Direen v D.C.T
[2007] FMCA 895
•8 June 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DIREEN v D.C.T. | [2007] FMCA 895 |
| BANKRUPTCY – Issue of a Bankruptcy Notice – issue to trustee personally – trustee’s personal liability – judgment obtained against named individual as trustee – liability of trustee under Taxation Administration Act. |
| Income Tax Assessment Act 1936, ss.254, 254(1)(b), 254(1)(h) Taxation Administration Act 1953, ss.8AAZA, 8AAZC |
| Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324 Deputy Commissioner of Taxation v Balnaves SG 7150 of 1997 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 David Christie as Trustee for the Moreton Bay Trading Company v Commissioner of Taxation [2004] AATA 1396 Ford & Lee, “Principles of the Law of Trusts”, LBC 1996, para 1560 |
| Applicant: | KAYLENE DELMA DIREEN AS TRUSTEE FOR THE DIREEN FAMILY TRUST |
| Respondent: | DEPUTY COMMISSIONER OF TAXATION |
| File number: | BRG287 of 2007 |
| Judgment of: | Coker FM |
| Hearing date: | 21 May 2007 |
| Date of last submission: | 21 May 2007 |
| Delivered at: | Townsville |
| Delivered on: | 8 June 2007 |
REPRESENTATION
| Solicitors for the Applicant: | Macrossan & Amiet |
| Counsel for the Respondent: | Mr Lynham/Ms Hoyer |
| Solicitors for the Respondent: | Australian Taxation Office |
ORDERS
That the application filed 17 April 2007 be dismissed.
That any submissions as to costs by either party be filed and served within 14 days of today and that each party have a right of reply in relation to same within 7 days of that day.
That any determination in relation to the issue of costs be conducted in Chambers unless otherwise requested by one or other of the parties in writing.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT TOWNSVILLE |
BRG287 of 2007
| KAYLENE DELMA DIREEN AS TRUSTEE FOR THE DIREEN FAMILY TRUST |
Applicant
And
| DEPUTY COMMISSIONER OF TAXATION |
Respondent
REASONS FOR JUDGMENT
This is an application filed on 17 April 2007 by Kaylene Delma Direen as trustee for the Direen Family Trust. The orders that are sought in the application are in these terms:
(a) Final orders sought by applicant.
On the grounds stated in the supporting affidavit or statement of claim the applicant seeks the following orders:
(1)The bankruptcy notice number Q297 of 2007 which was served on me on Friday 30 March 2007 be set aside.
(2)That the respondent pay the applicant's costs of the application on the solicitor and client basis.
(b) Interim orders sought by the applicant.
The applicant seeks the following interim orders:
(1)That the time for compliance with the bankruptcy notice be extended up to and including a period of 21 days after the resolution of this application.
A response has been filed in relation to the proceedings. A notice of appearance was filed on 11 May 2007. An affidavit was also filed in response under the hand of Kylie Burgess, a public servant within the Australian Government in relation to the proceedings that were before the Court. The matter was heard before me on 21 May 2007. At that time detailed submissions were provided to the Court as well as an address by the legal representatives for each of the parties.
A brief background in relation to the matter is important in relation to the determination. The applicant is the trustee for the Direen Family Trust. The applicant was, as trustee, operating the trust in so far as the operation of a business was concerned. On 21 November, following an obvious inability on the part of the applicant and respondent to resolve issues in relation to taxation liabilities, a claim and statement of claim in the amount of $71,688.20 was issued by the respondent against the applicant in her personal capacity, not as trustee of the Direen Family Trust.
The claim was said to arise as a result of the running balance account deficit owing to the respondent by the applicant personally. There was dispute in relation to the proceedings. The applicant filed a notice of intention to defend in relation to the claim and the defence alleged that the applicant, in these proceedings, was not personally liable for the tax debts of the trust, but rather that it was the trust which was liable for those debts.
A reply was apparently filed refuting the assertion in the defence that the applicant was not personally liable and, at a time following the filing of the reply, the applicant then filed an application seeking an order that the name of her as defendant, should be amended to read, Kaylene Delma Direen as trustee for the Direen Family Trust. As I indicated, the original proceedings were simply in the name of Kaylene Delma Direen.
On 26 March 2006, the respondent in these proceedings, advised the legal representatives for the applicant that it maintained that as trustee the applicant was personally liable for the running balance account deficit debt, owing to the respondent. But, it was conceded that they would consent to the defendant's name appearing on the claim and statement of claim being amended to read, Kaylene Delma Direen as trustee for the Direen Family Trust.
