Capershaw Pty Ltd as Trustee for the Bradley Family Trust and Ors and Commissioner of Taxation
[2004] AATA 1179
•10 November 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1179
ADMINISTRATIVE APPEALS TRIBUNAL )
)No QT2002/131-132,
TAXATION APPEALS DIVISION ) QT2002/212-217
Re CAPERSAW PTY LTD as Trustee for THE BRADLEY FAMILY TRUST
MARION KAY BRADLEY
ERNEST CYRIL BRADLEY
MELISSA KAY BRADLEY
SHEREE ANGELA VENABLES
(nee BRADLEY)Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member K L Beddoe;
Senior Member B J McCabeDate10 November 2004
PlaceBrisbane
Decision The Tribunal makes decisions to the effect that:
(a) the objection decisions assessing the Trustee under sections 169 as liable under section 99A be set aside, and decides in each application that the applicant’s objection be allowed in full;
(b) the objection decisions relating to assessment of income tax payable by the beneficiaries will beset aside and each matter is remitted to the respondent with a direction that each of the individual applicants was presently entitled to an equal share of the net income said to have been appointed to Northbourne as takers in default;
(c) the objection decisions relating to assessment of penalty tax payable by the beneficiaries will be set aside and decisions substituted that penalty tax be assessed in accordance with section 226G of the Act;
(d) there is no basis for exercising the discretion in sub-section 227(3) of the Act; and
(e) these proceedings have terminated in a manner favourable to the applicants.
.........[Sgd].......
K L Beddoe
Senior Member
CATCHWORDS
TAXATION – appropriation of trust income – review of objection decision – purported appointment of income to beneficiary ineffective – consequences of ineffective appointment of income – decision to assess income of trustee set aside
Income Tax Assessment Act 1936 s97, 99, 100A, 166, 166A, 170, 226G, 226H, 227
McPhail v Doulton [1971] AC 424
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) ATC 4111
Ramsden v Federal Commissioner of Taxation [2004] ATC 4659
East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 19 ALD 85
Taxation Case X30 (1990) 90 ATC 287
Jackson v Federal Commissioner of Taxation (1990) 90 ATC 4990
Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394
Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274
Nguyen v Federal Commissioner of Taxation (1999) 99 ATC 2211
Kajewski v Commissioner of Taxation [2003] ATC 4375
Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Federal Commissioner of Taxation v Ryan [2000] ATC 4079
Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243REASONS FOR DECISION
10 November 2004 Senior Member K L Beddoe
Senior Member B J McCabe1. Capersaw Pty Ltd as Trustee for the Bradley Family Trust seeks review of objection decisions by the respondent in relation to the years of income ended 30 June 1995 to 30 June 1997, although only the years ended 30 June 1995 and 30 June 1996 are before the Tribunal.
2. Marion Kay Bradley and Ernest Cyril Bradley seek review of objection decisions in relation to the years of income ended 30 June 1995 and 30 June 1996.
3. Melissa Kay Bradley and Sheree Angela Bradley seek review of objection decisions for the year of income ended 30 June 1996.
4. The multitude of applications arises because the respondent has sought to assess the Trustee under section 99A of the Income Tax Assessment Act 1936 (“the Act”) and beneficiaries of the Trust under section 97 of the Act in relation to the net income of the Trust.
5. Issues also arise as to whether amended assessments were authorised by section 170 and whether the respondent was correct in assessing additional taxes in accordance with Part VII of the Act and, if so, whether those assessed additional taxes should be remitted in part or in full.
6. These matters were heard jointly with other cases which have a common theme of appointment of net income of the relevant family trust to a company correctly described as No 2 Pitt Street Pty Ltd as Trustee of the Northbourne Holdings Unit Trust (“Northbourne”).
7. At the hearing Mr Russell QC appeared with Mr Bickford for all the applicants and Mr Hack SC appeared with Mr Robertson for the respondent.
8. The documents compiled pursuant to s 37 Administrative Appeals Tribunal Act 1975 (the T-documents) were before the Tribunal. There is a generic set of documents (marked T1 to T69) and also sets of documents specific to these applicants marked as Exhibit AR.
9. Further documents were tendered and marked as exhibits and oral evidence was given by John Damian Andrews, Ian Roland Stevens, Ginette Danen Muller, Steven Irvine Hart, Debra Ginette Campbell, Marion Kay Bradley and Ernest Cyril Bradley.
10. By deed of settlement dated 14 January 1982, Steven Irvine Hart settled the Bradley Family Trust, the Trustee being Capersaw Pty Ltd and the Specified Beneficiaries in accordance with clause 1 of the deed being the four individual applicants. No General Beneficiaries were nominated. By force of the definition the Specified Beneficiaries were also General Beneficiaries. Without setting out the detail we are satisfied that “General Beneficiaries” was defined to limit the beneficiaries of the Trust to persons real or incorporated with a familial connection to the Specified Beneficiaries.
11. In particular, clause 1(b)(iii) includes in the definition of “General Beneficiary” any entity which the Trustee may from time to time nominate in writing, as a General Beneficiary, the Trustee of any trust or settlement under which any General Beneficiary is a beneficiary whether present or contingent.
12. The directors of the Trustee (Mr and Mrs Bradley) resolved to participate in a real estate investment in Wodoga by way of acquisition of 400 units in Northbourne on 27 April 1995 (Exhibit 3 IRS 28). The directors were authorised to make the application. It seems the directors relied on what their accountants, Harts Consulting, told them about the project.
