error of law. … So too would an error of law be involved in refusing to permit a taxpayer to rely on new grounds because he had commercially adopted a structure involving two companies 'with tax and commercial objectives in mind'. A decision on that basis would take into account irrelevant considerations. …"[66]
at 156; 164; 714–715; 263; 4948 The two companies to which the Full Court referred had been established well before the Commissioner had issued his assessment and so before the taxpayer lodged its objection. (1991) 32 FCR 148 ;(1991) 103 ALR 156 ;22 ATR 707 ;25 ALD 257 ;91 ATC 4942
53. A few weeks later, Davies J considered the same issue in Gilder v Federal Commissioner of Taxation[67]
" The discretion is unfettered. But that is not to say that regard should not be had to the time limits imposed by the Act. The Act gives effect to a policy that taxation affairs should be dealt with efficiently and promptly. There are time limits for the lodgement of returns (s 161), for the lodgement of objections (s 185), for the lodgement of requests for reference (s 187), and upon the Commissioner for the amendment of assessments (s 170). This policy should be taken into account. And so also should the policy of this court that proceedings in the court be handled efficiently. These present proceedings, like other proceedings in the court, have been the subject of directions hearings in which a judge has given directions to ensure that the parties were aware of the legal and evidentiary issues which would arise at the hearing. In such circumstances, the court would rarely permit additional and different issues to be raised at the hearing, certainly not unless good reason for doing so has been shown, which in the present case has not been done.
ATC 1051
I take into account not only the fact that the proposed grounds raise matters entirely different from those presently before the court but also the fact that they do not stand out as matter which, in the interests of justice, must be considered by the court. …"[68]at 884; 5072. Like (1991) 22 ATR 872 ;91 ATC 5062 Lighthouse Philatelics , this case preceded the repeal of s 190(a) and the enactment of s 14ZZK(a) by theTaxation Laws Amendment Act (No. 3) 1991 .
54. I refer also to the case of McLean and Dean v Commissioner of Taxation[69]
55. Northrop J decided that the Tribunal had been in error in refusing to allow the amendments sought by the taxpayers. He underlined the unfettered nature of the discretion which had been conferred to overcome a mischief resulting from injustice. The Tribunal had placed a fetter in the nature of a straight-jacket manufactured from its practice and procedure. His Honour continued:
"… The practice and procedure should be seen as facilitating the identification of the nature and determination of the issues in dispute. Practice and procedure is not an end in itself. The interests of the litigants are to be determined by applying justice between them, not on whether their representatives have followed the practices and procedures of the Tribunal. The substantial issues must be determined."[70]
at [43]; 116; 656; 4452 [1996] FCA 1459 ;(1996) 66 FCR 106 ;32 ATR 647 ;96 ATC 4443
56. The taxpayers had objected on the basis that the retention payments were not considered as income in any sense of the word and were not taxable. Northrop J considered that it should have been apparent to the Commissioner that the retention payments could be exempt income. It was strange that neither the Commissioner nor the Tribunal had considered the possibility of the retention payments being fringe benefits under the fringe benefits law. Whether the taxpayers' legal representatives were at fault or not, their failure to comply with practice and procedures of the Tribunal should not prevent the taxpayers themselves from having their objections determined according to law. The case was very different from that considered by Davies J in Gilder where the proposed grounds were completely different from those originally put forward. In McLean and Dean, the reality was that the grounds sought to be added formed part of the original grounds i.e. whether the retention payments formed part of the assessable income of each taxpayer and, in particular, do they constitute exempt income as fringe benefit payments.[71]
Consideration
57. Unlike the case of McLean and Dean, the grounds of objection as originally made were not drafted in terms that were sufficiently broad to encompass an objection based on TVKS's having disclaimed the benefit of the distributions. Unlike that case, the factual basis that existed when the original grounds of objection were made may have changed through TVKS's own actions. The grounds on which TVKS seeks to rely are based on an assumption that her actions have in fact changed that factual basis.
58. Whether or not the interests of justice require me to give TVKS leave in those circumstances led me to consider whether or not her actions did in fact change that factual basis. I have done that later in these reasons where set out my findings regarding TVKS's delegation of responsibility for her financial affairs to her husband, Martin. I have found that she has done so without fetter upon his powers to act on her behalf. In addition, I have set out the course of events taken by the ATO. Even if I were to assume that Martin knew nothing of the distributions to TVKS before the ATO issued its position papers in December 2012 and January 2013, I have found that is the latest time at which Martin would have been aware that the ATO regarded distributions to TVKS as taxable income in her hands. Despite that knowledge and despite having
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unfettered authority as her husband in relation to her financial affairs, Martin took no action on behalf of TVKS to disclaim those distributions. He took no action as her tax agent after his appointment in that role on 26 May 2014. TVKS took no action until 15 December 2015 when she executed the disclaimers and attached them to her witness statement of the same date in these proceedings.59. If effective, the disclaimers would have retrospective effect so that TVKS would be regarded as never having received the distributions. That would mean that the disclaimed income would be taxable in the hands of the trustees, Archer Property and Shee Investments, under either ss 99A or 99 of ITAA36. They would not be taxable in the hands of the default beneficiaries for their entitlements would only arise from 15 December 2015 when TVKS executed the disclaimers. The default beneficiaries would have no entitlements in the 2006 Year and the 2007 Year. This is consistent with the conclusion reached by Tamberlin J in Nemesis Australia Pty Ltd v Federal Commissioner of Taxation.[72]
60. Whether or not the Commissioner will be able to recover from Archer Property or Shee Investments is not a matter on which I can make a finding. Despite that, it remains an open question and not one that can be answered by saying that the Commissioner should have issued alternative assessments to the trustees and to TVKS. The Commissioner is entitled to assess tax on the basis of the affairs of a taxpayer as they stand at a particular time while being aware that, in some circumstances, a taxpayer may change those affairs quite legitimately by disclaiming an entitlement. Until that time, the Commissioner is entitled to assume that affairs are as they seem and is not required to issue alternative assessments to cover all possible courses of action that might be taken by a taxpayer.
61. As I set out below, the law relating to disclaimers limits the circumstances in which they may be made. To permit TVKS to extend the grounds of her objection so that she may rely on the disclaimers would, for the reasons given in the previous paragraph, prejudice the Commissioner in carrying out his statutory functions to administer the taxation laws. It would do so in circumstances in which TVKS, at least through Martin and her advisers, has been aware of the distributions for at least three years and, until December 2015, has taken no steps to execute disclaimers, to raise the distributions as a ground of objection or to pursue it in her application for review lodged in September 2015. In the course of its investigations, the ATO has conducted its investigations on the basis of the distributions as made by the trustees and Martin, to whom TVKS has delegated responsibility for her affairs, has been fully aware of their progress. It would be not be in the interests of justice to give TVKS leave to extend the grounds stated in the objection decision which itself reflected the grounds of objection she had previously made. In none of them has she touched on the issue of disclaimer and, as I have already indicated and for the reasons I set out in the following section, TVKS has no basis on which she can make out the objection.
ISSUE 1(a)(i): Could TVKS disclaim her entitlements?
62. Although I have decided not to give TVKS leave to extend the grounds on which she relies, I have considered whether her disclaimers were effective. The findings of fact that I have made in this section of my reasons as to the course of events have informed my consideration in relation to the previous issue. I also note that TVKS has submitted that the Archer Property Resolution distributing 100% of the income of the Woodchester No. 4 Trust to her has been invalidly made. For the reasons I give below, I have concluded that the resolution was validly made. Therefore, I have considered the disclaimer in relation to any distribution made to TVKS from the Woodchester No. 4 Trust in the 2006 Year among the disclaimers made by TVKS.
The evidence
Management of TVKS's finances
63. TVKS's evidence is to the effect that she has always left the family's financial affairs in the hands of her husband. She uses a supplementary credit card tied to a credit card issued to him and he pays the account when the statement is issued to him. TVKS and Martin have a joint cheque account to
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which each is a signatory. The cheque account and the credit card are her only means to finance her expenses and those of her family.64. TVKS gave evidence that she does not know the means by which the cheque account is kept in funds or the sources from which the money is drawn to pay the credit card accounts. As far as she is aware, she said, credit card and the cheque account are the product of her husband's business activities.[73]
65. Martin said in his statement that, at all times since at least the mid 1980s, he has attended to the taxation affairs of his wife, himself and of the various corporations and trusts that he controls. He does not generally discuss his business affairs with his wife as she has little or no interest in them. His wife has access to a credit card in her name but using a credit facility in his name. She also has access to a cheque account. Martin funds those two accounts from the Martin Family Trust and has done so since at least the mid 1980s. The Martin Family Trust derives its income from consultancy and management fees from the services that he and others provide. None of the funds in those accounts has been derived from either the Woodchester No. 4 Trust or the Bristol Trading Trust.[74]
66. Martin gave an example of what he described as "… the complete trust the applicant has put in me when it comes to the financial affairs of our family. …".[75]
Management of TVKS's taxation affairs
67. With regard to the ATO's investigation of her taxation affairs, TVKS explained that:
"7. I have been aware for some time that the Australian Taxation Office (ATO) has been looking into … [Martin's] financial affairs but I had no idea as to how I could have somehow been involved in this examination. I have never had been interviewed by an ATO officer and really only became aware of my involvement through the fact that … [Martin] asked me on a number of occasions sign forms which I now know were intended to enable the ATO to continue to look at my personal tax affairs longer than it would have otherwise been able to do.
8. Back in late 2014 … [Martin] asked me to sign some form of authority enabling him to speak with ATO officers on my behalf but, consistent with what has been going on for many years dating back to when we got married in 1979, … [Martin] did not explain exactly what was going on at that time. I do remember telling him that I don't want anything to do with the ATO and that I don't want to be involved in any form of dispute because, from my perspective, I had nothing to do with the financial side of our relationship.
9. It was not until I met with my tax barrister and tax solicitor on 28 October 2015 that I saw copies of amended assessment notices issued by the ATO to me showing that I was liable to pay the ATO considerable sums of money for the 2007 and 2008 income years. I had been unaware of the amended assessments until this time.
10. I now know the disputes relate to two trusts but although I have heard the word 'trust' mentioned on a number of occasions by … [Martin], I don't have any real understanding as to what a trust is. I was specifically asked by my lawyers at the meeting on 28 October 2015 whether I had ever heard of a company called … [Archer Property Pty Ltd] … or the … [Woodchester No. 4 Trust] and my answers were 'no' as they were when I was whether I had ever heard of a company called … [Shee Investments Pty Ltd] or a trust called the … [Bristol Trading Trust]. I was unaware of the existence of these trusts or … [Archer Property] or … [Shee Investments] until they were drawn to my attention during a conference that my barrister requested me to attend after this proceeding was commenced.
11. When I was told that the reason I owe the ATO the amounts shown on the amended assessments issued to me related to me being a beneficiary of those two trusts, told my tax barrister and tax lawyer and …
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[Martin] that I wanted absolutely nothing to do them and that as far as I knew I had never received any money from them.12. It was explained to me that if I have never received an actual distribution from either of those trusts and don't want to in the future then I may be able to disclaim my interest in them and that the disclaimers could operate from a point of time prior to when the ATO has argued that I somehow became entitled to distributions from those trusts. After considering that explanation, I decided I wished to disclaim my interest and reject absolutely any entitlement to a gift of any kind from either trust. I was unaware until the recent meeting with my barrister that distribution resolutions had been made to distribute income to me."[77]
Exhibit E
68. These issues were examined further in cross-examination by Mr Linden. TVKS agreed that she had done typing, filing and end of month accounts for Martin on a part-time basis. He was her employer and would give her a cheque book to write cheques to pay for the bills that he gave her. TVKS did that work from his office at home. In her return for the 2006 Year, TVKS agreed that the figure of $9,000 was shown at Item 2 for allowances, earnings, tips, directors fees, etc. When asked what she had received that sum for, she replied that she could not tell and nor could she tell what the same amount in the return for the 2007 Year had been paid to her for.
69. When shown the letter of consent dated 10 November 2010 and addressed to the ATO, TVKS acknowledged that she had signed it. She had "probably" read it before she signed it.[78]
70. TVKS's attention was drawn to the consent to the Commissioner's request that she had signed on 15 November 2010. In it she had given her consent to an extension of the period within which the Commissioner might amend the assessment for the 2006 Year under s 170(1) of ITAA36. When Mr Linden suggested to her that, when she signed the document, she suspected that she might have a tax liability, TVKS replied that she did not know what it was about. The following exchange then took place between Mr Linden and TVKS:
"But you knew it related to the Commissioner of Taxation? - I sign things without - I didn't read it. I may have looked at it but I didn't understand so - I trust my husband so if he asked me to sign it, I would sign it."[80]
Transcript at 41
71. TVKS agreed that she had signed a similar consent dated 24 December 2011.[81]
"And did you read it before you signed it? - Probably.
And you were aware, therefore, that he was dealing with the Tax Office on your behalf? - Yes, I can see this, yes.
And you were aware, therefore, there was some dispute with the Tax Office? - No.
Is that right? - No.
Just that he was dealing on your behalf with the Tax Office? - Yes.
You said to your husband that you don't want anything to do with the ATO,
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and you don't want to be involved in any form of dispute, is that right? - Yes, I did say that. Yes.So you were aware, when you said that, that there was a dispute? - I can't recall whether there was at that time or later."[83]
Transcript at 43
72. Martin gave evidence regarding the basis on which he had prepared TVKS's returns. In his statement, he explained that:
"When the Notices of Amended Assessment dated 14 May 2013 were received, they were sent to my business address … I did not inform my wife of their existence. Rather, I instructed that objections be lodged on her behalf without informing my wife that I was doing so. Nor did I inform her when an Objection Decision was made. My wife was unaware, to the best of my knowledge, of the existence of the … [Woodchester No. 4 Trust], the … [Bristol Trading Trust], the Amended Assessments and the Objection Decision until late October 2015 when the barrister acting for her requested a conference and advised that she should attend. At that point, to the best of my knowledge, she was shown for the first time the Notices of Amended Assessment."[84]
Exhibit F at [11]
73. Martin also referred to his having set up an email account in his wife's name so that he could respond on 16 June 2011 to the ATO's request for her consent to extend the amendment period relating to the assessment issued to her for the 2006 Year.
74. Martin said that Pitcher Partners had never conveyed to him that the ATO was investigating TVKS's taxation affairs. Martin had earlier acknowledged that he knew that the ATO was investigating his affairs and those of his associated entities. He had also acknowledged that the ATO had requested his wife's consent to its extending the limited amendment period in relation to her assessment for the 2006 Year. Martin did not agree with the proposition that the ATO's request showed that it was investigating her taxation affairs. He responded:
"No, not - not quite. At the time I was going through an extensive audit of which you were aware and I did not at any stage connect the dots that she would be caught in the web as she has been."[85]
Transcript at 52
75. Martin instructed Mr Young to prepare and lodge an objection to the amended assessments issued to TVKS for the 2006 and 2007 Years. Mr Linden and he had the following exchange regarding his role in that decision:
"You believed you had authority from TVKS to engage a lawyer to act on her behalf? - I believe I was in charge of matters and I was dealing with it. I didn't ask her for express authority.
