Case M45

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 16 July 1980.

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M.B. Hogan (Chairman)

The question at issue in this reference is whether the trustee of a settlement who has paid over to a minor beneficiary in the year of income a sum of money on account of income allocated to the beneficiary in a distribution of income by the trustee of the settlement, is liable for assessment under sec. 98 of the Income Tax Assessment Act in respect of the income so distributed and paid over.

2. The facts are very simple. On 1 April 1977 a sum of money ($20) was settled on a trustee company formed for the purpose of the arrangements about to be described - which trustee company was controlled by the parents of the minor beneficiary - by a person who bore no relationship to the beneficiary. On 10 May 1977 the trustee company signed an ``Agreement for Sale of Business'' whereby the parents of the beneficiary sold to the trustee company on terms, a business formerly conducted by them; the Agreement recorded that the sale of the business took place on 1 April 1977. The business was then conducted for the benefit of the trustee company as trustee of the settlement dated 1 April 1977 (referred to hereafter as ``the family trust'').

3. The reference concerns the operations of the family trust in relation to the income derived by it in respect of the income year which was to end on 30 June 1978. A photostat copy of a ``TYPEWRITTEN COPY OF MINUTES'' of a meeting of the directors of the trustee company was introduced as an exhibit to establish that the directors of the trustee company on 21 June 1978 resolved that a ``distribution of income for the year ending 30 June 1978 be made from'' the family trust in the amount of $16,000 to the nominated minor beneficiary; the resolution continued that the trustee company ``pay from the Trust the Distribution of Income as an absolute discharge of the Trust entitlements to the respective beneficiaries (sic)''. (The photostat of the ``TYPEWRITTEN COPY OF MINUTES'' bears the appearance of being a full copy of the material recorded therein; as only the one minor beneficiary is specified in relation to the distribution of income from the family trust, the reference to ``respective beneficiaries'' in the second part of the resolution is confusing and indicates the contrived and highly artificial nature of the minutes.) Photostat copies of:

• (i) a single sheet from a bank statement of an account in the name of the trustee company showing the debiting of a cheque for $16,000 on 22 June 1978;
• (ii) a cheque for $16,000 dated 22 June 1978 drawn in favour of the minor beneficiary by the trustee company; and
• (iii) a page of a savings account passbook in the name of the mother of the minor beneficiary as trustee for the minor showing the deposit on 22 June 1978 of a cheque for $16,000 in that account,

were produced as an exhibit to evidence payment over of the sum of $16,000 in terms of the resolution of the meeting of directors. No parol evidence was given in relation to these transactions and the Board was informed that the ``facts'' as set out in the documents were not challenged by the Commissioner and was invited to proceed on the basis of ``agreed facts''.

Such a procedure severely hampers the operation of the Board. In effect, it invites the Board to act on such matters as the taxpayer and the Commissioner have agreed between them are the relevant facts and limits the Board in its pursuit of material on which to base its own ``findings of fact'' which clearly (vide subsec. (2) of sec. 195) constitute one of the props on which a decision of the Board should be founded.

4. The present reference highlights the shortcomings of proceeding on agreed facts. In the material before the Board, the photostat copy of the ``TYPEWRITTEN COPY OF MINUTES'' dated 21 June 1978 includes immediately after the minute already adverted to above dealing with ``distribution of income'', a further minute which I quote in full:

``TRUST LOAN: IT WAS RESOLVED that the company accept for a period of one year from the date hereof, the loan set opposite the name of the respective

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beneficiary, such loan to bear interest at the rate of 20% per annum:

(Minor beneficiary's

name)

$16,000.''

