Grant v Commissioner of Taxation
[2024] FCAFC 173
•19 December 2024
FEDERAL COURT OF AUSTRALIA
Grant v Commissioner of Taxation [2024] FCAFC 173
File number(s): QUD 180 of 2024 Judgment of: O’CALLAGHAN, MCEVOY AND NEEDHAM JJ Date of judgment: 19 December 2024 Catchwords: TAXATION – appeal pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) – review of objection decision – Tribunal failed to give proper regard to submissions and evidence under s 43(2B) of AAT Act – Tribunal made findings absent regard to evidence and submissions – Tribunal failed to give proper reasons – Tribunal erred in construction of s 177C(1)(a) of the Income Tax Assessment Act 1936 (Cth) – whether Tribunal erred in finding it had no jurisdiction or power to review a refusal of the respondent to defer time at which tax liabilities became due and payable under s 255-10 of the Taxation Administration Act 1953 (Cth) – appeal allowed Legislation: Administrative Appeals Tribunal Act 1975 (Cth) ss 43(2B) 44
Income Tax Assessment Act 1936 (Cth) Part IVA ss 97, 177A, 177C, 177F
Tax Administration Act 1953 (Cth) s 8AAG, Sch 1 s 255-10
Cases cited: Blackman v Commissioner of Taxation (1993) 43 FCR 449
Collie v Commissioner of Taxation [2024] FCAFC 172
Commonwealth Bank Officers Superannuation Corp Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427
Copperart Pty Ltd v Commissioner of Taxation (1993) ALD 377; (2013) 26 ATR 327
Dennis Willcox vFederal Commissioner of Taxation (1988) 79 ALR 267
Federal Commissioner of Taxation v Administrative Appeals Tribunal (2011) 191 FCR 400
Federal Commissioner of Taxation v Apted (2021) 284 FCR 93
Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325
Federal Commissioner of Taxation v Futuris Corporation (2012) 205 FCR 274
Gomeroi People v Santos NSW Pty Ltd (No 2) (2024) 303 FCR 255
Grant v Commissioner of Taxation [2024] AAT 427
Hart v Federal Commissioner of Taxation (2018) 261 FCR 406
Minister for Immigration and Border Protection v Maioha (2018) 267 FCR 643
Paciocco v ANZ Banking Group Ltd (2016) 258 CLR 525
RCI Pty Ltd v Federal Commissioner of Taxation [2011] FCAFC 104; (2018) 84 ATR 785
Statham v Federal Commissioner of Taxation [1988] FCA 463; (1988) 20 ATR 228
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 123 Date of hearing: 21 and 22 November 2024 Counsel for the Applicant: P Tucker Solicitor for the Applicant: Merthyr Law Counsel for the Respondent: A Wheatley KC with B McEniery Solicitor for the Respondent: Australian Government Solicitor ORDERS
QUD 180 of 2024 BETWEEN: STEVEN GRANT
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
O’CALLAGHAN, MCEVOY AND NEEDHAM JJ
DATE OF ORDER:
19 DECEMBER 2024
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The decision of the Administrative Appeals Tribunal dated 12 March 2024 be set aside.
3.The proceeding be remitted to the Administrative Review Tribunal for the hearing and determination of the following questions:
(a)whether the applicant had assessable amounts in respect of the Cleary Hoare Practice Trust taxable income for the 1997 to 2002 tax years pursuant to Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936); and
(b)whether the applicant had assessable amounts in respect of the Income Earning Trusts taxable income for the 1997 to 2000 tax years pursuant to Part IVA of ITAA 1936.
4.On or before 4.00pm on 31 January 2025, the applicant is to file and serve written submissions not exceeding three pages on the question of costs.
5.On or before 4.00pm on 7 February 2025, the respondent is to file and serve responsive written submissions not exceeding three pages.
6.The question of costs of the appeal will be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THE COURT
INTRODUCTION
By an amended supplementary notice of appeal the applicant, Mr Grant, appeals pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) from the decision of the Administrative Appeals Tribunal in Grant v Commissioner of Taxation [2024] AAT 427 delivered on 12 March 2024.
The Tribunal’s decision followed an application filed by Mr Grant on 29 October 2013 to review a decision made by the Commissioner of Taxation on 20 August 2013 (Objection Decision).
The Objection Decision was made in response to notices of objection lodged by Mr Grant in response to income tax assessments and amended income tax assessments issued by the Commissioner to Mr Grant in respect of income years 1997 to 2002.