But you believed you had that authority? - I believed as a tax agent and her husband, yes.
And you approved the grounds of objection? - Yes, I believe so."[86]
Transcript at 55
Consideration
76. Mr Broadfoot referred me to the judgment of the Full Court of the Federal Court in Ramsden[87]
The authorities: the right to disclaim and its boundaries
77. Turning to the case of Ramsden, I note that it was decided at first instance by Spender J, who considered disclaimers in the context of s 190(a) of ITAA36. The objections to an assessment issued to the taxpayers had been lodged on 19 September 2000, the objection decisions were given on 26 April 2001 and an appeal to the Federal Court lodged on 5 June 2001. Each of the taxpayers executed a deed of disclaimer on 17 April 2001. In his judgment, Spender J accepted the following propositions:
(1) "… [A] beneficiary of a discretionary trust may disclaim for each exercise of the discretion, that is to say, the fact that the beneficiary has accepted benefits previously does not bar a disclaimer in respect of later exercises of discretion …"[88]
at [71]; 56; 4672 Ramsden vFederal Commissioner of Taxation [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659 (2) "… [A] beneficiary has entitlement to income under a trust for the purposes of s 97
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of the ITAA 1936 from the moment it arises, notwithstanding that the beneficiary has no knowledge of it and might be able later to disclaim entitlement."[89]at [72]; 57; 4672 The relevant provisions of Division 6 of Part III of ITAA36 are attached at Annexure A [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659 (3) A person is entitled to disclaim an appointment of income whether as a discretionary beneficiary or whether taking in default of appointment by the trustee.[90]
at [75]; 57; 4672 [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659 (4) A beneficiary may not disclaim if he or she has accepted the distribution:
"… A beneficiary will be taken to have accepted the interest where the beneficiary is made aware of it and does not, before a reasonable time has elapsed, seek to disclaim it … The act of disclaimer must, usually, occur before any act constituting assent to the distribution. …"[91]
at [80]; 58; 4673–4674 [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659 (5) A mere statement that a person is a beneficiary of a trust does not equate with acceptance of an interest.[92]
at [79]; 58; 4673 [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659 (6) "In
Re Paradise Motor Co Ltd [1968] 1 WLR 1125, it was said (at 1133):' In order that someone should be treated as having, by words or actual conduct, disclaimed a gift, it must, I think, be shown that he possessed reasonably full information as to the nature and amount of the gift. Here, Johns, like many before him, proved ready to pocket his pride when he learned on the amount at stake.
The Court of Appeal said (at 1142):
Pennycuick J … considered that, for disclaimer of a gift to be effective as such, the donee must possess reasonably full information as to the nature and amount of the gift. We do not think, with respect, that the generalisation is of universal application, and we do not think that it applies here. The message to Watson was quite plainly couched in language which showed the he was in no circumstances accepting entitlements to any shares."[93]
at [78]; 58; 4673 [2004] FCA 632 ;56 ATR 42 ;2004 ATC 4659
78. On appeal,[94]
" Until disclaimer, a beneficiary's entitlement to income under a trust is operative for the purpose of s 97 of the ITAA 1936 from the moment it arises from notwithstanding that the beneficiary has not knowledge of it …. A beneficiary may disclaim an entitlement on its coming to his or her knowledge. At law an effective disclaimer operates retrospectively, and not merely from the time of disclaimer.
To be effective, a disclaimer may constitute an absolute rejection of the gift, as a qualified disclaimer may constitute a form of assent to the gift. Any gift is the donor's gift, and must be assented to or disclaimed on the donor's terms. Thus a gift of residue by will, although comprising many assets, can only be disclaimed in its entirety. … A disclaimer operates only in relation to the gift disclaimed. …"[95]
at [30]–[31]; 492; 4144 [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136
79. Later, the Full Court added:
"A donee may indicate acceptance of a gift by positive conduct. In addition, if a donee knows of a gift, and does not disclaim it within a reasonable period having regard to the circumstances of the particular case, the donee is ordinarily treated as tacitly accepting it:
JW Broomhead (Vic) Pty Ltd (In Liq) v JW Broomhead Pty Ltd [1985] VR 891 at 930-931. In that case McGarvie J pointed out that the significance of inactivity over time is that it may operate in an evidentiary way to found an inference that the beneficiary has accepted the gift. …"[96]at [53]; 496; 4147 [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136
80. The first step in determining whether a beneficiary has lost the right to disclaim a gift is to identify that gift that he or she has been given. In Ramsden, the Full Court identified the gift to have been made under cl 3(e) of the trust deed. It was so much of the net income of the trust fund for each accounting period that was not the subject of a determination under cl 3(b) of that same deed. It was held in trust for the persons described in cll 4(a), (b) and (c) of the deed. The first to take were descendants of a specified beneficiary. There were four in all, including Ms Ramsden, who took in equal shares as tenants in common. That was a gift made on the execution of the trust deed and not
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on the exercise of any discretion by the trustee at a later stage. The trust deed had been executed on 1 May 1981 and so that was the date of the gift.81. The Full Court then turned to the time at which the beneficiaries became aware of the gift made by cl 3(e) of the trust deed. In the absence of any other evidence, it thought that an inference was available that they became aware of the gift shortly after 19 July 2000 when the Commissioner gave each a notice of the assessment. In the alternative, the Full Court said:
"… the probabilities are that the respondents (if only by their advisers) became aware of that gift made by the time that the notices of objection against the amended assessments were lodged on 19 September 2000. In any event, the respondents (if only by their advisers) must have known that the gift at the end of April 2001 when the Commissioner gave his decision on the objection. …
Thus from September 2000, or April 2001, the respondents had to determine whether they wished to disclaim their interests under cl 3(e), such a disclaimer having effect from the commencement of the trust. Whether the respondents wished to accept the entitlement which accrued to them for the year ended 30 June 1996 was not the question. They had to determine, within a reasonable time from September 2000 or April 2001, whether they would renounce the vested interest they had in the annual income of the trust for the duration of the trust. The fact that the respondents were then contesting whether cl 3(e) had been enlivened in relation to the year ended 30 June 1996 is beside the point."[97]
at [59]–[60]; 497–498; 4148 [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136
82. The Full Court then found that the period of three years between September 2000 or April 2001 and 8 October 2003 was well in excess of a reasonable period within which to disclaim their entitlements under cl 3(e). Their failure to do so until the day before the trial before Spender J led to an inference that they were reluctant to do so. Limited and ineffectual disclaimers had been made in April 2002 and October 2003. They were consistent with an intention not to disclaim their entire interests in the trust income and consistent with an implied acceptance of the gift. Therefore, there was no valid disclaimer.
83. McGarvie J considered a related issue in JW Broomhead (Vic) Pty Ltd (In liquidation) v JW Broomhead Pty Ltd[98]
84. McGarvie J accepted the principle that a beneficiary under a trust deed may disclaim a beneficial interest but may lose that right by inaction, for silence may amount to acceptance of that interest.[99]
"I accept the evidence of Lynette and Graham Wood that she knew nothing of her beneficial interest or this action until a few days before she gave her evidence. At the earlier relevant times she left her financial affairs to her husband and he relied mainly on Mr. Calver to look after his and his wife's affairs. However, I do not regard them on the evidence as having authority to commit Mrs. Wood in respect of the new and unexpected beneficial interest that became available to her pursuant to the trust deed. By her actions in opposing the claim in this action since she knew of the pleadings, she has ratified what her legal representatives had alleged in the deed and has thus disclaimed the beneficial interest which was available to her."[100]
at 932 [1985] VR 891
85. Mr Broadfoot drew my attention to the decision of Senior Member McCabe, as he then was in Re Applicant and Federal Commissioner of Taxation[101]
Case [2008] AATA 927). He
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found that the Commissioner had raised a default assessment against the taxpayer under s 167 of ITAA36 because of his failure to disclose trust distributions as part of his assessable income in 2002. Senior Member McCabe accepted that the taxpayer had no personal knowledge of his interest in the trust or the distributions until shortly before he disclaimed his entitlement. The date of that default assessment is not given in the reasons but it is apparent that the taxpayer lodged an objection. In August 2006, he instructed a solicitor to represent him in discussions with the ATO. It is not clear whether he did that before or after he lodged the objection. What is clear is that Senior Member McCabe found that, during those discussions with the ATO, the solicitor became aware of the taxpayers' interest under the trust. He also found that the solicitor never communicated his knowledge to the taxpayer. Relying on the principles expressed by Mason J in Sargent v ASL Developments Ltd[102]86. Mr Broadfoot submitted that I should not find the reasoning in
Case [2008] AATA 927 to be persuasive. The case of Sargent, on which that reasoning relied, was dealing with a very different situation, he submitted, and that took it outside the circumstances such as those in
Case [2008] AATA 927. In Sargent, two groups, the Sargents and the Turnbulls, agreed to sell to ASL Developments Limited (ASLDL) three parcels of land that adjoined each other. A clause in each contract provided that either party would be entitled to rescind the contract if it were established prior to completion of the contract that, at the date of the contract, the relevant property was affected by any planning scheme or proposal otherwise than a planning scheme or proposal disclosed in a schedule to the contract. The schedule specified that the property was affected as shown in a certificate attached to the schedule. No certificate was attached. At all material times including the date on which the contract was signed, the property was affected by planning schemes. At the date of the contract the Sargents knew of the planning schemes. The Turnbulls' solicitors knew of them but there was a question whether the Turnbulls did. After the date of the contract and before completion, the vendors received from ASLDL payments of interest, instalments or principal and increased rates. They also joined with ASLDL in bringing the land under the operation of the Real Property Act 1900 (NSW).
87. The High Court found that the failure to annex the relevant certificate to the schedule meant that the parties to the contract had a right to rescind it. The next issue was whether the Turnbulls had, by their conduct, lost that right. Stephen J, with whom McTiernan ACJ agreed, found that neither Mr nor Mrs Turnbull had notice of the planning schemes but that their solicitor did. The question then became whether their solicitor's knowledge operated so as to attract to the acts of affirmation the irrevocability of an election. Their Honours said that there does not need to be any conscious choice. All that is required is:
"… that there should be intentional and unequivocal conduct together with knowledge of the facts giving rise to legal rights. … Now, where, as in this case, a vendor employs a solicitor to attend to the carrying out of the legal aspects of a sale he necessarily authorizes that solicitor to attend to all the usual aspects of conveyancing practice; that authority will here extend to the obtaining of the necessary planning certificate and the solicitor's knowledge gained from that certificate, may properly be imputed to his clients since it was acquired both for the purpose of that transaction and in the course of it …
Again, where a vendor so arranges matter that his solicitor undertakes on his behalf the carrying out of a conveyancing transaction as a whole her thereby not only authorizes his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at first hand knowledge of the relevant facts, at the same time depriving himself of the opportunity of
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acquiring such first hand knowledge. If any such steps taken by the solicitor happen to constitute acts of affirmation of the continued existence of the contract they will be binding upon the client … If they be unequivocal and are performed at a time when the solicitor has himself acquired knowledge of facts giving rise to a right to rescind the contract the client will, without the need to attribute to him the knowledge of his solicitor, be bound by those acts of affirmation as on an election; the duly authorized conduct of the solicitor, who has acquired the relevant knowledge, will, without either conduct or knowledge on the client's part, constitute an effective election not to rescind the contract …"[104]at 648–649; 415–416; 268–269 (1974) 131 CLR 634 ;48 ALJR 410 ;4 ALR 257
88. Mason J began his judgment by stating the proposition that:
"… If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract: the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected.'[105]
at 658; 419; 276 (1974) 131 CLR 634 ;48 ALJR 410 ;4 ALR 257
89. His Honour went on to consider whether the knowledge of the Turnbulls' solicitor was to be attributed to them:
"… As against a third party the law imputes to a principal knowledge gained by his agent in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal, under such circumstances that it is the duty of the agent to communicate it to the principal. In the words of James LJ in
Vane v Vane [(1873) 8 Ch App 383 at 399], 'the actual knowledge of the agent through him an estate is acquired is … equivalent to the actual personal knowledge of the principal'. In my view this principle applies to information acquired by a solicitor in the course of acting for his client in a conveyancing matter (
Dixon v Winch [[1900] 1 Ch 736]. The solicitor is to be regarded as the alter ego of the client and the rights of the other party to the contract cannot be made to depend on the diligence or lack of diligence exhibited by the solicitor in his dealings with his client.Consequently, as the information as to zoning which Mr Sweeting acquired was within the ambit of his authority from the Turnbulls and as he was under a duty to communicate it to the Turnbulls once he received it, his knowledge is to be imputed to them."[106]
at 658–659; 429; 276 (1974) 131 CLR 634 ;48 ALJR 410 ;4 ALR 257
90. I agree with Mr Broadfoot that the factual circumstances considered in Sargent are different from those arising in
Case [2008] AATA 927 but I do not agree with his submission that the principles on which Sargent was decided are not applicable. At one level, the case of Sargent concerned the position of a third party - being the purchaser of the three properties owned by either the Sargents or the Turnbulls - for its rights would be determined by whether the vendors could rescind the contracts. The interests of that purchaser were not, however, at the heart of the case. The central issue related to right or otherwise of the vendors to rescind the contract. The right to rescind depended upon the actions of the Sargents and Turnbulls and the knowledge that they had or which could be attributed to them. The Sargents had the requisite knowledge and, by their actions, lost the right to rescind. Stephen J, with whom McTiernan ACJ agreed, found that the Turnbulls did not have the
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requisite knowledge themselves and Mason J was equivocal. Either way, Stephen J based his consideration on principles relating to the nature and extent of the authority given to the solicitor according his terms of engagement by the Turnbulls. There was no need to attribute the solicitor's knowledge to the Turnbulls for the solicitor's actions bound them regardless of their knowledge or conduct. The approach of Mason J was expressed a little differently in that he said that, as against a third party, the law imputes to a principal knowledge gained by an agent provided that knowledge is, first, gained by the agent in the course of, and is material to, a transaction in which the agent is employed on behalf of the principal and, second, the circumstances require that it be communicated to the principal.91. The approach taken in
Case [2008] AATA 927 is that taken by Mason J rather than by the majority. The common element between Sargent and
Case [2008] AATA 927 is that a person engaged a solicitor for a particular purpose. The nature and limits of that task are not as precisely drawn in the reasons for decision in
Case [2008] AATA 927 as in Sargent but it is clear that the Tribunal has taken the view that the circumstances were such that it concluded that the taxpayer's solicitor was under the same duty to communicate information as was the Turnbulls' solicitor. What I think is clear from the approach taken by both Stephen J and Mason J is that regard must be had to the terms of the engagement by principal and agent, whether that agent be a solicitor or a tax agent or some other person engaged to perform a task. Simply engaging a person who is, for example, a solicitor or tax agent, does not define the parameters of the task for which the person was engaged. It does not determine the knowledge that can be ascribed to the principal or whether the acts of the person can be taken to bind the principal. The latter approach can be framed in terms of apparent or implied authority or in terms of estoppel.
