Cajkusic and Commissioner of Taxation

[2006] AATA 134

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 134

ADMINISTRATIVE APPEALS TRIBUNAL          № VT2004/243
  № VT2004/244

TAXATION        APPEALS      DIVISION           № VT2004/245

Re:            MILIVOJ CAJKUSIC
  BRANKA CAJKUSIC

DANIEL CAJKUSIC

Applicants

And:         COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       The Hon Howard Olney AM QC, Deputy President

Date:17 February 2006

Place:Melbourne

Decision:In respect of each of the applications, VT2004/243, VT2004/244 and VT2004/245, the decision of the Tribunal is that:

(a)The objection decision made by the respondent on the applicant’s objection in respect of the amended assessment to income tax for the year ended 30 June 1997 is set aside and in substitution therefor there be a decision that the taxation objection of the applicant dated 23 June 2003 be allowed.

(b)The objection decision made by the respondent on the applicant’s objection in respect of the amended assessment to income tax for the year ended 30 June 1998 is set aside and the matter be remitted to the respondent for reconsideration in accordance with the Tribunal’s findings.

. . . . . . . . . . . . . . . . . . . . . . . .

Deputy President

INCOME TAX – amended assessments – disputed amounts – whether contributions by employer to the employee benefit trust represent legitimate deductions for income tax purposes – whether assessment of employer for fringe benefits tax amounts to "double taxation" - onus of proof

Income Tax Assessment Act 1936 ss 177F, 97, 51, 23L, Part IVA

Income Tax Assessment Act 1997  s 8-1

REASONS FOR DECISION

17 February 2006  The Hon Howard Olney AM QC, Deputy President

1.      The Tribunal has before it three separate applications to review decisions made by the Commissioner of Taxation (the respondent) concerning the income tax liability of the applicants.  The applicants Milivoj Cajkusic and Branka Cajkusic are husband and wife and are the parents of the applicant Daniel Cajkusic.  The applicants were at all relevant times the principal beneficiaries of the Cajkusic Family Trust (the family trust) and each was an employee of Intex Coatings Pty Ltd (Intex) which carried on business as the trustee for the family trust.  Intex was incorporated on 18 December 1992.  At all material times Branka Cajkusic was the sole director of the company and together with Daniel Cajkusic, a shareholder.  Intex went into voluntary liquidation on 17 December 2001.

2.      In April 2003 the respondent issued amended assessments of income tax for each applicant in relation to the years ending 30 June 1997 and 1998.  In the case of the 1997 assessments, the taxable income of each applicant was increased by $205,425 and for 1998 the taxable income of each applicant was increased by $197,125.  On 23 June 2003 each applicant objected against the amended assessments and in April 2004 the respondent disallowed each objection in full.  In the present proceedings the applicants seek the review of the relevant objection decisions.

3. The circumstance which gave rise to the issuing of the amended assessments was the disallowance by the respondent of deductions claimed by Intex in each of the 1997 and 1998 years for contributions made, and implementation costs incurred, in relation to an employee benefit trust arrangement entered into on 30 June 1997. The family trust’s 1997 accounts include as a deduction against income the sum $198,000 said to have been paid as “Employee Share Unit Trust contributions” together with $7,425 described as “Employee Share Unit Trust costs” (these sums totalling $205,425). For the 1998 year similar deductions of $190,000 and $7,125 (totalling $197,125) were made. On 13 March 2003 the respondent’s delegate determined under s 177F(1)(b) of the Income Tax Assessment Act 1936 (the 1936 Act):

that the amount of $205,425 being a tax benefit that is refundable to a deduction being allowable to the Cajkusic Family Trust TFN 74645308 (the taxpayer) for the year of income ended 30 June 1997 shall not be allowable to the taxpayer in relation to that year of income.