Mr Grant’s amended supplementary notice of appeal is a lengthy document, but the principal grounds upon which the appeal was argued – and the grounds upon which the appeal is bound to succeed – are that the Tribunal:
(1)failed to comply with s 43(2B) of the AAT Act by not making reference to relevant evidence in respect of material findings of fact and thereby not providing proper reasons;
(2)made material findings of fact not based on any rational evidence; and
(3)failed to have regard to relevant material and submissions that were put by Mr Grant to the Tribunal.
This appeal was heard immediately before we heard a related appeal in Collie v Commissioner of Taxation [2024] FCAFC 172.
Mr Grant and the Commissioner have now been in dispute over the assessments for over 20 years.
The original assessments totalled just over $453,324, and the amended assessments totalled approximately $3 million.
As at 2 October 2023, there was sworn evidence that that amount had increased to over $19.5 million. By now, no doubt, the figure is considerably more.
The main part of the 20 year delay is accounted for as follows.
First, it took the Commissioner seven years after Mr Grant lodged his notices of objection to make the Objection Decision (which he did in August 2013).
Secondly, after the Tribunal proceeding was commenced in October 2013, it was put on hold until November 2018, pending the determination of proceedings commenced by one of Mr Grant’s former partners (Mr Hart) against the Commissioner in respect of an assessment issued to him.
Thirdly, after the Tribunal proceeding was reactivated in 2019, the hearing did not commence until October 2021, and was then inexplicably adjourned until November 2022, for further hearing.
Fourthly, the Tribunal then did not hand down its decision until 16 months later.
THE FACTS
Mr Grant is a solicitor. Between May 1992 and 30 June 1999 he was a partner at the law firm Cleary Hoare. The firm was run by the Cleary Hoare Practice Trust (CH Practice Trust or CHPT). Mr Grant, along with Messrs Hart, Cleary and Hoare, was a trustee of that trust, and the legal practice was under their control pursuant to the terms of the relevant trust deed. Mr Hart practised as a solicitor in tax matters. Mr Grant did not.
Towards the end of the 1997 financial year, Mr Hart and others, being the other principals of Cleary Hoare, entered into two tax planning arrangements which involved a series of new trusts and transactions with no pattern of previous income distributions, each known as the “New Venture Income scheme” or NVI Scheme.
The CH Practice Trust was a unit trust. The units were divided into ordinary units and special units. Trust entities associated with the firm’s principals were the ordinary unitholders; in Mr Grant’s case, Wood Duck Pty Ltd (Wood Duck) as trustee for the Sensitive New Age Guy Trust (SNAG Trust). Mr Grant was also a special unit holder of the CH Practice Trust.
Separately, during the 1997 to 2000 income years, Cleary Hoare Corporate Pty Ltd (CHC) (as trustee for the CHC Discretionary Trust) carried on a business of marketing and facilitating tax planning arrangements and products, called “promotional activities”, as well as “employee welfare funds and non-complying super funds”. During those years, a series of so called “income earning trusts”, called the IETs, earned income in the form of fees in respect of that business.
The IET business used Cleary Hoare to prepare documents and provide legal services in respect of those schemes.
Between 1997 and 2000, there were a total of ten IETs that earned income. Each IET was a discretionary trust operated by a corporate trustee.
In relation to six of the IETs, Mr Grant was not a director of the relevant corporate trustee. And three of the IETs were created after Mr Grant left the firm after having been told by Messrs Hart and Collie that if he did not resign then he would be excluded from the CH Practice Trust and IETs.
In July 1999, Mr Grant commenced practice in his own firm, Grants Lawyers, and subsequently Merthyr Law. He had no further involvement with Cleary Hoare or the IETs.
RELEVANT PROVISIONS OF THE ITAA 1936
Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies where a taxpayer participates in a “scheme” as defined in s 177A of the ITAA 1936 in order to obtain a “tax benefit”, as defined in s 177C of the ITAA 1936, where the scheme was entered into for the dominant purpose of obtaining the tax benefit.
In this case, Mr Grant did not dispute the Commissioner’s contention before the Tribunal that the alleged schemes were schemes as defined in s 177A of the ITAA 1936, and he advanced no submissions on the question of dominant purpose.
Mr Grant contended before the Tribunal that he had not obtained a tax benefit, or alternatively, such tax benefit as he did obtain was less than that contended for by the Commissioner.