92. The judgment of McGarvie J in Broomead is based on the same approach. At [84] above, I set out his Honour's conclusion relating to Mrs Wood's disclaimer of her entitlement under the unit trust. I respectfully suggest that this passage does not explain how McGarvie J came to his finding that he did not regard Mrs Wood's husband or their accountant, Mr Calver, as having sufficient authority to commit her to accepting, if only by inaction, a beneficial interest under the trust. Having regard to his Honour's earlier findings, it may be that part of the explanation may lie in the fact that Mr Calver had ceased to act for Mr Wood at some earlier time. He had been unable to determine when that earlier time had been.[107]
93. If the approach taken by Mason J in Sargent is taken, regard need then be had to the circumstances in which The Victorian Court of Appeal considered them in NML Limited v Man Financial Australia Ltd.[108]
"(1) A notification given to an agent is effective as such if the agent receives it within the scope of his actual or apparent authority, whether or not it is subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal his knowledge from the principal.
(2) The law imputes to the principal and charges him with all notice or knowledge relating to the subject matter of the agency which his agent acquires or obtains while acting as such agent.
(3) Where an agent is authorised to enter into a transaction in which his own knowledge is material, or where the principal has a duty to investigate or make disclosure, the knowledge of the agent may be attributed to the principal whether it was acquired in connection with the agent or not.
For present purposes, the second of those rules may be set aside. The extent of its application is uncertain. …and in this country its scope of operation appears limited to instances where it is the duty of the agent to communicate knowledge to the principal. … Generally speaking, the idea seems to be that, where there is a duty to
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communicate, the consequent probability of communication is so strong that the fact of a communication will be presumed (except in case of fraud). …"[109]at [38]–[39]; 167–168 (citations omitted) [2006] VSCA 128 ;(2006) 15 VR 156
The authorities: summary of principles regarding disclaimer
94. On the authorities to which I have referred above, there is no question that a beneficiary is entitled to disclaim a beneficial interest under a trust in certain circumstances. What they show is that:
(1) Care must be taken to:
- (a) identify what interest or benefit was conferred or given;
- (i) an interest of benefit may be conferred or given even if the beneficiary does not know of it;[110]
See at [113]–[116]; 453 per Gleeson JA with whom Meagher and Leeming JJA agreed and see [127]–[131] below of these reasons Segelov vErnst & Young Services Pty Ltd [2015] NSWCA 156 ;(2015) 89 NSWLR 431 - (b) identify the interest or benefit that is disclaimed;
- (c) decide whether what is being disclaimed is that which was conferred or given for:
- (i) the disclaimer must relate to the whole of the interest or benefit that is conferred and not simply to part of it; and
- (ii) if the disclaimer relates to part only of the interest or benefit, that may be taken as acceptance of the gift.[111]
at [31]; 492; 4144 Ramsden [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136 (2) Whether a person has disclaimed an interest or benefit is determined by reference to all of the circumstances including:
- (a) the time at which the person became aware of the interest or benefit;
- (i) that knowledge may be actual knowledge or, in certain circumstances, imputed knowledge;[112]
and at 658; 420; 276 Sargent (1974) 131 CLR 634 ;48 ALJR 410 ;4 ALR 257 - (b) what he or she did, or did not do, once it came to his or her attention.[113]
at [53]; 496; 4147 and see also Ramsden [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136 at 932 Broomhead [1985] VR 891 (3) Whether a person is estopped from disavowing the actions of another in relation to his or her affairs and whether that other's knowledge of those affairs is attributed to that person is determined by reference to the terms on which the person engaged that other person.[114]
at 658; 419–420; 276–277 per Mason J Sargent (1974) 131 CLR 634 ;48 ALJR 410 ;4 ALR 257 (4) Once exercised, a disclaimer cannot be retracted and operates retrospectively to the date when the interest or benefit was conferred.[115]
at [30]–[31]; 492; 4144 citing Spender J at first instance without disapproval. Ramsden [2005] FCAFC 39 ;(2005) 58 ATR 485 ;2005 ATC 4136
Has TVKS disclaimed the benefits or entitlements under the trusts?
95. Although the amount of their income may not exceed the threshold amount at which income tax is payable so that the amount of income tax is nil, income tax is payable by each individual and company.[116]
96. I also find that Martin acted as TVKS's tax agent from, at the latest, 26 May 2014 when she signed an authority directed to him to act on her behalf in respect of her dealings with the ATO. This authority was given in terms that are much more limited than those in which she had already conferred upon him in his position as her husband. Her doing so at that time does not detract from the scope of that broader authority which has dated from a time shortly after their marriage in 1979.
97. Acting within the scope of the unfettered power that TVKS conferred on Martin shortly after their marriage in relation to her financial affairs, I find that she had conferred actual authority on him to act as he thought appropriate in relation to those affairs.
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Therefore, if I apply the approach taken by Mason J in Sargent, I find that Martin's knowledge of her affairs is attributed to her. Even if he was not aware of the distributions made to her under the Archer Property Trust in the 2006 Year and under the Bristol Trading Trust in the 2007 Year at some earlier time, Martin was made aware of them in the ATO's position papers dated 20 December 2012 and 22 January 2013. His knowledge would, as I said, be attributed to her. Despite knowing that and despite knowing that the ATO was continuing its investigations in 2013 and had sought an extension of the time in which it could issue amended assessments to TVKS, Martin, and so TVKS, did nothing to disclaim the distributions at all. Only on 15 December 2015 did TVKS disclaim both distributions. By then, seven or eight years had passed since the distributions had been made and at least two or three years since Martin, and so she, had knowledge. Neither did anything to disclaim the distributions whether in the objections lodged in her name against the amended assessments for the 2006 and 2007 Years or in the subsequent applications for review of the reviewable decisions or by any other means. I am satisfied that the passage of such a period of time is consistent with an intention by TVKS not to disclaim her interests in those distributions. It is also consistent with an implied acceptance of those distributions. Therefore, I am satisfied there were no valid disclaimers.98. If I follow the approach taken by Stephen J, with whom McTiernan ACJ agreed, I reach the same outcome. I would find that TVKS's actions in authorising Martin to act on her behalf in relation to all of her financial matters places in him in the position of acquiring, at first hand, all knowledge of the relevant facts. By doing that, TVKS deprived herself of obtaining that first hand knowledge. In that context, Martin's actions, or inactions, in relation to TVKS's financial affairs are binding upon her. As the relevant actions or inactions were undertaken by Martin at a time when he realised that distributions had been made to TVKS, she is bound by them in relation to whether she may now disclaim the distributions. For the reasons I have given in the previous paragraph, too much time has passed for her to do this. Martin's inaction in relation to the lodgement of objections and applications for review in her name, leads me to find that he has accepted the distributions. His actions and inactions are binding upon TVKS.[117]
ISSUE 1(b): Should TVKS be given leave to expand the grounds of objection to include the ground that the Archer Property Resolution was ineffective to distribute income to TVKS?
The submissions
99. Mr Broadfoot submitted that this ground is inherent in TVKS's objection when she elaborated upon her general statement that the Amended Assessment for the 2006 Year was invalid, void and of no effect in respect of the income tax purportedly assessed. She said:
"Without limiting the generality of paragraph 1, neither section 170 nor any other provision of the ITAA 1936 or the Income Tax Assessment Act 1997 (the ITAA 1997) required, entitled or permitted the Commissioner to issue the Amended Assessment in that there had not been any failure by the Taxpayer to disclose the whole of her assessable income which she derived during the 2006 Year."[118]
T documents; T51 at 617
100. The Commissioner would not be prejudiced because he could issue an assessment to the trustees under s 99A of ITAA36. It would be an original assessment for it was not issued when Archer Property submitted the taxation return for the Woodchester No. 4 Trust. The taxation return was prepared on the basis that there were carried forward losses, and so no income returnable. In accordance with his practice set out in Practice Statement Law Administration PS LA 2015/2, the Commissioner does not, as a matter of course, issue a nil assessment to the trustee to reflect the position as returned.
101. On behalf of the Commissioner, Mr Linden submitted that TVKS had not only failed to advance the ineffectiveness of the Archer Property Resolution as a ground of her objection but had advanced an objection that was inconsistent with the ground she seeks leave to add. He referred particularly to cll 3 and 26(1) and (2) of her objection. Clause 3 of the objection stated:
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"The Taxpayer is a beneficiary of a trust estate known as the … [Woodchester No. 4 Trust] … and by a resolution of the sole director of a company called … [Archer Property Pty Ltd] as trustee of the … [Woodchester No. 4 Trust] made on 30 June 2006 (… [the Archer Property] Resolution), the Taxpayer was to be entitled to 100% of the 'income of the trust, as defined in the Deed' …"[119]Objection, cl 3: T documents; T51 at 617–618
102. Clauses 26(1) and (2) of TVKS's objection stated:
"(1) The Trust Deed governing … [Woodchester No. 4 Trust] effectively aligns its distributable income with its taxable income (unless … [Archer Property], as trustee, determines otherwise, which it did not do either under the … [Archer Property] Resolution or otherwise).
(2) The … [Archer Property] Resolution provided that the Taxpayer was to be entitled to 100% of the taxable income of … [Woodchester No. 4 Trust] calculated before taking into account any adjustments made by the commissioner to its taxable income for the 2006 Year."[120]
T documents; T51 at 622–623
103. Furthermore, Mr Linden submitted, TVKS had failed to raise the contention during audit or to withdraw the concessions she had made in her objection. If the Archer Property Resolution was ineffective, the Commissioner was out of time to amend Martin's assessment for the 2006 Year unless there was a finding of fraud or evasion. He had issued that assessment on 20 December 2006.[121]
Consideration
104. In making a taxation objection, a taxpayer must comply with s 14ZU of the TA Act. Section 14ZU(c) provides that it must "state in it, fully and in detail, the grounds that the person relies on." As Northrop J said in McLean and Dean:
" The purpose of the statement of grounds is obvious. It is to direct the attention of the Commissioner to the questions raised. …"[122]
at [18]; 111; 651; 4447 [1996] FCA 1459 ;(1996) 66 FCR 106 ;32 ATR 647 ;96 ATC 4443
105. In this case, it seems to me that the grounds of objection are too widely cast to draw in the ineffectiveness of the Resolution. On the contrary, the whole tenor of her objection assumes that the Resolution was effective. For that reason, I consider that TVKS requires leave under s 14ZZK to extend the grounds on which she relies.
106. The Commissioner had no reason to consider whether he should be looking to Archer Property's liability as the trustee under s 99A of ITAA36 rather than TVKS's liability as the beneficiary. He had no reason to consider whether he should issue an assessment to Archer Property at an earlier stage. The fact that he may still do so as it would be an original assessment does not remove the prejudice that he may face in gathering the tax. Issuing an assessment is one thing and collection another. Although I am not suggesting that it was deliberate, the way in which TVKS presented her grounds not only did not disclose the questions that she raised, it obscured them. The Commissioner has been prejudiced by that. In view of that, I have concluded that it would be not be in the interests of justice to give TVKS leave to extend the grounds stated in her objection.
107. Despite reaching that view, I have considered the issues raised by the ground put forward by TVKS and concluded that the Archer Property Resolution was effective.
ISSUE 1(b)(i): In referring to " Income ", was the Archer Property Resolution an ineffective exercise of Archer Property's power to distribute the Net Income of the Woodchester No. 4 Trust?
The submissions
108. On behalf of TVKS and subject to being granted leave to rely upon the ground, Mr Broadfoot submitted that she was not entitled to a share of the income of the Woodchester No. 4 Trust for the 2006 Year. Regardless of whether account was taken of adjustments made by the Commissioner, she was not entitled to a share of the income because the effect of the Archer Property Resolution had been to pay, apply and set aside "the income" and not "the Net Income" as permitted by the Trust Deed. Mr Broadfoot submitted that there is a clear distinction between the "Income" and the "Net Income". If that submission is accepted, Mr Broadfoot argued, TVKS was not presently entitled to the distribution. That meant that
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Martin should have been assessed on the net income of Woodchester No. 4 Trust as the Specified Beneficiary.[123]109. If the determination were not validly made, the s 95 income would be held on trust for the Specified Beneficiary being Martin. Presumably, he would not press an entitlement but, if he does not have a present entitlement, then the trust deed would be assessable under s 99A of ITAA36. The Commissioner would not be out of time in issuing an assessment to Archer Property for he has never done so in the past.
110. Mr Linden submitted that the Archer Property Resolution was effective to appoint the "Net Income", as defined in cl 1.17 of the Trust Deed of the Woodchester No. 4 Trust for the 2006 Year to TVKS. Under the Archer Property Resolution, the income of the Woodchester No. 4 Trust was to be paid, applied and set aside to, or for the benefit, of TVKS so that her assessable income for taxation purposes is 100% of income.
111. Mr Linden relied on the case of Segelov v Ernst & Young Services Pty Ltd[124]
112. Mr Linden pointed to the balance sheet of the Woodchester No. 4 Trust observing that it shows a distribution of accounting net profit to beneficiaries. That, he continued, is consistent with a determination by the trustee that net income was the income calculated in accordance with established accounting principles and trust law. In any event, he added, it is irrelevant whether the income is trust or accounting income on one hand or taxable income on the other because 100% of it was distributed to TVKS.
The Woodchester No. 4 Trust Deed
113. Under cl 2.1, the Settlor declared that the Trustee would hold, and the Trustee declared that it holds, the Trust Fund and any Income or gain accruing to it upon the trusts, and subject to the powers and provisions, contained in the Woodchester No. 4 Trust Deed.[126]
114. Clause 3.3 of the Woodchester No. 4 Trust Deed reads, in part, that:
"3.3 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:-
3.3.1 to pay, apply or set aside the same to or for any one or more of the General Beneficiaries living or in existence at the time of the Determination.
3.3.2 …
3.3.3 to accumulate the same;
3.3.4 …
provided that nothing in this clause shall oblige the Trustee to Set Aside any sum or affect any rights of the Trustee in the event that any assessment of tax being made against him in respect of any amount so paid, or Set Aside."
115. If the trustee, Archer Property, did not make a Determination under cl 3.3 (or, in the case of a determination made after the expiration of the Accounting Period, cl 3.4) or to the extent that it did not exercise, or did not effectively exercise, that discretion, Archer Property held the Net Income upon trust for the Specified Beneficiaries living on the last day of the Accounting Period.[128]
116.
