Case A50

Judges:
AM Donovan Ch
JD Davies M
GR Thompson M

Court:
No. 2 Board of Review

Judgment date: 3 September 1969.

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A. M. Donovan (Chairman): Before the Board in these references are objections to assessments raised under sec. 99A, which was introduced into Div. 6 of Part III of the Act in 1964. It operated for the first time in respect of the year of income ended 30 June 1966.

2. Division 6 is concerned with the assessment of income of trust estates. If particular instances are put to one side, its scheme, effected by sec. 97, is to assess to a beneficiary (but understandably, only if he is ``presently entitled'' to a share of the income of the trust) the appropriate part of the net income of the trust determined in accordance with the Act, although it has not been received by him. That part of the net income of the trust is aggregated with the other income of the beneficiary, and the whole is subject to tax according to the graduated scale of tax applicable to individual taxpayers. Because of the graduated scale, the tax payable on the aggregated income exceeds the tax which would be payable if the two components were subjected to separate assessments calculated by reference to the same scale.

3. If special instances are again ignored to the extent that a beneficiary is not ``presently entitled'' to the income of a trust, Div. 6 contemplates that the net income should be assessed to the trustee. As the provisions previously stood, whatever the nature of the trust, the trustee was assessable under sec. 99 which required the income to be assessed ``as if it were the income of an individual''. The tax therefore had to be calculated by reference to the graduated scale applicable to individual taxpayers.

4. Where the income of a trust was destined for a single beneficiary already in receipt of income of taxable proportions, a tax saving would inevitably result if it could be arranged for the beneficiary to be not ``presently entitled'' to the trust income so that an assessment would be issued to the

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trustee under sec. 99. This end could be achieved by the simple expedient of a direction to the trustee to accumulate the income for a time before it passed to the beneficiary. What was invariably true when there was but a single beneficiary usually held good when there was more than one.

5. Practitioners realised that the very substantial advantage which arose in these circumstances could easily be further enhanced. If the trust instrument contained discretions relating to the application of income or the choice of beneficiaries, the trust was given considerable flexibility. If a single assessment to a trustee appeared likely to attract a high rate of tax, the creation of identical trusts would ensure any number of assessments each benefiting from the low rates applicable to small incomes. Practitioners realised, too, that with these characteristics, trusts provided a convenient receptacle for the receipt of income diverted from a taxpayer who, nevertheless, wished to remain, in a practical sense, in control of the property producing the income.

6. It was a matter of common knowledge that tax planners found trusts perhaps the most versatile instruments at their disposal. It was common knowledge, too, that extensive use was made of them and that substantial tax savings were being effected for those whose affairs lent themselves to arrangement through trusts and who chose to make use of them.

7. This was the climate in which sec. 99A was incorporated into the Act. It was made not to apply to trusts arising from wills or intestacies and so applies only to trusts inter vivos . The effect of sec. 99A and the appropriate Rates Act is to impose on income assessable to trustees of trusts inter vivos tax at the rate of 50c in the $. I am unable to think otherwise than that the purpose of the section is to prevent the widespread avoidance of tax which resulted from the use of trusts inter vivos under the law as it previously stood.

8. It is to be observed that sec. 99A imposes no restriction on settlors as to the terms on which trust property may be held or the manner in which trust income may be dealt with. The only effect of the section is that, whereas previously a tax advantage almost certainly accrued if a beneficiary was not made ``presently entitled'' to the income of the trust, the opposite is now the case. A tax disadvantage will now result in the majority of cases if a beneficiary is not ``presently entitled'' to the whole income of the trust and, as a consequence, the trustee becomes assessable on the whole or any part of the trust's net income. Nevertheless, it will usually, but not always, be practicable for a trust instrument to be so drafted, and the trust estate to be so administered as to give effect to a settlor's benefaction in the way he desires and, at the same time, avoid an assessment on the trustee under sec. 99A.

9. No difficulty would arise with the section were it not for the fact that, by sub-sec. (2), sec. 99A does not apply ``if the Commissioner is of opinion that it would be unreasonable that'' it ``should apply in relation to the trust estate in relation to that year of income''. If such an opinion is formed, then sec. 99 applies and the assessment against the trustee is calculated as formerly. It was this discretion which founded the unsuccessful attack on the section in Giris's case 43 A.L.J.R. 99. That the Legislature found it necessary to confer the discretion is most readily explicable on the basis that it desired to leave undisturbed the trusts against which the section was not directed and yet was unable to formulate a description either of these trusts or those which it was intended the section should comprehend. If it is accepted that the purpose of the section is to prevent tax avoidance (and that was the view which commended itself to Windeyer J. in Giris's case (supra) ), then, in spite of the absence of any guidance from the words of the section itself, the manner in which the discretion is to be exercised appears to me to be plain. It should be exercised to take outside the operation of the section trusts which are not contrary to the purpose of the section, that is to say, the prevention of tax avoidance. If, in any year, a trust itself cannot be considered an actual or a possible tax avoidance device and it is not part of a wider scheme for tax avoidance, it is not a trust of the type against which sec. 99A was intended by the Legislature to operate and the opinion ought to be formed that it would be unreasonable for sec. 99A to apply to it. I am at present unable to bring to mind any other circumstances in which it would be unreasonable for the section to apply to a trust inter vivos.

10. My colleague, Mr. Davies, has set out the facts relating to these references, in the light of which I find it unnecessary to go

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beyond a consideration of the trusts themselves as a means of avoiding tax. The discretions which the trust instruments contain would enable the income included in the trustee's assessments of the year under review to be paid at some future time to beneficiaries who, during the year under review, are themselves subject to tax. If that happened, and if the trustee were assessed under sec. 99, then the combined taxes of the trustee and beneficiaries of the subject year would be less than that which would be paid by the beneficiaries if the trust income had gone directly to them and there would be an avoidance of tax. It is therefore not possible to say of the trusts that they are not, during the year under consideration, devices for the avoidance of tax, and for that reason I am unable to form the opinion that it would be unreasonable for sec. 99A to apply to them.

11. Counsel for the trustees suggested that the Commissioner had failed properly to exercise his discretion and that the assessments should be remitted to him. I am in agreement with Mr. Davies that it is not open to the Board to take this course.

12. I would uphold the Commissioner's decisions on the objections and confirm the assessments.