As a result of that, consent orders were apparently entered into by the parties and on 10 April, following that change, Pack DCJ of the District Court in Townsville gave judgment against Kaylene Delma Direen as trustee for the Direen Family Trust, in the sum of $80,212.10, being the amount then owing to the respondent, in respect of the primary tax debts owing in respect of the trust.
It would appear, that the applicant's position in relation to this was to, at least on the face of it, consider that there was a debt owing by the trust and that her being named as trustee of the Direen Family Trust, rather than named simply as Kaylene Delma Direen, gave rise to a different consideration in respect of the proceedings.
In fact, the whole of the argument now before the Court, is based on whether there is a distinction that can properly be drawn between the applicant in her personal capacity and the applicant in her capacity as a trustee, for the Direen Family Trust.
It is argued on the part of the applicant that there are in fact two separate legal entities, specifically the individual, Kaylene Delma Direen, and the Trust. It is submitted that the Trust is defined as a fiduciary relationship, where a person holds the title of property for the benefit of another. It is conceded, however, that the Trust is not a separate entity, within the strict meaning of the doctrine, but, that a Trust is often treated as a separate entity, for financial, estate planning and taxation matters.
That is accepted by the respondent, and I would think it is a generally accepted position that can be taken in relation to such proceedings. The difficulty that arises in relation to this matter, however, is that as the Trust is not of itself a separate legal entity, the question of liability, when there is such a liability, and who might be the appropriate person to be named and to take responsibility for same, is the issue to be determined.
The argument on the part of the applicant is that there is a separate position that can and should be taken in relation to the liability of the Trust. The applicant says that the separate entities of Kaylene Delma Direen and Kaylene Delma Direen as trustee for the Direen Family Trust, is in fact recognised by the respondent. In the submission it is contended that this is evidenced by:
(a) The issue of separate tax file numbers to each entity,
(b) The fact that the Trust was registered for GST while Mrs Direen was not so registered, and
(c) The fact that the Trust was required to submit a business activity statement while Mrs Direen personally, was not so required to do.
It is further argued on the part of the applicant, that the separate status of a Trust and a trustee, in his or her individual capacity is bolstered by the operation of s.254 of the Income Tax Assessment Act 1936. This, it is submitted, arises as a result of the interpretations that are open under the subsections of s.254. Section 254 (1)(b) provides that:
“The trustee shall make returns and be assessed on the income, profits or gains of the Trust in his or her representative capacity only”
and further,
“that each return and assessment shall be separate and distinct from any other.”
More particularly, it is argued that the distinction is recognised specifically in s.254(1)(h) which provides as follows:
…for the purpose of ensuring the payment of tax, the Commissioner shall have the same remedies against attachable property of any kind vest in or under the control or management or in the possession of any …trustee, as he would have against the property of any other tax payer...
What is contended therefore, is that there is the capacity to find that there is, in clear language of the legislation, an interpretation as to the meaning of the liability of a trustee and that it is limited to the Trust assets and not to the trustee personally. It is submitted that there is a clear distinction able to be drawn, pursuant to an interpretation of the legislation, between the individual and the individual acting in a representative capacity as trustee.
It is contended for the respondent that an entirely different course is to be followed, in relation to the proceedings. In that regard I am referred specifically to the provisions of the Taxation Administration Act 1953. Section 8AAZC(3) of the Act provides that:
A running balance account "may be established for any entity".
The term "entity" is defined in s.8AAZA(c) to include
“a person in a particular capacity of trustee.”
Accordingly, the respondent says that they were permitted to establish a running balance account for the Trust on the basis that the trustee was the entity to be included pursuant to the definitions, under the Act. It is then argued, pursuant to s.8AAZH of the Taxation Administration Act, that if there is a running balance account deficit debt on a running balance account, at the end of the day, the tax debtor is liable to pay to the Commonwealth the amount of the debt.
The term "tax debtor" is also defined in the definitions section to mean:
In relation to a running balance account - the person or persons who are liable for the tax debts that are allocated to the running balance account.
The respondent therefore says, that as there is no dispute as to the fact that the applicant was, at all relevant times the trustee for the family trust, that it is the applicant, in a personal capacity, who is liable for the running balance account debts owed to the respondent and that therefore, the judgment debt which was defined within the judgment of the District Court is due and owing by the applicant, in a personal capacity, to the respondent.