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Clause 3.6 applies to any Determination made under cl 3.3. It includes the following provisions:"3.6.1 the validity of the 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 clause 3.6.2) be irrevocable;
3.6.2 if at the end of any Accounting Period the amounts in respect of which Determinations have been made pursuant to clause 3.3 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, to the extent of the deficiency, be deemed to have applied the capital of the Trust Fund pursuant to clause 4;[129]
Clause 3.10.6 is to similar effect 3.6.3 a Determination to pay, apply or Set Aside any amount to or for the benefit of any Beneficiary shall be irrevocable and may effectually be made and satisfied (inter alia) by a resolution of the Trustee that a sum out of or portion of the Net Income of the trust estate of the Trust Fund for the Accounting Period or a sum out of or portion of the Net Income of the trust estate of the Trust Fund for the Accounting Period be allocated to that Beneficiary or otherwise dealt with for the benefit of that Beneficiary or 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 or by paying the same over to or for the benefit of such Beneficiary in such manner and to such person on behalf of such Beneficiary as the Trustee shall think fit;
3.6.4 if a Beneficiary in whose favour the Trustee may determine to pay apply or Set Aside Income is an infant then the Trustee may without derogating from anything in clause 3.6.5, do one or more or all of the following:-
3.6.4.1 pay all of some of that Income to the infant or to a bank account in the name of the infant whether solely or jointly with that of another person including the Trustee;
…"
117. Clause 3.7 is concerned with a determination to accumulate:
"Any Income which the Trustees shall determine to accumulate shall be added to and form part of and may be dealt with in the same manner as the capital of the Trust Fund."
118. Clause 3.8 provides that:
"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 same person and in the same proportions as the Trustee would hold the corpus of the Trust Fund pursuant to clause 4 as if the last day of that Accounting Period were the Vesting Day."
119. Clause 3.10 sets out provisions applying to any Determination made under cl 3. Of those, cl 3.10.1.4, is relevant:
"3.10.1 A Determination to pay, apply or Set Aside any part of the Net Income may be effectually made and satisfied by:
…
3.10.1.4 a resolution of the Trustee that a sum out of or portion of the Net Income on the whole of the Net Income for the Accounting Period be paid, applied or set aside to or for the Beneficiary or otherwise dealt with for the benefit of the Beneficiary specified in the resolution; …"
120. Clause 3.10.2 provides that:
"Any resolution of the Trustee under clause 3.10.1.4 is irrevocable and the Net Income must be dealt with as required by that resolution."
121.
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Clause 3.10.3 gives the Trustee power to:"3.10.3.1 identify and segregate Income from different sources or of different natures for the purpose of dealing with it separately; and
3.10.3.2 where the Income of an Accounting Period is directly or indirectly derived from different sources, in making a Determination to pay, apply or Set Aside Income for a Beneficiary or to accumulate the same, determine from what source that Income is derived."
122. The expression "Net Income" is defined in cl 1.17:
"'Net Income' means the amount calculated as the net Income of the Trust Fund for an Accounting Period in accordance with section 95(1) of the Tax Law including:
1.17.1 any net capital gain included in the assessable Income of the Trust Fund by virtue of section 160ZO of Tax Law; and
1.17.2 to the extent allowable, any taxation credits available to the Trustee under Tax Law including but not limited to:
1.17.2.1 foreign tax credits;
1.17.2.2 prescribed payment tax credits; and
1.17.2.3 dividend imputation credits;
Unless the Trustee determines in respect of any Accounting Period that Net Income for that Accounting Period means the Income produced from the investment of the Trust Fund calculated in accordance with established accounting principles and trust law;"
The expression "Income" "… includes but is not limited to assessable Income as defined in the Tax Law".[130]
123. Clauses 4.1.1 and 4.1.2 provide that:
"As from the Vesting Day the Trustee will hold the Trust Fund and its Income:-
4.1.1 in trust for such charitable purposes or for such of the Beneficiaries in such manner for such interests and in such proportions … as the Trustee may subject to clause 12 by instrument in writing revocable or irrevocable and without offending the rule against perpetuities before the Vesting Day may appoint provided that any revocable appointment shall be revocable only until the end of the day preceding the Vesting Day when it shall become irrevocable;
4.1.2 insofar as any part of the Trust Fund shall not have been disposed of in accordance with cl 4.1.1 in trust for, the Specified Beneficiary living on the Vesting Day and if there is more than one in trust for such of the Specified Beneficiaries as shall be living on the Vesting Day as tenants-in-common in equal shares absolutely …"
Division 6 of Part III of ITAA36: "net income" and related terms defined
124. Division 6 of Part III of ITAA36 is concerned with trust income. Section 95 defines relevant terms. Beginning with "net income", s 95(1) provides, in relation to a trust estate, that it:
"… means 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 deductions under Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of the previous years as are required to be met out of corpus."
125. The expression "exempt income":
"… in relation to a trust estate, means the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident.
Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements and structured orders."[131]
ITAA36; s 95(1)
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The expression "non-assessable non-exempt income":"… in relation to a trust estate, means the non-assessable non-exempt income of the trust estate calculated as if the trustee were a taxpayer who was resident."[132]
ITAA36; s 95(1)
126. The expression "assessable income" has the meaning given by s 995-1(1) of ITAA97.[133]
The authorities
127. A trustee may make a distribution but when does the beneficiary become entitled to that distribution? The New South Wales Court of Appeal touched on this issue in Segelov v Ernst & Young Services Pty Ltd[138]
" The effect of a deposit into a joint bank account is described by the High Court in
Russell v Scott. [(1936) 55 CLR 440 at 448 (Starke J) and 450 (Dixon and Evatt JJ)] It was not disputed that the vesting of the right and title in the holders of the account takes place when the deposit is made, irrespective of knowledge that it has been made. [
Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394 at 402 (Latham CJ)] Nor was it disputed that an entitlement under a trust is valid notwithstanding that the beneficiary has no knowledge of it. [
Vegners v Federal Commissioner of Taxation (1991) 91 ATC 4,213 at 4,215] … The use to which moneys in the joint bank accounts were in fact put after payment of the distributions does not inform, let alone provide a foundation for, the asserted duty of notification at an earlier point in time."[139]at [118]; 453–454 [2015] NSWCA 156 ;(2015) 89 NSWLR 431
128. In Segelov, the Court of Appeal considered two issues. One was whether the trustee of a discretionary trust was permitted by the trust deed to make interim distributions of "income". The other was whether the trustee was under a general duty to inform the beneficiary of the existence of the trust and of an exercise of the trustee's discretion in his or her favour.
129. Gleeson JA, with whom Meagher and Leeming JJA agreed, started by considering the proper interpretation of the terms of the trust deed saying:
" The first matter to note is that the rules for construction of contracts apply also to trusts. Accordingly, the search for 'intention' is only a search for the intention as revealed in the words used by the parties, amplified by the facts known to the parties …"[140]
at [83]; 447 per Gleeson JA with whom Meagher and Leeming JJA agreed [2015] NSWCA 156 ;(2015) 89 NSWLR 431
130. Those rules of interpretation include the following:
" First '[a] court will strain against interpreting a contract so that a particular clause in it is nugatory or ineffective, particularly if a meaning can be given to it consonant with other provisions in a contract': Chapman Ltd v Australian Stock Exchange Ltd. …
Secondly, as Fullagar J stated in Halford v Price, … there is no rule of law or of construction in the case of a statute, nor in the case of a contract or any other instrument, which requires a court to apply a definition where to do so would be at variance with a context or with a general intent to be gathered from the whole of the instrument. Similarly, it is not the rule that 'defined terms inevitably bear every aspect of their defined meaning': …
Thirdly, regard should be had to the circumstance that cl 6.26 was introduced into the trust deed by an amending deed …"[141]
[ at [100]–[102]; 450–451 2015] NSWCA 156; (2015) 89 NSWLR 431
131. These rules of interpretation were applied to the trust deed to conclude that it permitted the trustee to make interim distributions of income. The Court of Appeal also applied them in considering whether the trust deed imposed a duty on the trustee to
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notify the beneficiaries of the trust or of any distributions of income. A trustee's duty, they said, requires that trustee to carry out the office faithfully. What that involves is determined by the precise terms of the particular trust deed, the circumstances surrounding the establishment of the trust and the nature of the property involved.[142]"… [T]he inquiry is what is required of the trustee in the faithful performance of its duties according to the trust deed having regard to the relevant social or business context and the practical exigencies of the types of decision that the trustee has to make."[143]
2015] NSWCA 156; at [139]; 457(2015) 89 NSWLR 431
The Court of Appeal found no such duty imposed by the trust deed's terms.
132. Mr Broadfoot drew my attention to the case of Mount Bruce Mining[144]
" The rights and liabilities of parties under a provision of a contract are determined objectively, … by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. …
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable business person would have understood those terms to mean. … That enquiry will require consideration of the language used by the parties to the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. …
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. …
However, sometimes recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. … It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. …
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption 'that the parties … intended to produce a commercial result'. … Put another way, a commercial contract should be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience.'. …"[145]
at [46]–[51]; 116–117; 197–198; 998–999 (citations omitted) [2015] HCA 37 ;(2015) 256 CLR 104 ;325 ALR 188 ;89 ALJR 990
133. The Commissioner's assessment of the trustee as liable to tax drew attention to determinations made by the trustee in BRK (Bris) Pty Ltd v Commissioner of Taxation[146]
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in the income year concerned to those to whom it had appointed income. That meant that the purported resolutions were nullities and void ab initio. That meant that those persons were never presently entitled to the income of the trust in the income years concerned. After construing the trust deed, Cooper J concluded that no beneficiary was presently entitled to the income of the trust. Consequently, in the absence of beneficiaries, the trustee was assessable under s 99A(4) of ITAA36.134. In his judgment, Cooper J referred to the judgment in Turner v Turner[147]
Consideration
135. As Mr Broadfoot submitted, the case of BRK underlines the principle that a trustee must exercise the powers conferred by the Trust Deed in accordance with that deed and the terms in which the powers are expressed. In doing so, the trustee must apply his or her mind to the exercise of those powers and of any discretion imposed in him as pointed out in Turner.
136. The definition of "Net Income" in s 1.17 draws in s 95(1) of ITAA36 and so is a sum that is determined after taking into account not only the Trust Fund's income but also have regard to most allowable deductions. The power of distribution given by cl 3.3 is drafted in terms of that Net Income but it is clear from a reading of the Trust Deed as a whole that the power of Distribution is intended to relate to either the whole of the Net Income or a part or parts of that Net Income as Net Income. It does not refer to the individual components taken into account in assessing Net Income under s 95(1). That is not altered by specific references to "Income" in clauses such as cll 3.6.4 and 3.10.3.2. Each is using the word as a descriptor of that part of the Net Income that has been distributed. Clauses 3.6.2 and 3.10.6 provide for the situation in which Determinations made under cl 3.3 exceed the Net Income for that Accounting Period. They provide first for the reduction of distributions made for accumulation and, if that should not bring them back to the amount of the Net Income, to apply the capital of the Trust Fund. Those clauses do not point to an intention that the Trustee be able to distribute an amount beyond the Net Income in any Accounting Period. Rather, they are machinery provisions that provide for a situation in which the Trustee has made a determination that exceeds the Net Income.
137. The determination made by Archer Property on 30 June 2006 before it distributed the income, was not made under cl 1.17 but as an addendum to the definition of "Income" in cl 1.15. Clause 1.17 permitted Archer Property to determine in respect of the particular Accounting Period that the Net Income is the income produced from the investment of the Trust Fund calculated from the investment of the Trust Fund according to established accounting principles and trust law. That is not what the determination did. Instead, it described with particularity what was to be understood by the word "Income" when Archer Property made the Archer Property Resolution distributing that Income.
138. That said, the Determination must be understood in the context of the Trust Deed under which it was made. The only power of distribution conferred by that Trust Deed was to be found in cl 3.3. That power referred to the "Net Income" of the Trust Fund and the exercise of the power in the form of the Determination to "Income" but I do not think that difference leads me to conclude that Archer Property exercised its power invalidly when seen in context. That context includes its Balance Sheet for the 2006 Year as well as the Resolution as to what was included in Woodchester No. 4 Trust's income for that same year.
139. The Balance Sheet shows a figure of $10,374,993 as the "Profit Earned This Year" (Profit). The same figure is shown as the "
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Distributions to Beneficiaries". At a practical level, it is clear that Archer Property distributed not the Income as defined in cl 1.17 but the Profit, being the net income determined according to accounting principles and trust law earned for that year. Archer Property's intention to do that is apparent from the Distribution it made when it determined that, for the 2006 Year, the income included all amounts (including capital gains) taken into account in calculating the net income of the trust. In making the Archer Property Resolution, Archer Property distributed 100% of that amount to TVKS.140. For these reasons, I have concluded that the Archer Property Resolution was not an invalid exercise of power by reason of referring to "Income" and not "Net Income".
ISSUE 2: Were the Archer Property Further Resolution and Shee Investments Further Resolution effective in preventing TVKS from being presently entitled to a share of the income of the Woodchester No. 4 Trust for the 2006 Year or the Bristol Trading Trust for the 2007 Year?
The submissions
141. Mr Broadfoot submitted that the Archer Property Further Resolution and the Shee Investments Further Resolution are effective. Their effect is to render ineffective the Archer Property Resolution and the Shee Investments Resolution with effect from 30 June 2006 and 30 June 2007 respectively. In their place, and with effect from either 30 June 2006 or 30 June 2007, resolutions are made to the effect that the income of each is distributed to an entity other than TVKS. The intention of the trustees was clear. It was an intention to distribute the amount to Carson Underwriting or Isaacs Investments as the case might be if any amounts were disallowed or added to the assessable income by the Commissioner. To decide that the effect were otherwise would be to adopt an uncommercial and unintended construction of the resolutions. In each case, the Resolution and Further Resolution must be read together as a single resolution. Even if they are to be read as two separate resolutions, it is clear that the Resolution is contingent upon the Further Resolution. If it were otherwise, there would be no point in making the Further Resolution. It would have no work to do. The Further Resolution is a variation of the income that is the subject of the Resolution. The whole has to be seen in the context that prevailed at the time. At that time, the Bristol Trading Trust was thought to have no income.
142. If the Resolution and Further Resolution are not to be interpreted in this way, the Resolution is to be read as contingent upon the Further Resolution and is not effective at all. He referred to the cases of Walsh Bay Developments Pty Ltd v Federal Commissioner of Land Tax[148]
" Are conditions on the entitlements fully effective by 30 June?
A resolution would not be effective if it states that the entitlements of beneficiaries would change in the event of a future adjustment by the Commissioner of Taxation. This is because such a resolution would not have been effective to create an entitlement before 30 June."