As will be noted from the description in para. 2 above of the documents submitted as an exhibit, a cheque for $16,000 in payment of the ``distribution of income'' was not drawn and banked to the minor beneficiary's account until 22 June 1978. Whether, how and when the sum of $16,000 found its way back to the business operations of the trust as a ``Trust Loan'' (as it appears it was always intended to do) is material which is not before the Board. Questions which immediately spring to mind are, firstly, whether the payment of a cheque on 22 June 1978 may not be a step in a sham in the sense that Windeyer J. saw that concept in
Bolton v. F.C. of T. (1964) 13 A.T.D. 378 at p. 388 - as ``something set up merely to dissemble'', or, secondly, whether it is, in the circumstances, to be seen as evidence of a change to ``some antecedent arrangement... in order to avoid the tax consequences which would have followed from the earlier arrangement'' vide Aickin J. in
Slutzkin and Ors. v. F.C. of T. 77 ATC 4076 at p. 4085 which passage is clearly advertent to the decision of the High Court in
Jaques v. F.C. or T. (1924) 34 C.L.R. 328 .

5. Proceeding on the basis that the Board is confined by the ``agreed facts'' emerging from the scanty range of documents submitted as exhibits, and noting that the Commissioner has accepted that ``the facts, as stated in the documents, are not challenged'', I turn to consider the question of whether the transactions embodied in the minutes and reflected in the bank statement etc. constitute a sham. I have come to the conclusion that there is not sufficient evidence on which I could base a conclusion that the whole of the steps recorded in the minutes of 21 June 1978 constitute ``a mere facade dishonestly erected'' per Windeyer J. in Bolton's case supra at p. 388. It is easy to postulate that there must have been a ``round-robin'' exchange of cheques on 22/23 June 1978 - indeed the photostat copy of the bank statement in the name of the trustee company shows the deposit on 23 June 1978 of a single cheque for $25,500 which effectively restores the bank balance to what may be described as ``pre-distribution levels'', the amount of $25,500 being $500 less than the obvious distributions totalling $26,000 made on 22 and 23 June 1978. But lacking any evidence in explanation of the arrangements between the parties, and the Commissioner not having challenged the facts as set out in the documents, there cannot be sufficient basis for finding that the arrangements embodied in the documents were ``a scheme in the sense of a transaction having apparent legal consequences but not intended by the parties to operate according to its tenor'' (per Windeyer J. in Bolton's case at p. 388) despite the suggestion inherent in the minutes that it was never intended that funds would move from the trust business. Similarly, lacking evidence, it is not possible to define an arrangement of the type which might attract the operation of sec. 260, though again the minutes raise at least the suggestion that there may have been some antecedent arrangement for retaining funds on loan to the business operated by the trustee company which was varied by a round-robin exchange of cheques in order to avoid the tax consequences which may have flowed from the earlier arrangement. I am reinforced in these views by the observations of Lee J. in the penultimate paragraph of his decision in
Ure v. F.C. of T. 80 ATC 4264 .

6. The argument advanced on behalf of the taxpayer was to the effect that the amount of $16,000 having been paid over for his benefit, the taxpayer fell to be assessed under sec. 25(1) or sec. 26(b) and he did not fall to be assessed under Div. 6 of the Assessment Act, specifically under sec. 98. The argument was founded in dicta of Barwick C.J. in the case of
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of T. 69 ATC 4084 . In that case, the Chief Justice observed at p. 4086:

``Section 96 of the Act provides that except as provided in the Act a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Other than the provisions of Div. 6 there are none which render the trustee liable as such to pay income tax on the income of a trust estate. It may thus be said that the Division is the exclusive source of liability of a trustee to pay income tax upon the

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income of the trust estate. But, in my opinion, for reasons which will appear, it cannot properly be said that the Division is the exclusive source of the liability of a beneficiary to pay tax in respect of the beneficiary's share of the income of the trust estate paid or payable to the beneficiary.''

and at p. 4087:

``In applying the provisions of Div. 6 a clear distinction must be maintained between the position of a person who is entitled to receive a share of the estate and one who has been paid the amount of it. When a beneficiary has been paid his share of the income of the estate in respect of a tax year he no longer satisfies the description of a beneficiary who is entitled to a share of the net income of the estate for that year. Thus, if at the close of the taxation year the appropriate share of the income of the trust estate has been already paid to the beneficiary who before the payment was merely entitled to it, the amount so paid to the beneficiary as his share of that income will form part of his assessable income by virtue of sec. 26(b) and not, in my opinion, by reason of sec. 97.''