13. On 27 April 1995 the Trustee, by its directors, applied for 400 units in Northbourne. In cross-examination Mrs Bradley agreed they anticipated the Trust would have a net income the year ended 30 June 1995 of at least $400,000. Apparently this was done on advice from Mr Hart and for which the Trustee paid a fee of $50,000.
14. For reasons not made clear to us Northbourne issued a Unit Trust Certificate for 1200 units in the name of the Trustee. It is likely this anticipated further investment by the Trustee in Northbourne.
15. By a deed dated 28 June 1995 the Trustee purported to nominate Northbourne as a “General Beneficiary of the Trust”. On the same day the Trustee, by its Directors, resolved as follows:
“It was resolved that the income for the Trust for the year ended 30th of June 1995 be appropriated, set aside and applied to the beneficiaries:
No 2 Pitt Street Pty Ltd as Trustee for the Northbourne Holdings Unit Trust – the first $454,641
Ernest Cyril Bradley – 50% of the balance
Marion Kay Bradley – 50% of the balance
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the Trust, such amount or amounts are to be deemed to be distributed at 30 June 1995 in the same proportion as listed above.”
16. While the document is not dated it appears that also on 28 June 1995 the Trustee, by its directors, resolved as follows:
“The Directors resolved to provide to No 2 Pitt Street Pty Ltd as Trustee for the Northbourne Holdings Unit Trust an acknowledgment of debt in the sum of $454,641 being the sum outstanding pursuant to the distribution made by the Trust. Ernest Cyril Bradley and Marion Kay Bradley were authorised to affix the Common Seal of the company to relevant documents.
The Directors resolved to forward a letter in the terms of that tabled at the meeting agreeing to the terms of repayment of the balance of the distribution outstanding to No 2 Pitt Street Pty Ltd as trustee for The Northbourne Holdings Unit Trust in the sum of $5,624.00 per calendar month.
The Directors were authorised to procure from the Trust’s Bankers a Bank Guarantee in favour of No 2 Pitt Street Pty Ltd as Trustee for The Northbourne Holdings Unit Trust or its assignee in the sum of $100,000 so as to provide security for the acknowledgement of debt given.
It was further resolved that Ernest Cyril Bradley and Marion Kay Bradley be authorised to affix the Common Seal to whatever documents are required for the procurement of said Bank Guarantee.”
17. On 28 June 1995 the Trustee also acknowledged through its directors that the sum of $454,641 was due and owing to Northbourne and that the debt would be repaid by 120 instalments of $5,624.00 commencing on 15 July 1995 or such other date as advised by the creditor.
18. On 21 June 1996 the Trustee resolved as follows:
“It was resolved that the income for the Trust for the year ended 30th of June 1996 be appropriated, set aside and applied to the beneficiaries:
No 2 Pitt Street Pty Ltd as Trustee for the Northbourne Holdings Unit Trust – the first $400,000
Ernest Cyril Bradley – 50% of the balance
Marion Kay Bradley – 50% of the balance
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the Trust, such amount or amounts are to be deemed to be distributed at 30 June 1996 in the same proportion as listed above.”
19. A further acknowledgement of debt for $400,000 was signed by the directors on 21 June 1996 with repayment of $5,624 per month.
20. The 1995 and 1996 income tax returns of the Trustee reflected those resolutions although there was a misdescription of Northbourne in the 1995 return and the amount differed in the 1996 return. The amounts shown as distributed to Northbourne are:
Year ended 30 June 1995 $452,641
Year ended 30 June 1996 $300,000
21. In the 1996 year there was also a distribution of $722 to Melissa Kay Bradley.
22. On 4 October 1996 the Trustee through its directors acknowledged in writing a further debt of $400,000 repayable by 120 monthly instalments of $5,624 – the same repayment rate as applied to the two previous year’s acknowledged debts of $454,641 and $400,000.
23. The basis for this acknowledgement of debt was a resolution of the Trustee on 4 October 1996 as follows:
“It was resolved that the income for the Trust for the year ended 30th of June 1997 be appropriated, set aside and applied to the beneficiaries:
No 2 Pitt Street Pty Ltd as Trustee for the Northbourne Holdings Unit Trust – the first $400,000
Ernest Cyril Bradley – 50% of the balance
Marion Kay Bradley – 50% of the balance
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the Trust, such amount or amounts are to be deemed to be distributed at 30 June 1997 in the same proportion as listed above.”
24. Because the year ended 30 June 1997 is not before us we merely note that there was a constancy in the Trustee’s diversion of the net income to Northbourne. In her oral evidence Mrs Bradley said she saw the investment in the shopping centre as a long term investment. As it transpired the 4 October 1996 resolution was futile because the Trustee had a net loss for the year ended 30 June 1997 (Exhibit AU).
25. In the light of their oral evidence we are satisfied, in the words of Mr Bradley, “we didn’t sort of understand things because a lot of these things I don’t understand” (T504), Mr Bradley admitting he signed his affidavits without fully understanding them.
26. We formed the view that Mr and Mrs Bradley are unreliable witnesses. In view of their explanations we are satisfied that it is more likely than not that they entered into the Northbourne transactions for purposes that included a purpose of avoiding paying tax on net income of the Trust. That purpose was the primary purpose because there is no other objectively determined purpose that justified the transactions. The ill-informed participation in the Northbourne arrangements can only be explained, objectively, by the anticipated savings of income tax which would be otherwise payable.
27. In August 2003 the individual applicants executed documents entitled “Deed of Disclaimer” whereby they purported to disclaim any entitlement to any income of the Trust for the years ended 30 June 1995 and 30 June 1996 in the case of Marion Kay Bradley and Ernest Cyril Bradley, and the year ended 30 June 1996 in the case of Melissa Kay Bradley and Sheree Angela Venables.
