Case W51

Members:
CJ Bannon QC

Tribunal:
Administrative Appeals Tribunal

Decision date: 16 June 1989.

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C.J. Bannon Q.C. (Deputy President)

The objection to assessment under review relates to the year of income ended 30 June 1983. The taxpayer is a trustee company, let us give it the pseudonym of Wembley, for a family trust, let us call it the Norfolk family trust. The Norfolk family trust deed, Exhibit D, was executed on 4 September 1978 appointing Wembley as trustee, and naming as beneficiaries in the First Schedule various relatives of Mr Norfolk, including his wife, children, grandchildren, great-grandchildren, his father, his brother and sister. The directors and shareholders of Wembley are Mr Norfolk and his wife.

There is a power to vary the trusts contained in cl. 2.8 of the Norfolk family trust deed, which refers to Mr Norfolk as ``the Father''. The relevant part of cl. 2.8 is as follows:

``2.8 `The Beneficiaries' shall mean:

• (a) the persons referred to in the First Schedule hereto, and;
• (b) any such persons as the Father or after his death his legal personal representative shall by notice to the Trustee before the Distribution Date nominate and whom the Trustee shall appoint to be beneficiaries provided however that the Settlor, the Father's legal personal representative or any trustee or former trustee hereof shall not be added as beneficiaries pursuant to this paragraph.''

The Norfolk family trust deed provides in cl. 4, so far as is relevant:

``4.1 Until the Distribution Date the Trustee shall hold the Trust Fund upon trust as to the income derived therefrom to pay or apply or set aside the whole or any part of such

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income for an Accounting Period for or towards the maintenance, advancement, education or benefit of such one or more of the Beneficiaries who are then living or existing, exclusive of the other or others of them and/or to such charitable purposes in such proportions and shares as the Trustee in its absolute discretion may from time to time throughout any Accounting Period determine without being bound to assign any reason therefor or to accumulate the whole or any part of such income.

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4.4 The application or setting aside of any part of the income of the Trust Fund to or for the benefit of any Beneficiary may be effectively made by a resolution of the Trustee that a sum out of or a portion of the income of the Trust Fund for the Accounting Period be allocated to such Beneficiary or that a sum out of or a portion of the net income of the Trust Fund as defined in Section 95 of the Income Tax Assessment Act be allocated to such Beneficiary.

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4.7 Any determination made by the Trustee in this clause shall be irrevocable to the intent that any Beneficiary in whose favour such determination is made shall be absolutely and permanently entitled to the share of income, allocated to him pursuant to such determination.''

The Deed further provides in cl. 19 as follows:

``19. Every Trustee who is a corporation or company may exercise or concur in exercising any discretion or power hereby conferred on the Trustee by a resolution of such corporation or company or by a resolution by its board of Directors or Governing Body or may delegate the right and power to exercise or concur in exercising any such discretion or power to one or more members of its Board of Directors or Governing Body appointed from time to time by the said Board of Directors or Governing Body for that purpose AND the Trustee's discretion shall be deemed to be exercised when a resolution of the Trustee exercising its discretion has been recorded in the Trustee's Minute Book relating to this Settlement PROVIDED that where it appears to the Trustee that any such Minute might attract liability to stamp duty the Trustee may in its discretion refrain from making such Minute and the failure to make any such Minute shall not invalidate the decision, discretion or power which it would otherwise have recorded.''

No minute of Wembley has been produced in evidence or found, with regard to a variation of the list of beneficiaries referred to in the first schedule to the deed. However, a deed executed on 12 October 1982 was put in evidence as Exhibit E, the deed being executed under the seal of Wembley and signed by Mr Norfolk as a director of Wembley. Substituting the pseudonym of the father for his real name, the deed provides:

``Pursuant to Clause 2.8(b) of the said Deed of Trust made the 4th day of September, One thousand nine hundred and seventy eight the Trustee hereby varies the Deed of Trust to the intent that there shall be added within the definition of Beneficiaries under the Deed of Trust the following persons: Mr Norfolk together with any brother or sister, uncle, aunt, cousin, niece, nephew or parent whether such relationship esist [sic] by blood or by the marriage of the said Mr Norfolk.''

Mr Norfolk is a naturalised Australian who came to this country with his wife, from a populous Asian country.