On the same date the delegate made a determination in similar terms in relation to the sum of $197,125 for the year ended 30 June 1998. In addition the respondent made determinations under s 177F(1)(a) in similar terms in relation to the assessable income of each of the applicants. The respondent further determined under s 177F(2) that the amounts in question (i.e. $205,425 for 1997 and $197,125 for 1998) shall be deemed to be included in the assessable income of each of the applicants by virtue of s 97 of the 1936 Act.

4.      The respondent concedes that in each case the objection decision made by the respondent on the applicant’s objection in respect of the amended assessment for the year ended 30 June 1997 should be set aside and in lieu the taxation objection of each applicant dated 23 June 2003 be wholly allowed.  This concession is made on the basis that in the 1997 year no distribution was made by the family trust in favour of the beneficiaries.  The respondent also concedes that for the 1998 year, in accordance with the terms of the family trust deed the net income should be distributed equally between each of the three beneficiaries.  Accordingly, the respondent is prepared to concede that the objection decision made on each applicant’s objection in respect of the year ended 30 June 1998 should be varied to reflect this circumstance.

5.      For present purposes it is assumed that the payments said to have been made, namely a total of $205,425 in the 1997 year and $197,125 in 1998 were in fact made.  Although the available evidence is inadequate to establish conclusively that the full amount of each of the contributions was in fact made, these amounts are shown as deductions in the accounts of the family trust.  The 1997 accounts show a net loss for that year of $54,838 which has been carried forward into the 1998 accounts which show an accumulated loss at 30 June 1998 of $26,141. If the deductions of $205,425 in 1997 and $197,125 in 1998 were properly disallowed there would not have been any loss to carry forward into 1998 and hence the net profit for 1998 (shown as $28,679 in the Cajkusic Family Trust Trading, Profit and Loss Statement for the year ended 30 June 1998) would be increased by $197,125.

6.      The applicants assert that during the income years ended 30 June 1997 and 30 June 1998 Intex entered into an employee benefit arrangement under which Intex as employer made contributions on behalf of its employees to the trustees of various employee benefit trusts.  The amounts contributed are said to have been:

(a)in relation to the income year ended 30 June 1997, $140,000 on behalf of Branka Cajkusic and $58000 on behalf of Daniel Cajkusic (being a total contribution of $198,000);

(b)in relation to the income year ended 30 June 1998, $65000 on behalf of Branka Cajkusic, $60000 on behalf of Daniel Cajkusic and $65000 on behalf of Milivoj Cajkusic (being a total contribution of $190,000).

It is said further that Intex incurred administrative costs in implementing the arrangement and claimed a deduction for both the contributions and the administrative costs in the income years ended 30 June 1997 and 30 June 1998.  Under the arrangement the trustees of the employee benefit trusts provided the applicants with interest-free loans to purchase units in the employee benefit trusts following which the trustees invested the funds in various entitles which were related parties so that the funds were effectively provided back to Intex.

7.      On 13 June 2001 the respondent issued Intex with a fringe benefits tax (FBT) assessment for the FBT year ended 31 March 1998 which was based on the assertion that Intex provided its employees with a property fringe benefit with a net taxable value of $198,000.  On 2 October 2002 the respondent issued an additional FBT assessment in relation to a property fringe benefit provided to the employees with a net taxable value of $388,000.  The two FBT assessments relate to the contributions referred to above.  Intex has not lodged any objections in relation to the two FBT assessments.  It is common cause that the respondent has lodged a proof of debt in the winding up of Index in relation to the FBT assessment and that no distribution has been made in favour of the respondent in relation to that debt.

8. In addition to the documents required to be lodged with the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 the evidence before the Tribunal includes the witness statements and oral testimony of two witnesses, notably the applicant Daniel Cajkusic and the former accountant of Intex Mr Luciano Columbo together with a number of additional documents tendered in the course of the oral evidence.  In his witness statement (Exhibit 2) Daniel Cajkusic said (at paragraphs 6 and 7):

6.Around January 1997, Mr Ron Scott from Ruskin Financial Services Pty Ltd (“RFS”) approached Milivoj, Branka and me in relation to an employee Share Unit Trust (“the ESUT”) reward remuneration package (“the Plan”) developed by Remuneration Planning Corporation Pty Ltd (“RPC”).  After further discussions with RFS it was decided that the Plan would be implemented beginning from the income year ended 30 June 1997.