Re Northbourne
28. The Northbourne Holdings Unit Trust (Northbourne) was established by deed in 1989 (Exhibit F) for the purpose of acquiring and redeveloping real property known as No 22 Pitt Street, Sydney.
29. For reasons not apparent to us and not relevant to these proceedings, the investment was unsuccessful and Northbourne incurred substantial losses. The 20 issued units were held for the benefit of Northbourne Rural Property Trust.
30. At all relevant times No 2 Pitt Street Pty Ltd was the Trustee (initially the company was known as Northbourne Holdings Pty Ltd but nothing turns on the change of name).
31. In or about 1995 (probably March 1995), Harts Consulting Pty Ltd (“Harts”), a company controlled by Steven Irvine Hart, acquired the units in Northbourne and the two shares issued in No 2 Pitt Street Pty Ltd. It is reasonable to infer, and we do, that the purchase of Northbourne was for the purpose of getting access to approximately $13.5 million in accumulated losses resulting from the unsuccessful Pitt Street development. Northbourne does not appear to have had any commercial value at March 1995 or at any time immediately thereafter except for any value of tax losses.
32. While the evidence of Mr Stevens made it apparent to us that proper process was not a strong point of Harts so that it could be said that the share transfer was not properly executed, we accept that the company controlled No 2 Pitt Street Pty Ltd effectively from probably March 1995.
33. In the years of income ended 30 June 1995 through to 30 June 1999, Harts promoted a scheme whereby Trustees of family trusts were invited to acquire units in Northbourne on the basis of one unit for each $1,000 of net income of the family trust appointed to Northbourne. Essential to this arrangement was the need for the Trustees of the family trusts to add Northbourne as a general beneficiary of the family trust. Fees at 12% were payable to Harts.
34. As already noted, the Trustee nominated Northbourne as a General Beneficiary of the Trust by resolution dated 28 June 1995.
35. In pursuance of the scheme, the Trustee appointed income to Northbourne as set out above.
36. On the basis of the evidence of Mr Stevens, Ms Campbell and Exhibit G, we are satisfied that there was no intention that the family trusts would be required to repay the acknowledged debts, being the unpaid distributions in favour of Northbourne. Northbourne had limited recourse only for unpaid amounts, being the right to redeem the units issued to the family trusts by Northbourne.
37. Northbourne, guided by Harts, purported to enter into contracts for the purchase of the Birralee Shopping Centre. The respondent initially contested that the shopping centre was never purchased. Certainly Harts represented that the purchase had taken place in stages with completion by December 1997 (Exhibit F). The documents before the Tribunal are not complete as to purchase of the shopping centre and shops but we are satisfied that it is more likely than not that Northbourne had contracted to purchase the centre. We are uncertain as to actual dates of purchase but note that the report in Exhibit H by Ms Muller indicates date of purchase as 5 July 1996 for $2.8 million. We are satisfied that is in relation to the Centre but does not include the purchase of some strata title shops. It is apparent, however, that final settlement in the purchase of the shopping centre and shops did not occur until February 1998 with a payment of $4.2 million funded by borrowing from Metway Bank.
38. The borrowing by Northbourne from Metway Bank was secured by bank guarantees to be provided by the unit holders in Northbourne, that is the respective Trustees of the family trusts including the present applicant Trustee. The Trustee provided a guarantee dated 5 February 1997 for an amount of $300,000.
39. Northbourne instituted proceedings in the Supreme Court of Victoria regarding matters arising out of the Birralee project. Copies of two judgments by Balmford J are part of Exhibit B. We have read the judgments but nothing arises from them in the context of this matter other than to explain one of the factors delaying the Birralee development.
40. The investment scheme for the Birralee Shopping Centre did not promise any profit to the unit holders in Northbourne until the tenth year of the scheme. It is apparent to us from the material before us that any ultimate return to unit holders depended on a successful sale of the shopping centre after, it may be assumed, ten years.
41. We are satisfied that the applicant Trustee was motivated by two factors when entering into the arrangements proposed by Harts, namely:
(a)the avoidance of income tax on net income in the relevant years;
(b)the projected ultimate return; and
(c)the understanding that income tax payments would be deferred for up to ten years.
42. Ultimately the development of the shopping centre failed and the company is in liquidation. Northbourne’s investment in the development appears to be worthless. That is not to say that the shopping centre was other than a reality – it was probably overly ambitious in its concept but we accept that the proposal put to the Trustee was such that it could not be foretold to be a failure. In deciding to go into the scheme the applicant Trustee made decisions which included the investment in the shopping centre. We accept that the investment decision followed the decision to appoint the net income to Northbourne and, we infer, it is unlikely the investment decision was made independently from the decision to appoint the net income to Northbourne.
43. The arrangements entered into by the Trustee have their genesis in advice to the directors of the Trustee by Steven Irvine Hart. Mr Hart was called to give evidence. He answered formal questions but refused to answer questions relevant to the arrangements in question on the grounds that he claimed the privilege against self-incrimination. The basis for this claim is set out in Exhibit 2. The Tribunal accepted that he was not required to answer questions where the privilege was claimed. The Tribunal does not draw any inferences from the fact that Mr Hart claimed the privilege.
Consideration
44. Detailed written submissions were made on behalf of the applicants and the respondent. These were explained and supplemented by oral submissions.
45. By clause 2 of the Deed of Settlement (“Trust Deed”) the Trustee stood possessed of the Trust Fund as defined and income thereof upon the trusts and subject to the powers and provisions expressed in the Trust Deed.