143. Mr Linden submitted that each of the Further Resolutions is ineffective. TVKS was already presently entitled to 100% of the Net Income of the Woodchester No. 4 Trust and to the balance of the Net Income of the Bristol Trading Trust that remained after deducting the sum of $3,500.000. That was the effect of the Archer Property Resolution in relation to the Woodchester No. 4 Trust and the Shee Investments Resolution in relation to the Bristol Trading Trust. Example 6 given at cll [24]-[27] of Commissioner's Taxation Determination, TD 2012/22 (TD 2012/22) mirrors the situation in this case:
"24. The trust deed of the Surrey Trust equates the income of the trust with its section 95 net income unless the trustee determines it to be a different amount. The trustee did not make any other determination of income.
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25. On 30 June 2011, the trustee resolved to distribute the income of the trust equally between two individual beneficiaries, Daisy and Rose. The trustee further resolved that should the Commissioner later include any amount in the assessable income of the trust, the amount so included is deemed to be distributed on 30 June to Bouquet Pty Ltd.26. The trust income tax return lodged by the trustee for the year ended 30 June 2011 shows the net income as $100,000 consisting of business income. The Commissioner later determined that the income from the business carried on by the trustee was understated by $20,000. That is, the net income of the trust was not $100,000 as calculated by the trustee but rather $120,000 and likewise the income of the trust was $120,000.
27. Under the proportionate approach Daisy and Rose are each assessable on $60,000 as a consequence of the trustee resolution to resolve to distribute the income of the trust equally in their favour. As that resolution effectively dealt with all of the income of the trust, there is nothing in respect of which the further resolution in favour of Bouquet Pty Ltd could operate."[150]
T documents; T54 at 655
The authorities
144. In Glenn, the High Court considered a will under which the trustees held the real and personal estate upon trust to accumulate a specified sum and to pay amounts from that sum to persons specified in the will and at the times and in the circumstances also specified. Having made those payments over what would amount to a number of years, the testator directed that his residuary estate be divided amongst this three sons in equal shares with substitutionary gifts should any of them die before the distribution of the estate. Other than to mortgage property, the testator gave the trustees full power to deal with any part of his estate as a majority of them saw fit in carrying out the trusts of his will together with full powers of investment.
145. In his judgment, Griffith CJ referred to a note written by Mr Butler to the 10th edition of Contingent Remainders by Mr Fearne. In a passage, Mr Fearne had explained the difference between estates vested in possession and those vested in interest. He had added that an estate is vested in possession when there is an immediate fixed right of present or future enjoyment and is vested in interest when there is a present fixed right of future enjoyment. Mr Butler was concerned that it might be inferred from this passage that Mr Fearne had meant that, under a conditional limitation, or conditional devise, depending on a certain event, the cestui que use[151]
"… it seems evident, that, as in all these cases, the whole fee simple is either in the person from whom the land moves, or in his heirs, or is included in the actual limitations, the person taking under the conditional limitation or executory devise, cannot, while the suspense continues, in the proper sense of that word, have any estate, though the event, on which it depends, is certain of happening."[152]
at 496 (1915) 20 CLR 490
The events in question in that case were the deaths of certain persons and the attainment of a certain age by others.
146. Griffith CJ agreed with Mr Butler's understanding of the principles applicable in determining who held the "estate … in possession" for the purposes of the Land Tax Assessment Act 1910. That is the just interpretation to be placed on the words "… for the tax is an annual tax, and the 'owner' of the land is the person who is in the present enjoyment of the fruits which presumably afford the fund from which it is to be paid."[153]
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" Just as a will devising land to trustees is to be construed in such a sense as will confer upon the trustees such an estate as is necessary for the execution of the powers and duties imposed upon them by the testator, so, in my opinion, it is to be construed as denying to a beneficiary any estate other than such as will confer on his the benefit which the testator intended him to enjoy. … "[154]at 497–498 (1915) 20 CLR 490
147. The case of Walsh Bay concerned the way in which income generated by money held in trust under an agreement dated 12 January 1989 between a developer and the Maritime Services Board of New South Wales (Board) to redevelop land owned by the Board. Under the agreement, some $74.5m was invested in a bank account in the joint names of the developer and of the Board. Their agreement referred to that sum as being held on trust pending the occurrence of certain events related to planning permits and approval. In essence, if the developer could not obtain the planning permits and approvals that it required on terms acceptable to it and within a certain time period, the money invested would be returned to it. Any interest earned on the money in that period was to be divided equally between them on condition that the Board did not receive more than $1m. If the developer were to confirm in writing that acceptable development approvals had been given, then all of the money and interest were to become the sole property of the Board.
148. The agreement also provided that the money and interest would also be paid to the Board if the agreement were to be terminated because of the developer's breach. If that breach were to occur before the developer notified the Board of the development approvals, then the agreement provided that the developer was entitled to have the money returned plus interest less a retention sum of $10m. The sum of $10m was to be held on trust pending the resolution of any dispute the Board might have as a result of the developer's breach of their agreement.
149. The issue in dispute was whether there was a beneficiary who was presently entitled to interest on the $74.5m within the meaning of ITAA36. By 30 June 1989, interest exceeding $5m had accrued. On 13 July 1990, the developer gave the Board written notice of termination of the agreement on the basis that it had not obtained the development approvals within the time provided in the agreement. As at 30 June 1989, no payments had been made from the bank account where the $74.5m had been deposited.
150. The Commissioner had decided that the money constituted a trust estate and was held on trust by both the developer and the Board as trustees. He issued an assessment to each on that basis. Both the developer and Board objected. When the Commissioner disallowed their objections, both appealed. In a joint judgment, Beaumont and Sackville JJ, with whom Jenkinson J agreed, found that the money was held on trust. It was not a question of whether a trust was needed in the circumstances but whether the parties intended to create it.
151. Their Honours said that, before a beneficiary is entitled to a vested interest, two things must occur: his or her identity must be established; and his or her right to the interest (as distinguished from a right to possession) must not depend upon the occurrence of some event.[155]
"where a settlor makes a gift to A if A fulfils in the future some condition, and to B if A does not fulfil that condition, his intention is to make to A an immediate gift of the property including its income, of which, however, A is liable to be divested if and when the condition becomes impossible of fulfilment …"[158]
Cited: at 428; 27; 4389 (1995) 130 ALR 415 ;31 ATR 15 ;95 ATC 4378
152. In the case of Craig v Federal Commissioner of Taxation, McTiernan J held that "A contingent interest is 'merely the prospect or possibility of a future estate': Jarman, Wills, 7th ed. (1930), vol. 2, p. 1325: and every contingent interest is not
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153. Returning to Walsh Bay, the Court found it difficult in view of the terms of the agreement, to avoid the conclusion that the income derived by 30 June 1989 was contingent and not vested. It was not swayed by three arguments put forward to rebut their conclusion. I will refer only to the first argument. It was based on the timing of events. When the Commissioner made his assessments, it was put on behalf of the developer and the Board, the fact that the agreement had been terminated was known. It was at the time of the assessment that a determination should be made as to whether the developer and the Board had a present entitlement and not at 30 June 1989 being the end of a financial year and some 13 months prior to the termination of the agreement. Termination was one of the contingencies contemplated by the agreement and that had not occurred as at 30 June 1989.[160]
Consideration
154. I have gone back to the Resolution and Further Resolution made by each of Archer Property and Shee Investments and looked at them together and in their context. In each case, the trustee has adopted a format of first identifying the income, then distributing the income (what is described as the Resolution) and then providing for what is to occur if there is a variation in the income (Further Resolution). Neither Resolution is expressed to be subject to a contingency. In so far as the Further Resolution can be read as providing for a contingency, it is a contingency that may, or may not, occur. If it were to occur, it would relate to the distribution to be made on 30 June 2006 in the case of the Woodchester No. 4 Trust and 30 June 2007 in the case of the Bristol Trading Trust but that would come about in some later year of income when the Commissioner had issued his assessments. Whether the contingency could occur is open to some doubt for the Further Resolution in each instance is predicated, in part, upon the Commissioner's disallowing any amount as a deduction and not distributing that amount. The power of distribution does not rest with the Commissioner but with the trustees.
155. Mr Broadfoot urges me to find that the intention of each Resolution and Further Resolution is that Carson Underwriting Pty Ltd and Isaacs Investments Pty Ltd were intended to be the ultimate beneficiaries in the case of any disallowance by the Commissioner of a deduction or inclusion of a further amount in the trusts' assessable income. I do not read them in that way. In making the Resolution, Archer Property and Shee Investments have clearly intended to distribute the whole of the income of the relevant trust in the manner indicated. Even if it could be said that their interest in the distribution were intended to be defeasible if the Commissioner made certain decisions, TVKS and, in the case of the Shee Investments Resolution, Isaacs Investments Pty Ltd and TVKS were intended as at 30 June 2006 and 30 June 2007, as the case might be, to enjoy possession and benefit of the income distributed. It was vested both in interest and in possession at that date by the relevant Resolution.
156. That could not be changed by the Further Resolution for, in so far as the events to which it referred might occur in the future, Isaacs Investments and TVKS remained in possession and enjoying the benefit of the income. The attempt by the Further Resolution to deem the distribution to have been made otherwise than it was from 30 June 2006 or 30 June 2007 cannot change what was in practical terms the result. There was nothing in either Resolution that indicates that the beneficiaries named were not free to use and spend the distribution as they would. It only has to be expressed in that way to show that Archer Property and Shee Investments had exhausted their powers to distribute when they made their first Resolutions. There was nothing left to be distributed in the Further Resolutions so neither could stand but each of the Resolutions was effective in making the distribution to TVKS and Isaacs Investments in the proportions shown on their face.
157.
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In reaching this conclusion, I have not had regard to Martin's evidence regarding his intentions in making the Resolutions and Further Resolutions. As said in Segelov, the rules of construction of contracts apply also to the interpretation of trusts. That means that, if the trustee's intention is sought, it must be found in the words that trustee has chosen to express that intention amplified by the facts known to the parties. This view was also expressed by Mason J in Codelfa Construction Pty Ltd v State Railway Authority of New South Wales.[161]158. My conclusions lead me to the further conclusion that, for the purposes of s 97 of ITAA36, TVKS was presently entitled to 100% of the Net Income as assessed by the Commissioner of the Woodchester No. 4 Trust for the 2006 Year and Bristol Trading Trust for the 2007 Year as assessed by the Commissioner. That follows from the principles found in the judgment of Sundberg J in Zeta Force Pty Ltd v Commissioner of Taxation[162]
" 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."[164]
at 74–75; 282; 4686 (1998) 84 FCR 70 ;39 ATR 277 ;98 ATC 4681
159. His Honour added that the construction of s 97(1) seemed reasonably clear to him even though it might result in unfairness to beneficiaries. Had Parliament intended a beneficiary to be assessed on no more than the amount of the distributable income to which that beneficiary is presently entitled, it could easily have done so.[165]
160. Applying that principle in this case in which 100% of the net income of the Woodchester No. 4 Trust was distributed to TVKS, she is, within the meaning of s 97(1)(a), presently entitled to 100% share of the net income of that trust. With regard to the Bristol Trading Trust, she is presently entitled to the same proportion of the net income as the amount distributed to her under the Shee Investments Resolution was of the whole of the income of the trust. That means that Isaacs Investments' present entitlement will be an amount exceeding $3,500,000 if the net income of the trust exceeds the distributable income.
ISSUE 3: Were the Commissioner's amended assessments out of time?
Legislative framework
161. Section 170 of the ITAA36 provides for the amendment of assessments. The time within
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which any amendment must be made is determined by reference to the six items listed in s 170(1). Subject to certain qualifications, Item 1 of the table in s 170(1) provides that:"The Commissioner may amend an assessment of an individual for a year of income within 2 years after the day on which the Commissioner gives notice of the assessment to the individual."
The qualification listed in Item 1(d) is relevant in this case when it provides that:
"This item does not apply:
…
(d) if the individual is a beneficiary of a trust estate at any time in that year unless the trust is an STS taxpayer for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for that year; …".
162. TVKS is a beneficiary of trust estate. That means that Item 1 does not apply to TVKS unless the qualification in (d) applies. Both parties agree that the qualification does not apply. Therefore, Item 1 of s 170(1) does not apply. As Items 2 and 3 do not apply either, Item 4 would apply. Item 4 permits the Commissioner to amend an assessment within four years after the day on which he gives notice of the assessment to the taxpayer. That item is subject to Items 5 and 6, which have not been raised in this case.
163. Provision is made for an extension of the time provided for in, among others, Item 4 of the table in s 170(7). That time is known as the "limited amendment period".[166]
"If:
- (a) the Commissioner has started to examine the affairs of a taxpayer in relation to an assessment; and
- (b) the Commissioner has not completed the examination before the end of the limited amendment period or that period as extended;
the limited amendment period may be extended as follows:
Extensions of limited amendment period In this case: the position is: … … The Commissioner, before the end of the limited amendment period or that period as extended, requests the taxpayer to consent to extending the limited amendment period The taxpayer may, by notice in writing, consent to extending the limited amendment period for a specified period.
The submissions
164. On behalf of TVKS, Mr Broadfoot of counsel submitted that the Commissioner had appeared to concede that he had not commenced any examination specifically into her taxation affairs when he initially sought her consent to an extension of time. He had sought her consent in a letter dated 11 November 2010. I have set that out at [31] above. At that time, the Commissioner had commenced an examination of her husband's taxation affairs but not of her taxation affairs, Mr Broadfoot submitted.
165. Section 170(7), he continued, only applies if the Commissioner has started to examine the affairs of the taxpayer whose consent he seeks. It does not contemplate a situation in which the Commissioner has commenced a broad, wide ranging enquiry into the taxation affairs of another taxpayer and entities related to that other taxpayer. The language of s 170(7) is such that the Commissioner's examination must be of the taxation affairs of the taxpayer whose amendment he may wish to amend. Section 170(7) is not intended to be used as a tool to give the Commissioner unlimited time within which to issue amended assessments when he has not commenced an investigation in a timely fashion.
166. The letter written to Pitcher Partners on 11 November 2010 suggests that the Commissioner had not looked at her return at this point. The inference that he had not done so
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can be drawn from the letter. There can be some comfort in drawing that inference because the Commissioner has not called as witnesses those ATO officers who were conducting the audit. The absence of those witnesses cannot be relied upon to make a finding of fact but, in their absence, an inference that the examination had not commenced can be more readily drawn.167. Mr Broadfoot submitted that there is nothing in the T documents that suggests that the Commissioner had commenced an examination of TVKS's affairs before he wrote to her on 11 November 2010 requesting her consent to an extension of the limited amendment period. The Commissioner was reviewing Martin's affairs and those of entities associated with him but that does not equate with an examination of TVKS's affairs as required by s 170(7). The Commissioner's position is that it is sufficient if there is an examination of the affairs of the Woodchester No. 4 Trust and of the Bristol Trading Trust. That position, which was taken in the objection decision, permits an inference that there had been no specific examination of TVKS's affairs. In that context, the rule in Jones v Dunkel[167]
168. Mr Linden submitted that TVKS had the burden of proving that the Commissioner was not entitled to seek her consent to extend the limited amendment period under s 170(7). That follows from s 14ZZK.[168]
Consideration: Jones v Dunkel
169. Before I turn to the evidence, I have looked to the principles established by Jones v Dunkel. Mrs Jones's husband was killed when the International truck that he was driving came into collision with an un-laden diesel truck owned by Mr Dunkel and being driven by his employee, Mr Hegedus, in the opposite direction. She alleged that Mr Hegedus had been negligent. There were no witnesses to the collision and, apart from recalling his applying his brakes when he saw the other vehicle, Mr Hegedus could not recall anything further. The diesel truck he was driving was found facing in the opposite direction to that in which Mr Hegedus had been travelling. The final resting places of the two trucks was known. Mr Hegedus was not called to give evidence.