I was referred particularly to the provisions of Jacobs Law of Trusts 5th Edition at paragraph 2102. Paragraph 2102 is in these terms:
As a general and fundamental proposition the common law does not recognise a trustee as having assumed an additional or qualified legal personality. One consequence of this is that his liability for debts he contracts and torts he commits include those incurred and committed in the course of performance of the Trust and his liability is not limited by or qualified by reference to the extent of the Trust assets. As Latham CJ said in Vacuum Oil v Wiltshire: 'In respect of debts incurred by him in so carrying on the business he is personally liable to the trading creditors - the debts are his debts.' The result is that if the debt is not paid or tort liability is not satisfied the individual trustee may be bankrupted and the corporate trustee wound up.
The argument put by the respondent therefore, is that the clear definitions of the liabilities of a trustee indicate that, as would be the case here, Mrs Direen as trustee for the Direen Family Trust takes on personal liabilities, particularly where, as I understand the position is here, the Trust itself is not in a position to make the payment. The respondent says that the arguments put forward by the applicants have been rejected by various Courts, in situations similar to this.
I was referred particularly to the decision in an unreported case of Deputy Commissioner of Taxation v Balnaves SG7150 of 1997, a decision of Mansfield J, as well as the decision of Senior Member McCabe in the Administrative Appeals Tribunal in the decision of David Christie as trustee for the Morton Bay Trading Company v Commissioner of Taxation.
In Balnaves case, Mansfield J made the following comments in relation to the issue of the operation of a Trust and the liabilities arising:
In my judgment the affairs of the Trust were conducted by Mr Balnaves as its trustee from 1 December 1995.
I should stop there and note, that the information that is before the Court in relation to this proceeding is fairly limited, but there is certainly no suggestion by either party, that Mrs Direen was anything other than the trustee for the Direen Family Trust and conducted the affairs of the Trust at the relevant times giving rise to the liability which is claimed. Mansfield J then goes on:
The consequence of that finding is that Mr Balnaves as trustee was the legal owner of the assets of the Trust and is personally responsible for the debts that he incurred in carrying out the affairs of the Trust: Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367. The Trust itself has no legal personality, but is:
‘…no more than a collection of duties, disabilities, rights and powers in relation to some specific property imposed upon or accorded to an existing legal person, the trustee’ (Ford and Lee, Principles of the Law of Trusts, LBC 1996, para 1560).
It cannot, as Mr Balnaves contends, be directly liable to the Commissioner.
Consequently in my judgment Mr Balnaves was liable to the Commissioner in respect of the tax instalment deductions made for the period in issue, that is, from 1 July 1996.
Mansfield J has, in my view, succinctly and appropriately referred to and considered the position in that case, but also the position that arises in relation to this matter. The Trust itself is not a legal personality. The Trust is simply the collection of, as his Honour indicated, the duties, disabilities, rights and powers in relation to the specific property and they have been imposed upon or accorded to Mrs Direen, as trustee for the Trust.
Senior Member McCabe in the Administrative Appeals Tribunal similarly explained the relevant principles in the decision of Christie to which I have already referred. At paragraphs 22 and 23 Senior Member McCabe said the following:
A trust is not a legal person. A trust is a creature of equity. It is a relationship in which a person holding an interesting property or funds, (the trustee) assumes obligations to manage or apply the property or funds for the benefit of others (the beneficiaries) or for a specific purpose.
23. The Trust does not exist independently of the trustees or the beneficiaries who are involved in the trust relationship. Trusts do not own property and they do not have the capacity to enter into contracts. The trustee is the legal actor. It follows it is inaccurate to say someone is employed by a trust. He or she is employed by the trustee.
The fact is, in relation to this particular matter, that the liability has arisen in relation to operations of the business of the Trust. However, the legal entity is, as it always must be, the individual acting as trustee. There is clearly a liability that arises in relation to such matters. It is clear that there is an obligation which falls upon the trustee in relation to that capacity of acting as trustee for the Trust. It is the trustee that is the legal entity. It is upon the trustee that the obligations fall.
Without hesitation, therefore, I find that the application by the applicant in relation to this proceeding, seeking an order for the bankruptcy notice served upon her personally to be set aside, is fundamentally flawed. The bankruptcy notice is properly served. It is appropriate that the trustee in a personal capacity be liable for the debts of the Trust, in the event of the Trust not, for whatever reason, being able or in a position or willing, to meet those debts.
The liability falls upon the trustee. The application filed 17 April 2007 must therefore fail and the order that I make in relation to same is as follows:
ORDERS DELIVERED
I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Coker FM
Associate: C Herbst
Date: 8 June 2007
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