46. Clause 3 of the Trust Deed provides for the Trustee to determine the net income of the Trust Fund for each accounting period and may, in its complete discretion, at any time prior to the expiration of each accounting period until the Vesting Day, determine in respect of all or part of the net income for such accounting period to do all or any of the following:
(a)to pay, apply or set aside the net income for any one or more of the General Beneficiaries living or in existence at the time of the Trustee’s determination;
(b)to accumulate the net income; or
(c)to pay, apply or set aside for such charitable purposes as the Trustee may think fit.
47. We understand, as a question of law, that where a Trustee exercising its discretion decides to distribute the net income of the trust, the Trustee must ensure that a proposed appointee is within the range of beneficiaries (in this case general beneficiaries as defined), that the quantum of the distribution is appropriate and takes into account the interests, including needs, of all beneficiaries.
48. In McPhail v Doulton [1971] AC 424 at 449 Lord Wilberforce expressed the law as follows:
“Any Trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, the particular grant was appropriate.”
49. In this case the Trustee clearly failed Lord Wilberforce’s test. Northbourne was clearly not a general beneficiary and therefore it was not within the Trustee’s power to appoint income to it. We have come to that conclusion because we are satisfied that Northbourne was not an entity contemplated by the definition of “general beneficiary”.
50. That definition reads as follows:
“1(b) The ‘General Beneficiaries’ means:
(i)the Specified Beneficiary and the Specified Beneficiaries;
(ii)the brothers and sisters, spouses, children and grandchildren of the Specified Beneficiary or Specified Beneficiaries and the spouses children and grandchildren of such brothers and sisters, spouse, children and grandchildren; and
(iii)any of the following entities whether formed in Australia or elsewhere which the Trustees may from time to time in writing nominate as a General Beneficiary (subject to Clause 10 hereof) namely:
Athe Trustees (in their Capacity as such) of any trust or settlement (called an eligible Trust) under which any General Beneficiary hereinbefore referred to is a beneficiary whether present or contingent;
Bany corporation (called an eligible corporation) at least one share in which is owned by any General Beneficiary hereinbefore referred to or by the Trustees of an eligible Trust;
Cany other legal entity at least one share or other interest (whether present or contingent) in which is owned or held by any General Beneficiary hereinbefore referred to or by the Trustee of an eligible Trust or by any eligible corporation;
(iv)such additional persons corporations and Trusts (if any) as are named and described or defined in the Schedule as additions to the class of General beneficiaries;
PROVIDED HOWEVER that:
(1) Any person from time to time being the Settlor the Guardian the Appointor or the Trustee or Trustees hereof or any other person or corporation settling property on the Trusts of the Settlement (herein called “an excluded person”) and also
(2) Any corporation in which and the Trustees of any Trust in or under which and any other legal entity in which any excluded person has any actual or contingent beneficial interest so long as such interest continues are excluded from the class of general beneficiaries –
Aunless specifically included in the Schedule as a Specified Beneficiary; or
Bfor all purposes except as an Additional Income Beneficiary if specifically included as such in the Schedule;
PROVIDED FURTHER that the Trustees at any time and from time to time may declare in writing (subject to Clause 10 hereof and not otherwise) that any person who would otherwise be a General Beneficiary under paragraphs (i), (ii), (iii) or (iv) of this sub clause (b) shall be excluded from the class of General Beneficiaries and shall as from the date of making each declaration be modified accordingly but so that this power shall not be capable of being exercised so as to derogate from any interest to which such General Beneficiary has previously become indefeasibly entitled whether in possession or reversion or otherwise;”
51. Insofar as it may be said that the Trustee was a beneficiary of Northbourne, we are satisfied that the Trustee itself is not within the defined meaning of General Beneficiary so that the fact of it being a beneficiary in Northbourne does not thereby make the Trustee a General Beneficiary as defined. Whatever doubts may exist as to the certainty of the definition should be resolved on the basis that there is a clear intention that the Trustee would not be a General Beneficiary as defined. That intention is evident from construction of the definition itself.
52. We are satisfied, as submitted for the applicants, that the purported nomination of Northbourne as a General Beneficiary was ineffective. It follows that there was not an effective appointment of net income to Northbourne in the years of income before the Tribunal.
53. Without more, clause 3(e) of the Trust Deed would apply. It reads:
“Subject to the provisions of Clause 29 hereof the Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to the end of such Accounting Period pursuant to paragraph (b) of this Clause in Trust successively for the persons described in paragraphs (a), (b) and (c) of Clause 4 hereof as though the last day of such Accounting Period were the Vesting Day.”
54. Clause 29 provides in effect for the Trustee to make a declaration that clause 3(e) does not apply to some or all of the net income of an accounting period. No such declaration has been made on the material before us.
55. Clause 4 is an extensive provision which we need not set out. In the context of these matters its general effect is that the takers in default of an ineffective determination of appointment of net income are the Specified Beneficiaries taking in equal shares.
56. The Specified Beneficiaries are the four personal applicants:
§Ernest Bradley
§Marion Kay Bradley
§Sheree Angela Bradley
§Melissa Kay Bradley
57. Insofar as the minutes of the Trustee dated:
§28 June 1995 (Exhibit E: IRS-28/62)
§20 June 1996 (Exhibit AT)
§4 October 1996 (Exhibit E:IRS28/46)
suggest either that the balance of the net income or any amount included in the assessable income of the Trust are deemed to be distributed “in the same proportions as listed above” or similar wording, we are satisfied those resolutions are ineffective on their face. This is because each of the resolutions clearly intend a distribution to Northbourne. Such a purported appointment of income is beyond the power of the Trustee so that the resolution can have no further effect. There is nothing in the material to suggest that the Trustee ever intended to accumulate the net income in any relevant year of income.