7.During the course of discussions with RFS, Milivoj, Branka and I were provided with various documents marketing the Plan, as well as documents to implement the Plan.  Our understanding of the Plan from the various materials that we were provided was that it would provide an effective savings and remuneration structure for key executives of the Employer.

However, the witness did not demonstrate any real understanding of the manner in which the plan was to be implemented nor of the nature and extent of the benefits that would accrue from it.  Mr Colombo was at the relevant time associated with the promoters of the plan but was of little assistance in identifying the process whereby the funds said to have been contributed by Intex were dealt with.  It was entirely unhelpful that none of the relevant documents that would have explained the working of the plan were put before the Tribunal.  Although Intex and indeed it appears the various companies involved in promoting the plan are now in liquidation no explanation was offered as to why relevant records and documents could not be made available.  The clear inference from the available evidence is that whatever contributions Intex may have made pursuant to the plan, the amounts contributed were, through a series of interest free loans or other transactions, returned in full.  The conclusion gleaned from Daniel Cajkusic’s evidence is that the money was ultimately distributed to the applicants as part of their remuneration as employees of Intex.  There is nothing in Intex's accounts to suggest that amounts corresponding to the contributions were ever received by it either by way of loan or otherwise.

9.      Despite the inconclusive nature of the evidence as to what amounts were in fact contributed by Intex pursuant to the employee benefit trusts it is appropriate for the purposes of the present applications to treat the amounts of $198,000 and $190,000 claimed as deductions in Intex's 1997 and 1998 accounts as having been paid pursuant to the plan described in Daniel Cajkusic’s evidence.  The applicants bear the onus of proving that the sums in question represent legitimate deductions for income tax purposes; and if they were legitimate deductions, the further question arises as to whether the amounts were paid pursuant to a scheme which would attract the operation of Part IVA of the 1936 Act.

10. Section 51(1) of the 1936 Act provides that:

51(1)    All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

(Section 8-1 of the 1997 Act provides to the same effect).  There is nothing in the evidence to support the proposition that the contributions made to the employee benefit trusts represented outgoings incurred in gaining or producing assessable income or that they were necessarily incurred in carrying on Intex’s business for the purpose of gaining or producing such income.  The contributions served no business purpose; they were clearly voluntary payments which in no way affected the capacity of Intex to derive income.  Nor is there any material to suggest that the contributions were made to ensure the applicants’ loyalty or productivity or as an incentive to continue in their employment.  The only motivation for making the contributions was the tax savings the applicants sought to achieve.  The requirements for deductibility have not been established.

11.     The reasoning leading to the conclusion expressed in the preceding paragraph is equally applicable to the payments of $7,425 and $7,125 described in the evidence as administrative costs in implementing the arrangement which were respectively claimed as deductions in Intex’s 1997 and 1998 accounts.

12.     As a consequence of the deductions claimed for the year ending 30 June 1997 not being allowable, there was no loss to carry forward from that year; and by reason of the deductions claimed for the year ending 30 June 1998 not being allowable the net income of the family trust for that year increases by $197,125.  Intex, as trustee of the family trust, did not determine to exercise its discretion to distribute income of the trust estate for the year ending 30 June 1998 and accordingly, by virtue of the provisions of paragraph 3(a) of the Deed of Settlement, the applicants became entitled to the net income as tenants in common in equal shares.  In these circumstances it is appropriate (as the respondent concedes) that the amended assessment of income tax issued to each applicant be varied to take account of an increase in taxable income equal to one third of the net income of the family trust for the year ended 30 June 1998.

