Grant and Commissioner of Taxation (Taxation)
[2024] AATA 427
•12 March 2024
Grant and Commissioner of Taxation (Taxation) [2024] AATA 427 (12 March 2024)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2013/5605, 2013/5606, 2013/5607,2013/5608, 2013/5609, 2013/5610
Re:Steven Grant
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President F D O'Loughlin KC
Date:12 March 2024
Place:Melbourne
The objection decisions under review are set aside and remitted to the Commissioner to be remade in accordance with these reasons.
..................................[sgd]......................................
Deputy President F D O'Loughlin KC
Catchwords
Income Tax (Cth) — Whether ordinary income or trust income, Scheme to reduce tax — Tax benefit— Dominant purpose —Change in basis of assessment, Procedural fairness — Income Tax Assessment Act 1936 (Cth) Part IVA, ss 25(1), 97 51(1), 177A(1) 177D, 177F — Income Tax Assessment Act 1997 (Cth), s 6-5.
Legislation
The Income Tax Assessment Act 1936 (Cth)
Taxation Administration Act 1953 (Cth)
Cases
Cajkusic v F. C. of T. [2006] FCAFC 164
Condell v F. C. of T. [2007] FCAFC 44
Commonwealth Bank Officers Superannuation Corporation Pty Ltd v F. C. of T. (2005) 148 FCR 427
CPH Property Pty Ltd v F. C. of T. (1998) 88 FCR 21
Dismin Investments Pty Ltd v F. C. of T [2001] FCA 690
Epov v F. C. of T. (2007) 65 ATR 399
Essenbourne Pty Ltd v F. C. of T. (2002) 51 ATR 629
F. C. of T. v Administrative Appeals Tribunal [2011] FCAFC 37
F. C. of T. v Apted [2021] FCAFC 45; (2021) 284 FCR 93
F. C. of T. v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49
F. C. of T. v Australia & New Zealand Savings Bank Ltd [1994] HCA 58
F. C. of T. v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204
F. C. of T. v Black [1990] FCA 267; (1990) 25 FCR 274
F. C. of T. v Lenzo (2008) 167 FCR 255
F. C. of T. v Mochkin (2003) 127 FCR 185
F. C. of T. v Peabody (1994) 181 CLR 359
F. C. of T. v Radilo Enterprises Pty Ltd [1997] FCA 22
F. C. of T. v Resource Capital Fund IV LP [2019] FCAFC 51
F. C. of T. v Rawson Finances Pty Ltd [2012] FCA 753]
F. C. of T. v Spotless Services (1996) 186 CLR 404
F. C. of T. v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410
F. C. of T. v Wade (1951) 84 CLR 105
GE Capital Finance Australasia Pty Ltd v. F. C. of T. [2011] FCA 849
Hart v F. C. of T. [2018] HCASL 273,
Hart vF. C. of T. No4 [2018] FCAFC 61; (2018) 261 FCR 406
Hart vF. C. of T. (No 4) [2017] FCA 572
Herdegen v F. C. of T. [1988] FCA 419
Macquarie Finance Ltd v F. C. of T. [2004] FCA 1170
McCutcheon and F. C. of T. [2006] AATA 535
McCutcheon v F. C. of T. [2008] FCA 318
Melbourne Corporation of Australia Pty Ltd v F. C. of T.[2022] FCA 972
Minerva Financial Group Pty Ltd v F. C. of T [2024] FCAFC 28
Mussalli v F. C. of T. [2020] FCA 544
Noza Holdings Pty Ltd v F. C. of T. [2011] FCA 46
Ogilvie v Adams [1981] VR 1041
Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties [1997] ATC 5015
RCI Pty Limited v F. C. of T.[2011] FCAFC 104
Re Briggs; ex parte Deputy Commissioner of Taxation (1986) 14 FCR 249
Rowntree v F. C. of T. [2018] FCA 182
Sibai v F. C. of T. [2021] FCA 1353
Smorgon v. Australia & New Zealand Banking Group Limited (1976) 134 CLR 475
Sole Luna Pty Ltd as Trustee for the PA Wade No 2 Settlement Trust v F. C. of T. [2019] FCA 1195
Tesco Supermarkets Limited v. Nattrass [1972] AC 153
Visy Packaging Holdings Pty Ltd v. F. C. of T. [2012] FCA 1195
VL Finance Pty Ltd v Legudi [2003] VSC 57
Vincent v F. C. of T. (2002) 124 FCR 350
Secondary Materials
C L Pannam, The Law of Money Lenders in Australia and New Zealand (1964)
REASONS FOR DECISION
Deputy President F D O'Loughlin KC
BACKGROUND
These reasons concern disputed assessable income for the 1994 to 2001 Years[1] that the applicant says is income of other entities and not assessable for him on any basis. The disputed assessability of that income has led to disputed income tax assessments for the 1997 through 2001 Years. Those assessments draw in whether undisputed prior Year losses[2] were utilised during the 1994 through 1996 Years and no longer available in and for the 1997 and later Years. Corresponding penalty assessments are also disputed.
[1]A 12 month period ending on 30 June in any calendar year.
[2]Losses incurred before the 1994 Year that the Commissioner does not dispute were available as deductions in the 1994 Year through to and including the 1996 Year.
The disputed assessments involve facts and considerations that to a degree overlap with those reviewed in the Hart litigation.[3] That is, the disputed assessments involve consideration of:
[3]Hart v F. C. of T. [2018] HCASL 273, Hart v F. C. of T. No 4 [2018] FCAFC 61; (2018) 261 FCR 406 and Hart vF. C. of T. (No 4) [2017] FCA 572.
(a)how, and to whom, CHPT[4] business profits and related consulting trusts’ business profits were moved through a complex scheme without any tax burden being born ultimately to those involved in those businesses and/or their related or connected entities; and
[4]The Cleary Hoare Practice Trust, the trustee of which conducted a regulated legal practice business principally in Queensland.
(b)who should pay tax on the taxable income referrable to those profits and distributions.
Annexure A to these reasons is a Table of entities and Annexure B is a Table of evidence and other materials before the Tribunal. The list of documents included in Annexure B has been provided to the parties. It is unnecessary to publish that list more widely.
THE DISPUTE IN OVERVIEW
The CHPT legal practice profits were largely conventional legal practice profits. The CHPT connected consulting trusts’ profits were largely generated through giving advice and/or providing services in relation to structures and arrangements designed, potentially with additional objectives, to avoid tax liabilities. Those profits were processed through what has been described as a NVI Scheme and did not bear tax.
The applicant contends he had good reason not to own any assets or earn any income personally. Out of the story the applicant tells, it can be inferred others associated with CHPT were similarly affected and motivated. The applicant took steps to bring about the outcome that he did not own any assets of material value or earn any income personally. Those steps produced, according to the applicant, the effect that the applicant did not derive or otherwise become responsible for any assessable or taxable income of any trust through the substantive provisions of s 25(1) of the 1936 Assessment Act[5] and 6-5 of the 1997 Assessment Act,[6] or s 97 of the 1936 Assessment Act. And with heavy reliance of what fell from the Peabody decision,[7] the applicant also contends that there was no relevant tax benefit for him within the meaning of s 170C of the 1936 Assessment Act as it was before the 2012 amendments. Further contentions are advanced concerning relevant purposes for Part IVA analysis, penalties, deferment of payment dates and procedural limitations on the Commissioner.
[5]The Income Tax Assessment Act 1936 (Cth).
[6]The Income Tax Assessment Act 1997 (Cth).
[7]F. C. of T. v Peabody (1994) 181 CLR 359.
The Commissioner:
(a)has treated the applicant as having personal responsibility for part of the taxable income distributed by the CHPT for the 1994 to 1996 Years and has recalculated the carried forward losses for those Years with the effect that he says that they were exhausted in the 1996 Year and not available as deductions in the 1997 and later years;
(b)has assessed the applicant personally in respect of a proportion of the taxable income of the CHPT and the IETs[8] for the 1997, 1998, 1999, 2000, and 2001 Years;
[8]Income Earning Trusts that participated in the various NVI schemes, namely the Annesley Trust, the Balmoral Income Trust, the Barcelona Trust, the CHC Discretionary Trust, the Falcon Income Trust, the Hawk Income Trust, the LM Income Trust, the Packard Income Trust, the Parramatta Trust, and the Wilston Income Trust, with whom the applicant and the CHPT were connected.
(c)now defends:[9]
[9]In the sense of contending that the applicant needs to establish that these provisions do not apply.
(i)the carried forward loss recalculations for the 1994 to 1996 Years on the basis that s 25(1) of the 1936 Assessment Act, or in the alternative s 97 of the 1936 Assessment Act apply to include the respective shares of the CHPT taxable income in the applicant’s assessable income for those Years; and
(ii)the assessments he has issued for the 1997 and later Years on the basis that s 25(1) of the 1936 Assessment Act and s 6–5 of the 1997 Assessment Act, or in the alternative s 97 of the 1936 Assessment Act, or in the further alternative Part IVA of the 1936 Assessment Act apply to include the respective shares of the CHPT taxable income in the applicant’s assessable income for those Years, and that Part IVA applies to cause the respective shares of the IET taxable income in the applicant’s assessable income for those Years;
(d)imposed penalty which he now says should be set at the 50% rate and remission is not appropriate; and
(e)has not exercised deferment powers afforded by 255-10 of Schedule 1 to the Administration Act.[10]
[10]The Taxation Administration Act 1953 (Cth).
Table 1[11] sets out the disputed amounts assessed and carried forward loss re-calculations.
[11]Adapted from the table in [291] of the Commissioner’s objection decision. T 2, p 276.
Table 1
Year
Income/loss
returned
Losses carried forward disallowed because of earlier year adjustments to assessable income
CHPT income added to the applicant’s assessable income
Cleary Hoare connected IET income added to the applicant’s assessable income
Disputed adjusted taxable incomes
1994
$339 283/L
$0
$89,203
-
$250,080/L[12]
1995
$348,202/l
$89 203/L
$202 863
-
$56,136/L[13]
1996
$347 488/L
$292,066/l
$209,273
-
$153,851[14]
1997
$345,845/l
$345.488/L
$216,228
$275,481
$491,352
1998
$348,198/l
$345,845/l
$210 693
$797,329
$1,005 669
1999
$317 419/L
$348,198/l
$182,878
$910,166
$1,123,823
2000
$207 288/L
$317,419/l
$150,000
$260,191
2001
$137,975/l
$207.288/L
-
$69 253
2002
$2,163
$137 975/L
-
$140,138
[12]The Commissioner did not issue any assessment for this post adjustment balance.
[13]The Commissioner did not issue any assessment for this post adjustment balance.
[14]The Commissioner did not issue any assessment for this post adjustment balance. Why that is so is not apparent.
The present disputes have a long history. Table 2 below sets out some of the relevant events in that history.
Table 2
Date
Relevant Document/Event
7 August 2001
ATO employees conducted a s 263 access without notice visit to the Cleary Hoare business premises.[15]
15 November 2001
The Commissioner advised that he intended to conduct an audit. It can be presumed that ATO activities had commenced earlier than this to reach this conclusion.[16]
1 October 2004
The Commissioner’ issued his CHPT Position Paper.[17]
28 January 2005
The Commissioner issued notices of assessment for the 1997 to 2002 Years[18] giving effect to the CHPT Position Paper.
11 March 2005
The applicant objected to the assessments for the 1997 to 1999 Years.[19]
21 March 2005
The applicant objected to the assessments for the 2000 to 2002 Years.[20]
7 September 2005
The Commissioner’ issued his IET Position Paper.[21]
20 April 2006
The Commissioner issued notices of amended assessment for 1997 to 2000 Years [22] giving effect to the IET Position Paper.
20 June 2006
The applicant objected to the amended assessments for 1997 to -2000 Years.[23]
30 August 2013
The Commissioner issued a Notice of Objection Decision.[24]
28 October 2013
The applicant commenced the present applications.[25] The present applications were held in the Tribunal pending the outcome in the Hart litigation. Following the High Court’s refusal of special leave to appeal in that litigation, the present matters were reactivated in the Tribunal.
[15]T 37.
[16]T 38.
[17]T 89. The paper dated 1 October 2004 prepared by or on behalf of the Commissioner’s audit team addressing taxation issues identified during the course of the Commissioner’s audit concerning CHPT income and advising the Commissioner's position in respect of those issues.
[18]T 14-T 19.
[19]T 21-T 23.
[20]T 24-T 26.
[21]T 102. The paper dated 7 September 2005 prepared by or on behalf of the Commissioner’s audit team addressing taxation issues identified during the course of the Commissioner’s audit concerning IET income and advising the Commissioner's position in respect of those issues.
[22]T 27-T 30.
[23]T31-T34; T1, 148-234.
[24]T1, 4.
[25]T1, 2.
The applicant contends that the disputed assessable income was not his assessable income on any of the bases asserted by the Commissioner. Further, the applicant contends that even if there were assessable amounts for the 1997 and later Years, prior year losses that had accrued before the 1994 Year remained unused and were available to set off the assessable amounts in the 1997 and later Years.