170. The three judges in the majority expressed their views in slightly different ways:
Kitto J:
"… His Honour told the jury that the fact that Hegedus had not gone into the witness box left them in this position, that they could accept the facts given by the plaintiff as proved, and that the question for them then was whether they thought that from the proved facts an inference of negligence ought to be drawn. It was right enough to point out, in effect, that the evidence might be the more readily accepted because it had been left uncontradicted, and the omission to call Hegedus as a witness could not properly be treated as supplying any gap which the evidence adduced for the plaintiff left untouched. But what should have been added, and not being added was in the circumstances as good as denied, was that any inference favourable to the plaintiff for which there was ground in the evidence might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by the defendant and the evidence provides no sufficient explanation of his absence. The jury should at least have been told that it would be proper for them to conclude that if Hegedus had gone into the witness-box his evidence would not have assisted the defendants by throwing doubt on the correctness of the inference which, as I have explained, I consider was open on the plaintiff's evidence. …"[172]
at 308 [1959] HCA 8 ;(1959) 101 CLR 298
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Menzies J:" In my opinion a proper direction in the circumstances should have made three things clear: (i) that the absence of the defendant Hegedus as a witness cannot be used to make up any deficiency of evidence; (ii) that evidence which might have been contradicted by the defendant can be accepted the more readily if the defendant fails to give evidence; (iii) that where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference."[173]
at 312 1959] HCA 8; (1959) 101 CLR 298 Windeyer J:
"… I think that a jury properly directed might - not necessarily should - reasonably infer that immediately before the vehicles collided that driven by Hegedus was on the wrong side of the road. A jury could, in my view, properly think it more probable that this was so than that it was not … The cause of the collision can be only a matter of conjecture; but on which side of the road it occurred is, I think, susceptible of rational inference. If there is to be a new trial, it is not desirable to say more than that, in my view, an inference could properly be drawn from the positions where the vehicles were found immediately after the collision, taken in conjunction with the nature of the damage to each, the gradient and conformation of the road and other circumstances. If immediately before the collision Hegedus's vehicle was on the wrong side of the road, that, unexplained, is, I consider, some evidence of negligence on his part. …
…
… Then, I think, his Honour should … have given an answer in accord with general principles as stated in Wigmore on Evidence, 3rd ed. (1940) vol. 2, s. 285, p.162 as follows: '
'The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which made some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted.'
This is plain commonsense. If authority be needed, two passages from
R. v Burdett [(1820) 4 B. & Ald. 95 [106 E.R. 873]" may be cited. Abbott CJ said:'No person is to be required to explain or contradict, until enough has been proved to warrant a reasonable and just conclusion against him, in the absence of explanation or contradiction; but when such proof has been given, and the nature of the case is such as to admit of explanation or contradiction, if the conclusion to which the proof tends be untrue, and the accused offers no explanation or contradiction; can human reason do otherwise than adopt the conclusion to which the proof tends? The premises may lead more or less strongly to the conclusion, and care must be taken not to draw the conclusion hastily; but in matters that regard the conduct of men, the certainty of mathematical demonstration cannot be required or expected.' … And Best J. said: 'Nor is it necessary that the fact not proved should be established by irrefragable inference. It is enough, if its existence be highly probable, particularly if the opposite party has it in his power to rebut it by evidence, and yet offers none; for then we have something like an admission that the presumption is just.' …"[174]
at 319–321 [1959] HCA 8 ;(1959) 101 CLR 298
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24. The first thing to note is that there must be sufficient evidence adduced by the party which has the onus of proving its case to warrant a reasonable inference being drawn from that evidence in the absence of any explanation or contradiction. Where there is sufficient evidence to draw a reasonable inference from the party which bears the onus of proving its case, and the other party has in its power to rebut that inference or conclusion being drawn by evidence but chooses not to lead that evidence despite the witness being available to give evidence, if no explanation is provided for failure to call that witness, then a rational inference may be drawn that the evidence would not help that party's case."[175]Confidential and Commissioner of Taxation at [23]–[24]; 232–233; 436–437 [2012] AATA 178 ;(2012) 88 ATR 222 ;2012 ATC ¶1-044
171. A more recent explanation of the principles in Jones v Dunkel appears in the judgment of the Full Court in Kordan but I will begin with the preceding paragraph in which it set out its understanding of three formulations given in Jones v Dunkel. The two paragraphs read:
"The rule in Jones v Dunkel is no more than a statement of common sense. It is regularly referred to but often mistakenly applied. It is regularly formulated in two different, albeit related ways. One formulation, derived from the judgment of Dixon J at 304-5 is that where a party having the onus adduces evidence in support of his or her case which gives rise to a positive inference which is more probable than another inference which is also open, that more probable inference if left unexplained will be accepted. It is important to note that his Honour, referring to an unreported judgment of the High Court in Bradshaw v McEwans Pty Ltd (27 April 1951), firmly rejected the rule that failure to give evidence permits an inference to be drawn where the state of evidence is such that there are 'competing inferences of equal degree of probability' so that the choice between them is a mere matter of conjecture. The other formulation, derived from the judgment of Kitto J at 308 is that where there is an inference favourable to a plaintiff and the defendant chooses to call no evidence to rebut it, it can be concluded that that evidence would not have assisted the case of the defendant and an inference favourable to the plaintiff, for which there are grounds in the evidence, might then be more confidently drawn. Both formulations are to be found linked in the judgment of Menzies J …
However, what is important to note is that the rule, however expressed, does not permit an inference to be drawn by reason of the failure of the other side to call a witness where that inference is not otherwise open. Put another way, the failure to call evidence does not provide positive evidence, nor does it fill up any gap in evidence. In the present case there is no evidence, whether direct or otherwise, which gives rise to the inference which the appellants seek to draw. …"[176]
[ ; at [47]–[48]; 202–203; 4822–4823 2000] FCA 1807; (2000) 46 ATR 191 ;2000 ATC 4812
172. In Schellenberg, a worker was injured when a hose delivering high pressure air to a hand-held grinder he was using became loose and struck him in the face. He sued his employer in negligence but did not establish any specific ground of negligence. The trial Judge then permitted him to amend his Statement of Claim to allege that the fact that the air hose separated from its fitting was in itself evidence of negligence. The trial Judge determined the cause of the hose's separating from its coupling and then went on to find, in effect, that the defendant had properly failed to assemble, inspect or maintain the equipment. In making that finding, he relied on the absence of any evidence being as to how it was assembled, inspected or maintained. In doing that, Gleeson CJ and McHugh J said, the trial Judge had drawn on a Jones v Dunkel inference to make a finding in favour of Mr Schellenberg.
173. Their Honours said that there had, however, been nothing which called for the defendant to lead evidence in respect of these matters. In light of that, therefore, its failure to call evidence had no probative significance. Its failure could not assist Mr Schellenberg in drawing any inference in his favour. They referred favourably to a passage from Cross on Evidence where it was said that:
"[T]he rule [in Jones v Dunkel] only applies where a party is 'required to explain or contradict' something. What a party is required to explain or contradict depends on the issues in the case as thrown up
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in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts 'requiring an answer'."
174. The trial Judge had found that there was insufficient evidence to find that the equipment was faulty or defective, the plaintiff had not pleaded that the defendant's systems of maintenance or inspection were defective and the plaintiff did not adduce any evidence that those systems were defective or that, had they been effective, the damage to Mr Schellenberg would have been prevented. Gleeson CJ and McHugh J concluded:
" In these circumstances, which were quite possibly the result of a tactical decision to avoid a possible plea of contributory negligence on the part of the plaintiff by the defendant, it would be quite wrong to draw an inference against the defendant. A Jones v Dunkel inference would not have availed the plaintiff in any event. A Jones v Dunkel inference can only make certain evidence more probable. It 'cannot be used to make up any deficiency of evidence'…. It follows that the trial judge's finding with respect to the assembly, inspection and maintenance of the compression equipment could not stand, as there was insufficient evidence to support the findings, either directly or by inference."[177]
at [53]; 143; 609; 754 (citations omitted) [2000] HCA 18 ;(2001) 200 CLR 121 ;170 ALR 594 ;74 ALJR 743
175. Mr Broadfoot would have me find that I should draw an inference from the evidence that the Commissioner had not started an examination of TVKS's affairs. He had started only an examination of the affairs of Martin and not of those of TVKS. That is supported by the documents that have been lodged. They show that an examination has begun of the affairs of the trusts but not specifically of TVKS's affairs. By not calling the ATO officers who had been working on the audit, that inference is strengthened and I may find that the Commissioner had not commenced an examination of TVKS's affairs in relation to either the assessment for the 2006 Year or the 2007 Year.
176. Mr Broadfoot's submission is founded on a premiss that the Commissioner cannot be said to be conducting an examination of a taxpayer's affairs in relation to an assessment when examining the affairs of a trust of which that taxpayer may be a beneficiary. It seems to me that I should consider this premiss before I consider whether the principles in Jones v Dunkel have a role to play. In view of the conclusion I have come to regarding that, I do not think that the principles in Jones v Dunkel have a role to play.
177. Before the Commissioner asked TVKS for her consent to extend the limited amendment period under Item 2 of s 170(7) of ITAA36, two preliminary issues must be established. The first raises the question whether the Commissioner had started to examine her affairs in relation to an assessment before he asked her to consent to an extension of the limited amendment period. If he did so, the next question is whether he did so before the end of the limited amendment period or, in the case of the later consents, before the end of the limited amendment period as extended. I will start with the first of these issues.
178. Section 170(7) focuses on the Commissioner's having started to examine the affairs of a particular taxpayer in relation to "an assessment ", and so in relation to a particular assessment. In the correspondence, the ATO was specific about the particular assessments in relation to which he was seeking TVKS's consent. One was issued on 25 January 2007 and related to the income returned by TVKS in the 2006 Year. That draws in any distribution made to her by Archer Property as the trustee of the Woodchester No. 4 Trust. The other assessment was issued on 22 February 2008 and related to income she had returned in the 2007 Year. That draws into consideration any distribution made by Shee Investments as trustee of the Bristol Trading Trust.
179. What does it mean to "examine the affairs of a taxpayer in relation to an assessment"? The ordinary meanings of the word "examine" include "… to inspect, consider or look into something closely. …"[178]
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that they must be of the "… matters of interest or concern; particular doings or interests …"[180]180. In this context, the relevant meaning of the word "assessment" is to be found in s 6(1) of ITAA36.[181]
" assessment means:
(a) the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable); …"
The expression "taxable income" has the same meaning as in the Income Tax Assessment Act 1997 (ITAA97)[182]
181. Trust income is the subject of Divisions 6 to 6D of Part III of ITAA36. Whether or not the share of the income of a trust estate to which a beneficiary is entitled is included in the assessable income of that beneficiary is determined according to those provisions. That determination necessarily includes an examination of the affairs of the trust in order to characterise the share of the trust estate to which the beneficiary is entitled as well as its quantum and characterisation as assessable income, exempt income or non-assessable non-exempt income. It may include an examination of the affairs of the trustee and beyond to those with whom the trustee dealt in gaining the trust's income.
182. Against this background, it can be seen that the Commissioner may use an examination to investigate the financial affairs and business dealings of various interests in order to determine whether a taxpayer has, or taxpayers have, correctly returned their income. That is part of the Commissioner's functions under Australian taxation law. The precise scope of an examination and whether or not it has begun is determined by reference to the particular circumstances of each situation.
183. In this case, the starting point is not with TVKS herself but with the Commissioner's initial enquiries regarding Martin and on entities he or members of his family either, directly or indirectly, owned and/or controlled. Acting on Martin's behalf, Pitcher Partners responded to the Commissioner's request for information in a letter dated 27 April 2009.[187]
184. The Commissioner responded in a letter addressed to Pitcher Partners and dated 18 August 2009.[188]
185. The ATO's letter dated 11 November 2010 might be thought to be equivocal as to whether the audit had commenced. The letter was addressed to Pitcher Partners and related to the TVKS's consenting to an extension of the time within which the Commissioner might issue amended assessments. It referred to their acting for TVKS "in relation to the examination of the income tax affairs of … [Martin] and associated entities. …".[190]
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in the context of the events which followed, I find that the examination had commenced by this time.186. The first of those events was an Amended Audit Management Plan for the audit of Martin and associated entities for the years ending 30 June 1999 to 2009 inclusive was dated 13 October 2011.[191]
187. The second of those events is that Position Paper dated 20 December 2012. This is a further year on from the Amended Audit Plan, the focus has not only narrowed but the material has been examined and a position reached regarding the losses incurred by the Woodchester No. 4 Trust and the consequences for TVKS in relation to the 2006 Year. A month or so later, on 22 January 2013, a similar Position Paper is prepared in relation to the tax losses of the Bristol Trading Trust and the consequences for TVKS in relation to the 2007 Year. As the affairs of both trusts have an impact on the assessments previously issued to TVKS, I am satisfied that each of the Position Papers relates to the affairs of TVKS in relation to the one or other of those assessments.
188. The progress of the audit extended beyond the time frames originally envisaged by the ATO but I accept that the evidence shows a clear course from the initial notice to Martin that an audit would be conducted to the issue at the final stage of amended assessments to TVKS. The material was gathered and the issues narrowed before the Commissioner reached a final position. The steps preceding the formulation of a final position cannot be discounted. Gathering information and narrowing issues are just as much a part of an examination of a taxpayer's affairs as are the analysis of the material and the formulation of that final position. Where a taxpayer's affairs are affected by those of other entities, an examination of that particular taxpayer's affairs may often incorporate an examination of the affairs of those other entities. Where, as in the case of a trust, an individual's income may be affected by whether or not a distribution is made to him or her and the appropriate quantum and taxation treatment of that distribution is yet to be determined, it may be necessary to conduct the examinations sequentially and not contemporaneously. The examination of the affairs of those entities is no less an examination of her affairs to the extent that they affect, or may affect, her assessable income. It was always clear that the audit was not limited to Martin's taxation affairs but related to those of his associated entities including TVKS.
