Confidential and Commissioner of Taxation

[2008] AATA 927

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 927

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/6160

TAXATION APPEALS DIVISION		)
Re		CONFIDENTIAL

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member Bernard J McCabe

Date13 October 2008

PlaceBrisbane

Decision The Tribunal declines to make the orders sought by the applicant on the interlocutory application.

......................[Sgd]........................

Senior Member

CATCHWORDS

TAXATION – Income Tax – Trust distribution – Default assessment – Disclaimer – Whether applicant disclaimed interest under trust – Applicant did have personal knowledge of interest under trust – Solicitor acted as applicant’s agent – Agent had knowledge of applicant’s entitlement – Applicant imputed with agent’s actual knowledge – Applicant did not disclaim interest under trust

Income Tax Assessment Act 1936 (Cth), ss 97, 167

Commissioner of Taxation v Ramsden [2005] FCAFC 39

JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VR 891

Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634

Nathan v Dollars & Sense Finance Ltd [2007] NZCA 177; [2007] 2 NZLR 747

Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716

REASONS FOR DECISION

13 October 2008 Senior Member Bernard J McCabe         

1. This application relates to the Commissioner of Taxation’s decision to raise a default assessment against the taxpayer pursuant to s 167 of the Income Tax Assessment Act 1936 because of his failure to disclose trust distributions as part of his assessable income in 2002. The taxpayer sought review of the objection decision in the Tribunal. An interlocutory hearing was convened to consider a preliminary question. It was agreed the matter would not proceed to a final hearing if I decided the preliminary point in the taxpayer’s favour. I was unable to do that. I gave oral reasons for my decision on 13 October 2008. The respondent subsequently requested written reasons for that decision.

The issue

2. The question I was asked to consider at the interlocutory hearing is whether the taxpayer effectively disclaimed the gift of a beneficial interest in the trust. Unless and until he disclaims his interest, he remains entitled to income under the trust: s 97(1) of the Income Tax Assessment Act 1936. That entitlement arises even if he is unaware of that interest: Commissioner of Taxation v Ramsden [2005] FCAFC 39, at [30] per Lee, Merkel and Hely JJ. Once he learns of his interest, he must act within a reasonable time if he wishes to disclaim the interest effectively: JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VR 891, at 930 per McGarvie J. If he assents to the gift by words or conduct (including inaction, in which case acceptance might be inferred), he is thereafter unable to disclaim the interest: Broomhead, at 931; see also Hardoon v Belilos [1901] AC 118, at 127 per Lord Lindley.

What the taxpayer knew and when he knew it

3.      The taxpayer executed a deed of disclaimer dated 17 April 2007. I accept for the purposes of the argument that the deed would be effective to disclaim any and all interests in the income and the corpus of the trust. That is subject to two provisos:

·the taxpayer must have acted promptly upon learning of his entitlement; and

·he must have done nothing in the meantime which suggested he assented to the gift.

4.      I accept the taxpayer did not in fact know of his entitlement in the sense that he had no personal knowledge of the interest under the trust or the distributions that occurred until shortly before he instructed his accountant to prepare the deed.

5.      The difficulty for the taxpayer is that he instructed a solicitor to act on his behalf in relation to his taxation affairs some months earlier in August 2006. The solicitor’s authority to act on behalf of the taxpayer is clear: the taxpayer signed an authority which instructed the solicitor to represent him in discussions with the Australian Taxation Office. There is no doubt the solicitor became aware of the taxpayer’s interest under the trust in the course of negotiating with the respondent pursuant to the terms of the retainer. I accept the solicitor never communicated that fact to the taxpayer. He may or may not have communicated that fact to the taxpayer’s father, but that is not the same thing.

6.      I was invited to infer that the solicitor had breached his duties to the taxpayer. I accept that serious questions were raised about the way in which the solicitor discharged his obligations as a professional. His conduct merits further scrutiny. But making a finding of fraud on the solicitor’s part is a big step. I do not say that further evidence may not justify such a finding, but I think the question remains open at this stage.

7.      If that issue were determinative, I would have called the parties back to seek further evidence on the point so I could satisfy myself as to what actually occurred. As it happens, I do not think it is determinative.

8.      The authorities make it clear that a principal will be deemed to have actual knowledge of matters communicated to an agent “in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal” provided the agent is under a duty to communicate that knowledge to the principal: Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634, at 658 per Mason J. That knowledge will be attributed to the principal even if the agent does not pass on the information. Mason J went on to explain that the principle applied to a solicitor acting for a client in a conveyancing matter. His Honour said (at 659):

The solicitor is to be regarded as the alter ego of the client and the rights of the other party to the contract cannot be made to depend upon the diligence or lack of diligence exhibited by the solicitor in his dealings with his client.

9.      His Honour accepted the solicitor in Sargent was under a duty to inform his client of what he learned in the course of discharging his instructions. The same duty applies in this case. I accept the taxpayer’s solicitor was obliged to communicate the information he learned about the taxpayer’s interests under the trust.

10.     The taxpayer invited me to find that a fraud exception was available in the circumstances. He argued he should not be held to be aware of matters that had not been communicated to him as a result of a breach of duty. I think the better view of the law is that a fraud exception does not exist provided the third party dealing with the agent is acting in good faith in the sense that the third party does not know the information is being withheld from the principal. There is no evidence here that the Commissioner was aware the information was not being passed back to the taxpayer.

11.     My view on the availability of a fraud exception is consistent with the decision in Sargent. It is also consistent with more recent authorities like the decision of the New Zealand Court of Appeal in Nathan v Dollars & Sense Finance Ltd [2007] NZCA 177; [2007] 2 NZLR 747, which suggested that, in the event of a contest, the person who should bear the loss is the person who made the mistake of appointing an inappropriate agent, or who failed to monitor the agent appropriately. As Professor Dal Pont opined in Law of Agency (2 ed) (LexisNexis Butterworths, Sydney, 2008) at 633 that conclusion is also consistent with the seminal decision of the House of Lords in Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716. In that case, Lord Shaw said (at 740):

the loss occasioned by the fault of a third person … ought to fall upon the one of the two parties who clothed that third person as agent with the authority by which he was enabled to commit the fraud.

12.     I accept the taxpayer in this case was fixed with the agent’s knowledge of the applicant’s entitlements. That is actual knowledge, and it was derived sometime during the course of 2006. The solicitor did not promptly disclaim the interest on the taxpayer’s behalf; indeed, his ill-judged application for informal review appears to have acknowledged the interest. But even if that document is not held against the taxpayer, no action was taken for some time after the point at which he was held to have become aware of his interest. While nice questions arise as to what length of time is a reasonable time in the circumstances, I am not persuaded the taxpayer could be said to have acted reasonably promptly (although I accept he did act reasonably promptly once he was actually told of the entitlement).

13.     In those circumstances, I cannot make the finding the applicant seeks at this point. The proceedings must therefore continue.

I certify that the 13 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed:................................[Sgd]..............................................
  Michael Buckingham, Associate

Date of Hearing  16 July 2008
Date of Oral Decision                13 October 2008
Date of Written Reasons          17 October 2008
Counsel for the applicant          Mr D W Marks
Solicitor for the applicant          Dibbs Abbott Stillman
Counsel for the respondent      Ms M Brennan
Solicitor for the respondent      Australian Tax Office