THE ISSUES TO BE RESOLVED AND THEIR RESOLUTION
The issues to be resolved are whether:
(a)the Commissioner is permitted to contend that the prior Year losses had been exhausted by and in the 1996 Year on the basis he now does, namely that the applicant had assessable amounts pursuant to ss 25(1) or 97 of the 1936 Assessment Act in respect of the taxable income of the CHPT;
(b)assuming the Commissioner is allowed to contend that the prior Year losses had been exhausted by and in the 1996 Year, whether they had been so exhausted;
(c)the applicant had assessable amounts in respect of the CHPT taxable income for the 1997 and later Years pursuant to s 25(1) of the 1936 Assessment Act and s 6–5 of the 1997 Assessment Act,[26] or in the alternative s 97 of the 1936 Assessment Act, or in the further alternative Part IVA of the 1936 Assessment Act;
[26]The Income Tax Assessment Act 1997 (Cth).
(d)the applicant had assessable amounts in respect of the IET taxable income for the 1997 and later Years pursuant to Part IVA; and
(e)penalty set at the 50% rate is appropriate;
(f)it is appropriate to remit any penalty; and
(g)if there are taxable amounts, s255-10 of Schedule 1 to the Administration Act ought be applied to defer the date for payment of any tax liability that might arise.
For the reasons that follow:
(a)the Commissioner is not permitted to contend that the prior Year losses had been exhausted by and in the 1996 Year on the basis he now does, namely that the applicant had assessable amounts pursuant to ss 25(1) or 97 of the 1936 Assessment Act in respect of the taxable income of the CHPT;
(b)had the Commissioner been permitted to contend that the prior Year losses had been exhausted by and in the 1996 Year, they had not been so exhausted and were available to reduce the amounts for which the Applicant ought be assessed for the 1997 Year;
(c)the applicant had assessable amounts in respect of the CHPT taxable income for the 1997 and later Years pursuant to Part IVA of the 1936 Assessment Act;
(d)the applicant also had assessable amounts in respect of the IET taxable income for the 1997 and later Years pursuant to Part IVA, but those amounts were less than the Commissioner determined to be the relevant tax benefits; and
(e)penalty set at the 50% rate is appropriate applied to the corrected shortfalls;
(f)it is not appropriate to remit any penalty; and
(g)the Tribunal has no jurisdiction to address whether s 255-10 of Schedule 1 to the Administration Act ought be applied.
PRIOR YEAR LOSSES.
The accrual of losses by the applicant before the 1994 Year is not disputed. Nor is the balance available to be used commencing in the 1994 Year or what would be allowable in the 1997 Year if none of the adjustments to the applicant’s assessable incomes in those Years were required.
Whether the prior Year losses can be deducted is a disputed discrete question with two limbs; first whether the Commissioner is allowed to contend that the prior Year losses had been exhausted before the 1997 Year on the basis he settled upon at the hearing, and second, if he is allowed to do that, whether those losses had been exhausted in any or all of the 1994 to 1996 Years.
The Commissioner has not issued any assessments for the 1994 to 1996 Years. That, however, does not dispose of the entitlement aspect of the dispute. Notwithstanding that he said that he would issue assessments reflecting use of the losses in the 1994 to 1996 Years, whatever he wanted or intended to do, he could not do anything that would constitute an assessment for the 1994 and 1995 Years because even after what he says was assessable income in those Years, the applicant remained in a loss, a much reduced loss, position. The communication of intended assessing actions was unfortunate.
In support of the position that he is entitled to contend that the prior Year losses had been exhausted by the conclusion of the 1996 Year, the Commissioner contends that the applicant was always aware:
(a)that the Commissioner contends that those losses were exhausted by having been applied to adjustments made to 1994 to 1996 Year income and were no longer available for use in 1997 and later Years; and
(b)of the basis upon which the Commissioner contended that they had been applied.
In the alternative, the Commissioner contends that the applicant has been notified of the basis upon which those losses had been applied in sufficient time, and sufficient steps had been taken, namely an adjournment had been allowed, so as not to preclude the Commissioner contending that the losses had been applied and were not available in the 1997 and later Years. In summary the Commissioner supports those propositions with arguments concerning burden of proof, the disputes never having been confined, no action on the part of the Commissioner creates any estoppel against the operation of the Assessment Acts and that he is permitted to defend an assessment on any basis the law allows.
The applicant does not strictly engage on, and possibly accepts, that the Commissioner has always made it clear that in his view the prior Year losses were not available to be applied in 1997 and later Years. However, the applicant contends that the basis upon which the Commissioner now asserts that the losses have been applied before the 1997 Year was revealed too late and that no step taken can cure the procedural unfairness associated with that late revelation such that the Commissioner ought not be permitted to contend this that the prior Year losses have been applied before the 1997 Year.
In these circumstances it is critical to review precisely:
(a)what the Commissioner communicated concerning the prior Year losses;
(b)when he communicated what he did on this topic; and
(c)if the basis upon which the Commissioner now contends that the prior Year losses had been applied before the 1997 Year was a late revelation, what the authorities have to say about fairness in the process of revelation in a tax setting.
In the 1 October 2004 Practice Trust Position Paper the Commissioner was not express in his communication as to the basis on which the prior Year losses had been exhausted. He said:
[W]e believe you have omitted to include significant sums of assessable income in your income tax returns for the Years ended 30 June 1994 to 30 June 1999.[27]
[27]T89, pp 1042
…
… Records held by this office indicate that you have not returned income from the practice of law during any of the income Years ended 30 June 1994 to 30 June 1999, although through the whole of this period you have engaged in the provision of legal services as a principal of the firm. Income has however been included in the income of the practice trust and dealt with in accordance with the terms of the trust.[28]
[28]T89, pp 1043.
…
In the circumstances, and subject to any evidence you may be able to provide to the contrary, it is possible to conclude that the conduct of the practice of law by you and other practitioners, purportedly in the capacity as trustees of the practice trust, would be in contravention of Rule 78. As a legal practitioner with a practicing certificate, you were not yourself prevented from conducting practice as a solicitor in your own right or as a member of a firm. I do not believe it is possible to conclude that the practice income was derived by you in a trustee capacity which, if recognised, would have been contrary to law.[29]
[29]T89, p 1047.
Furthermore the trust deed of the practice trust states that the Queensland Law Society has to provide written authorisation prior to any person or entity being able to hold units (refer clause 4.1).
Consequently, it is the ATO's position that you would be assessable to a share of the net income purportedly derived by the practice trust, as follow.[sic]
1994.
$89,203
1995.
$205,335
1996.
$209,500
1997.
$219,399
1998.
$212,523
1999.
$185,540
PART B. SHAM.…
‘In the Alternative, having regard to all circumstances, it is possible to conclude that the arrangements entered into by the members of the firm Cleary Hoare which purport to covey the conduct of the business upon the trustees of the practice trust amount to a sham for the purposes of Australia law …
We would identify the following factors as relevant to a conclusion that to the arrangement amounts to a sham:
• You and the other members of the firm have signed and lodged declarations with the Queensland Law Society in which the ‘Cleary Hoare Practice Trust’ is described as a service, administrative or nominee company or trust associated with a practice conducted by partners. Such representation are not consistent with the purported disposal of a legal practice hitherto carried on by persons in partnership to the practice trust.
• Other documents notably a form 4 ‘Firm Record’ has regularly been submitted to the Queensland Law Society recording firm details from time to time including nominating named persons as ‘partners’
• There is no evidence to suggest that creditors were advised in 1993 that the practice debts were to be met by the former partners in their new capacity as trustees
• In dealing with the Supreme Court of Queensland in October 1994, in connection with the change of the name from Cleary Hoare Hart Grant to Cleary Hoare, a representation has been made to the Court that the practice was carried on by a ‘firm’ which again amounts to a representation that the practice is carried on by a partnership.
• In all dealings with the profits of the legal practice, you and other members continued to direct the disbursement of profits to yourself and family members.
This alternative position would result in your assessable income being increased by the same amounts as outlined in Part A.’[30]
[30]T89, p 1047-1048
PART C APPLICATION OF PART IVA
Alternatively, the ATO also considers that the provisions of Part IVA of the Income Tax Assessment Act 1936 (the 'Act') applies [sic] in respect of the participation of the trustee(s) for the Cleary & Hoare Practice Trust and the Sensitive New Age Guy Trust in the distributions to the Cleary & Hoare Office Unit Trust for the years ended 30 June 1994 to 30 June 1996 and the NVI arrangement for the years ended 30 June 1997 to 30 June 1999.
It is considered that you, in your capacity as a beneficiary of the Sensitive New Age Guy Trust and as a legal practitioner with a practicing certificate, has obtained a tax benefit in consequence of the participation of the trustee for the Sensitive New Age Guy Trust in a 'scheme(s)' as defined in section 177A(1) of the Act.’[31]
[31]T89, p 1048
…
‘Assessments will be issued to include the amounts detailed above in your assessable income in respect of the 30 June 1994 to 30 June 1999. This will result in the following adjusted incomes for each year.[32]
[32]T89, p 1061.
…
The primary basis upon which the adjustment amounts for the 1994 to 1996 Years were assessable was not expressed in the Practice Trust Position Paper, but it can be inferred that it was s 25(1) of the 1936 Assessment Act founded on an apprehended invalidity or illegality of the CHPT arrangements in the legal profession regulatory context. The first alternative position was that the arrangements were a sham leading to the same adjustments and presumably on the same basis. The second alternative was that Part IVA applied.
The Practice Trust Position Paper invited the applicant was to respond within 28 days.[33] The ATO’s 24 November 2004 letter to the applicant reveals that the applicant did not respond, and absent any response, in the ATO’s 24 November 2004 letter the Commissioner said:
[33]T89, p 1062
(2)You have caused income tax returns to be lodged on the purported basis that the entitlement to such funds rested with entities which did not fall within the restrictions imposed under Rule 78.
In the circumstances it is appropriate to conclude that the purported entitlement to a share of the income, and/or profits in favour of 'non-approved' entities, was in fact a sham and did not reflect the intended legal and equitable entitlement to such income/profits. As the income/profits have been dealt with entirely at your direction, the following assessing treatment is warranted:
a. you should be assessed on the entirety of the amount, as a person actually entitled to deal with the said income/profits, and therefore should be taken to have derived such income/profits under subsections 25(1) and section 19 of the ITAA1936,
b. in the alternative, the persons who actually received the flow of income/profit should be assessed on the amounts so received pursuant to subsection 25(1).
(3) In the alternative, application of Part IVA, as outlined in the position paper, is appropriate.[34]
[34]T90, pp 1064-1065.
For all practical purposes the Practice Trust Position Paper and the 24 November 2004 letter should be treated as components of the same communication. They were complimentary components of a contemporaneous and continuous composite communication. And this communication made the basis of assessability of the amounts that exhausted the prior Year losses very clear.
In his 20 August 2013 objection decision, and expressly in relation to the 1997 and later Years, the Commissioner abandoned arguments that the applicant had derived assessable s 25(1) amounts but contended that the applicant had assessable income under s 97, or by operation of Part IVA. In that objection decision the Commissioner said:
Are the appointments of income by the Sensitive New Age Guy Trust into the NVI arrangements a sham?
116. The Commissioner no longer considers the arrangement or any part of the arrangement is a sham.
Are amounts included in your assessable income under section 25(1) of the ITAA 1936 for the financial year ended 30June1997 and section 6-5 of the ITAA 1997 for the financial years ended 30June1998 and 1999 on the basis that the Practice Trust is void?
117. The Commissioner no longer considers that the Practice Trust is void.
Should amounts be Included in your assessable income for the financial years ended 30 June 1997 to 30 June1999 pursuant to section 97 of the ITAA 1936 as a beneficiary of the Practice Trust?
118. Yes. The amounts for each of the relevant years should be included in your assessable income pursuant to section 97 of the ITAA 1936 as a beneficiary of the Practice Trust.
119. During the financial year ended 30 June 1997 and subsequent financial years, the Practice Trust made payments to or for the benefit of you. On or about 30 June 1997 and for each subsequent financial year, the trustees of the Practice Trust resolved to distribute the income of the Practice Trust to the Special Unit Holders in amounts paid or advanced to Insert them each financial year. Pursuant to the Third Schedule of the Practice Trust Deed you held special units in the Practice Trust in each of the relevant financial years.
120. The amounts paid or advanced to you by the trustees of the Practice Trust in the relevant financial years are the amounts as assessed.’[35]
[35]T2, pp 255-256.
…
Are your prior year losses allowable in the financial years ended 30 June 1997 to 30 June 2002?
145. No.
…
153.In the position paper of 1 October 2004, we advised you that the prior year tax losses reported in your income tax return during the financial years ended 30 June 1994 to 30 June 1996 were exhausted by the proposed adjustments to your taxable income.
154.The process by which this has occurred is an extrapolation of the effect of proposed adjustments to your taxable income commencing from the financial year ended 30 June 1994. The fact that the Commissioner has not raised assessments, at this time, for the financial years ended 30 June 1994 to 30 June 1996 does not make the carried forward losses, as claimed by you, available to you to deduct in the subsequent financial years.
155.In fact, under this process of extrapolation, the losses would have been completely exhausted by the financial year ended 30 June 1996. Therefore, the Commissioner has not ignored the losses and your subsequent objection on this matter is disallowed.[36]
[36]T2, pp 259- 260.
Because the Practice Trust Position Paper dealt with the sham and personal derivation of income matters consistently for the 1994 through 1999 Years, the objection decision should reasonably be accepted as a communication that treated all years on that same basis and that the professional invalidity and sham based s 25(1) contentions for the 1994 to 1996 Years, in so far as they affected the 1997 and later Year assessments, were withdrawn.
The s 97 contention in the objection decision was made concerning the 1997 and later Years without mention of earlier Years such that following the objection decision the applicant could have been quite reasonably of the view that the only remaining basis for denial of the prior Year losses was a Part IVA contention.