189. For these reasons, I accept that, at least by 11 November 2010 when the Commissioner asked her to consent to an extension of the limited amendment period, he had started to examine her affairs in relation to the assessments that had been issued to her in relation to the 2006 and 2007 Years. He had not completed the examination in that limited amendment period and asked TVKS for her consent before the end of the limited assessment periods. TVKS gave her consent within that period although Item 2 of s 170(7) does not require that she do so; only that she be asked before the expiration of the limited amendment period or any extension of that period. I have reached the same conclusion in relation to the later consents requested by the Commissioner and given by TVKS. It follows that I am satisfied that the Commissioner was not out of time when he issued his amended assessments to TVKS.
ISSUE 4: Were carried forward losses available to Archer Property in its capacity as trustee of the Woodchester No. 4 Trust in the 2006 Year?
190. Archer Property prepared its taxation returns on the basis that it was entitled to deductions in the year ended 30 June 1999 (1999 Year) determined on its being a 40% member of the WP Syndicate. In all, it claimed deductions amounting to 40% of $23.5m being the total price payable under the Contract of Sale and $7.26m under the Purchase of Business Agreement. Both agreements were entered on 30 June 1999.
191.
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In his objection decision, the Commissioner determined that Archer Property was permitted only to claim as deductions 40% of the amounts he found to have been incurred in the 1999 Year. The Commissioner determined that amounts totalling $5.75m had been incurred. That amount was made up of $1m payable as a deposit under the Contract of Sale, $1.75m payable as a deposit under the Business Purchase Agreement 'and $3m payable as a syndication fee. The Commissioner allowed a deduction in the 2009 Year of $2.3m representing 40% of that total amount of $5.75m incurred.192. TVKS initially claimed in the course of these proceedings that Archer Property is entitled to an additional deduction of $2,204,000 in the 1999 Year in respect of its interest in the WP Syndicate on the basis that whole of the purchase price under the Purchase of Business Agreement is deductible in the 1999 Year. She later made an additional claim to the effect that Archer Property is entitled to an additional deduction of $696,000 in the 1999 Year in respect of its interest in the WP Syndicate under the Contract of Sale. TVKS states that the Commissioner should have Commissioner should have allowed that deduction in accordance with Taxation Ruling TR94/24. TVKS claims that, taking into account the Commissioner's allowance of $145,000 in the 2000 Year, Archer Property should have been allowed a further deduction totalling $2,755,000 in the 1999 Year.
The submissions
193. Mr Broadfoot submitted that neither the Contract of Sale nor the Purchase of Business Agreement was an executory agreement as at 30 June 1999. Each involved a promise to pay in exchange for a promise to deliver a transfer of title. For the Commissioner, Mr Linden submitted that both contracts were executory. The Contract of Sale involved a promise to pay in exchange for the delivery of a registrable transfer. It was not the case that the obligation to pay arose upon delivery of a transfer in registrable form as might be the case in a contract for the sale of goods where the obligation to pay arises on the delivery of the goods. That is consistent with the General Condition stated in the Seventh Schedule to the Transfer of Land Act 1958 (Vic) (ToL Act), he submitted. The Purchase of Business Arrangement involved a promise to pay in exchange for the delivery of the 12 things listed in cll 6.4 and 6.5 of that contract.
194. Mr Linden submitted that both contracts were executory contracts as at 30 June 1999. All that existed in each was a promise to pay on the delivery of certain things. In the case of the Contract of Sale, it was a promise in exchange for the delivery of, and not simply a promise to deliver, a registrable transfer. In the case of the Purchase of Business Arrangement, it was a promise to pay in exchange for the delivery of, and not simply a promise to deliver, the 12 things listed in cll 6.4 and 6.5. Until delivery, there was no accrued obligation to pay.
The legislation
195. Section 8-1(1) of ITAA97 provides:
"You can deduct from your assessable income any loss or outgoing to the extent that:
- (a) it is incurred in gaining or producing your assessable income; or
- (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income."
Its terms are substantively the same as those that had previously been found in s 51(1) of ITAA36.
196. The Seventh Schedule to the ToL Act was amended with effect from 10 October 2006 by the Conveyancers Act 2006[192]
197. Table A of Schedule 7 contained the General Conditions of Sale of Land under the ToL Act. Condition 12 provided that:
"12. Upon payment of all purchase and other moneys payable by the purchaser
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under the contract the vendor shall deliver to the purchaser such registrable instrument or instruments of transfer of the land sold as will enable the purchaser to become registered as proprietor of the land sold and shall deliver to the purchaser the certificate of title or if other land or interests are then comprised therein or if the land sold is under mortgage shall cause such certificate to be made available at the Office of Titles for registration. The instrument of transfer to the purchaser shall be prepared by or on his behalf. The delivery of such document shall not of itself be deemed acceptance of title."
The authorities
198. In Federal Commissioner of Taxation v Malouf[194]
199. The primary judge, Allsop J, as he then was, found the legal obligation to pay the residue at settlement was incurred, and was referable to, the year in which the contract was entered into by Mr Malouf. That meant that Mr Malouf was entitled to the deduction in the year of income ending 30 June 1999 (1999 Year). In reaching that conclusion, Allsop J set out a number of principles drawn from previous authorities but considered that he was bound by two Full Court authorities in particular: Federal Commissioner of Taxation v Raymor (NSW) Pty Ltd[196]
" The above said, there was nothing qualified or inchoate about the promise in special condition 11 of the contract. There was no condition precedent to the coming into existence of the promise there stated. It was, from exchange of contracts, a legal obligation intended to have effect; but it is to be construed (as its words make plain) as an obligation to pay a certain time after tender of the transfer on settlement. After the contract was made, it was a promise that was part of an executory contract, but, of course, it could not be withdrawn. The point of the above authorities is that until delivery (here, of the transfer) there is no accrued obligation to pay, no debt. What exists beforehand is a promise to pay, but in one sense dependent or conditional upon delivery. Delivery can, perhaps, be seen as the condition precedent to performance (cf
Perri v Coolangatta Investments Pty Limited [1982] HCA 29; (1982) 149 CLR 537). The use, however, of the words 'conditional' or 'unconditional' in this context is apt to cause confusion. A better way of expressing the analysis from the above cases is that the mutual promises (here, to build and transfer, on the one hand, and to pay, on the other) are unconditional, but dependent, and calling for concurrent performance. Neither promise was conditional on a contingency; they were mutually dependent: see generally JW Carter and DJ Harland, Contract Law in Australia, 4thed, Butterworths, 2002 at [742], [1807] and [1808]."[198]at [50]; 263–264; 481; 8300 [2008] FCA 497 ;(2008) 250 ALR 253 ;68 ATR 470 ;[2008] ATC ¶20-023
200. Allsop J underlined that:
" It is also important to bear in mind, as the Full Court said in Woolcombers 47 FCR 561 at 575, that much depends on the circumstances of the case at hand. Whilst a legal or jurisprudential approach is to be taken, the precise circumstances of the contract and surrounding circumstances in question are what must be assessed, not generalities and wide categories of cases."[199]
at [58]; 266; 483; 8302 [2008] FCA 497 ;(2008) 250 ALR 253 ;68 ATR 470 ;[2008] ATC ¶20-023
201. On appeal, the Full Court set out the principles to which Allsop J had referred. Among them were those relating to the meaning
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of the word "incurred" for the purposes of s 8-1 of ITAA97 and to related areas such as the distinction between a promise in an executory contract and the entitlement to be paid the price agreed upon. The issue arose in the context of a contract for services in Automatic Fire Sprinklers v Watson[200]" In certain forms of executory contract where the promise of one party is to pay the other money in consideration of his transferring property, of his doing work, of his serving the former as his master, and, perhaps, of his providing other tangible things or definite services, the money to be paid is regarded as the price of or reward for the property or service when and so often as the transfer of the one or the performance of the other affords an executed consideration. In these contracts the promise to pay the price or reward is not construed as a simple obligation to pay a sum or sums at a future date supported solely by a consideration consisting in the corresponding promise to transfer the property, do the work, serve, or provide the things or services by the other party, so that a mere readiness and willingness on the one side of the latter to perform his part is enough to entitle him to the payments, notwithstanding that, whether owing to the fault of the former, or without fault on either side, the property is not transferred, the work is not done, the relation of master and servant ceases, or the things or services are not provided. The most familiar example is that of the sale of goods. There the common understanding of an agreement to sell is that it is the goods and not the promises to deliver that are to be paid for. The result is that, if the seller tenders goods in accordance with his contract but the buyer rejects them in breach of his contract, the seller cannot sue for the price; his remedy is for unliquidated damages for non-acceptance …
… At one time there was a tendency to say that instalments of purchase money could not be recovered by a common law action because the purchase price was payable for the land, not for the promise to convey, and was, therefore, not recoverable except upon conveyance … That is to say the construction given to the promise of the purchaser of land was like that given to the promise of the buyer of goods. The result would have been that a vendor of land could sue at law only for damages for loss of the sale. But more lately instalment contracts for the purchase of land have been treated as importing an obligation on the part of the purchaser to pay sums certain on fixed dates in exchange for a promise to convey and at the risk that, for some unforeseen reason, a conveyance may never be obtained. …"[201]
at 463–464 [1946] HCA 25 ;(1946) 72 CLR 435
202. The Full Court decided that the principles expressed in Raymor were consistent with those adopted by Allsop J but that the terms of the arrangements in the two cases were materially different from those before the primary judge. The arrangements in Woolcombers bore a closer resemblance but the Full Court noted:
"… Nevertheless, as was emphasised by the Full Court in Woolcombers …, much will depend 'upon the true interpretation of the particular language of the contract' (at 575). Much will also depend on the nature of the contractual arrangements. This involves looking at the circumstances of each case. Woolcombers recognises, as do the other authorities referred to by the primary judge, one guiding principle. Every contract must be construed according to the intention of the parties, and upon taking a legal or jurisprudential approach, the contractual arrangements and surrounding circumstances must be considered in determining when the loss or outgoing has been incurred."[202]
at [45]; 593–594; 347 [2009] FCAFC 44 ;(2009) 174 FCR 581 ;75 ATR 335
After analysing the factual matrix in Woolcombers, the Full Court in Malouf found that it was distinguishable on its facts and did not dictate the result in the case before it.
203. The Full Court also referred to Commissioner of Taxation v Citylink Melbourne Limited[203]
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2034. On expiry, Citylink would transfer the roads and related property to the State. In return for the concession, Citylink was obliged to pay concession fees including rent for the land on which the loads were built, project debts repayable from the tolls it received and, semi-annually in arrears, base concession fees comprising an annual base fee to be adjusted based on time and traffic flow if that exceeded certain assumptions. Citylink was entitled to satisfy the concession fees by issuing transferable concession notes redeemable on presentation to it before the expiration of the concession provided certain conditions were met. Citylink issued notes to the State to satisfy the base concession fees for each year of income ended to 30 June 1996 to 20 June 1998, which were expected on toll road traffic forecasts to be redeemable to 2013 and subsequent years. In each of the years from 1996 to 1998, Citylink claimed an allowable deduction for the annual base concession fee.204. Crennan J, with whom Gleeson CJ, Gummow, Callinan and Heydon JJ agreed, cited a passage from the judgment of Dixon J in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (New Zealand Flax)[204]
"… Dixon J said …:
'To come within [the] provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which no more than impending, threatened or expected.'
It has long been recognised that an outgoing may be 'incurred', but not 'discharged' …, in the relevant year of income. In Federal Commissioner of Taxation v James Flood Pty Ltd … Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ considered commercial and accounting practice and the test for deductibility and said of s 51(1) …:
' The word 'outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word 'incurred', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement.'
(Emphasis added)
The Court went on to say 'outgoings' could only have been 'incurred' if 'in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them'….
…
In Coles Myer Finance Ltd v Federal Commissioner of Taxation … Deane J, agreeing with the majority …, stated …:
[T]he weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a 'loss or outgoing' which is 'incurred' within the meaning of that subsection notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled. …
Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future …. His Honour recognised that on some facts it would be apparent that a condition giving rise to a theoretical contingency could be treated, for practical purposes, as certain to be satisfied …"[206]
at [122]–[125]; 37–38; 327; 1303–1304; 674–675; 4424 [2006] HCA 35 ;(2006) 228 CLR 1 ;228 ALR 301 ;80 ALJR 1282 ;62 ATR 648 ;2006 ATC 4404
205. In Citylink, the Commissioner submitted that the concession fees were not incurred because payment was not possible until cl 1.9 of the Master Security Deed and the
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conditions in the Concession Notes were satisfied. None of the conditions was satisfied in the relevant years of income. The plurality did not accept that submission. Crennan J said:" The conclusion will be reached here that the concession fees were incurred in the years of income. On a semi-annual basis, the respondent was subjected to a contractual liability to pay the concession fees. The liability arose as and when each concession fee became due. That is when the outgoing was encountered or run into … These facts exemplify a situation where a liability is 'incurred' in the year of income but not 'discharged' in that same year … Here the liability comes into existence in the year of income. The deferral of the time for its discharge cannot alter this conclusion, nor can the length of time of the deferral …
…
In the relevant years of income, the respondent was definitively committed and had completely subjected itself to the losses or outgoings which the concession fees represent. A condition affecting the timing of the discharge of a liability (but not the creation of the liability) does not render the liability contingent in any business or commercial sense …"[207]
at [134]–[137]; 39–41; 329–330; 1305–1306; 677–678; 4425–4426 [2006] HCA 35 ;(2006) 228 CLR 1 ;228 ALR 301 ;80 ALJR 1282 ;62 ATR 648 ;2006 ATC 4404
Consideration
206. The authorities to which I have referred make essential points regarding s 8-1(1) of ITAA97 and its predecessor, s 51(1) of ITAA36. One is that, a loss or outgoing may be "incurred" by being defrayed, discharged or borne but it may also be "incurred" by being what might be broadly described as "taken on" or, as Dixon J described it in New Zealand Flax, "encountered, run into, or fallen upon" or, as Deane J described it in Coles Myer Finance Pty Ltd v Federal Commissioner of Taxation,[208]
207. The Contract of Sale and the Purchase of Business Agreement are interdependent with each other. Settlement of one is to coincide with the completion of the other and a breach of one is a breach of the other. That is provided for in cll 6.1 and 6.2 of the Contract of Sale and cll 11.1 and 11.2 of the Purchase of Business Agreement. It is consistent with the nature of the arrangements reached between the WP Syndicate and Osborne Properties. On the face of the contracts, what was to be achieved at settlement and completion was threefold: the transfer of a business from Osborne Properties to WP Syndicate; Osborne Properties would have carried out improvements to buildings on the land of if it had not, WP Syndicate would have become entitled to complete them and to deduct the cost from the Final Post Settlement Amount before it became due; the land would have been transferred from Osborne Properties to the WP Syndicate; and Osborne Properties would have transferred all documents and things reasonably required to put the WP Syndicate into full possession of the business and assets.