Mr Norfolk gave evidence that at a meeting of himself and his wife, as the directors of Wembley, held on 23 June 1983, he and his wife discussed ``people who were close to us and who needed help'' (Transcript pp. 15, 34 and 42). He said it was decided to distribute a substantial portion of the Wembley trust's income for the year ended 30 June 1983 amongst relatives of himself and his wife in the country of their origin, in equal shares of $585 each. A holograph list of these deserving people was made out at the meeting. It contained 121 names. It was verbally agreed that another five persons to whom income was distributed by the Norfolk family trust in the previous taxation year, should also be included in the distribution, those five people being the mother, father, brother and sister of Mr Norfolk and also his mother-in-law.

Later, the holograph list was typed in Mr Norfolk's office, and the holograph list

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destroyed (Transcript p. 35). The typed list of 121 names was produced and became part of Exhibit G. Mr Norfolk explained that the last five names in the list of non-resident beneficiaries in the Norfolk family trust income tax return for the year ended 30 June 1983 (Exhibit C) were the names of his mother, father, brother, sister and mother-in-law, which did not appear in Exhibit G. A further list stating relationships was supplied to the respondent Commissioner on behalf of the Norfolk family trust under cover of letter dated 11 August 1988, and the list and letter became Exhibit 1.

A minute of the meeting of Wembley held on 23 June 1983, was tendered in evidence and became Exhibit F. The minute resolves that the net income of the family trust for the year ended 30 June 1983 will be distributed ``by applying for the benefit of the undermentioned beneficiaries the following amounts, such amounts to be credited to the beneficiaries in the books of the Trust and held on their behalf''. There follow the names of three beneficiaries and certain amounts, not relevant to this hearing. The minute then proceeds as follows:

``any remaining income will be distributed to non residents.''

There is no reference to deserving people close to us, or to the per capita distribution of $585 each in the minute.

Mr N. Burns, counsel for the respondent Commissioner, pointed out that in the year ended 30 June 1983, the tax threshold for non-residents was $585 - see Income Tax Rates Act 1982, Sch. 1. It beggars belief that the sum was not chosen with that provision in mind, whether by Mr Norfolk, or his accountant. It was also clear to me from the accountant's evidence, that the decision to distribute $585 each to 125 persons living in Asia was designed for tax purposes, and had precious little, if anything, to do with the persons involved needing help, or being close to Mr and Mrs Norfolk.

However, in fairness to Mr Norfolk, he did not advance the needs of the 126 people in evidence in chief, but in answer to cross-examination. It was admitted by Mr Norfolk's accountant that his company had a number of clients engaged in distributing income to non-resident beneficiaries (Transcript pp. 74-76), and had designed the format of letters of advice to beneficiaries used by Wembley. The format of the letters devised by the accountants was as follows:

``Please be advised that a distribution from net income of the... Trust of A$ has been exercised in your favour, pending Reserve Bank approval. Subject to your authorization, this amount will be credited to a loan account at call in your name of [sic] the books of account of the abovenamed Family Trust.''

The other format letter devised was in the following terms:

``Authorization is hereby granted, subject to Reserve Bank approval where required, to credit a loan account in the name of the undersigned in the books of the Family Trust for the amount specified.

Furthermore, your previous correspondence dated 24th June, 1983 advising my share of the net income of the Trust is acknowledged.''

Some samples are contained in Exhibits J and N. Mr Norfolk gave evidence that he went to the far Asian country and distributed, or arranged, the distribution of the two format letters to the 126 beneficiaries, procuring their signatures to the last-mentioned document. Thus no money changed hands. The Norfolk family trust kept the money in its bank account, and no income tax was to be paid, because of the income tax threshold limit for non-residents' income.

Mr Norfolk gave conflicting versions of the dates of his journeys to the East, but eventually produced his passport confirming one version in which he opted for July 1983 (Transcript pp. 27, 86). He gave conflicting accounts of the relationships of several persons on the list to himself and his wife (Transcript pp. 19-25 and 62-65), but explained this by reference to some beneficiaries having the same names as others. A temptation to refer to Gilbert & Sullivan's ``Mikado'', ``I've got them on the list, they never would be missed'' was not wholly repressed by the Tribunal. To add to the confusion, the majority of the pro forma letters were stated to have been sent to the accountants, and lost or destroyed when they moved offices (Transcript p. 74). The chief of the accounting firm gave evidence of the

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unsuccessful efforts made to locate the letters for this case (Transcript pp. 83, 84). Mr Burns properly made all the points I have enumerated, and left me in a position of disquiet as to what really happened. The terms of the company minute, the discrepancies in the lists in Exhibits G, C and 1, and the missing documents, do not leave me in a state of comfortable satisfaction. Furthermore, the terms of the minute Exhibit F are hardly confirmatory.