13.     The respondent’s initial response to the taxation affairs of Intex and the applicants was to treat the contributions claimed to have been made to the employee benefit trusts as a property fringe benefit and assessed the company for fringe benefits tax accordingly.  The first assessment relating to the FBT year ended 31 March 1998 was issued on 13 June 2001.  A subsequent assessment issued on 2 October 2002 took into account the total of the contributions claimed for the years ended 30 June 1997 and 1998.  Despite assertions contained in the promotional material considered by the applicants before becoming involved in the employee benefits plan to the effect that contributions would not attract FBT, the applicants do not now dispute the FBT assessments.  It is of course not a matter for them as individuals to take issue with the FBT assessments which were directed to Intex.  The applicants bear no responsibility in respect of the FBT assessed against their employer.  Intex for its part has never challenged the FBT assessments nor indeed has it ever paid the amount of tax assessment.

14. The applicants contend that the contributions to the employee benefit trusts are not assessable to them on the basis that such contributions are subject to FBT in the hands of the family trust. The applicants rely upon s 23L(1) of the 1936 Act which provides:

23L(1) Income derived by a taxpayer by way of the provision of a fringe benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986 is not assessable income and is not exempt income of the taxpayer.

The short answer to the applicants’ contention is that they have not been assessed on income derived…by way of the provision of a fringe benefit; they have been assessed on their proportionate shares of the increased net income of the family trust which arose as a consequence of the disallowance of the deductions claimed by their employer.  By reason of the disallowance of the deductions it may well be that the factual basis giving rise to the FBT assessments has changed, but that is not a matter presently before the Tribunal and is not a question upon which the Tribunal is prepared to express an opinion.

15. As a corollary to the applicants’ assertions in relation to the operation of s 23L, it is further said that income cannot and should not be effectively taxed twice unless it is Parliament's clear and express intention to do so. The proposition expressed in this assertion is supported by judicial authority, but the facts as they exist here do not reveal a case of double taxation.  The respondent has correctly pointed out that these proceedings concern income tax assessments raised against the applicants.  The question before the Tribunal is the proper interpretation of the law with respect to the deductions claimed by Intex and the consequential effect upon the applicants as beneficiaries of the family trust.

16.     In view of the conclusions expressed earlier in these reasons concerning the non-deductibility of the contributions to the employee benefit trusts made by Intex, it is unnecessary to embark upon a consideration of the application of the provisions of Part IVA of the 1936 Act to the transactions which have been described.

17.     It will be necessary for the assessments of each of the applicants for the year ended 30 June 1998 to be further amended to reflect the outcome of these applications.  This is not a task that the Tribunal should undertake but rather it will be for the respondent to give effect to the changed position and to exercise the statutory powers and discretions in relation to the imposition of any penalties that may be appropriate in the circumstances as they now exist.

18.     The Tribunal proposes, in relation to each application, that:

(a)The objection decision made by the respondent on the applicant’s objection in respect of the amended assessment to income tax for the year ended 30 June 1997 be set aside and in substitution therefor there be a decision that the taxation objection of the applicant dated 23 June 2003 be allowed.

(b)The objection decision made by the respondent on the applicant’s objection in respect of the amended assessment to income tax for the year ended 30 June 1998 be set aside and the matter be remitted to the respondent for reconsideration in accordance with the Tribunal’s findings.

I certify that the eighteen [18] preceding paragraphs are a true copy of the reasons for the decision herein of

The Hon. Howard Olney AM QC,

Deputy President

(sgd)     Elite Aloni

Clerk

Dates of Hearing:  25 November 2005 and 25 January 2006

Date of Decision:  17 February 2006
Counsel for the applicant:         Mr K. James

Solicitor for applicant:               Hall and Wilcox

Counsel for respondent:            Ms D. Harding

Solicitor for the respondent:       Australian Government Solicitor