Case X40

Members:
CJ Bannon QC

Tribunal:
Administrative Appeals Tribunal

Decision date: 5 April 1990.

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

This matter comes back to the Tribunal pursuant to a direction given by Hill J. in the Federal Court [reported as
East Finchley Pty. Ltd. v. F.C. of T. 89 ATC 5280]. The taxpayer's objection concerns an assessment of income tax for the financial year ended 30 June 1983. The taxpayer is a proprietary company, and is the trustee of a family trust. It was claimed on behalf of the taxpayer, that it had effectively distributed the bulk of its income for the financial year by resolving on 23 June 1983 to

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distribute all but $13,088 of its net taxable income amongst some 126 persons residing in a foreign country, in equal shares of $585 each, a figure which equalled the non-taxable threshold for non-residents.

My first decision upheld the objection decision under review upon the basis that the taxpayer's resolution and other steps taken by the taxpayer fell within the provisions of sec. 100A of the Income Tax Assessment Act 1936 (``the Act''). Upon appeal, Hill J. held the decision was erroneous and that the Tribunal should first decide whether or not the resolution of the directors of the taxpayer on 23 June 1983 was effective to create a present entitlement in the non-residents to the sum of $585 each. Hill J. also raised the question of sham. In my first decision I thought I had negatived a finding of sham. If I did not make myself clear, I indicate now that I am not prepared to make a finding that the artificial arrangements intended to create legal relationships were a sham. There is no need to recite all the previous findings of fact, because they are set out in Case W51,
89 ATC 479. However, it should be noted that when the matter was returned to me, I asked Mr F.P. Carnovale, for the taxpayer, whether or not it was intended to call further evidence, being that of the wife of the director who gave evidence on the last occasion, who is also a director of the taxpayer, and also that of the accountant's employee who played an important role in relation to the implementation of the tax scheme. Neither person has been called as a witness.

When the matter came before me for further hearing, no further evidence was called, but Mr T.M. Jucovic Q.C. submitted that I should make further findings of fact on the evidence. He submitted that at the meeting on 23 June 1983, all that was done was to pass the resolution set out in ex. F, which, omitting references to names and amounts, reads:

``Resolved that the company, as Trustee of the... Family Trust, distribute the Net Income of the Trust for the year ended 30 June, 1983 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.''

Three names and amounts then are set out. The resolution continues:

``Any remaining income will be distributed to non-residents.''

Mr Jucovic submitted that the evidence showed that in spite of what was said by the taxpayer's director in his evidence at transcript pp. 35, 36, 42 and 17 (Appeal Book pp. 43, 44, 50 and 26), the list of non-residents, set out in ex. G, was not decided upon at the meeting on 23 June 1983 as the witness alleged. Mr Jucovic pointed out that in order to avoid paying Australian tax, and to give distributions at the tax threshold of $585 amongst the numerous cousins and other relatives of the witness and his wife, it was necessary to know the exact balance of the net income after making specific provision for the beneficiaries named in ex. F.

However, it was not until 17 December 1983 that the directors received and approved the accounts of the taxpayer company (transcript p. 60, Appeal Book p. 68). The trust estate tax return for the financial year ending 1983 appears in the Appeal Book at p. 104 et seq. and is stamped, lodged 19 January 1984. As previously decided, I reject the witness' evidence (transcript p. 43, Appeal Book p. 51) that the decision to pay each person $585 was made independently of a consideration of the tax threshold and the witness' evidence concerning this bridging (transcript pp. 57-58, Appeal Book pp. 65-66). On p. 60 of the transcript (Appeal Book p. 68), the witness was questioned thus by Mr Burns of counsel:

``I am showing you a minute of a meeting of directors on 17 December 1983. Do you see that that minute records the directors receiving and approving the accounts of the company for the year ended 30 June 1983? Can you recall that meeting taking place? - Yes, I can.

Would you agree with me that until the accounts had been placed before the directors, the amount available for distribution to beneficiaries was unknown? - Yes, it looks like that.''

Mr Carnovale submitted that although the exact amount was unknown until 17 December 1983, the directors had a good understanding at 23 June 1983 as to the net income and were not prevented from then determining who were to be the recipients of $585 each. However, in my judgment, out of the numerous possible beneficiaries, the decision to choose 126 of them to receive $585 each could not be

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undertaken until the net balance of income was ascertained.

It therefore appears to me to be correct to decide as an additional fact, that the directors did not identify the list of 126 beneficiaries at the meeting on 23 June 1983, and such list was not prepared or identified by the director witness until some later point in time. There being no evidence of any other relevant directors' meeting of the taxpayer company, it must follow that there was no resolution to distribute the sum of $585 to each non-resident beneficiary passed within the relevant financial year. That being so, it follows that the 126 non-residents were not presently entitled to the balance of income at 30 June 1983.

It is therefore decided that the objection decision under review be set aside and the Commissioner be directed that the balance of income for the financial year ended 30 June 1983, after provision for the three named beneficiaries in the amounts specified in ex. F was income to which the two infant beneficiaries named in the default clause in the trust deed were presently entitled, and that the taxpayer is nevertheless liable to pay income tax on that sum pursuant to sec. 98 of the Act. (This direction is in accordance with counsel's submission at transcript pp. 134 and 151.)