In both his original SFIC dated 27 June 2019 not altered by his amended SFIC dated 4 September 2020 the Commissioner said:
494. The Applicant had claimed the following tax losses in each of the relevant Years:
Year
Amount
1997
$347,488
1998
$345,845
1999
$348,198
2000
$317,419
2001
$206,993
2002
$137,975
495. The Commissioner’s position paper dated 1 October 2004 considered years ending 30 June 1994 to 30 June 1999, in relation to the Practice NVI Scheme. However, even applying these claimed losses from 1994 to 30 June 1996, such amounts were exhausted by the adjusted income for those earlier years.[37]
[37]Respondent’s Amended Statement of Facts, Issues and Contentions, 4 September 2020, 138 [495].
In his supplementary SFIC dated 18 March 2022 the Commissioner abandoned an earlier held position, namely Part IVA, and made his ongoing position for the 1994 to 1996 Years that amounts were properly included in the applicant’s assessable income pursuant to s 25(1) or s 97 of the 1936 Assessment Act. The s 97 argument was truly new for these years. The s 25(1) and 6-5 argument are technically not new when considered at a high level as they were made in the Practice Trust Position Paper. The basis for them, however, is a completely new case as the Commissioner no longer advances breaches of Queensland legal profession regulation or sham arguments to found his assertion. And even at the higher level, all s 25(1) and 6-5 allegations were abandoned in the objection decision so have not been apparent since 2013. It could reasonably be expected by the applicant that he was not required to meet these provisions.
In his Opening Submissions dated 1 October 2021, the Commissioner said:
81. The Applicant claims that in the 1997 income year he had prior losses available that had accrued prior in the 1994, 1995 and 1996 income years, which he says have been ignored by the Commissioner.[38]
[38]AASFIC at [26].
82. The Commissioner in response says that he applied those prior year losses and that they have now been exhausted. The table at paragraph [291] of the Commissioner’s Objection Decision records the adjustments the Commissioner made to increase Mr Grant’s assessment income in the 1994 to 2002 income years during audit, albeit without notices of assessment having been issued in respect of the 1994 to 1996 income years. The Commissioner will contend that the prior year losses claimed have not been ignored, but have been exhausted.[39]
[39]Respondent's Opening Submissions, dated 1 October 2021, [82].
In his Amended Opening Submissions dated 8 August 2022, the Commissioner had added to this issue, and said:
103.The Commissioner will contend that the prior year losses (being the Accrued Personal Losses) claimed have not been ignored, but were exhausted. This position has not changed. The Commissioner continues to contend that the attribution of income in the 1994 to 1996 income years exhausted the Accrued Personal Losses such that there were no losses available to be deducted from income in the 1997 year and onwards.
104. The Commissioner will contend that:[40]
[40]RSSFIC at [9].
(a) the Accrued Personal Losses were exhausted (not ignored) by the attribution of the 94-96 Income; and
(b) the 94-96 Income is properly attributable to the Applicant either by operation of s 97 of the ITAA 1936 or by it being ordinary income[41]
[41]Respondent’s Amended Opening Submissions, dated 8 August 2022, [103]-[104]
105.The Commissioner will contend that the Applicant was by s 97 presently entitled to the 94-96 Income in the 1994 to 1996 income years as a result of the determinations of the trustees of the Practice Trust to pay or apply income of the Practice Trust to Special Unitholders[42] (which included the Applicant) or because of the operation of clause 14.4 of the Practice Trust Deed.
[42]The determinations of the trustees of the Practice Trust to pay or apply income of the Practice to Special Unitholders were in accordance with clauses 14.2, 14.5.3 and 14.7 of the Practice Trust Deed and by application of s 95A of the ITAA 1936: RSSFIC at [41]-[61].
106.In the alternative, the Commissioner will contend that the 94-96 Income is income according to ordinary concepts because it can be inferred, as was inferred in Hart in analogous circumstances,[43] that:
[43]Federal Court in Hart v F. C. of T. [2018] FCAFC 61; (2018) 261 FCR 406 at [62]-[65].
(a) the SNAG Trust received the Applicant’s remuneration for providing legal services for or on behalf of the Cleary Hoare legal practice at the Applicant’s direction;
(b)the Applicant used what was paid to the SNAG Trust to fund his personal expenses; and
(c) the notations on the SNAG bank statements are consistent with those payments being for the Applicant’s remuneration by the Practice Trust.
…
123. there has been no agreement by which the Commissioner has agreed to limit the scope of the issues in dispute in the proceedings before the Tribunal. Thus, the onus has always been on the Applicant to establish that the Accrued Personal Losses were still available to be deducted from income in the 1997 income year.[44]
[44]Respondent’s Amended Opening Submissions, dated 8 August 2022, [123]
…
124. the Tribunal’s directions made on 14 April 2022 provided the Applicant with an opportunity to file evidence in order to make his case in relation to the 94-96 Income Argument and he has availed himself of that opportunity. He did so by giving a further statement dated 3 May 2022… Prior to the directions of 14 April 2022, the Applicant had already provided bank statements held in the name of the SNAG Trust for the whole of the 1994 to 1996 income years [45]
[45]Respondent’s Amended Opening Submissions 8 August 2022 [123]-[125]; Grant 3 May 22 Statement; ST449 at 5171-5244.
…
127. Finally, it was the Applicant’s interlocutory application dated 5 November 2021 seeking to rely on late evidence of Mr Grant dated 27 October 2021 and a supplementary report of Mr Paul Laxon, together with seeking (in the alternative) leave to raise the Additional Ground that prompted the Commissioner to advance a different reason for why the Tribunal should not be satisfied that the Applicant was entitled to deduct the Accrued Personal Losses in the 1997 and later income years.’[46]
[46]Respondent’s Amended Opening Submissions 8 August 2022 [127].
In his Closing Submissions dated 2 September 2022 the Commissioner said[47]:
[47]Respondents Closing Submissions Dated 2 September 2022 [464]-[470], [485]-[486].
464. …the 1 October 2004 Position Paper,[48] which sets out a number of reasons why amounts of income should be included in the 1994 to 1996 years.
[48]T89 at 1042-1063, see in particular at 1059 and 1061
465. That position was confirmed in a 24 November 2004 letter from the ATO to Mr Grant, which made explicit reference to the former s 25(1) of the ITAA 1936 (albeit in connection with the now-abandoned allegation that the arrangements were a sham):[49]
[49]T90 at 1064-1065
you should be assessed on the entirety of the amount, as a person actually entitled to deal with the said income/profits, and therefore should be taken to have derived such income/profits under subsections 25(1) and section 19 of the ITAA1936
…
The losses carried forward and claimed in the taxation return for the year ended 30 June 1997 will not be allowed as a deduction. Also, due to prior year losses carried forward, adjustments to years ended 30 June 2000 to 30 June 2002 will be necessary to reflect adjustments to prior year losses.
466. The position was repeated in the 20 August 2013 Objection Decision.[50] The Commissioner did not disavow anything in his Objection Decision in respect to there being no entitlement to deduct carry forward losses into the 1997 year.[51]
[50]T2 at 259-260 (paragraphs [145] and [153]-[155]).
[51]T2 at 235-372, in particular at 236 [8(g)], 238 [12], 259-260 [145]–[155] and 276-277 [291]-[292].
467. That position was confirmed in the individual tax and penalty calculation and income tax adjustment sheets for the 1994 to 2002 income years that record the allowed and adjusted prior year losses claimed.[52]
[52]T414 at 2847-2852.
468. The position is also consistent with the Notice of Assessment for the 1997 income year.[53]
[53]T14 at 456-458.
469. Thus, since at least 28 January 2005, when the Notice of Assessment for the 1997 income year issued, Mr Grant has known that he bears the burden to prove that the Accrued Personal Losses were still available and that the taxable amount of that assessment is excessive or otherwise incorrect and what the correct amount is. That position did not fundamentally change when the Notice of Amended Assessment for the 1997 income year issued on 20 April 2006.[54] Any basis on which the Commissioner defends an assessment does not change Mr Grant’s burden of proof.
[54]T27 at 613-614.
470. Further, what has also not changed is the source of the 94–96 Income. That source has always been Mr Grant’s share of the net income of the Practice Trust in the 1994 to 1996 income years which was paid to the SNAG Trust at his direction and for his benefit. This source remains unchanged irrespective of whether the basis for attributing that income is a reliance on Part IVA or a reliance upon either s 97 or that income being ordinary income.’
…
485. In those circumstances, it cannot be said that the Commissioner’s characterisation of the 94-96 Income as being s 97 income or ordinary income when he did so is in any way oppressive or manifestly unfair to Mr Grant or is a use of the Tribunal’s procedures that would bring the administration of justice into disrepute.
486. Mr Grant was clearly on notice that the Commissioner had allowed a deduction for the Accrued Personal Losses in each of the 1994 to 1996 years against income that he had attributed to Mr Grant in each of those income years because the Commissioner had notified him of that position in the:
(a) 1 October 2004 Position Paper;[55]
[55]T89 at 1042-1063, see in particular at 1059 and 1061.
(b) 24 November 2004 letter, which made explicit reference to the former s 25(1) of the ITAA 1936;[56]
[56]T90 at 1064-1065.
(c) the 20 August 2013 Objection Decision;[57]
[57]T2 at 259-260 (paragraphs [145] and [153]-[155])
(d) the individual tax and penalty calculation and income tax adjustment sheets for the 1994 to 2002 income years; and[58]
[58]T414 at 2847-2852.
(e)the Notice of Assessment for the 1997 income year.[59]
[59]T14 at 456-458.
One of the propositions advanced by the Commissioner in support of him being permitted to rely on the changed basis of denial of the prior Year losses is an alleged additional ground of objection being advanced by the applicant at a late stage to which the Commissioner was responding. At the commencement of the (subsequently aborted) hearing, the applicant sought, presumably out of an abundance of caution, the ability to advance the proposition that the Commissioner had not made and served any s 177F determinations for the 1994 to 1996 Years, and could not rely on Part IVA of the 1936 Assessment Act to deny the prior Year losses. The Commissioner objected to the initiative, the hearing was adjourned, and “after mature reflection” the Commissioner agreed that the applicant was entitled to advance the proposition. Whether the original grounds of objection were sufficient to allow the argument proposed was never tested, and on the views of the Full Court concerning grounds as expressed in Cajkusic,[60] it’s conceivable that they were. Properly considered, the Commissioner was responding to the prospect of not having any basis to continue with his contentions.
[60]Cajkusic v F. C. of T. [2006] FCAFC 164 Kiefel, Sundberg and Edmonds JJ.
From the 2004 position paper it can be implied that the Commissioner’s basis for contending the prior Year losses had been exhausted was that there were s 25(1) assessable amounts on a professional regulation invalidity or sham basis.[61] The letter dated 24 November 2004 made the s 25(1) basis express.[62] The Objection Decision abandoned s 25(1) but asserted s 97, but only concerning 1997 and later Years. The Supplementary SFIC contends s 97 and s 25(1). The Commissioner’s propositions that the applicant always knew of the s 25(1) and s 97 bases for the 1994 to 1996 Years cannot be accepted. With his Supplementary SFIC the Commissioner advances a fundamentally new case.
[61]T89, p 1047.
[62]T90 at 1064-1065.
The late change from a long-held view that the prior Year losses had been applied by reason of a notional application of Part IVA raises procedural fairness issues. That procedural fairness rules apply in a tax setting notwithstanding the taxpayer having the burden of proof is an uncontroversial proposition. In Peabody,[63] for example, the High Court said:
[63]F. C. of T. v Peabody (1994) 181 CLR 359 Mason CJ., Brennan, Deane, Dawson, Toohey, Gaudron, McHugh JJ.at 382-383.
Of course, the Commissioner may be required to supply particulars of the scheme relied on and in this case has supplied them in the form of the ten steps identified by the Commissioner. But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirements of Pt IVA, then in our view there is no reason why the Commissioner should not be permitted to do so (38), provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course (39).
O'Loughlin J. at first instance took the view that the Commissioner had particularized the scheme too widely and that it should be confined to the devaluation of the Kleinschmidt shares and the subsequent disposal of them. He was not bound to accept the wider scheme advanced by the Commissioner before him and there was no unfairness to the taxpayer in his reaching the conclusion which he did, notwithstanding the apparent failure of the Commissioner to advance alternative schemes. The argument of the Commissioner plainly relied upon the devaluation of the Kleinschmidt shares as evidence of a dominant purpose on the part of Mr. Peabody to obtain a tax benefit, however widely the particulars were otherwise drawn. Before us the Commissioner sought to rely upon the narrower scheme identified by the judge at first instance and, in our view, he was entitled to do so.
The absence of procedural unfairness in Peabody lay in the central feature of both the wider and narrower schemes being common.
Strict application of burden of proof rules mould to dispute resolution rules that provide for fair and efficient systems for resolving disputes. Proper notice, or time, needs to allow an opportunity to deal with an altered course. At times there cannot be a proper amount of time if there is no possibility of dealing properly with the altered course.