58. We are satisfied that because those resolutions were ineffective, clause 3(e) of the Deed of Settlement operated so that the default beneficiaries (that is, the Specified Beneficiaries) became presently entitled, at 30 June of each year of income, to the net income of that year of income in equal shares, that is, 25% of net income each. Insofar as it is suggested that the beneficiaries only became presently entitled after midnight on 30 June of each year of income, we do not follow what was said by Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) ATC 4111 at paragraph 38.
59. In the BRK case the Trustee was Trustee of a discretionary trust with power to accumulate income or to distribute income to the beneficiaries set out in the schedule to the Trust Deed at the discretion of the Trustee. To the extent that the Trustee had not decided to accumulate income and had not decided to distribute income during the year of income, the Trustee was held to have a reasonable time after the last day of the year of income to exercise the duty to consider whether net income should be accumulated and/or distributed before the default clause in the Trust Deed took effect, that is, the default clause did not require the discretions as to accumulation and distribution to be exercised within the relevant year of income.
60. In Ramsden v Federal Commissioner of Taxation [2004] ATC 4659, Spender J said at paragraphs 32 to 37 as follows:
“32. I do not agree that because the Trustee had had until the last instant of the 1996 year to exercise its discretion, the effect of the default clause would be to include the income in the default beneficiaries’ taxable income, not in 1996 year but in the next year of income. I respectfully am unable to agree with the observations of Cooper J at 356 in this aspect of his Honour’s judgment in BRK (Bris), namely that where the discretion to the Trustee remained open until the last moment of the income year to exercise:
‘Default, in these circumstances, would not have occurred until the income year had expired. Thereafter, if the default proviso were effective and valid, it would have taken effect according to its tenor. The consequence would be that in the subsequent financial year, the default beneficiaries would become entitled to income of the Trust earned in the previous financial year. However, the position would remain that as at the end of the financial year, there was no beneficiary presently entitled to the income.’
33. The default clause in the Trust Deed, cl 3(e), is similar to the clauses in the trust deeds considered in Commissioner of Taxation v Marbray Nominees Pty Ltd (1985) 81 FLR 280 (“Marbray”) and East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 (“East Finchley”). Clause 3(4) of the Trust Deed considered in Marbray provided:
‘The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectually made in relation to such Accounting Period in trust successively for the persons described in sub-clauses (1) (2) (3) and (4) of clause 4 hereof.’
34. Tadgell J in Marbray said, at 292:
‘Clause 3(4) is obviously intended to be capable of operation upon the net income of the trust fund from year to year, save in so far as that income is not the subject of a determination pursuant to cl 3(1) to pay or apply it or to set it aside or accumulate it. Clause 3(4) and (5) could not so operate if the expression “person described” in cl 3(4) were construed to mean, in effect, “the Specified Beneficiaries who shall be living on the Vesting Day”. Clause 3(4) is not concerned at all with the factual position on the Vesting Day. It is concerned to identify individuals, alive at the time it operates, by reference to their description in cl 4 and not by reference to their condition on the Vesting Day.
It follows that, in accordance with the deed, the respondent held the net income of the trust in each of the two years in question on trust for the specified beneficiaries.’
35. Clause 4.2 of the relevant Trust Deed considered in East Finchley provided:
In the event that the Trustee shall fail to make an effective determination in accordance with cl 4.1 hereof prior to midnight on the last day of any accounting period then any such income not paid or applied or set aside or accumulated (hereinafter called “the undistributed income”), or, where a determination has been made under cl 4.1 to accumulate income and such accumulation would be void then the Trustee shall hold the undistributed income upon trust for the persons successively described in paras (a) to (e) of the second schedule as shall then be living and if more than one in any paragraph in equal shares …’
36. Hill J said at 468:
‘Should it have turned out that the resolution was either legally ineffective to constitute present entitlement in the overseas beneficiaries or if it should have been the case that the discussion as to the overseas beneficiaries never happened or indeed if it had been the case that the resolution was a sham intended as a disguise to deceive the Commissioner or that the acts done by Dr Thomas overseas were a sham, then the consequence would be that the default beneficiary clause would have come into operation and the beneficiaries entitled under it would have been presently entitled to the whole of the income of the estate not otherwise disposed of by the resolution to the immediate family of Dr Thomas. This being the case there would have been no part of the net income of the trust estate that had not been dealt with either under s 97 or 98 with the consequence that s 99A of the Act could not have applied and the assessment would have been shown to have been excessive.’
37. In each of Marbray and East Finchley, the court indicated that the income for the relevant year, where there was an ineffectual appointment by 30 June, went to the takers in default.”
61. Accepting that the purported nomination of Northbourne as a beneficiary was ineffective, and accepting that the Trustee did not determine to accumulate any of the net income in each relevant year of income, there was default by the Trustee in respect of the net income said to have been appointed to Northbourne during each year of income.
62. It follows, in our view, that the Trustee holds so much of the net income, in respect of which no effective determination was made, for the beneficiaries described in clauses 4(a), 4(b) and 4(c) successfully as though the last day of each accounting period (here the same as the year of income) was the Vesting Day.
63. Clause 4(a) is the primary clause and has the effect of appointing the net income (in default of an effective determination) to the Specified Beneficiaries, who are:
§ Marion Kay Bradley;
§ Ernest Cyril Bradley;
§ Melissa Kay Bradley;
§ Sheree Angela Venables (nee Bradley).
They take in equal shares as tenants-in-common.