208. Running alongside of the contracts, and referred to at cl 3 of the Purchase of Business Agreement is the need for the WP Syndicate to obtain approvals and licences if it were to be able to operate the business it was purchasing. From 30 June 1999, being the date of the agreement, until Completion and after Completion, cl 3.2 obliged both parties to seek and use their best endeavours to obtain the necessary approvals to enable the WP Syndicate to operate the business. If the WP Syndicate had not obtained the necessary approvals, then, provided it had used its best endeavours to obtain them, its failure to do so did not constitute a default under the agreement entitling it to be repaid its deposit if completion did not take place.[209]
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Agreement to dispose of the land and assets within the parameters and to third parties meeting certain specified criteria.209. The WP Syndicate had to pay the deposit within the 1999 Year. The balance of the purchase price became payable on Completion when Osborne Properties had delivered, or caused to be delivered the items listed in cl 6.4. Some of those items related to matters such as the releases of any encumbrances affecting the assets that were the subject of the sale, the assets themselves and associated registration documents. Others related to, were consequential upon, and required by the WP Syndicate if it were to operate the business with some of the necessary approvals. These were matters that were essential for the conduct of the business. Also essential for the WP Syndicate was that it itself be approved to operate the business. That was not an item listed in cl 6.4 and nor could it be for it was in the hands of the WP Syndicate to apply for that approval even though Osborne Properties undertook to use its best endeavours to assist.
210. Even if WP Syndicate did not obtain approval for itself, it is clear from cl 3.6 that Osborne Properties would hold certain other approvals and assets, being vital to the operation of the business, in trust for WP Syndicate. If the approvals were still not forthcoming within 12 months of the Completion date, the WP Syndicate would be obliged under cl 3.6.2 to dispose of the assets and property.
211. That arrangement does not take from the fact that the parties agreed to certain things on Completion Day. For Osborne Properties' part, these were all matters that were within its control to deliver. It is apparent that, whether or not the WP Syndicate had all of the approvals it required was of no matter. There were arrangements in place if the WP Syndicate did not obtain the necessary approvals as I have said. Provided it had used its best endeavours to obtain them, its failure to obtain them was not taken as a default by the WP Syndicate and nor was the Purchase of Business Agreement regarded as conditional upon its obtaining them.
212. Having regard to the Purchase of Business Agreement as a whole, I have concluded that the liability to pay the balance of the purchase price arose on the Completion day and not on the signing of the contract. That was the day on which Osborne Properties would deliver what it was required to deliver. Until that date, it was not known whether the Contract of Sale would proceed. As each contract stated, a breach of one was a breach of the other and, if either the WP Syndicate or Osborne Properties was entitled to terminate or rescind the other, it was entitled to rescind that contract as well.[210]
213. Clause 8 of the Contract of Sale specifies the time at which the three amounts are payable by the WP Syndicate. Its 40% share of the deposit of $1m has been allowed by the Commissioner as a deduction for the 1999 Year for that was incurred on the signing of the contract on 30 June 1999. The Settlement Amount was to be paid on 31 October 1999 or such other date on which settlement occurred. The First Post Settlement Amount was payable on 1 July 2000 or on the date of the issue of the Planning Permit, whichever was the later. Payment of the Final Post Settlement Amount was payable on the Date of Completion which would occur 14 days after the date on which the Certificate of Completion was issued. A "Certificate of Completion" was defined in cl 1.12 to mean a certificate of completion issued by architects confirming that, in their opinion, the building had generally been completed in accordance with the relevant plans, fixtures, fittings and furnishings and an Occupancy Permit had been issued by a registered Building Surveyor.
214. If the Planning Permit were not granted, the WP Syndicate's liability to pay the First Post Settlement amount would never arise. Until the Planning Permit was issued and 1 July 2000 had arrived, the WP Syndicate's liability to pay the First Post Settlement amount did not arise. Until that time, the WP
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Syndicate's liability was contingent upon that event's occurring. It was not a liability incurred under the Contract of Sale. Its liability to pay the Final Post Settlement Amount was necessarily contingent for it did not arise until there was first a Planning Permit, then the construction works and, finally, a Certificate of Completion. That could not occur until after 1 July 2000.215. For these reasons, I do not accept TVKS's position that, by reason of its interest in the WPS Syndicate, that Archer Property was entitled to further deductions arising from the Contract of Sale or the Purchase of Business Agreement.
ISSUE 5: Should the Shortfall Interest Charge be remitted?
Legislative background
216. Part 4-25 of Schedule 1 to the TA Act provides for the imposition of charges and penalties. I am concerned only with the shortfall interest charge (SIC). SICs are applied to shortfalls of various taxes, including income tax, that are revealed when the Commissioner amends an assessment. When income tax is involved, a person is liable to pay SIC on the additional amount of income tax that the Commissioner has assessed that the person is liable to pay by issuing an amended assessment.[212]
217. The formula for calculating SIC is provided in section 280-105 of Schedule 1 to the TA Act. The rate per day is calculated on a compounding basis by taking the base interest rate, adding 3 percentage points divided by the number of days in the year. In general terms, the base interest rate is the 90-day Bank Accepted Bill rate published by the Reserve Bank for the quarter in which the day falls.[213]
218. Generally, liability to pay the SIC begins from the day on which income tax was due to be paid, or would have been due to be paid if there had been any, under the first assessment. Under s 204(1) of ITAA36, the due date falls 21 days after the notice of assessment is given to the taxpayer. Liability to pay the SIC ends the day before the Commissioner gave notice of the amended assessment.[214]
219. The Commissioner may remit a shortfall interest charge under s 280-160 of Schedule 1 to the TA Act if he "… considers it fair and reasonable to do so."[216]
"Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
- (a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and
- (b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments."
220. The Commissioner has issued a Practice Statement Law Administration, PS LA 2006/8, relating to, among other matters, the remission of the SIC for shortfall periods. At cl 2A, he explains why SICs are imposed:
"Taxpayers have a responsibility to lodge, report correctly and pay their tax debts on time. GIC[217]
General Interest Charge. The GIC applied up to and including the year ending 30 June 2004 but does not arise in this case which is concerned with later years. and SIC are intended to encourage the timely payment of tax. They also deny late payers, including people who have paid late because they have reported too little in tax or claimed too much, an advantage over those who pay on time. Taxpayers who have underpaid have had the use of those moneys."
221. PS LA 2006/8 sets out examples of circumstances in which remission of SIC may, or may not, be appropriate. They are not intended to be exhaustive and are not intended to limit the discretion to remit.[218]
Background
222. The decisions that I have reached on each issue mean that I also affirm the objection decisions made by the Commissioner in relation to the 2006 Year and the 2007 Year. That means that the combined tax shortfall for those two years of income remains at $6,477,794.46. In so far as it relates to the 2006 Year, the tax shortfall became payable on 21 March 2007
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and, in so far as it relates to the 2007 Year, it became payable on 18 March 2008. In each case, the period ends on the day before the Commissioner issued the amended assessment.223. The Commissioner has remitted the SIC in part on three bases. One related to the 2006 Year. It was that it had not commenced the audit within a period equivalent to half the four year period of assessment permitted under s 170(1) of ITAA36. The Commissioner remitted the SIC to the base rate i.e. the rate less the addition of the 3 percentage points in the formula.
224. The other two bases related to both the 2006 Year and the 2007 Year. Finding that the audit had exceeded the two year period contemplated for a Comprehensive Audit by the HWI Booklet, the Commissioner remitted the SIC in each case to the base rate from the day after the end of that two year period. The third base related to the unavailability of the case officer who was working on the audit for a period greater than 30 days and to his or her not being replaced. That fact led to the Commissioner's remitting the SIC in full for the period from 2 January to 7 March 2012.
225. In summary, the Commissioner's decisions regarding remission of the SIC led to SIC's being payable as follows:
| Year | 2006 | 2007 |
| Date Commissioner gave notice of assessment | 28 January 2007 | 25 February 2008 |
| Date tax debt would have been due for payable | 21 March 2007 | 18 March 2008 |
| Date four year assessment period under s 170(1) ends | 27 January 2011 | 24 February 2012 |
| Half period between notice of assessment and s 170(1) period | 28 January 2009 | 25 February 2010 |
| Full rate of SIC | 22 March 2007 to 27 January 2009 | No SIC payable |
| Base rate of SIC (remission from full rate on basis that audit not commenced more than half way through assessment period permitted under s 170(1) of ITAA36) | 28 January 2009 to 18 August 2009 | No SIC payable |
| Full rate of SIC | 19 August 2009 to 17 August 2011 | 19 March 2008 to 17 August 2011 |
| Base rate of SIC (remission from full rate on basis of the audit's having exceeded the expected completion date of two years concluding on 17 August 2011) | 18 August 2011 to 1 January 2012 | 18 August 2011 to 1 January 2012 |
| Full remission (total remission on basis that no action on case for period in excess of 30 days) | 2 January 2012 to 7 March 2012 | 2 January 2012 to 7 March 2012 |
| Base rate[219]
|
8 March 2012 to 1 May 2013 | 8 March 2012 to 1 May 2013 |
Consideration
226. TVKS's Amended Statement of Facts, Issues and Contentions lodged on 4 March 2016 contended that the SIC should be remitted in full or, alternatively, in part on the basis
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that she was unaware of the existence of the trust distributions, the trusts themselves, or the notices of assessment issued to her. In view of the findings I have made, I do not consider that the SIC should be further remitted. This is a situation in which TVKS has chosen to place entire responsibility for her financial, including taxation, affairs in the hands of another whether as her husband or as her tax agent. Having done that, she cannot now rely on her lack of knowledge to avoid or minimise the consequences of decisions made on her behalf by persons to whom she entrusted that task.DECISION
227. For the reasons I have given, I affirm the objection decisions made by the Commissioner on in relations to assessments of income tax for the years ended on 30 June 2006 and 30 June 2007.
LEGISLATIVE BACKGROUND: Division 6 and Trust Income
"Income" and related terms defined
228. Division 6 of Part III of ITAA36 is concerned with trust income. Section 95 defines relevant terms. Among them is "net income" which s 95(1) provides:
"… in relation to a trust estate, means 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 deductions under Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of the previous years as are required to be met out of corpus."
229. The expression "exempt income":
"… in relation to a trust estate, means the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident.
Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements and structured orders."[220]
ITAA36; s 95(1)
Finally:
" non-assessable non-exempt income , in relation to a trust estate, means the non-assessable non-exempt income of the trust estate calculated as if the trustee were a taxpayer who was resident."[221]
ITAA36; s 95(1)
Liability of trustee as trustee limited by ITAA36
230. Section 96 in that Division provides that:
"Except as provided in this Act [ITAA36] a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate."
Division 6 goes on to prescribe those situations in which the trustee is liable to pay income tax upon the income of the trust estate and those in which a beneficiary is liable and to what extent each is liable. I am concerned only with a situation in which a beneficiary is an individual, a resident and not under any legal disability[222]
- "(a) a trustee of the trust estate was a resident at any time during the year of income; or
- (b) the central management or control of the trust estate was in Australia at any time during the year of income."[223]
ITAA36; s 95(2) A trust estate that is not a resident trust estate in relation to a year of income is referred to in Division 6 as a “ non-resident trust estate ” in relation to that year of income: ITAA36; s 95(3).
Section 97: Identifying assessable income in hands of beneficiary not under legal disability and presently entitled to a share of the income of the trust estate
A. General rules to identify assessable income
231. Section 97 of ITAA36 is concerned with a beneficiary who is not under a legal disability. Section 97(1) provides:
"Subject to Division 6D,[[224]
Division 6D is concerned with certain closely held trusts. It is not relevant in this case. ]where a beneficiary of a trust estate who is not under 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; and
- (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
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- (b) the exempt income of the beneficiary shall include -
- (i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
- (ii) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and
- (c) the non-assessable non-exempt income of the beneficiary shall include:
- (i) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
- (ii) so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia."
B. Exclusion from general rules by reference to status of beneficiaries
232. The reference in s 97(1) to the income of a trust estate to which a beneficiary is presently entitled:
"… shall be read as not including a reference to income of a trust estate -
- (a) to which a beneficiary is deemed to be presently entitled by virtue of the operation of subsection 95A(2) where the beneficiary -
- (i) is a natural person;
- (ii) is a resident at the end of the year of income;
- (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and
- (iv) is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; or
- (b) to which a beneficiary is presently entitled where the beneficiary -
- (i) is a non-resident at the end of the year of income;
- (ii) is not a beneficiary to whom subsection (3) of this section or subsection 97A(1) or (1A) applies in relation to the year of income; and
- (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate."
234. That is the effect of s 97(2) but it has to be understood in light of ss 95A(2) and ss 97A(1) and 97A(1A). Section 95A(2) provides:
"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."
Sections 97A(1) and 97A(1A) are concerned with beneficiaries who are the owners of income equalization deposits or farm management deposits.
Section 98: Liability of trustee
235. Again, I am not concerned with the situation in which a beneficiary is not resident or is a company. That means that I am concerned only with ss 98(1) and (2) when they provide for the liability of a trustee:
"(1) 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 -
ATC 1092
(a) 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; and- (b) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
as if it were the income of an individual and were not subject to any deduction."
(2) Where a beneficiary of a trust estate -
- (a) is deemed to be presently entitled to a share of that income of the trust estate of a year of income by virtue of the operation of subsection 95A(2);
- (aa) is a natural person and is not, in respect of the share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;
- (b) is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; and
- (c) is not under a legal disability,
- the trustee of the trust estate shall be assessed and liable to pay tax in respect of -
- (d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was resident; and
- (e) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
as if it were the income of an individual and were not subject to any deduction."
Section 99: certain trust income to be taxed as income of an individual
A. General rule
236. Section 99 applies in relation to a trust estate in relation to a year of income only if s 99A does not apply in relation to that trust estate in relation to that year of income.[225]
"Where there is no part of the net income of a resident trust estate -
- (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
- (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
- (c) that represents income in 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 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."
B. Qualification to the general rule
237. As I noted, s 99 applies only if s 99A does not. In essence, s 99A takes certain types of trust outside the ambit of s 99 but only if the Commissioner is of the opinion that it would be unreasonable for the section - s 99A - to apply in relation to that trust estate in relation to a year of income. If s 99A does not apply, the trustee is liable to pay tax on the net income of the trust estate at the rate declared by Parliament for the purposes of s 99A.[226]
- "(a) that resulted from:
- (i) a will, codicil or an order of a court that varied or modified the provisions of a will or a codicil; or
- (ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate;
- (b) that consists of the property of a person who has become bankrupt, being property that has vested in the Official Receiver in Bankruptcy, or in a registered trustee, under the Bankruptcy Act 1966;
- (c) that is administered under Part XI of the Bankruptcy Act 1966; or
- (d) that consists of property of a kind referred to in paragraph 102AG(2)(c); …"[227]
ITAA36; s 99A(2)(a)–(d)
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Section 99A(3) sets out the matters to be considered by the Commissioner in forming the relevant opinion.Footnotes
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