Whether the Commissioner is permitted to contend that the prior Year losses have been exhausted in the present circumstances requires a blending of purely taxation principles (that no action on the part of the Commissioner estops the proper operation of the Act, the Commissioner is permitted to defend an assessment on any basis permitted by the Assessment Acts, and taxpayers bear the burden of proving an assessment is excessive) with conventional procedural fairness rules. Notably, that taxpayers bear the burden of proof in a Part IVC dispute does not set conventional procedural fairness rules aside. Those conventional procedural fairness rules coexist in harmony with the no estoppel etc. principles.[64]
[64]F. C. of T. v Peabody 181 CLR 359 at 383; F. C. of T. v Australia & New Zealand Savings Bank Ltd [1994] HCA 58; (1994) 181 CLR 466 at 479 citing F. C. of T. v Wade (1951) 84 CLR 105 at 117; Dismin Investments Pty Ltd v F. C. of T. [2001] FCA 690, [31]–[36]; Condell vF. C. of T. [2007] FCAFC 44 at [14] Gyles J (dissenting in the ultimate outcome but with whom the majority, Kenny and Allsop JJ, agreed on this point); F. C. of T. v Resource Capital Fund IV LP [2019] FCAFC 51, [90]; Sibai v F. C. of T. [2021] FCA 1353 at 59[b] and at [72].
The question in the present circumstances is whether it is unfair for the applicant to be asked to contend that the CHPT income was not assessable to him under the 1994 to 1996 Years under s 25(1) or s 97. Where the s 25(1) proposition in relation to the losses, was made on a particular foundation that has long been abandoned, and the s 97 proposition never made, and where the applicant has led evidence that his sources of evidence are now incomplete, and one such source, the ATO, once having relevant evidence and now unable to find it (as noted below), a case for prejudice can be seen, particularly in a s 25(1) case. The better conclusion is that the Commissioner is not entitled to contend that the prior Year losses had been exhausted before the 1997 Year under either s 25(1) or s 97.
Recognising that there are competing views concerning the extent to which the Commissioner might be so limited, either generally or in respect of the present matter, the reasoning below addresses the 1994 to 1996 Years on the basis that the Commissioner is permitted to change his case as he has. In this regard, albeit in pursuit of an outcome which the tribunal does not reach, in support of his contentions the Commissioner urges that inferences be drawn that the same behaviours and attributes associated with 1997 and later Years, would have occurred and been found in and for the 1994 to 1996 Years.
EXPERT EVIDENCE LED
The applicant led evidence from another experienced lawyer who was asked to opine on questions concerning reasonableness of the applicant being posited as the recipient of the relevant income had the schemes not been entered into and advices he had given to people in professional roles. He was asked to opine on:
1Whether it is reasonable to expect that, if the scheme identified by the Commissioner of Taxation (called the NVI scheme) in his Statement of Facts Issues and Contentions (SFIC) had not been entered into, would the relevant income have been included in Mr Grant's assessable income; and
2. If Mr Grant didn't derive the income, who could reasonably be expected to have derived it?
and subsequently to address the following questions:
1. Have you ever advised persons engaged in professional advisory practice, such as doctors or lawyers, to utilise discretionary trusts to structure their affairs?
2. If so, have you ever advised as to how they might distribute income derived from such trusts on a tax-effective basis, in the manner in which you suggest commencing on page 2 of your previous report?
3. In your previous report, you state at paragraph on page 3 that you assume that Mr Grant’s partner had no other income during the relevant years. If Mr Grant’s partner had had an income of $50,000 or $80,000 in each of those years, how (if at all) would the advice you describe beginning on page 2 of your previous report have changed in respect of distributions by the relevant trustee?
4. In your previous report, you do not suggest that the relevant trusts should accumulate income. Why is that?
The evidence given addressed the questions in a manner supportive of the applicant’s case. The Tribunal is not assisted by this evidence in deciding the matters in dispute.. No weight is given to it.
FACTS
The applicant’s personal circumstances and their impact on his taxation position.
The principal reason advanced by the applicant in support of his contentions that he ought not be assessed as he has been are that for asset protection reasons he did not derive any of the disputed income, that he was not entitled to any trust income, and that Part IVA does not apply to him. He says that his personal circumstances were such that arrangements were put in place and steps were taken to ensure he did not personally derive any income or own any assets of material value. Those steps and arrangements included the NVI Scheme referred to in more detail below that had at its core a system of arranging for distributions by trust entities that did not have any pattern of distribution so that it could not be predicated who, apart from the actual recipient or beneficiary of a distribution, would have been such a recipient or beneficiary. As noted above, with heavy reliance of what fell from the Peabody decision, the applicant contends that this means there was no relevant tax benefit within the meaning of s 170C of the 1936 Assessment Act as it stood before the 2012 amendments. The subsidiary Part IVA rebuttal argument advanced is that the dominant purposes of the schemes identified by the Commissioner were not to enable the applicant to have the tax benefit contended for.
Central to the applicant’s case is the proposition that in his circumstances it could not reasonably be expected that any income would be appointed to him or that he would own any assets of value beneficially. The applicant outlined his personal circumstances and a history of dealings and events upon which, according to the applicant, it could reasonably be concluded that, if choices were available to him, income would not be appointed to him and he would not require assets of material value.
The applicant commenced articles of clerkship at the Firm[65] in 1982, the year after he left school.[66] He was admitted to legal practice as a solicitor in 1987, and became a salaried partner of the Firm in 1988.[67]
[65]The then partnership of individuals carrying on business as the law firm Cleary Hoare.
[66]Grant 5 June 20 Statement, [1.2]-[1.3].
[67]Grant 5 June 20 Statement, [1.4]-[1.5].
The Firm used a service trust, CHOUT, in the operation of its business.[68]
[68]Grant 5 June 20 Statement, [1.11].
The applicant was offered a 10% equity stake in the Firm In late 1989 and in 1990 he borrowed $180,000 from the NAB[69] to purchase that equity stake.[70] The Firm had historically been successful and at that time occupied a lease of three levels of a Brisbane CBD office building.[71]
[69]National Australia Bank Ltd.
[70]Grant 5 June 20 Statement, [1.7].
[71]Grant 5 June 20 Statement, [1.12]-[1.13].
Later in 1990 two partners of the Firm were charged with criminal offences.[72] Thought to be as a consequence, large clients left the firm, and eight partners resigned in the period to 1992.[73] The Firm began operating at a loss. By 1991 the Firm required financial support and NAB provided it.[74] The applicant was personally liable to creditors of the Firm for more than $2M because of personal guarantees he had given.[75]
[72]Grant 5 June 20 Statement, [1.8].
[73]Grant 5 June 20 Statement, [1.9].
[74]Grant 5 June 20 Statement, [1.10].
[75]Grant 5 June 20 Statement, [1.11].
From 1990 to 1992, staff numbers at the Firm fell from approximately 120 to fewer than 20.[76] The Firm entered into a new lease of its business premises, for two floors not three, for a nine year term.[77] That lease was abandoned after a year, leaving a contingent liability of $3.52M.[78]
[76]Grant 5 June 20 Statement, [1.12].
[77]Grant 5 June 20 Statement, [1.12]-[1.13].
[78]Grant 5 June 20 Statement, [1.14].
Separately, a judgment had been entered against the Firm for more than $80M.[79] There is no evidence that this judgment was ever paid or satisfied.
[79]Grant 5 June 20 Statement, [1.15].
The partners of the Firm sought to restructure.[80] The applicant did not want to earn income or accumulate assets personally into the future.[81]
[80]Grant 5 June 20 Statement, [1.16].
[81]Grant 5 June 20 Statement, [1.17].
Before any restructure was implemented, QLS permission was sought for CHPT to conduct the practice of the Firm and for sharing receipts as intended. The QLS was also advised that the Firm would have, in addition to its four “Principal Solicitors” who would have equity interests through the trust structure there would be three other Principal Solicitors who were at the time salaried partners[82] and their operational roles (as equity and salaried partners) would continue. The representations to the QLS included assurances as to limits to the range of people beyond whom CHPT profits would not be distributed.[83] These assurances were breached, whether consciously or otherwise.
[82]T110 p 1143, T112 p1146.
[83]T110, p1143.
The QLS granted CHPT permission to operate the Firm’s practice and for the unit holders to share in the Firm’s receipts.[84]
[84]T111 to T114.
The Tribunal accepts the events contended for happened and that the applicant’s personal asset holding and income earning arrangements are one rational response to those circumstances.
Entities and their formation
CHPT
The CHPT was created by deed of 29 January 1993 and on that date purchased the Cleary Hoare legal practice and thereafter continued that practice. [85]
[85]Grant 5 June 20 Statement, [1.2]-[1.3].
Cleary, Hoare and Grant were the original trustees of CHPT.[86] The CHPT was a trust in which interests were identified by holding units and there were discretions allowing, among others, the trustee to make distributions to unit holders unequally. What might be styled equity or ordinary unit holders of the CHPT were the trustees of discretionary or family trusts aligned with the Firm’s principals, Cleary, Hoare, Grant and Hart,[87] and in correspondence with the QLS[88] said to represent those families. This structure was implemented to separate the business of the Firm and Cleary, Hoare, Grant and Hart in their personal capacities.[89] The trustees of those discretionary trusts were the Firm’s Principals or companies controlled by them.
[86]T110, p1143.
[87]T110, p1143.
[88]Queensland Law Society Inc.
[89]Grant 5 June 20 Statement, [2.2].
There were seven original special unitholders in the CHPT: Cleary, Hoare, Hart, Grant, Fraser Dawson, Andrew Howlett and Suzanne Peterman. The Applicant held 12 special units in the Practice Trust.
As trustee of the SNAG Trust, Wood Duck held 36 units in the CHPT.
SNAG Trust
The SNAG Trust was established by deed of 29 January 1993 with Wood Duck as trustee. Seemingly an illustration of enthusiasm for the transaction getting ahead of the paperwork, Wood Duck was incorporated on 1 February 1993. No issue is raised concerning the order of events.. The Applicant was a director of Wood Duck from 1 February 1993 and was the sole director of Wood Duck from 17 December 1997.
The applicant was the “Principal”. Primary beneficiaries included the Principal and the Principal’s spouse. Tertiary beneficiaries included
“ … any trustee of any settlement or any company or corporation whereunder or wherein any of the beneficiaries has a beneficial entitlement in the trust assets or to shares… whether, in each case, absolutely contingently presumptively or prospectively …”.[90]
[90]T373, p1931.
On or about 30 June 1994, the trust deed of the SNAG Trust was varied to include the CHOUT as an additional tertiary beneficiary.
Clause 3 of the SNAG Trust deed deals creates powers to deal with annual income in the following terms:
DISCRETION AS TO INCOME OF THE TRUST FUND
3.1The Trustee shall in each year determine the net income of the Trust Fund after allowing for all expenses of the Trust Fund
3.2The Trustee may at any time prior to the expiration of any year which ends before or upon the Perpetuity date determine with respect to all or any parts of the net income of the Trust Fund of such year:
3.2.1to pay apply or set aside the same or any part thereof for all or one or more of the Primary and Secondary Beneficiaries living or in existence at the time of the determination;
3.2.2to pay apply or set aside the same or any part thereof for all or one or more of the Tertiary Beneficiaries living or in existence at the time of the determination;
3.2.3to accumulate the same or any part thereof.
…
3.4If the Trustee shall not by the Thirtieth day of June, in each year have exercised its discretion to pay, apply, set aside or accumulate the whole of the net income and the whole of the additional tax income (if any) then such net income and such additional tax income (if any) not so paid, set aside or accumulated shall be accumulated.
SNAG Trust income distributions
On 30 June 19977 and 30 June 1998 the Applicant as director of Wood Duck caused the trustee to exercise its power under clause 3 of the trust deed to distribute all of the income to Haven Sea Pty Ltd as trustee for the Annesley No.3 Trust.
On 30 June 1998, the Applicant as director of Wood Duck caused the trustee to exercise its power under clause 3 of the trust deed to distribute all of its income for the 1998 Year to Haven Sea as trustee of the Annesley No. 3 Trust
On 30 June 1999, the Applicant as director of Wood Duck caused the trustee to exercise its power under clause 3 of the trust deed to distribute $185,540 to Gainsoar Pty Ltd as trustee for the Condor Trust.
Income of the SNAG Trust
The SNAG Trust became presently entitled to part of the income of the Practice Trust and as a consequence that income was included in the assessable income and in the net income under s.97 of the ITAA 1936 of the SNAG Trust.[91]
[91] For 1997, T-337 at 1569 and 1571, for 1998, T-343 at 1586 and 1588 and 1999, T-345 at 1605.
SNAG No. 2 Finance Trust
The SNAG No.2 Finance Trust was settled on 1 July 1997 and A Tough Row to Hoe was the trustee. From 3 February 1998, the Applicant was the sole director of A Tough Row to Hoe.
The SNAG No.2 Finance Trust was a discretionary trust conferring similar powers on the trustee as those for the SNAG Trust. Raymond Grant[92] was the Principal for the purposes of the deed and beneficiaries included extended family members of the Principal.
[92] The applicant’s father.
Income distributions
CHPT income distributions
Clause 14 of the CHPT trust deed provided for the distribution of income relevantly in the following terms:
DISTRIBUTION OF INCOME
14.1The Trustee shall in each year determine the net income of the Trust Fund after allowing for all expenses of the Trust Fund.
14.2The Trustee shall at any time prior to the expiration of any year which ends before or upon the Perpetuity Date determine with respect to all or any parts of the net income of the Trust Fund of such year:
14.2.1to pay apply or set aside the same or any part thereof for the Unitholders; or
14.2.2to accumulate the same or any part thereof;
14.3The Trustee shall at any time prior to the expiration of any year which ends before or upon the Perpetuity Date determine with respect to all or any parts of the additional tax income (if any) of the Trust Fund of such year:
14.3.1to pay, apply or set aside the same or any part thereof for the Unitholders; or
14.3.2to accumulate the same or any part thereof.