In accordance with Hill J.'s directions, I have reconsidered the facts. Having regard to the findings already made, the evidence of the director of the taxpayer and of its accountant, and having regard to the exhibits before me, I find that there was an arrangement or understanding on 23 June 1983, between the taxpayer and its two directors, one being the director who gave evidence, and the other being his wife. The arrangement or understanding was that the balance of the net income of the taxpayer for the financial year ending 30 June 1983 (after the provision for the three named beneficiaries mentioned in the resolution of the directors recorded on 23 June 1983) was to be distributed amongst non-resident beneficiaries in such proportions as would give each of them the maximum non-taxable threshold amount of $585 each, and upon the basis that each such non-resident would be asked to, and expected to, lend such moneys back to the taxpayer company. The object of the arrangement or understanding was to ensure that the taxpayer company retained in its possession and control the whole of the moneys distributed to non-residents without paying Australian taxation upon the sum retained. I am unable to say if only those members of the possible class of non-resident relatives of the directors of the taxpayer were ultimately selected as were prepared to sign a loan back agreement, or if the members of that class in fact selected were chosen because it was confidently anticipated by the taxpayer and its directors that they would do so. The uncertainty as to when the list (ex. G) was really compiled was not resolved. In so far as the taxpayer's case depends on proving that date, it fails on the onus of proof under sec. 190(b) of the Act as regards its attack on the assessment. The list may have been compiled after the director witness travelled overseas to visit the non-resident relatives and obtain their approval to the arrangement.

In his judgment, Hill J. expressed reservations as to the applicability of sec. 100A of the Act. The learned Judge, in a passage commencing at p. 5290, made it clear that the views he expressed were obiter dicta. At p. 5294 he said:

``While I have no difficulty in accepting that a reimbursement agreement can be a non-legally binding arrangement, for sec. 100A(13) so says, I have some difficulty in accepting the possibility that there could be a reimbursement arrangement in the relevant sense where present entitlement arose in circumstances where the trustee hoped that he might be able to enter into an arrangement in the future with the beneficiary, that the beneficiary pay money to the trustee. In such a case it would be difficult to see how the necessary purpose in sec. 100A(8) would be present.

It will be recalled that sec. 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into. Since the relevant agreement requires the payment of moneys to be made by some person, generally the beneficiary (in this case the payment clearly relied upon was a payment by the beneficiary to the trustee) it seems to me to be a matter of necessity that

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the relevant reimbursement agreement could only have been entered into where the beneficiary is in fact a party. It was not in dispute that for there to be an arrangement there had to be at least two parties to it:
F.C. of T. v. Lutovi Investments Pty. Ltd. 78 ATC 4708; (1978) 140 C.L.R. 434 at ATC p. 4712; C.L.R. p. 443 per Gibbs and Mason JJ., with whom Murphy J. agreed, and at ATC p. 4717; C.L.R. p. 451 per Stephen J.''

Mr Jucovic suggested that even on his Honour's view, a decision based on sec. 100A could still be reached, based upon the doctrine of ratification by virtue of the loan agreements entered into by the non-resident beneficiaries. I am not persuaded to accept this argument as it appears to involve an estoppel against the statute.

However, it appears to me that there are still grounds for the application of sec. 100A of the Act. In my judgment, there is clear evidence of an arrangement or understanding between the taxpayer company and its two directors in force at 30 June 1983, within the meaning of sec. 100A of the Act. I do not consider the non-resident foreigners were then a party to it. If the views expressed by Pincus J. in
Stamp v. F.C. of T. 88 ATC 4803 at p. 4806 regarding sec. 260 of the Act apply also to sec. 100A of the Act, there would be no need for the 126 foreigners to be parties to the arrangement in order for sec. 100A of the Act to apply. I am aware that Hill J. did not follow Pincus J. and criticised his views in
Davis v. F.C. of T. 89 ATC 4377 at p. 4408 col. 2. Even if Pincus J.'s views as to necessary parties to the understanding or arrangement do not apply to sec. 100A, there does not appear to me to be a necessary contemporaneity between the tax avoidance scheme and the reimbursement arrangement, provided it can be said that the present entitlements of the 126 foreigners arose by reason of an act, transaction or circumstance that occurred in connection with a reimbursement agreement (see sec. 100A ibid.).

It is clear, in my view, that the taxpayer had no intention of paying any money to the 126 foreigners unless they signed a reimbursement agreement as at 23 June 1983. At the very least, I am not satisfied that such payments were intended to have been made. (I am not now speaking of the subsequent events when the Commissioner's inquiries prompted a belated payment.) In the case of
Commissioner for Superannuation v. Perrett (1989) 89 A.L.R. 385 at p. 393, Jenkinson J. speaking of the provisions of sec. 66(2)(c) of the Superannuation Act 1976 (Cth) said:

``In my opinion, the expression `connected with' in s. 66(2)(c) does comprehend, on the proper construction of the paragraph, something short of the relationship between cause and effect. The choice of that expression by the draftsman strongly suggests that something more comprehensive than a causal relationship was to be indicated, for there is no shortage of stock expressions for denoting a causal relationship in the phrase book of legislative drafting, and `connected with' is not one of them. I respectfully agree with the opinion Beaumont J. expressed in Miller's case that `connected with' is intended to have in s. 66(2)(c) its ordinary meaning, and that that meaning comprehends `those cases where a link or an association exists between two medical conditions'.''

If Jenkinson J.'s views may be transposed to the words ``in connection with'' appearing in sec. 100A of the Act, then the evidence establishes to my satisfaction that the present entitlements of the 126 foreigners in this case arose by reason of transactions and circumstances that occurred in connection with reimbursement agreements, although those agreements were made when the witness director went to the foreign country concerned at the beginning of July 1983.

If I am wrong in the direction I have given that the taxpayer be assessed under sec. 98 of the Act, I would still be of the opinion that the taxpayer should be assessed under sec. 100A, subject to any binding decision to the contrary given by the Federal Court.

The Tribunal directs that the objection decision under review be set aside, but also directs that the Commissioner assess the taxpayer as liable to tax on the sum in dispute pursuant to sec. 98 of the Act.