Case R32

Judges: HP Stevens Ch

BR Pape M
TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 9 April 1984.

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B.R. Pape (Member)

I gratefully adopt the primary facts which have been carefully set out in the reasons for decision prepared by the Chairman, Mr. H.P. Stevens. At the outset I join with him in drawing the inference that the application for 114,800 units dated 8 June 1978 was not before the meeting of directors held on the morning of 8 June 1978. I find it more likely than not that this document was handed to A Jnr. by T in the banking chamber at midday in exchange for the undated and unnumbered certificate of units.

2. The issues raised by the reference are:

• (i) were the creation of the limited income units properly authorised under the terms of the trust deed?
• (ii) if the creation of limited income units were so authorised were they validly allotted to the Ezroh (Relief) Fund?
• (iii) was the Ezroh (Relief) Fund an eligible applicant as defined by the trust deed?
• (iv) if the limited income units were not allotted correctly was the purported distribution of the net income of $135,000 invalid?
• (v) if it is found that there was no legal and effective distribution of income amounting to $135,000, is the trustee liable to income tax pursuant to sec. 99 of the Act?

3. In the absence of any contrary evidence I am compelled to find that the letters declining the offer of units to the initial unitholders were signed by their respective representatives on 8 June 1978 and tendered to the meeting of directors of the trustee held on that morning. I further infer that the respective meetings of the initial unitholders to approve the rejection of the offer were held on the morning of 8 June 1978 before the meeting of the directors of the trustee commenced.

4. It is clear that pursuant to cl. 6(3) of the Trust Deed, the trustee required the consent of the unitholders to create the purported limited income units. All of the initial unitholders were corporations who held the units as trustees for family trusts. It is therefore clear from the provisions of cl. 13 that any such consent required a ``resolution or minute in writing favouring the giving of that consent signed by all of the directors of the unitholder either personally or by a director's attorney''. There was no evidence that any such consent was given by the directors of the unitholders. Consequently, I am compelled to find that the purported resolution creating the 114,800 limited income units was invalid as it was contrary to the provisions of cl. 6(3).

5. Therefore, it is strictly unnecessary for me to consider whether the limited income units were validly allotted or whether Ezroh (Relief) Fund was an eligible applicant. However, I would make the following observations. The evidence established that the trustee had not before the meeting of its directors on 8 June 1978 resolved to create the limited income units. Nevertheless, the letters declining the offer of units were tendered to this meeting by the representatives of the initial unitholders, these having been signed in anticipation that the units were to be created. Accordingly, I find that in this respect the provisions of cl. 6(3) would have been adhered to and that the initial unitholders had validly declined to accept the offer of the limited income units. On a strict

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ATC 309

view it can be said that there were never in existence any limited income units capable of being the subject of an offer before the meeting of directors of the trustee on the morning of 8 June 1978. As such it would have been impossible to decline such an offer. Nevertheless, by handing the letters declining the offer of the contemplated issue of units after they had supposedly been resolved to have been created, there was a valid rejection of the offer in accordance with para. (ii) to the proviso to cl. 6(3) of the trust deed.

6. Because I have found that no application for units by the Ezroh (Relief) Fund was properly before the meeting of directors of the trustee on the morning of 8 June 1978, I would also have concluded that they were invalidly allotted. There was no evidence of any later ratification of this invalid allotment by the unitholders. It would seem that such ratification would only operate from the date of ratification (cf. the validation by the Court of an invalid allotment of shares under sec. 122 of the Companies (Victoria) Code 1981 ). Thus for the invalid issue of the units to be validated it would seem that the trustees would require either the Court to exercise its inherent jurisdiction to sanction deviations from the trust by an order nunc pro tunc or by an order under sec. 63 of the Trustee Act 1958 (Vic.) validating the issue of the units on 8 June 1978. I might add no application for an adjournment was made by counsel for the taxpayer to allow such an application to be made. It follows that the resolution which purported to distribute the income of $135,000 applicable to these units was also invalid. Whether a Court of Equity would sanction or validate the creation and issue of the units bearing in mind that it was for the purpose of implementing a tax avoidance scheme is in my view not free from considerable doubt. In
Re Data Homes Pty. Ltd. (1971) 1 N.S.W.L.R. 338 the remarks of Street J. (as he then was) are apposite. At p. 340 his Honour said in relation to tax loss companies:

``I took the view that it was proper for this Court to harden its oft-repeated distaste for the current trafficking in tax loss companies, and, in this particular respect, to change the established course of practice. That change has now been in effect for six months or more, and during that time no assignment schemes for companies being wound up have been approved.''

On the other hand the Supreme Court of Queensland in
Re Insomnia Pty. Ltd. (1982-83) 7 A.C.L.R. 666 dismissed a summons for an order by the Commissioner of Taxation seeking to be joined as a party to proceedings by the company for an order under sec. 122 for the validation of a certain allotment of shares.

7. I now turn to deal with the question of whether the trustee is liable to tax under sec. 99 of the Act. To find the answer to this question it is necessary to determine if the provisions of cl. 11(1) of the trust deed satisfy the provisions of sec. 97(1) which then applied. This subsection provided:

``Where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the net income of the trust estate.''

For present purposes it is sufficient to say that I think the better view is that word share in sec. 97 refers to proportion and not amount. On this aspect I am content to adopt the reasons of Board No. 2 in Case C36,
71 ATC 156 . The provisions of cl. 11(1) show that the trustee is required to hold the net income in trust for the unitholders in proportion to the number of units which they are respectively registered as unitholders on the last day of the accounting period. It was not argued before the Board as to what the status of the initial unitholders was in respect of sec. 97. They were all trustees of a family trust (subtrustees), and on one view were not beneficially entitled to the net income of the trust estate. However, I think the better view is that the beneficiary referred to in sec. 97 is the beneficiary of the trust estate and not a beneficiary of the trust estate of which the unitholder was a trustee: see the helpful article ``Distributions of Trust Income - Some Selected Problems'' - Mark M. Leibler at para. 62-64 in Tax Essays vol. 1 (1979), edited by R.E. O'Neill. Butterworths. Accordingly, I find the present entitlement of the initial unitholders was as follows:

        



      Net income of the trust estate pursuant to

      sec. 95                                       $144,904

                                                    --------

      Present entitlement under sec. 97 -



      Trustee of the A

        Family Trust           45%                    65,207

      Trustee of the B

        Family Trust           45%                    65,207

      Trustee of the M

        Family Trust           10%                    14,490

                                                    --------

                                                    $144,904

                                                    --------
      

8. The interim distribution of trust income of $15,000 made to the initial unitholders on 8 June 1978 falls to be included as assessable income under sec. 25 or 26(b) in the net incomes of the initial unitholder trust estates in the relevant proportions. The amounts to be included in the net incomes of the initial unitholders for the year ended 30 June 1978 are set out below (see
Union Fidelity Trustee Co. v. F.C. of T. 69 ATC 4084 Per Barwick C.J. at p. 4087:

                                Sec. 25/26(b)    Sec. 97          Total

Trustee of the A Family Trust        6,750        58,457          65,207

Trustee of the B Family Trust        6,750        58,457          65,207

Trustee of the M Family Trust        1,500        12,990          14,490

                                   -------      --------        --------

                                   $15,000      $129,904        $144,904

                                   -------      --------        --------
      

Kitto J.: at p. 4091, remarked ``that the inclusion of an amount in assessable income by the force of two provisions is not an inclusion of it twice over''. On this view the shares of net income of $144,904 would be included under sec. 97. As a practical matter I think nothing turns on the differences in approach of their Honours.

9. Accordingly, for the above reasons I would reverse the Commissioner's decision on the objection and reduce that part of the net income of the trust estate upon which the trustee was assessed under sec. 99 from $136,729 to nil.