14.4If the Trustee shall not by the Thirtieth day of June in each year have exercised its discretion to pay, apply, set aside or accumulate the whole of the net income and the whole of the additional tax income (if any) then the Trustee shall hold such income and such additional tax income (if any) not so paid, set aside or accumulated for the holders of ordinary units in proportion to their respective holdings.
The resolutions to distribute CHPT annual income were in the following form:
IT WAS RESOLVED that income for the year ended 30 June 1997 be applied to Special Unitholders (including interim distributions to them, if any, during the year) in the amounts paid or advanced to them during the year.
IT WAS RESOLVED that income for the year ended 30 June 1998 be applied to Special Unitholders (including interim distributions to them, if any, during the year) in the amounts paid or advanced to them during the year.
IT WAS RESOLVED that income for the year ended 30 June 1999 be applied to Special Unitholders (including interim distributions to them, if any, during the year) in the amounts paid or advanced to them during the year except where the Special Unitholder is also an Ordinary Unitholder. In that event, the income applied to the Ordinary Unitholder in its capacity as a Special Unitholder is that part of the amounts paid or advanced as exceeds their entitlements as Ordinary Unitholders.
Periodical drawings were advanced by the CHPT and funds were transferred from the CHPT bank account to a bank account in the name of Wood Duck.[93] The advances on account of drawings were accounted for by the CHPT as advances to Wood Duck and were set off against annual profit distributions to Wood Duck.[94]
[93] The narrations associated with those deposits are discussed below.
[94] This too is the subject of further discussion below.
The applicant’s evidence was that the distribution resolutions were:
(a)to and in favour of the former salaried partners in the Firm who assumed a similar role in the CHPT through holding special units; and
(b)not intended to vest any of the CHPT income in him and did not do that.
The applicant gave evidence that while he was a special unit holder, he had not personally drawn moneys from CHPT. The CHPT financial statements suggest that the entitlements recorded in favour of Wood Duck were the residual 25% of profit represented by the 25% ordinary unit holdings it had.
The distributions were accounted for by the CHPT in a manner entirely consistent with that evidence and that evidence is entirely consistent with the plans and intentions in creating the CHPT structure.
In the 1994 to 1996 income tax years, the CHPT made distributions to the SNAG Trust as set out in Table 3.[95]
[95]ST494, p6150; ST495, p6154; ST496, p6162; ST508, p6246; ST509, p6250; ST510, p6255; ST517; ST527.
Table 3
Year
CHPT distribution to the SNAG Trust
1994
$89,203
1995
$203,818
1996
$209,500
The SNAG Trust then distributed those monies (or virtually all of those monies)[96] for each of those years, to CHOUT.[97] CHOUT had accrued substantial losses in previous years.[98]
[96]ST500, p6180 (distribution to CHOUT of $201,346 in 1995 year, out of distribution of $203,818 from CHPT to SNAG – see ST495, p6154 and ST500, p6179); ST 501, p6186 (distribution to CHOUT of $209,253 in 1996 year, out of distribution of $209,500 from CHPT to SNAG – see ST496, p6162 and ST500, p6184).
[97]T134 acknowledges the indebtedness to the CHOUT of $209,500.
[98]Losses to 1993 of $2,239,755 were contended to have accumulated for CHOUT by the applicant in his objections. T21 (and T22, T23) at [37.5]. Tax returns disclose losses. ST497, p6166; ST498, p6169; ST499, p6176; ST508, p6248; ST509, p6250.
No monies were recorded as distributed to the applicant in his personal capacity by the trustees of the CHPT or the SNAG Trust;
Comlaw Consultants and the Comlaw Trust
In 1992 Comlaw Consultants[99] was formed on 18 December 1992[100] and the Comlaw Trust was created on 22 December 1992.[101] Half the issued units were held by Hart as trustee of the Canowindra Trust and half by Cleary, Hoare and the applicant as trustees of the CHPT.
[99] Comlaw Consultants Pty Ltd.
[100] ST 477.
[101] ST 477.
Between approximately 1993 and 1995, the Comlaw Trust carried on the business of marketing and facilitating tax planning arrangements and products. The tax planning arrangements and products included facilitating the acquisition of entities with substantial tax losses in return for a fee.
On or about 30 June 1996, the Comlaw Trust ceased its business operations.
CHC and the CHC Discretionary Trust
On or about 20 September 1996, the principals of Cleary Hoare, including the Applicant, established CHC.
The original trustee for the CHC Discretionary Trust was CHC.
The directors of CHC were:
(a)Hart (from 19 September 1996 to 4 May 2003);
(b)Collie (from 19 September 1996 to 4 May 2003);
(c)Hoare (from 19 September 1996 to 4 May 2003); and
(d)Grant (from 19 September 1996 to 21 July 1999).
The “Primary Beneficiaries” were defined in the Schedule to the CHCDT Deed to include:56
(a)the “Principals” who included Collie, Hoare and Grant; and
(b)the spouse, de facto partner, widow, widower, children, grandchildren, great grandchildren, parents and grandparents of a Principal.
There were secondary and tertiary beneficiaries.
Between 1997 and 2000, CHC (as trustee for the CHC Discretionary Trust) carried on a business of marketing and facilitating seven categories of tax planning arrangements and products or services,[102] which are described by the Commissioner, whose description is seemingly accepted by the applicant, as “Promotional Activities”.[103]
[102]Transcript (22.08.22) P58_36-45.
[103]At RASFIC [158].
The Promotional Activities included the NVI Scheme (which underpinned the IET Schemes), as well as “employee welfare funds and non-complying super funds.[104]
[104]Transcript (22.08.22) P59_23-28.
IETs
Between approximately 1 May 1994 and 23 March 2000, the principals of Cleary Hoare, including the Applicant, established or caused to be established the IETs.
Each IET had a trustee that was controlled by its directors who comprised a combination of CHPT principals, at times including the applicant, Hart and Collie.
Each IET participated in the IET NVI Schemes detailed below and had the capacity to do so.
NVI Scheme
In 1996 CHC,[105] as trustee for the Cleary Hoare Corporate Trust, began to establish a scheme to shelter trust income from income tax liabilities with a particular focus on the then s 100A and Part IVA of the 1936 Assessment Act. The scheme developed was tagged the New Venture Income or NVI Scheme. Senior Counsel’s advice was obtained concerning the scheme.[106] Annexure C is a summary of that advice. The NVI Scheme was a scheme through which income emanating from the CHPT could be sheltered by tax losses in RTH[107] and Comvat.[108]
[105]Cleary Hoare Corporate Pty Ltd
[106]T 117
[107]Retail Technology Holdings Pty Ltd.
[108]Comvat Pty Ltd.
The SNAG Trust participated in the Practice Trust NVI Scheme between 1997 and 1999 in relation to the SNAG Trust’s income (received by distributions from the CHPT). SNAG Trust income processed through the Practice Trust NVI Scheme was distributed by the trustee of the SNAG Trust:
(a)in the 1997[109] and 1998[110] Years, to the Annesley No 3 Trust (of which Haven Sea Pty Ltd was the trustee); and
[109]T 137, p1196.
[110]T 171, p1230.
(b)in the 1999 year, to the Condor Trust (of which Gainsoar Pty Ltd was the trustee).[111]
[111]T226, p1288.
Trusts connected with the applicant received moneys originating in the profits of the IETs that had been processed by the IET NVI Schemes between 1997 and 2000. Monies paid into accounts of trusts associated with the applicant in the years 1997 to 2000 (being the IET Cash Receipts) were as set out in Table 4.[112]
[112]See Grant 27 October 21 Statement at [16], [17], [19], [24].
Table 4
Year
IET Cash Receipts
Trust entity
Amended assessment and asserted IET Tax Benefit[113]
1997
$90,500169
Lombard
$275,481
1998
$296,500170
SNAG 2
$797,329
1999
$655,500
SNAG 2
$910,166
2000
$150,000
Lombard/SNAG 2
$150,000
[113]See T102, Table 4, p1093.
The applicant’s evidence, relevantly, is that:
(a)the IET Cash Receipts were loans, and the debt balances were ultimately released as part of The applicant’s departure from the Firm;[114]
[114]See G5-33 (pp164 – 168); Transcript P16_12-15.
(b)the Lombard Trust and the SNAG 2 Finance Trust calculated and accounted for their income on a cash receipts basis;[115] and
[115]Grant 27 October 21 Statement at [16].
(c)contrary to the Commissioner’s assertion,[116] The applicant was not involved in promoting such schemes for the purposes of the IETs’ earning income.[117]
[116]See Commissioner’s Outline of Opening Submissions at [51].
[117]Mr Grant’s ASFIC at [22.1] – [22.5], Mr Grant’s response to the RASFIC, at [160], Grant (27.10.21) at [39], [41]; Transcript (22.08.2) P61_41-42, (23.08.22) P29_37 – 39.
Loans and loan records
The applicant frequently resorted to the cash representing, or originating in, the CHPT or IET profits and did so by way of loan. There is a significant degree of informality associated with the loan arrangements the applicant contends for. There were not regular repayments, interest was not charged, and there were no dedicated loan agreement documents. The financial statements of the entities that are in evidence reveal loan movements and balances.
Departure from CHPT
The applicant left the Firm on 30 June 1999,[118] and commenced practising in his own firm, Grants Lawyers, and subsequently Merthyr Law.[119]
[118]See T-115; Mr Grant’s ASFIC at [24]; Grant (27.10.21) at [39].
[119]See Grant 27 October 21 Statement at [12]; T115, p1162, T116, p1163.
The initial terms of leaving were that loans were to be repaid.[120] Subsequently, as part of The applicant’s departure from the Firm, it was agreed that loan balances owed between what might be described as Grant entities to Cleary Hoare entities would be released.[121]
[120]Grant 27 October 21 Statement, G5, Document 32, clause 10.
[121]See Grant 27 October 21 Statement at [32]; G5-26, G5-27, G5-29, G5-30 (financial statements for the Lombard Trust, the SNAG 2 Trust and the SNAG Trust showing 1999 loans repaid or released).
No representations
There is no evidence of any representation of the applicant to anyone that the amounts originating in the CHPT and the IETs were his income.
The documentation as between the applicant and his former business colleagues concerning his departure manifest a clear intention that there was a repayment obligation associated with money movements that is consistent with the financial recording of those arrangements. This documentation reflects dialogue between people who should be regarded as independent and dealing at arm’s length with each other. That fact lends credibility to the financial records of money movements.
Alternative taxpayers
The applicant contends that rather than himself, income would have been shared between himself, his family members and companies to achieve a 30% corporate rate of tax.
Assets acquired by the applicant’s family and entities connected to his family.
The Commissioner identifies material asset acquisitions by entities with connections to the applicant. Annexure D sets out the details.
Commissioner’s contentions
The Commissioner contends that either the moneys originating in the CHPT paid through the SNAG Trust were the applicant’s income as ordinarily understood or trust distributions to him as a beneficiary of the CHPT and paid to the SNAG Trust and other bank accounts at his direction.
The Commissioner also criticises the evidence concerning the management of IET income processed through the IET NVI Schemes. The reason for this is unclear and the Commissioner makes no allegation other than Part IVA applies. Implicit in this is an acceptance that the transactions have the effect they purport to have on the documentary evidence available.
Central to the Commissioner’s case that for the 1994 to 1999 Years the CHPT income was the applicant’s remuneration, either by trust distribution to him beneficially that he directed to the SNAG Trust, or as ordinarily understood, is that the money that passed was his money, that money that came to him was not by way of loan, and that the applicant has failed to prove that there were loans.
CONSIDERATION
ORDINARY INCOME OR TRUST DISTRIBUTIONS
The applicant contends and the Commissioner disputes that the moneys that passed between entities (including to himself) were a combination of loans and distributions of income by trustees of trusts to beneficiaries entitled thereto as shown in financial records. Characterization of the amounts that moved from the CHPT to the SNAG Trust and beyond is critical to the s25(1) and s 6-5 analysis and to whether s 97 could apply.
Critical in this analysis is that the Commissioner makes no sham allegation.
Calling a financial or money dealing a loan is not conclusive. There is nothing in a badge or title if the reality is not consistent.[122]
[122]See F. C. of T. v BHP [2000] ATC 4659 at 4668, Hill J at [36], Heerey and Merkel JJ agreeing. See also Australia and New Zealand Savings Bank Ltd v F. C. of T. [1993] ATC 4370 at 4372 Davies J; Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties [1997] ATC 5015 at 5020 Gleeson C.J.; Noza Holdings Pty Ltd v F. C. of T. [2011] FCA 46 at [238] Gordon J), and Mussalli v F. C. of T. [2020] FCA 544 at [97] Jagot J, as examples.
A dealing in money will constitute a loan if it has the essential features of a loan. The essence of a loan is an obligation to repay the amount advanced or otherwise provided.[123]
[123]C L Pannam, The Law of Money Lenders in Australia and New Zealand (1964), at 6 and F. C. of T. v Radilo Enterprises Pty Ltd [1997] FCA 22, Normandy Finance Pty Ltd vF. C. of T.[2015] FCA 1420 [70] – [72] Edmonds J. F. C. of T. v Rawson Finances Pty Ltd[2012] FCA 753], Rowntree v F. C. of T. [2018] FCA 182 at [21] and [22] Rares J
Absent a sham, a loan can be made or agreed to orally or by conduct or a combination of both, book entries in accounts can be sufficient evidence of the loan, and cash does not need to move or change hands.[124] A promise to repay, and the earlier advance do not necessarily need to be recorded in discrete purpose or even multipurpose written documents.[125] Clearly there advantages if they are. Absence of a contract document ought not be surprising in some settings and undue weight ought not be attached to that absence.[126]
[124]VL Finance Pty Ltd v Legudi [2003] VSC 57at [30] Nettle J.