Mr Norfolk is a professional man. A finding of perjury about the matters related would have serious consequences for his career and family. I am mindful that the accountant really did devise the scheme and that Mr Norfolk appears to have made some attempts to carry it out. Furthermore, it appears apposite by way of analogy to apply some observations of Beaumont J. regarding sham transactions in
Sharrment Pty. Ltd. & Ors v. Official Trustee (1988) 82 A.L.R. 530 at p. 552, where he said the evidence was consistent only with its being the genuine intention of the parties to enter into a series of legal relationships in terms of the documentation that was in fact employed. That seems to me to be the position of Wembley, the Norfolk family trust, Mr Norfolk and the accountants. However careless and neglectful the Norfolks were in carrying out the scheme propounded by the accountants, it was their earnest desire to do so to avoid paying tax.

For the purposes of this objection hearing, I am prepared to assume, without deciding, that Wembley and the Norfolks carried out the fundamentals of the scheme.

Matters did not proceed as planned, because the respondent Commissioner became suspicious of the outflow of philanthropy to non-residents centred on clients of the particular accountancy group, and started investigations. In August 1988 the Norfolk family trust decided to distribute the moneys loaned to it to the non-resident beneficiaries and bank drafts were employed to do so. Copies of documentation are contained in Exhibit M. While these may provide some confirmation that the scheme was carried out in 1983, they do not persuade me that the purpose was not to avoid payment of tax. Correspondence between Wembley and the respondent Commissioner in August 1988, concerning entitlements and distribution, is contained in Exhibits 1 and 2. Mr Norfolk gave evidence that he had been told that the Taxation Office advised that the money be sent to the deserving relations, and he thereupon arranged for the drafts to be sent to them.

The fact that I am not impressed with Mr Norfolk's tale of poor relations and deserving people does not, of course, spell the end of this account. Further questions remain concerning the effect of the Wembley company resolutions and the acts done.

Mr Burns was not prepared to argue that the varied list of beneficiaries under the Norfolk family trust failed for uncertainty. The word ``cousin'' where used without further qualification is treated legally as meaning a first cousin, and I am prepared to regard the varied list as sufficiently certain for the purposes of the law relating to trusts.

Mr Burns submitted that cl. 19 of the deed provided a regimen for the exercise of discretions or powers by Wembley, and that neither the circumstances of execution of the deed of variation, Exhibit E, nor of the minute, Exhibit F, coupled with the list of beneficiaries and oral evidence to explain it, complied with the prerequisites of cl. 19. As to the deed of variation, I agree with the submission of Mr Carnovale of counsel that the deed is prima facie evidence of a resolution having been arrived at by the board of directors of Wembley. As to the resolution to distribute to the numerous beneficiaries, I also accept Mr Carnovale's submission that cl. 19 does not impose an absolute requirement for validity, that it be recorded in the trustee's minute book. In my opinion, the deeming proviso in cl. 19 is simply a manner of providing evidence, and does not preclude other evidence as to resolutions passed at board meetings.

Mr Burns then submitted that the facts of this matter fall within the provisions of sec. 100A of the Income Tax Assessment Act 1936 (Cth) (``the Act''). The relevant parts of the section are set out hereunder:

``100A(1) Where -

• (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
• (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust

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  estate (which share or part, as the case may be, is in this sub-section referred to as the `relevant trust income') arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement,

the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.

(2) Where -

• (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability would, by reason that income of the trust estate was paid to, or applied for the benefit of, the beneficiary, be deemed to be presently entitled to income of the trust estate; and
• (b) that income or a part of that income (which income or part, as the case may be, is in this sub-section referred to as the `relevant trust income') was paid to, or applied for the benefit of, the beneficiary as a result of a reimbursement agreement or as a result of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement,

the relevant trust income shall, for the purposes of this Act, be deemed not to have been paid to, or applied for the benefit of, the beneficiary.

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(4) Where sub-section (1) or (2) applies in relation to any income of a trust estate of a year of income -

• (a) in the application of this Division in relation to the trust estate in relation to the year of income, section 99A shall be read as if sub-sections (2), (3) and (3A) of that section were omitted; and
• (b) for the purposes of any application of section 99A in relation to the trust estate in relation to the year of income, the trust estate shall be deemed to be a resident trust estate.