64. In coming to that view we have accepted the submission for the applicant to the effect that the residual income provisions of the distribution minutes do not apply to amounts purported to have been appointed to Northbourne. The Trustee intended that the distribution of net income to Northbourne have effect and the whole of the arrangements entered into by the Trustee with Northbourne can only be explained by the Trustee having that intention. Clearly there was no basis for the Trustee to acknowledge debts owing to Northbourne except for the unpaid purported appointments of net income in favour of Northbourne.
65. In East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 19 ALD 85, the issue was whether the taxpayer company had been correctly assessed in accordance with section 99A of the Act. The company was Trustee of a discretionary trust. The company, as Trustee, purported to determine a distribution of net income to non-resident beneficiaries. The Commissioner assessed the company on the basis that the purported distributions were made in connection with a reimbursement agreement.
66. The case proceeded on the assumption that the non-resident persons, the object of the Trustee’s determination, were in fact beneficiaries of the Trust. In that sense it is different to the present case because the applicants have not sought to argue that the appointment of income to Northbourne was effective.
67. In the course of his judgment, Hill J made it clear that where there is no present entitlement to net income vesting in the relevant persons, section 100A of the Act has no operation.
68. So instructed, we are satisfied section 100A has no effect on the facts of this case given that we are satisfied that it is the default beneficiaries, and not Northbourne, who were presently entitled to the net income sought to be appointed to Northbourne. We are further satisfied, for the reasons given by Spender J in Ramsden, that the default beneficiaries were so presently entitled in the respective years of income, the Trustee having made no decision to accumulate the net income of each year of income.
69. Each of the default beneficiaries has purported to disclaim any entitlement to any income of the Trust for the years ended 30 June 1995 and/or 30 June 1996 except such as may have been specifically paid to or applied for the benefit of the beneficiary and, in particular, purported to disclaim any entitlement to any income which might otherwise have accrued under clause 3(e) of the Deed of Settlement.
70. As set out in paragraph 53 above, clause 3(e) provides that any net income not the subject of an effective determination is to be held on trust successively for the persons described in paragraphs (a), (b) and (c) of clause 4.
71. We note that it is not suggested that the Trustee made a determination within the terms of clause 29 of the Trust Deed. In general terms such a determination would have the effect that clause 3(e) would not apply to so much of the net income for an accounting period for which there was not an effective determination pursuant to clause 3(b).
72. Paragraph 4(a) relevantly provides for the benefit of the specified beneficiaries being the personal applicants.
73. Paragraph 4(b) provides for siblings of specified beneficiaries and paragraph 4(c) provides for next of kin of specified charitable purposes.
74. The applicants submit, in effect, that a beneficiary under a discretionary trust is entitled to disclaim any income appointed to the beneficiary in a particular year, while not in any way precluding the Trustee from giving consideration to the appointment of income to that same beneficiary in another year. The applicants submit that the decision of the Tribunal in Taxation Case X30 (1990) 90 ATC 287 is wrong in law.
75. As the respondent points out the disclaimers were executed after the objection decisions under review had been made (in May 2002). The disclaimers are dated in August 2003 – dates later than the institution of the proceedings in this Tribunal and more than three years after the respondent notified the assessments before the Tribunal.
76. The respondent submits that the disclaimers, having been executed after the date of the respondent’s objection decisions, are not relevant to these proceedings. In Jackson v Federal Commissioner of Taxation (1990) 90 ATC 4990, Burchett and Von Doussa JJ agreed with reasons given by Hill J which included the following at pages 5005-6 where Hill J, after citing authorities said:
“The passages cited point out with some force that it is for the taxpayer to show that the assessment objected to is excessive. They do not, however, support the view that the issue before the Court or a tribunal is other than the review of the objection decision. To succeed in that review the taxpayer must, conformably with Dalco and with sec. 190(b) of the Act, show that the assessment does not represent his true tax liability, but the review or appeal, as the case may be, is not, as other proceedings in the law are not, wholly unconfined; it must be limited to events affecting that substantial liability no later than the date upon which the objection decision is made.”
77. It is obvious, on the facts, that the respondent could not have considered the disclaimers when making the objection decisions because they had not been executed.
78. We have considered whether we should take the disclaimers into account because of their expressed retrospective effect.
79. We doubt that a disclaimer can apply retrospectively where, on the facts of these cases, the donee has been aware of the ineffective appointment of income and the claimed operation of default provisions, however imperfectedly understood. It took the beneficiaries more than three years to say, in effect, “no – that is not mine because I have disclaimed”.
80. In our view, whatever may be the effect of the disclaimers they did not have the effect of ceasing present entitlement up to the time of the objection decisions because they:
(a) were not made in a timely manner to rebut the operation of clause 3(e); or
(b)did not effect any change in the operation of clause 3(e) at the time of the objection decision; or
(c) were not relevant to a review of the objection decision.
81. In Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394, Latham CJ considered an appeal from the Taxation Board of Review concerning assessment of income said to have been derived by a trust created in favour of the taxpayer’s former wife. The appeal was allowed on the basis that the trust had not been created.
82. However, his Honour also considered whether the taxpayer should succeed because the trust net income was for the benefit of the taxpayer’s former wife (if the creation of the trust is assumed).
83. At page 401 his Honour said:
“If, however, it were held that a trust had been created by the transfer of the shares with the intention of conferring benefits upon Mrs Corfield and some sufficiently identifiable members of the taxpayer’s family, the case for the taxpayer would nevertheless fail because, as Holroyd J in Townson v Tickell (1) said (speaking of a devise): ‘I think that an estate cannot be forced on a man. A devise, however, being prima facie for the devisee’s benefit, he is supposed to assent to it, until he does some act to show his dissent. The law presumes that he will assent until the contrary be proved; when the contrary, however, is proved, it shows that he never did assent to the devise, and, consequently, that the state never was in him’.”