[125]VL Finance Pty Ltd v Legudi [2003] VSC 57at [30] Nettle J.
[126]See Melbourne Corporation of Australia Pty Ltd v F. C. of T.[2022] FCA 972 Logan J at [44] to [47] and the authorities there cited, and Herdegen v F. C. of T. [1988] FCA 419 Gummow J at [21].
Loans do not need to specify repayment terms. Specifying repayment terms is the contractual process by which an obligation to repay on demand is overcome, so, in the absence of such specification the loan will be regarded as ‘at call’.[127]An at call conclusion might be set aside by an implied term that a period of notice is required,[128] again not an express term situation.
[127]Ogilvie v Adams [1981] VR 1041 at 1043 Fullagar J. See also VL Finance Pty Ltd v Legudi [2003] VSC 57 at [39] and [40] Nettle J, and Sole Luna Pty Ltd as Trustee for the PA Wade No 2 Settlement Trust v F. C. of T. [2019] FCA 1195 at [31] Steward J.
[128]VL Finance at [41] Nettle J referring to Ogilvie v Adams.
Loans do not need to bear interest or be secured.[129]
[129]Sole Luna Pty Ltd as Trustee for the PA Wade No 2 Settlement Trust F. C. of T. [2019] FCA 1195 at [31] Steward J.
To characterise the legal relationship created by a dealing in money where there is not a discrete document recording the terms of a contract, it becomes necessary ‘… to examine the acts and conduct relied on in the context in which they occurred to ascertain whether objectively they evince a contract.’[130]
[130]Rowntree at [55].
The Commissioner makes much of the proposition that actions were taken, and events happened at the applicant’s direction. And from this, together with other features of the records in evidence, the Commissioner urges that it should be concluded that money was dealt with by the applicant beneficially as the owner of the money, and that deposits to the SNAG Trust bank account in particular were deposits of his money at his direction.
Contrary to the Commissioner’s contentions, the fact that the applicant may have directed traffic in respect of activities of entities he controlled is of little or no moment. Few, if any, events are more conventional than a corporate entity’s business and financial transactions being undertaken at the direction of one of its directors, or its sole director. Few if any propositions are more conventional than the proposition that corporate entities act by the steps taken on their behalf by their employees, agents, officers, and managers, and that this group includes natural people. The applicant was a director and controller of various corporate entities so their actions can legitimately be seen to be the product of the applicant’s actions as their officer. In this regard it has been generally accepted that the actions of managers officers and agents are the actions of the entities they control, and the purposes of entities can lie in the purposes of those who control or manage them.[131]
[131]See Middleton J. in Visy Packaging Holdings Pty Ltd v. F C of T [2012] FCA 1195 at paragraphs 200-203 and in particular the references to Whitfords Beach (1982) 150 CLR 355 at 370 and to GE Capital Finance Australasia Pty Ltd v. F. C. of T. [2011] FCA 849 and Tesco Supermarkets Limited v. Nattrass [1972] AC 153 and Smorgon v. Australia & New Zealand Banking Group Limited (1976) 134 CLR 475.
The Commissioner also places significant weight on bank account narrations. The bank account deposit records in the SNAG Trust bank account record 185 deposits originating from the CHPT bank account over the period from 9 July 1993 to 16 June 1999. The narrations[132] to those deposits varied.
[132]Adopting Annexure A to the Commissioner’s closing submissions dated 30 September 2022, pp 164-174.
(a)The term “Pay" was used 14 times.
(b)The term “Deposit” was used 122 times.
(c)The term “Transfer” was used once.
(d)The term “CLEARYHOAREHARTGRANT" was used once.
(e)The term “CLEARY HOARNE HART" was used once.
(f)The term “Cleary Hoare pay SJG" was used 41 times.
(g)The term “Cleary & Hoare" was used once.
(h)The term “Cleary Hoare” was used once.
(i)The term “Cleary Hoare Drawings" was used once.
(j)The term “Cleary Hoare Mid-Monthly Drawings" was used twice.
The Commissioner contends that these entries show that the deposits were the applicant’s remuneration derived personally and dealt with as he directed.
The applicant’s evidence, which is accepted, is that these descriptions were made by a junior accounting staff person and not any decision-maker of authority.[133] In his oral evidence he said:
[133]Transcript 22 August 2022, pp 58-59.
Mr Grant, I think you agreed with me when I said (indistinct) bank statements back in the time in 1997 and you would’ve seen those entries at that point, and you didn’t go to the bookkeeping team at the firm and say, “You’re misdescribing those deposits, correct it”?---Yes, it wasn’t my area.
…
Area?---So, Michael, he ran all of the admin and I didn’t give it a second thought when I saw them at the time. I knew they were drawings going into SNAG’s account, and I just left it, didn’t say any more about it. When it came tax time I knew they were drawings and described them as such, and the financial statements. When I saw the accounts for Cleary Hoare Practice Trust, they weren’t described as wages or anything like that, they were described as distributions, sorry, they were described as drawings, offset against the distributions.
Why you said then though that it’s only raised in October last year, this issue has been pointed to in the documents throughout this matter, but only then do you decide to raise it. You’re not suggesting, are you, that your memory’s better in October ’21 than it was back then?---No, obviously I thought that the trust and terms, the way they’d been launched for Cleary Hoare Practice Trust and for SNAG would show what the funds actually were, rather than descriptions by a junior accounting person.
So rather than the contemporaneous records of the bank statements, is that what you’re suggesting …?---… yes.
Yes. Let me just make sure I’ve understood that answer properly. So you’re suggesting that the tax returns that you do after the end of the financial year are a better record than the contemporaneous records and entries that are made into your bank statements by those particular regular fortnightly payments, is that what you’re suggesting? --- I’m suggesting that the meeting of the trustees where we agreed to pay those drawings is the correct record of what happened, and how some junior accounting staff person described them when they made the payments didn’t concern me.[134]
[134]Transcript 22 August 2022, pp 58-59.
Subject to the amount of the tax benefit being correctly restated as noted above, for these reasons the Part IVA determinations confirmed.
Penalties
The Commissioner has assessed penalty at the 50% level.
The applicant’s circumstances are not materially different to those in the Hart litigation where the primary judge found that penalty at the 50% rate without remission was appropriate[544] and the full court found those conclusions plainly correct.[545] The reference to the McCutcheon litigation[546] by the primary judge in Hart[547] is presumably to the fact that such authorities as there have been concerning the NVI schemes are negative and not that there were any authorities at the time the schemes were entered into or carried out by the applicant and the entities involved in the schemes. Particular reference needs to be made to the Senior Counsel advice obtained. It appears conceptual rather than focused on the applicant’s circumstances, or at least shows no appearance of having been formulated with the applicant’s personal circumstances in mind. That is well short of the standard required to obtain penalty relief. It is difficult to see any basis upon which the present penalty was not correctly imposed, and it is equally difficult to see any basis upon which that penalty should be remitted.
[544][2017] FCA 572 [292] to [308].
[545][2018] FCAFC 61 [109].
[546]McCutcheon v F. C. of T. [2008] FCA 318; (2008) 168 FCR 149 and McCutcheon and F. C. of T. [2006] AATA 535.
[547][2017] FCA 572 [300(3)].
It ought be recalculated by reference to the reduced tax benefit amount but other than that it ought not be altered at all.
The penalty should be recalculated by reference to the reduced tax benefit and the effect of the prior year losses being allowed as deductions in 1997.
DEFERMENT OF PAYMENT DATE
In the event that the applicant didn’t succeed in the substantive application which is the case for the reasons set out above, the applicant seeks Tribunal’s decision to incorporate an exercise of the power under section 255–10 of Schedule 1 to the Administration Act.
Section 255-10 is in the following terms:
255-10To defer the payment time
Deferrals for particular taxpayers
(1)The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a * tax-related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly.
Note:General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5-15(a) of the Income Tax Assessment Act 1997 .
The respondent resists this endeavour and urges the Tribunal to conclude that it does not have jurisdiction to entertain the applicant’s request.
Whilst it is clear that there has been an inordinate amount of time between the commencement of the Commissioner’s audit activities and assessments and again between objections and decisions on objection, the Tribunal simply cannot review it impose a s 255 – 10 deferment.
The Tribunal is limited to statutory jurisdiction to re-review decisions in respect of which an affected party is conferred entitlement to seek that review. Relevantly, in the present circumstances, the decisions that are subject to review are objection decisions concerning assessments of income tax liability. Specific provision is made for a taxpayer dissatisfied with an assessment to object to it, and, in turn, if dissatisfied with the objection decision to have it reviewed by the Tribunal. The time for payment of the assessment is not part of the assessment and is therefore not reviewable.
As persuasive as the applicant’s submissions are, the authorities to which the applicant points[548] do not go so far as to suggest the Tribunal has any capacity to impose a deferred time for payment pursuant to section 25-510. The tribunal does not have jurisdiction to entertain this aspect of what the applicant seeks.
[548]F. C. of T. v Administrative Appeals Tribunal [2011] FCAFC 37; (2011) 191 FCR 400, Commonwealth Bank Officers Superannuation Corporation Pty Ltd v F. C. of T. (2005) 148 FCR 427 F. C. of T. v Apted [2021] FCAFC 45; (2021) 284 FCR 93
DECISION
The objection decisions under review are set aside and remitted to the Commissioner to be remade in accordance with these reasons.
I certify that the preceding 209 (two hundred and nine) paragraphs are a true copy of the reasons for the decision herein of Deputy President F D O’Loughlin KC
............................[sgd]............................................
Associate
Dated: 12 march 2024
Date(s) of hearing: 28 October 2021, 4 November 2021, 22-3 August 2022, 11-13 October 2022, 29 November 2022
Date final submission received: 14 April 2023 Counsel for the Applicant: Mr P Tucker Solicitors for the Applicant: Merthyr Law Counsel for the Respondent: Ms A Wheatley KC
Mr B McEnierySolicitors for the Respondent: The Australian Government Solicitor Annexure A
Table of entities
Entity Name
Entity name used in these reasons
Description
Annesley Corporate Trust
Annesley Corporate Trust
Discretionary trust settled on 30 May 1997.
Participated in the 1998 IET NVI Scheme.
Trustee of the Trust was Lake Mylor.
Annesley Investments Pty Ltd
Annesley Investments
Trustee for the Annesley Trust between 1 May 1994 and 3 July 1995.
Collie and Hart were Directors for the relevant period.
Collie was a director of Annesley Investments from 9 June 1994 to 21 November 1995.
Annesley No. 3 Trust
Annesley No. 3 Trust
Discretionary trust settled on 30 May 1997.
Trustee was Haven Sea.
Participated in both the 1997 and 1998. Practice and IET NVI Schemes.
Annesley Trust
Annesley Trust
Participated in the 1998 IET NVI Scheme.
Original trustee was Annesley Investments.
Haven Sea was appointed trustee on 3 July 1995
Australian Palliative Care Fund Ltd
Australian Palliative Care Fund
Tax exempt entity associated with CHC.
Participated in the 2000 IET NVI Schemes.
Registered on 29 June 1999.
Hart a director from 29 June 1999.
Australian Palliative Care Trust
Australian Palliative Care Trust
Trust created by Deed dated 3 November 1999.
A Tough Row to Hoe Pty Ltd
A Tough Row to Hoe
Proprietary company operating between 3 April 1996 and 16 May 2004.
Grant a director between 3 February 1998 and 16 May 2004.
Trustee for the SNAG No 2 Finance Trust.
Balmoral Income Trust
Balmoral Income Trust
Trust was settled on 15 June 2000.
Trustee was Clearmaze.
Participated in the 2000 IET NVI Scheme.
Barcelona Trust
Barcelona Trust
Trust was settled on 4 May 1999.
The trustee was Xenaberry.
Participated in the 1999 Practice NVI and the 1999 and 2000 IET NVI Schemes.
Canerink Pty Ltd
Canerink
Trustee for the CHC Discretionary Trust from 9 May 2000.
Registered on 16 June 1999.
Collie, Hart and Hoare were directors from 21 June 1999.
Canowindra Trust
Canowindra Trust
The Trust was settled on 21 December 1992
Hart was the trustee of the Canowindra trust
A unit holder of Comlaw Trust.
CHC Discretionary Trust
CHC Discretionary Trust
Discretionary trust which participated in the 1998, 1999 and 2000 IET NVI Schemes.
The trustee was Cleary Hoare Consulting.
CHC Services Trust
CHC Services Trust
Discretionary trust Settled on 30 July 1999, Trustee was CHC.
Participated in the 2001 IET NVI Scheme.
Clearmaze Pty Ltd
Clearmaze
Participated in the 2000 IET NVI Schemes.
Trustee for the Balmoral Income Trust, Condor No. 2 Trust, Pelican Capital Trust and Packard Income Trust.
Registered 14 June 2000. Hart a director from 16 June 2000.
Com-Law (No. 51) Pty Ltd
Com-Law (No. 51)
A company established on 22 October 1987.
The trustee of the Raymund Grant Trust.
Controlled by the applicant’s father.
Condor Trust
Condor Trust
Discretionary trust which participated in the 1998, 1999 and 2000 NVI IET Schemes.