This last passage, it will be noted, is phrased in terms of sec. 97 but the Chief Justice went on to add:

``The purpose of these three sections in Div. 6, sec. 97, 98 and 99, it seems to me, is to anticipate the receipt by a beneficiary of the share of the trust income upon the receipt of which, whatever his residence, he would be liable to tax: and to bring the share of that income to tax before it is received by the beneficiary.''

It is obvious that the Chief Justice saw the views expressed in relation to the lack of present entitlement (under sec. 97) remaining in a beneficiary who had been paid his share income, as being equally referable to a minor beneficiary, in respect of whom his trustee might otherwise have been assessable under sec. 98.

7. The Chief Justice's views found a clear echo in the same case in the decision of Kitto J. who at p. 4090 stated:

``The operation of the three sections is only to provide for the taxation of `the net income of the trust estate', the need to do so being a consequence of the provision in sec. 96 that, except as provided, a trustee shall not be liable to pay tax on that income. Their operation is not to define the tax liability of beneficiaries in respect of distributions of estate income, for income which they receive from a trust estate is taxable in their hands by virtue of the general provisions of sec. 25.''

(See also Kitto J. in
F.C. of T. v. Belford (1952) 88 C.L.R. 589 at p. 604 .)

There is also a fainter echo of the same theme in the decision of Menzies J. in the passage at p. 4091:

``Of course my reading of Div. 6 does not mean that beneficiaries who actually receive income from a trust estate in a year of tax may not be subject to income tax in respect of that income even if it is derived from sources outside Australia. Whether the income would be assessable or not would depend upon sec. 25 and sec. 26(b) of the Act, not upon Div. 6.''

and again at p. 4092:

``Such considerations have led me to conclude that the Division is concerned only with income derived from sources in Australia and not distributed ...''

(emphasis inserted).

8. These observations are indeed all obiter - the question raised in the case stated in The Union Fidelity case being:

``Should so much of the income which came into the estate of the deceased during the year ended 30th June 1961 in respect of books and a film scenario, written by the deceased before his death on 20th November 1960, from sources outside Australia and was income to which no beneficiary was presently entitled be included in the income on which the appellants are liable to pay tax pursuant to s. 99 of the Act?''

But, it is obiter from a very august source bearing very precisely on the circumstances of this reference, obiter also which provides a clear reasoned explanation of the interaction of Div. 6 and sec. 25(1) and 26(b) that it must indeed be reasoning of very compelling force so far as a Board is concerned even though there be instances in some earlier decisions which would indicate that, in an equally

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obiter manner, various judges of the High Court have taken the view that a beneficiary may be liable for assessment by reason of sec. 97 of the Act in respect of a share of the net income of a trust estate ``whether or not that income is paid to him'' per Latham C.J. in
Tindal v. F.C. of T. (1946) 72 C.L.R. 608 at p. 618 .

9. However, I am relieved of the dilemma of deciding between these competing views by the intervention in the circumstances of this case of sec. 101 of the Act. That section so far as it is relevant to the circumstances of this reference reads:

``For purposes of this Act, where a trustee has a discretion to pay... income of a trust estate to... specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him... by the trustee in the exercise of that discretion.''

Under cl. 2 of the Deed of Settlement of 1 April 1977, the trustee is directed:

``... to stand possessed of the Trust Fund UPON TRUST as to the income thereof for the Beneficiaries, or any one or more of them exclusive of the other or others in such shares and proportions as the Trustee in its absolute discretion may from year to year determine.''

It was in exercise of this power that the trustee company in the minutes of 21 June 1978 registered its resolve to distribute $16,000 to the minor beneficiary as a distribution of income of the family trust for the year ended 30 June 1978 and further resolved on the payment over to the minor beneficiary of the amount so distributed. That being so, it appears to me that the minor beneficiary, through the operation of the deeming provision in sec. 101, acquires ineradicably (no matter how artificially), a present entitlement to the amount paid over to him by reason of the very payment made to him. That present entitlement enures for all purposes of the Act including sec. 98 of Div. 6.

10. Accordingly, I would confirm the assessment in respect of the year ended 30 June 1978, notice of which issued on 9 May 1979.