84. That Holroyd J was being cited with approval is made clear at page 402 where Latham CJ said:
“The result, therefore, is that, even if the evidence were sufficient to establish a trust in favour of Mrs Corfield in the absence of evidence of dissent, the dissent which is proved makes it impossible to hold that a trust in her favour continued to exist. Accordingly, there was a resulting trust of the shares in favour of the taxpayer, and the dividends received from the shares, together with the small sums of interest paid by Cornell Ltd on retained moneys, were the income of the taxpayer.”
85. In Cornell the dissent was notified upon Mrs Corfield’s solicitors becoming aware of the supposed trust for her benefit.
86. In Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274 the Federal Court (Gummow J) allowed an appeal against a decision of the Tribunal to the effect that the beneficiary being not aware of the existence of a trust and that she was an object of the discretionary trust, the income was not her assessable income. His Honour said, in effect, that the taxpayer had acknowledged the existence of her interest in the trust and received income. The decision was upheld on appeal to the Full Court (91 ATC 4213).
87. As Senior Member Beddoe said in Nguyen v Federal Commissioner of Taxation (1999) 99 ATC 2211 at 2217 this is not a case of disclaimer upon becoming aware of an interest in the trust fund. This is an attempt to undo the past, an attempt destined to be ineffective in relation to income derived in earlier years. In the circumstances of this case it is reasonable to infer that the beneficiaries knew they may become presently entitled to the net income of each year of income unless the Trustee either decided to accumulate or, as it transpired, took some other step to avoid their present entitlement. That other step was to purport to introduce Northbourne as a beneficiary presently entitled to net income. That step failed in its purpose and the beneficiaries’ expectation that they may become presently entitled was realised. In our view a retrospective disclaimer in those circumstances is ineffective. Whether a court would allow the Trustee to redo the resolution of the net income in each year of income is not something this Tribunal can decide.
88. In the case of Marion Kay Bradley we infer the respondent made an assessment of income tax due and payable for the year ended 30 June 1995 and that the amended assessment notified on 30 April 2002, now in issue, was so notified more than four years after the original assessment was due and payable. In respect of the year ended 30 June 1996 the respondent notified an original assessment dated 29 July 1997 with tax due and payable on 1 September 1997 and notified an amended assessment, now in issue, dated 11 September 2001 i.e. more than four years after the original assessment was due and payable.
89. In the case of Ernest Cyril Bradley we also infer the respondent notified an original assessment of income tax due and payable for the year ended 30 June 1995 and that an amended assessment notified on 30 April 2002, now in issue, was so notified more than four years after the original assessment was due and payable. In respect of the year ended 30 June 1996 the respondent notified an original assessment dated 30 July 1997 with tax due and payable on 1 September 1997 and notified an amended assessment, now in issue, dated 11 September 2001, i.e. more than four years after the original assessment dated 30 July 1997 with tax due and payable on 1 September 1997 and notified an amended assessment now in issue, dated 11 September 2001, i.e. more than four years after the original assessment was due and payable.
90. In the case of Melissa Kay Bradley a refund notice issued to her on or about 30 July 1997 showing a taxable income of $3,180 and no tax payable. The respondent made an assessment of income tax payable, now in issue, which was notified in a notice of assessment dated 13 September 2001.
91. In the case of Sheree Angela Venables, there being no prior notice from the respondent a notice of assessment dated 10 September 2001 notified the making of an assessment of income tax now in issue.
92. We doubt that the quantum of any of the amended assessments is correct.
93. In the context of the beneficiaries the respondent shall make an assessment of the amount of the taxable income and the tax payable thereon from the returns and from any other information in the respondent’s possession (section 166 of the Act). No issue of deemed assessments arises in relation to the beneficiaries because they are not a relevant entity for the purposes of section 166A.
94. Each of the beneficiaries failed to disclose in their income tax returns that they were presently entitled to a share of net income for the respective years of income due to the operation of clause 3(e) of the Trust Deed. The result was that there was an avoidance of tax.
95. To the extent that it is necessary to so decide, we are satisfied that the avoidance of tax was due to evasion of tax by the Trustee’s appointment of net income to Northbourne in the 1995 and 1996 years of income but with the evident intent that the said net income not be paid to Northbourne, and we so find. It follows, in our view, that where necessary paragraph 170(2)(a) of the Act authorised the making of the amended assessment because the only apparent explanation of the Trustee’s action was to avoid payment of tax by the Trustee and the beneficiaries on net income of the Trust said to have been appointed to Northbourne but in fact derived by the beneficiaries.
96. In coming to that conclusion we have been instructed by the dicta of Drummond J in Kajewski v Commissioner of Taxation [2003] ATC 4375 at page 4400 paragraph 111 where his Honour also referred to the judgment of Dixon J in Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 313 as follows:
“Dixon J said of the word ‘evasion’ in a statute not materially different from s 170(2) in words applicable to this provision:
“…I think it is unwise to attempt to define the word ‘evasion’. The context of s 210(2) shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.””
97. In Federal Commissioner of Taxation v Ryan [2000] ATC 4079, the High Court reconsidered and followed the earlier decision in Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 where the High Court had “decided that the preparation and issue of the refund advice sent to the taxpayer….which said that no tax was payable, was not the making of an assessment within the meaning of the Act”.