The trustee was Gainsoar.
Donald Cleary
Donald Cleary
A founding partner and former owner of Cleary Hoare.
Cleary Hoare Consulting Pty Ltd
Cleary Hoare Consulting
The trustee for the CHC Services Trust.
Grant and Hart were directors for the relevant period.
Cleary Hoare Corporate Pty Ltd
Cleary Hoare Corporate
or
CHC
Trustee for the CHC Discretionary Trust between 20 September 1996 and 9 May 2000.
Changed its name to Clearcor on or about 22 February 2001.
Hart Collie, Hoare were the directors during the relevant period
Grant was a director from 19 September 1996 to 21 July 1999.
Cleary Hoare Practice Trust
Cleary Hoare Practice Trust
Unit trust established in 1993.
Carried on under the name "Cleary Hoare" the legal practice previously carried on by Cleary Hoare in conformity with the rules of the Queensland Law Society made under the Queensland Law Society Act 1952-1985.
Cleary Hoare Solicitors
Cleary Hoare Solicitors
A firm of solicitors in which the Applicant became a partner and/or Principal on or 20 May 1992 until 30 June 1999.
Ian Collie
Collie
A salaried solicitor and principal of Cleary Hoare.
Comlaw Consultants Pty Ltd
Comlaw Consultants Pty Ltd
Registered on 22 April 1993.
Collie a director from 7 October 1993 to 8 April 1999.
Hoare and Hart were directors from 21 December 1992 to 8 April 1999.
Comlaw Trust
Comlaw Trust
Unit trust established on 22 December 1992 by Grant, Cleary, Hoare and Hart.
The Canowindra Trust held 50% of the units.
Trustee was Lake Morundah Pty Ltd.
Comvat Pty Ltd
Comvat
Registered on 23 June 1995.
Participated in the 1999 Practice NVI Scheme and the 1999 and 2000 IET NVI Schemes.
Had tax losses resulting in little or no income tax being paid in the 1999 and 2000 income years.
Condor Trust
Condor Trust
A discretionary trust which participated in the 1999 Practice NVI and the 1999 and 2000 IET NVI Schemes.
The trust was settled on 18 May 1999.
The trustee was Gainsoar.
Condor No. 2 Trust
Condor No. 2 Trust
Participated in the 2000 IET NVI Scheme.
settled on 15 June 2000.
Trustee was Clearmaze.
Fairclass Pty Ltd
Fairclass
Established on 17 September 1999.
Trustee for the Wilston Income Trust and Randwick Trust.
Hart and Hoare were directors from 20 September 1999 to 4 May 2003.
Falcon Income Trust
Falcon Income Trust
Participated in the 2000 IET NVI Scheme.
The Trust was settled on 8 June 1999.
The trustee was Starwire.
Five Dock Investments Pty Ltd
Five Dock Investments
The trustee for Foresight Charitable Foundation.
Director was Richard Arnold.
Foresight Charitable Foundation
Foresight Charitable Foundation
Tax exempt entity which participated in the 2001 IET NVI Schemes.
A beneficiary of the Mosman Fixed Trust.
Five Dock Investments was trustee of Foresight Charitable Foundation.
Gainsleep Pty Ltd
Gainsleep
Established on 26 February 1996.
Trustee of the Zillmere Mafia Trust which the applicant controlled.
Gainsoar Pty Ltd
Gainsoar
Participated in the 1999 Practice NVI and the 1999 and 2000 IET NVI Schemes.
Registered on 23 March 1999.
Collie, Hoare and Hart were directors from 1 April 1999.
Gainosor was the trustee for the Condor Trust and Hawk Income Trust
Genius 2002 Pty Ltd
Genius 2002
A company established on 10 October 2001.
Genius 2002 was the trustee of the Genius 2002 Trust.
Genius 2002 Trust
Genius 2002 Trust
A trust controlled by the applicant.
Haven Sea Pty Ltd
Haven Sea
Established on 17 August 1992.
Participated in the 1998 Practice NVI Scheme and IET NVI Scheme.
Trustee for the Annesley Trust between 3 July 1995 and 8 April 1999.
Hart was a director of the company from 17 August 1992 to 8 April 1999.
Collie was a director from 30 April 1993 to 8 April 1999.
Hawk Income Trust
Hawk Income Trust
Participated in the 1999 IET NVI Scheme.
The Trust was settled on 8 June 1999.
The trustee was Starwire.
HIV Trust
HIV Trust
A trust controlled by the applicant.
HIV Pty Ltd
HIV
A company established on 28 July 1998
HIV was the trustee of the HIV Trust which the applicant controlled
Iapetus Pty Ltd
Iapetus
Participated in the 1999 Practice NVI Schemes and the 1999 and 2000 IET NVI Schemes.
The trustee for the Parramatta Trust, Tanker Trust, Tambo Trust, Orient Unit Trust and the Orient Fixed Trust.
Registered on 1 July 1997. Collie, Hoare and Hart were directors from 1 July 1997, Grant was one from 1 July 1997 to 21 July 1999.
Brett Hart
Brett Hart
A principal of Cleary Hoare.
John Hoare
John Hoare
or
Hoare
A founding partner and principal of Cleary Hoare.
LM Income Trust
LM Income Trust
Participated in the 1998, 1999 and 2000 IET NVI Schemes.
Lake Mylor was the trustee
Lake Mylor Pty Ltd
Lake Mylor
Participated in the 1997 and 1998 Practice NVI Scheme and IET NVI Scheme.
The trustee for the Annesley Corporate Trust, the LM Income Trust, the Zebra Fixed Trust, the Zebra Unit Trust and the Zebra Capital Trust.
Grant was a director from 17 March 1997 to 21 July 1999.
Michael James Patrick Hart (deceased)
Michael Hart or Hart
A partner and principal at Cleary Hoare and one of the primary architects of the NVI Scheme.
Mistrill Pty Ltd
Mistrill
Participated in the 2000 IET NVI Scheme.
Registered on 7 April 2000.
Collie and Hart were directors from 11 April 2000.
The trustee for the Packard Unit Trust and Packard Fixed Trust No. 2.
Morocco Fixed Trust
Morocco Fixed Trust
A discretionary trust which participated in the 1999 and 2000 IET NVI Schemes.
The trust was settled on 4 May 1999. The trustee was Xenaberry.
Morocco Unit Trust
Morocco Unit Trust
A unit trust which participated in the 1999 Practice NVI Schemes and the 1999 and 2000 IET NVI Schemes.
The trust was settled on 4 May 1999.
The trustee was Xenaberry.
New Venture Income Scheme
New Venture Income Scheme or NVI Scheme
A tax planning scheme developed by the Applicant and/or the principals of Cleary Hoare involving the use of trusts with no pattern of previous income distributions, which is designed to defeat or circumvent the application of Pt IVA of the ITAA 1936.
Orient Fixed Trust
Orient Fixed Trust
A discretionary trust which participated in the 1999 Practice NVI and IET NVI Schemes.
The trust was settled on 2 February 1998.
The trustee was Iapetus.
Orient Unit Trust
Orient Unit Trust
A unit trust which participated in the 1999 IET NVI Scheme.
The trust was settled on 2 February 1998. The trustee was Iapetus.
Packard Fixed Trust
Packard Fixed Trust
Participated in the 2000 IET NVI Schemes.
Settled on 15 June 2000.
Mistrill was trustee of the Packard Fixed Trust.
Packard Fixed Trust No. 2
Packard Fixed Trust No. 2
A trust which participated in the 2000 IET NVI Scheme.
Settled on 15 June 2000.
Mistrill was trustee of the Packard Fixed Trust No. 2.
Packard Income Trust
Packard Income Trust
A trust which participated in the 2000 IET NVI Scheme.
Settled on 15 June 2000.
Clearmaze was the trustee of the Packard Income trust.
Packard Unit Trust
Packard Unit Trust
A trust which participated in the 2000 IET NVI Scheme.
Settled on 15 June 2000.
Mistrill was the trustee of the Packard Unit Trust.
Parramatta Trust
Parramatta Trust
A trust which participated in the 1999 Practice NVI Scheme and the 1998 and 1999 IET NVI Schemes.
The Trust was settled on 2 February 1998.
The trustee was Iapetus.
Pelican Capital Trust
Pelican Capital Trust
A trust which participated in the 2000 Practice NVI and IET NVI Schemes.
The trust was settled on 14 July 2000.
Clearmaze was the trustee of the Pelican Capital Trust
Randwick Income Trust
Randwick Income Trust
A trust which participated in the 2001 IET NVI Scheme.
The Trust was settled on 23 March 2000.
The trustee was Fairclass. Relevant to the income years 1997-2002.
Raymund Grant Trust
Raymund Grant Trust
A Trust controlled by the applicant’s father.
Retail Technology Holdings Pty Ltd
Retail Technology Holdings
or
RTH
An entity associated with CHC which participated in the1998 and 1999 Practice NVI and IET NVI Schemes.
The company was registered on 6 June 1972.
During the relevant years RTH had deductions/tax losses resulting in little or no income tax being paid.
Sensitive New Age Guy Trust
Sensitive New Age Guy Trust
A trust associated with the Applicant.
The trust was settled on 29 January 1993.
Wood Duck was the trustee of the SNAG Trust.
SNAG No. 2 Finance Trust
SNAG No. 2 Finance Trust
A trust associated with the Applicant.
The trust was settled on 1 July 1997.
A Tough Row to Hoe was the trustee of the SNAG No.2 Finance Trust.
Starwire Capital Investment Trust
Starwire Capital Investment Trust
A discretionary trust which participated in the 1999 Practice NVI Schemes and the 1999 and 2000 IET NVI Schemes.
The trust was settled on 7 September 2001.
Starwire was the trustee of the Starwire Capital Trust.
Starwire Pty Ltd
Starwire
Participated in the 1999 Practice NVI Schemes and the 1999 and 2000 IET NVI Schemes.
The trustee for the Hawk Income Trust, Tambo Capital Trust, Tambo 2000 Capital Trust, Falcon Income Trust and the Starwire Capital Trust.
The company was registered on 29 April 1999.
Collie, Hart and Hoare were directors from 10 May 1999.
Steven Grant
The applicant
or
Grant
The Applicant and a principal of Cleary Hoare until 30 June 1999 and an original special unit holder of the Practice Trust.
Tambo Trust
Tambo Trust
A trust which participated in the 1999 Practice NVI Scheme and the 1999 and 2000 IET NVI Schemes.
The trust was settled on 13 August 1998.
Iapetus was the trustee of the Tambo Trust.
Tambo 2000 Capital Trust
Tambo 2000 Capital Trust
A discretionary trust which participated in the 2000 IET NVI Scheme.
The trust was settled on 20 September 2000. The trustee was Starwire.
Tambo Capital Investment Trust
Tambo Capital Investment Trust
A discretionary trust which participated in the 1999 Practice NVI Scheme and the 2000 IET NVI Scheme.
The trust was settled on 3 August 1999.
The trustee was Starwire.
Tanker Trust
Tanker Trust
A trust which participated in the 1999 Practice NVI and 1999 and 2001 IET NVI Schemes.
The trust was settled on 13 August 1998.
The trustee was Iapetus.
Wharf and Jetty Finance Trusts
Wharf and Jetty Finance Trusts
Trusts used as part of the NVI Schemes to provide ‘loans’ to the Grant or entities associated with the Grant.
Wilston Income Trust
Wilston Income Trust
A trust which participated in the 2000 IET NVI Schemes.
Wood Duck Pty Ltd
Wood Duck
A proprietary company registered on 1 February 1993.
Grant was a director of Wood Duck from 1 February 1993.
The trustee for the SNAG Trust and an original unit holder for the Practice Trust.
Xenaberry Pty Ltd
Xenaberry
An entity which participated in the 1999 Practice NVI Scheme and the 1999 and 2000 IET NVI Schemes.
The trustee for the Barcelona Trust, Morocco Unit Trust and Morocco Fixed Trust.
The directors of Xenaberry for the relevant period were Hart, Collie and Hoare.
Grant was a director from 5 June 1998 to 21 July 1999.
Zebra Capital Trust
Zebra Capital Trust
A trust which participated in the 1997 Practice NVI and the 1997 IEV NVI Scheme.
The trust was settled on 1 July 1997.
Lake Mylor was trustee of the Zebra Capital Trust
Zebra Capital Investment Trust
Zebra Capital Investment Trust
A trust which participated in the 1998 Practice NVI and the 1998 IET NVI Schemes.
The trust was settled on 1 July 1998.
Lake Mylor was trustee of the Zebra Capital Investment Trust.
Zebra Fixed Trust
Zebra Fixed Trust
A fixed trust which participated in the 1998 Practice NVI Scheme and IET NVI Scheme.
The trust was settled on 9 May 1997.
Lake Mylor was trustee of the Zebra Fixed Trust
Zebra Unit Trust
Zebra Unit Trust
A unit trust which participated in the 1998 Practice NVI and IET NVI Schemes.
The trust was settled on 9 May 1997.
Lake Mylor was trustee of the Zebra Unit Trust.
Zillmere Mafia Trust
Zillmere Mafia Trust
A Trust which the applicant controlled.