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(7) Subject to sub-section (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.

(8) A reference in sub-section (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

(9) For the purposes of sub-section (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.

(10) A reference in sub-section (7) to the payment of money to a person or persons shall be read as including a reference to the payment of money to a person or persons by way of loan.

(11) A reference in this section to a person shall be read as including a reference to a person in the capacity of a trustee.

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(13) In this section -

• `agreement' means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing;

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• `property' includes a chose in action and also includes an estate, interest, right or power, whether at law or in equity, in or over property.''

In terms of sec. 100A(13) of the Act, I am satisfied that the delivery of letters of entitlement coupled with letters providing for loans back to the trustee of the whole entitlement, and the procuring of signatures to the loan back agreement in each case, sufficiently evidences an agreement or agreements within the meaning of the subsection. Further, I am satisfied that the agreement or agreements were not entered into in the course of ordinary family or commercial dealing. Quite apart from the obvious origination of a tax scheme at the accountant's office, it seems to me that the adoption of a uniform payment at the tax threshold amount to each of the 121 names on Exhibit G, plus the extra five in the previous return, the provision of uniform give and take back letters for all beneficiaries from the accountant's office, and the discussions with the accountants (Transcript pp. 80-85), point to a course of parallel business conduct providing circumstantial evidence of an agreement to avoid taxation.
Trade Practices Commission v. Allied Mills Industries Pty. Ltd. and Ors (1980) ATPR ¶40-178 at p. 42, 458; (1980) 32 A.L.R. 570 at p. 577. Such an inference may be negated by a credible explanation. However, none has been forthcoming. I am unimpressed by Mr Norfolk's vagueness as to the list of relations and their relationships. Further, I find it difficult to see that a desire to help the genuinely deserving should be coupled with a loan back arrangement to Norfolk's family trust.

In my opinion, the evidence amply establishes that the arrangements under discussion fall within the terms of sec. 100A(1) of the Act. Furthermore, I consider the payments ultimately made to the 126 beneficiaries in 1988 (evidenced by Exhibit M) are to be deemed not to have been paid to, or applied for the benefit of those beneficiaries, because the facts show that the payments were made as the result of circumstances which occurred in connection with, or as a result of, a reimbursement agreement. I have no difficulty in arriving at the inference that such payments were made in connection with such reimbursement agreements in the light of taxation office inquiries evidenced by the correspondence (Exhibits 1 and 2) dated 11 August 1988, the copies of bank drafts dated 12 August 1988 (Exhibit M), cheque butt No. 905335 (Exhibit K), and bank statement showing debiting of the trustee company for the transferred amounts on 12 August 1988 (Exhibit L).

I am satisfied that sec. 100A(7) of the Act (as modified by sec. 100A(10) and (11) of the Act) is applicable, as the reimbursement agreement provides for payment of money to the trustee company Wembley. I am also satisfied that the purpose of all the 126 payment and loan back arrangements was tax avoidance, and that the exclusionary provisions of sec. 100A(8) do not apply. The parallel circumstances previously mentioned provide circumstantial evidence of this, and have not been satisfactorily rebutted. Section 100A(9) makes it plain that the purposes of any person may be looked to. It is clear to me that Norfolk, his wife and Wembley, all had the requisite purpose of avoiding liability to pay income tax.

Mr Carnovale submitted that if I was satisfied that sec. 100A applied to this case, then pursuant to sec. 100A(1) the beneficiaries should be deemed not to be entitled, the result being that the income should be deemed to belong to the default beneficiaries under the trust deed, viz. the two children of Mr Norfolk who are minors. But in this respect I am satisfied that sec. 100A(1) does not have the result contended for. It is simply an annihilating provision for the purposes of the Act, not for the purposes of the trust deed as varied, or for the purpose of distributions made by the trustee, Wembley. See remarks concerning similar provisions in Div. 6A in
Davis & Anor v. F.C. of T. 89 ATC 4377, at p. 4407 per Hill J. The result is that sec. 99A of the Act applies, and the trustee should be assessed and is liable to pay tax on the part of the net income of the resident trust estate distributed to the non-resident beneficiaries.

In the result, I decide that the objection should be disallowed and the objection decision under review affirmed.