98. In Ryan the respondent had notified a “refund notice” in December 1987 and then notified an assessment for tax due and payable in February 1994 (i.e. more than six years after the notification of the refund). Decisions in the Federal Court had not followed the decision in Batagol. On appeal in the High Court the Commissioner contended that sub-section 170(3) of the Act as it then read did not preclude the making of the assessment.
99. Sub-section 170(3) of the Act, as it was relevant to the decision in Ryan, read as follows:
“Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.”
100. In Ryan at ATC 4086 the joint judgment of Gleeson CJ, Gummow and Hayne JJ, after citing previous decisions said:
“31. …The Full Court in Batagol dealt with a case stated by a single justice pursuant to s 18 of the Judiciary Act 1903 (Cth). The facts stated in the case related to three years of income – the years ended 30 June 1952, 1953 and 1954. The taxpayer lodged returns of income for each of those years. The case stated revealed that officers of the Commissioner had examined each of the taxpayer’s returns and, in respect of each year, formed the opinion that, by reason of accrued losses carried forward, the taxpayer was not assessable to tax upon the return, although it disclosed what would otherwise be a taxable income. That is, in each of the three years in question the Commissioner ascertained the taxpayer’s taxable income and ascertained that no tax was payable on it. Each return was noted accordingly but no notice of this conclusion was given to the taxpayer in respect of either the 1952 or 1953 tax years.
32. In April 1955, the Commissioner sent to the taxpayer a ‘refund advice’ and a cheque for an amount equal to the instalments of tax that had been deducted from sums earned by the taxpayer during the 1954 tax year and remitted to the Commissioner. The refund notice ‘contained the statement that no tax was payable on the income shown in the return’.
33. In June 1955, the Commissioner issued notices of assessment to the taxpayer. Each notice stated an amount of tax payable in respect of the taxpayer’s taxable income in each of the three years. The questions stated for the opinion of the Full Court included whether, prior to the assessments the subject of the June 1955 notices, ‘the Commissioner [had] made an assessment within the meaning of the Act in respect of the taxpayer’ for any of the three years and whether the Commissioner had power to make the assessment the subject of the notice in respect of each of the three years. The Court answered the former question ‘no’ in respect of each year and the latter question ‘yes’ in respect of each year. That is, the Court decided that the preparation and issue of the refund advice sent to the taxpayer in April 1955, a refund statement which said that no tax was payable, was not the making of an assessment within the meaning of the Act.”
101. Section 226H of the Act provides, subject to Part VII, that if a taxpayer has a tax shortfall for a year and the shortfall, or part of it, was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of the Act or Regulations then the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part of it.
102. Sub-section 227(3) of the Act provides for a discretion to remit the whole or any part of additional tax payable under a provision in Part VII.
103. The respondent submits that the required recklessness arose from the recklessness of Mr Hart (and it might be added – his organisation) as tax agent for the Trustee (and the other applicants). The respondent submitted that Mr Hart was reckless as to the tax consequences of the scheme.
104. It is also submitted that the applicant beneficiaries were personally reckless in accepting the advice of Mr Hart to whom they were giving 12% of the distributions for entry into the scheme. The respondent also made other submissions about the applicants being grossly careless.
105. In the context of the beneficiaries we are of the view that their conduct must be considered separately to the conduct of the Trustee when considering the individual tax returns lodged by the beneficiaries. While the conduct of the tax agent may be relevant we are unable in these cases to come to a fair view of the conduct of Mr Hart and his organisation. In particular, we are unable to come to any view as to the conduct of Mr Hart in the context of his clients’ financial affairs on the one hand and his clients’ income tax affairs on the other hand. We are therefore unable to be satisfied that there was relevant conduct that could be described as reckless in the terms of section 226H.
106. We are satisfied, however, that there was a lack of reasonable care by both the beneficiaries and the tax agent in relation to the beneficiaries’ income tax returns. This is because both seem to have disregarded the effect of the Trust Deed in preparing the relevant income tax returns and, in particular, failed to recognise that the appointment of net income to Northbourne had not been made in accordance with the Trust Deed.
107. In our view the beneficiaries and the tax agent displayed a lack of reasonable care in lodging the income tax returns so that there was a resulting tax shortfall in relation to the beneficiaries. That satisfies us that the appropriate provision is section 226G of the Act. That section assesses penalty tax where a tax shortfall is caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or the Income Tax Regulations. We are satisfied that was the case in these matters. The evident lack of reasonable care does not justify any favourable exercise or discretion (section 227(3)).
108. For these reasons the Tribunal makes decisions to the effect that:
(a)the objection decisions assessing the Trustee under sections 169 as liable under section 99A be set aside, and decides in each application that the applicant’s objection be allowed in full;
(b)the objection decisions relating to assessment of income tax payable by the beneficiaries will be set aside and each matter is remitted to the respondent with a direction that each of the individual applicants was presently entitled to an equal share of the net income said to have been appointed to Northbourne as takers in default;
(c)the objection decisions relating to assessment of penalty tax payable by the beneficiaries will be set aside and decisions substituted that penalty tax be assessed in accordance with section 226G of the Act;
(d)there is no basis for exercising the discretion in sub-section 227(3) of the Act; and
(e)these proceedings have terminated in a manner favourable to the applicants.
I certify that the 108 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe and Senior Member BJ McCabe
Signed: T Ritchie
Associate
Dates of Hearing 18-26 September 2003 and 27 October 2003
Date of Decision 10 November 2004
Counsel for the Applicant Mr Russell QC and Mr Bickford
Solicitor for the Applicant Abbott Tout
Counsel for the Respondent Mr Hack SC and Mr Robertson
Solicitor for the Respondent ATO Legal Practice
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