Annexure B
Table of Evidence
Witness Statement/Affidavit
Date of Document
Referred to in reasons as
Affidavit of Steven John Grant
2 March 2020
Grant 2 March 20 Affidavit
Amended Statement of Steven John Grant
5 June 2020
Grant 5 June 20 Statement
Supplementary Statement of Steven John Grant
27 October 2021
Grant 27 October 21 Statement
Statement of Steven John Grant
28 October 2021
Grant 28 October 21 Statement
Statement of Steven John Grant
29 October 2021
Grant 29 October 21 Statement
Statement of Steven John Grant
5 November 2021
Grant 5 November 21 Statement
Further Statement of Steven John Grant
3 May 2022
Grant 3 May 22 Statement
Statement of Steven John Grant
16 August 2022
Grant 7 October 22 Statement
Affidavit of Steven John Grant
7 October 2022
Grant 2 March 20 Affidavit
Affidavit of Kurt William Bragg
30 September 2022
Bragg Affidavit
Affidavit of Scott Jonathan Turner
30 September 2022
Turner Affidavit
Affidavit of Leo Alan Kramer Walter
30 September 2022
Walter Affidavit
Annexure C
Summary of tax advice
RE: INCOME TAX ASSESSMENT ACT 1936
PRECIS OF SENIOR COUNSEL'S OPINION DATED 8 FEBRUARY 1996
1. RELEVANT ENTITIES
Instructing Solicitors sought an opinion in relation to the operation of the Income Tax Assessment Act 1936 in respect of a proposed series of transactions which will be entered into by a number of entities including six newly established trusts (NCT1, NCT2, NPT1, NPT2, NPT3.and NPT4). NCT1 and NCT2 will be under the control of clients of advisers who have sought assistance from Instructing Solicitors on behalf of their clients but who are not otherwise connected with Instructing Solicitors. NPT1, NPT2, NPT3 and NPT4 will effectively be under the control of persons associated with Instructing Solicitors.
2. ASSUMPTIONS
2.1 NCT1 is. a discretionary trust which will for the first time derive substantial assessable income as a result of which there will be distributable net income of its trust estate for the purposes of the Act. It will not have previously distributed any net income to its beneficiaries. Its classes of beneficiaries will be specified in such a way that they include NPT1, a number of charities and (possibly) additional individuals or entities unassociated with the persons who control its operations.
2.2 NPT1 will be a discretionary trust.
2.3 NPT2 will be a fixed trust.
2.4 NPT3 will be a discretionary trust.
2.5 NPT4 will be a unit trust.
2.6 NCT2 will be a discretionary trust.
2.7 There will be net income available for distribution in NCT1 of $1 million. The transactions which will then occur include the following:
2.7.l the net income of NCT1 of $1 million will be distributed to NPT1 and on to NPT2 with the bulk of the funds ultimately received by NPT4.
2.7.2 NPT4 will pay $900,000.00 by way of gift to NCT2. NPT4 wi11 a1so pay fees in connection with implementation of the proposal.
2.7.3 NCT2 lends the money it has received to NCT1.
3. CONSEQUENCES
3.1 The overall result of the transactions is that entities associated with the client have paid out $1 million and received $900,000.00, a net loss of $100,000.00. However, the receipt is conceived to be not assessable to income tax whilst the amount paid out would have been assessable in the hands of a beneficiary or the trustee of NCTl.
3.2 NPT1 and NPT2 have acted solely as conduits through which the sum of $1 million has passed.
3.3 NPT4 has received a sum properly categorised as capita1 from which it makes a gift to NCT2 which is also capital in the hands of the recipient.
In the context of the above transactions (and other steps not disclosed in this precis) the questions asked of Senior Counsel and his answers included:-
Question 1
Will the distribution of income by NCT1 to NPT1 result in any adverse tax investments for NCT1? In other words, will the trustee of NCT1 be free of any liability to income tax that might have arisen if Section 100A of the Act were to apply.
Answer
In Senior Counsel's opinion, no. Assuming that the section might otherwise be applicable, Subsection (3B) (which deals with, trust to trust distributions) will mean that since the income of NCT1 was distributed by NPT1 to NPT2, section 100A will not have any application to the distribution from NCT1.
Question 2
Will Section 100A apply to the distribution by NPT1 to NPT2?
Answer
For the same reason as given in the answer to question 1, Section 100A will not have any application to this distribution.
Question 3
Will the gift by NPT4 to NCT2 result in any income tax liability by either party?
Answer
For reasons including the following:
1.It is a one-off transaction with no incidents of business or enterprise;
2.The acquisition of a gift does not, of itself, give rise to a taxable capital gain. Such an issue requires consideration if, and when, the gift is disposed of;
3.The definition of "asset" for capital gains tax purposes (S. 160A) is not such as to include gifts of Australian currency not relating to an existing debt or chose in action; and
4.Even if the gift were an asset for capital gains tax purposes when acquired by NCT2 such an acquisition would not, of itself, give rise to a taxable capital gain. That issue would not arise until the asset is disposed of by NCT2 and the consideration received (if any) would never be more than the cash amount of the gift meaning there can be no capital gain;
there is no basis upon which any of the other entities involved should be liable to tax with the exception of the entity which receives the fees which will be taxable.
Provided that no instrument is brought into existence which falls within the definition of a “deed of gift" or similar in the relevant State legislation and settlement sums are nominal, no liability to stamp duty should arise.
Question 4
Will the proposal be adversely affected by Part IVA?
Answer
Whilst the proposal will come within the definition of a "scheme" (S. 177A(l)), it ought not be adversely affected by the anti-avoidance provisions contained within Part IVA because it will not be a scheme to which Part IVA applies as set out in S. 177D since it will not be possible to identify a taxpayer who was intended to obtain a tax benefit. Such a conclusion is dependent on there being no identifiable taxpayer associated with NCT1 in terms of enabling the Commissioner to point to such a taxpayer as evidenced, for example, by a pattern of previous distributions.
Question 5
Will the proposal be adversely affected by:-
1.The Trust Recoupment Tax Assessment Act 1985?
2.The Crimes (Taxation Offences) Act 1980?
Answer
Senior Counsel sees no reason why the proposal should result in any breach of the duties of directors, trustees, or the criminal law and, in particular, the Crimes·(Taxation Offences) Act 1980. It does not seem to him that the provisions of paragraph 3(4)(e) of the latter Act can apply in relation to a trustee which never becomes personally liable to pay tax, since the essence of offences created under that Act (apart from section 8, which applied only in the context of old sales tax) is the deprivation of a company or trustee of the capacity to meet tax liabilities which (are due, or which fall due. In his view, none will, either personally or otherwise.
Senior Counsel also considered and advised that there was no adverse impact on the proposal if the flow of funds from NCT1 to NPT1 (and back to NCT1) were by way of bearer promissory notes except for the fee component which would be by cheque.
NVI ARRANGEMENT
1.Principal features:
1.1Relevant to discretionary trusts and discretionary unit trusts ("the distributing trust") which are either:
1.1.1newly established without any trading history; or
1.1.2established in a previous year but without a pattern of distributions.
1.2At least two recipient trusts between the distributing trust and the ultimate beneficiary.
1.3Gift by ultimate beneficiary to non-associated trust in order for first recipient trust to qualify as a potential beneficiary.
1.4Gift of capital to capital trust.
2.Principal issues:
2.1S.l00A.
2.2Part IVA.
2.3Deductibility of qualifying gift.
2.4Gift on capital account.
2.1S. l00A:
Specifically:
(3B)Where -
(a)apart from this section, a beneficiary (in this subsection referred to as the trustee beneficiary) of a trust estate would, by reason that income of the trust estate was paid to, or applied for the benefit of, the trustee beneficiary, be deemed to be presently entitled to income of the trust estate in the capacity of a trustee of another trust estate (in this subsection referred to as the interposed trust estate);
(b)apart from this subsection, that income or a part of that income (which income or pan is in this subsection referred to as !he relevant trust income) would, by virtue of subsection (2), be deemed not to have been paid to, or applied for the benefit of, the trustee beneficiary; and
(c)apart from this section, a beneficiary of the interposed trust estate is or was, or beneficiaries of the interposed trust estate are or were, presently entitled, or deemedto.be presently entitled, to any income of the interposed trust estate (in this subsection referred to as the distributable trust income) that is attributable to the relevant trust income,
subsection (2) does not apply, and shall be deemed never to have applied, in relation to the trustee beneficiary, in relation to any part of the relevant trust income to which the distributable trust income is attributable.
-//-
(7)Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or !he transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.
-//-
(8)A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes !hat included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
In the contemplated circumstances:
2.1.1At trust law, no beneficiary of a discretionary trust has any interest in the property of the trust (including income) until such time as the trustee's discretion has been exercised in favour of the beneficiary. From an ITAA standpoint, in the absence of a pattern of distributions, it cannot be said that any particular beneficiary or beneficiaries would have been liable to pay income tax (or less income tax) in respect of the year of income if the agreement had not been entered into.
2.1.2In any event, even assuming that s. 100A might otherwise be applicable, sub-section (3B) will have the effect that as the income of the distributing trust is distributed by the first recipient trust to the second recipient trust, the section will have no application to the distributing trust.
2.2Part IVA
2.2.1Whilst the proposal will come within the definition of a "scheme" (s.177A(l) of the ITAA), it will not be a scheme to which Part IV A applies as set out in s. l 77D because it is not possible to identify a taxpayer who was intended to obtain a tax benefit.
2.2.2The requirements of s.177D are similar to those of sub-section 100A(8). For Part IV A to adversely impact on the proposal there must be an identifiable "taxpayer" who obtained a tax benefit in connection with the scheme being referable to an amount not being included in the assessable income of the taxpayer in the year of income.
2.3Deductibility of qualifying gift:
2.3.1The obtaining of the income distribution is the only purpose of the expenditure involved in the gift and, accordingly, the expense is incurred in the gaining of assessable income. No capital asset is acquired by the ultimate beneficiary. There exists the appropriate nexus between the expense and the derivation of the income.
2.3.2Neither Part IVA nor any other provision of the ITAA will operate to impact on the deductibility of the qualifying gift.
2.3.3In any event, at all material times, the ultimate beneficiary was either a company with available tax losses or an exempt entity.
2.4The capital nature of the gift received by the capital trust:
2.4.1The proposal provides for the payment of monies by way of subscription for units in the unit trust which are to be properly treated on capital account in the books of the unit trust.
2.4.2There is nothing in the transaction including the steps prior to the receipt of the funds by the unit trust that adversely impacts on the capital nature of the transaction.
2.4.3There is nothing at tax law that affects the capital nature of the gift received by the capital trust.
Annexure D
Annexure # Assets purchased between 1 July 1992 to 30 June 2001 by entities connected with the applicant or his family members.[549]
[549]Respondent’s response to Applicant’s request for Particulars, dated 31 July 2020, pp 10-1.
Owner / Purchaser
Asset Description
Date purchased
Price
The applicant
120 Sydney St New Farm
16 August 2000
$200,000[550]
Genius 2002
15 Thompson St, Bowen Hills (applicant contends only one third interest was held on the property)[551]
9 February 2002
$330,000
A Tough Row To Hoe
41 Dilkera St, Balmoral
20 February 1998
$220,000[552]
Gainsleep
73 Gillies St Zillmere
(applicant contends Gainsleep only held a 50% interest on the property)[553]
7 February 1997
$110,000[554]
HIV
42 Abbott St, New Farm
22 January 2001
$355,000[555]
HIV
27 Ballow St, Valley
24 August 1999
$165,000[556]
HIV
188 Thynne Road, Morningside
24 October 1999
$390,000[557]
Com-Law (No 51)
4 Ulric St, Indooroopilly
21 August 1997
$180,000[558]
Com-Law (No 51)
4A Ulric St, Indooroopilly
n/a
n/a
Com-Law (No 51)
12 Ulric St, Indooroopilly
(applicant contends that 12 Ulric St is their parents’ family home that they have resided in since 1980)[559]
21 August 1997
$180,000
Com-Law (No 51)
12A Ulric St, Indooroopilly
21 August 1997
$180,000
Com-Law (No 51)
11 Samarinda Drive, Point Lookout
20 August 1998
$465,000
A Tough Row To Hoe
A boat[560]
n/a
$15,050[561]
A Tough Row To Hoe
Motor vehicles
n/a
$42,671
A Tough Road
to Hoe
Motor vehicles
n/a
$65,000[562]
[550]ST471 p 6051- 6053.
[551]Applicant’s Response to Respondent’s Amended Statement of Issues, Facts and Contentions dated 8 May 2021, [499].
[552]T432, pp 3136, 3138, 3137, 3148 and 3156; ST449 pp 5177, 5179, 5185, 5191; ST 468 at 6042-6044.
[553] Applicant’s Response to Respondent’s Amended Statement of Issues, Facts and Contentions dated 8 May 2021, [499].
[554]ST462, p 6028- 6029.
[555]T432, pp 3136, 3138; ST469, p 6045- 6066.
[556]ST467 at 6040-6041
[557]ST470 at 6048-6050
[558]T432, pp 3156, 3154, 3135, 3138; ST449, pp 5172, 5175, 5181, 5193ST463 at 6030-6032.
[559]Applicant’s Response to Respondent’s Amended Statement of Issues, Facts and Contentions dated 8 May 2021, [499].
[560]The boat was subsequently recorded as an expense in the P&L for year ended 30 June 2000.
[561]Notes to and forming part of the financial Statements for the year ended 30th June 1998 – Lombard Trust Applicant's Appendices to SFICs filed 19 October 2020, p 86.
[562]Financial Statements for the year ended 30th June 199823 and 30th June 199924 – SNAG No 2; Applicant's Appendices to SFICs filed 19 October 2020, pp 110 & 133.
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