Section 177F(1)(a) of the ITAA 1936 provides that:
(1)Where this Part applies to a scheme in connection with which a tax benefit has been obtained, or would but for this section be obtained, the Commissioner may:
(a)in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income – determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income;
Section 177C(1)(a) of the ITAA 1936 provides that for a tax benefit to be obtained by a taxpayer in connection with a scheme there must be
… an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out.
THE ASSESSMENTS
The Practice Trust Scheme Assessments
Following an audit commencing in 2001, the Commissioner issued a position paper on 1 October 2004, in which he asserted that Mr Grant should be taken to have derived income personally from the CH Practice Trust, or that he would have derived income but for an alleged scheme under Part IVA of the ITAA 1936 (Practice Trust Scheme).
The Practice Trust Scheme commenced in 1997 and involved:
(a)the distribution of income by the SNAG Trust (that income having been distributed by the CH Practice Trust to the SNAG Trust) to a separate trust; and
(b)a series of subsequent transactions that involved:
(i)income distribution to further trusts, including an entity with accumulated losses;
(ii)subscription for units in a separate trust, and the making of gifts to other trusts; and
(iii)ultimately, the making of loans to entities associated with the principals of Cleary Hoare, including (in Mr Grant’s case) the SNAG Trust.
The Commissioner issued notices of assessment to Mr Grant dated 28 January 2005 in respect of the 1997 to 2002 tax years, which included income that the Commissioner contended that Mr Grant:
(a)had derived from the CH Practice Trust in the 1997 to 1999 tax years by distributions of income made directly to Mr Grant, or by distributions of income to him by the SNAG Trust (which had received income distributions from the CH Practice Trust); or
(b)should be taken to have derived, upon a determination made by the Commissioner under s 177F(1)(a) that he had obtained a tax benefit in connection with the Practice Trust Scheme.
The IET Scheme assessments
On 7 September 2005, the Commissioner issued a position paper in which he asserted that Mr Grant would have derived income but for alleged schemes under Part IVA of the ITAA 1936 involving the IETs (IET Schemes).
The IET Schemes commenced in 1997, and involved income earned by the IETs being subject to a series of transactions similar to those described above, but:
(a)without any earlier income distribution to the SNAG Trust (or to any other trust related particularly to Mr Grant); and
(b)rather than loans to the SNAG Trust, loans were made to two other trusts related to Mr Grant, the Lombard Trust (in 1997) and the SNAG No.2 Finance Trust (in 1998 to 2000).
On 8 March 2006, the Commissioner made and issued to Mr Grant determinations pursuant to s 177F(1)(a) of the ITAA 1936 that additional amounts were to be included in his assessable income by virtue of s 97 of the ITAA 1936.
On 20 April 2006, the Commissioner issued to Mr Grant amended notices of assessment in respect of the 1997 to 2000 income years, which included income that the Commissioner asserted that Mr Grant should be taken to have derived from the IETs.
The IET Schemes
Mr Grant advanced a serious and substantial submission before the Tribunal that he obtained no tax benefit in relation to the IET Schemes because:
(1)he was not a person who caused the IETs to earn income;
(2)none of the profits of the IETs were from a business enterprise that he had any role in;
(3)he did not control any of the IETs; and
(4)in the case of three IETs, they were established after he left the partnership,
so that, if the schemes had not been entered into, it was not “reasonably to be expected” that he would have derived any income from the IETs within the meaning of s 177C(1)(a).
The Practice Trust Scheme
As to the Practice Trust Scheme, it was central to the Commissioner’s case in respect of that scheme that relevant trusts would have distributed specified amounts of their net income to a trust controlled by Mr Grant, and that the trust would then have distributed all or part of that income to him (and been taxed at the marginal rate).
Mr Grant’s case, founded on his uncontested evidence and supported by expert evidence, was that absent the Practice Trust Scheme, relevant income would have been distributed to himself, his de facto partner and to companies in the 1998 to 2002 tax years, in accordance with certain postulations, such that he would effectively have paid tax at the then prevailing corporate rate.
Deferral of date from which any tax-related liability should operate
Mr Grant also appealed against a decision of the Tribunal that it had no power under s 255-10 of Schedule 1 to the Tax Administration Act 1953 (Cth) (TAA) to make an order to defer the date from which any tax-related liability in respect of the assessments should operate.
THE TRIBUNAL HEARING
The submissions made to the Tribunal
It is convenient now to set out in a little more detail the submissions made by the parties to the Tribunal on the critical issues relevant to this appeal.
Mr Grant submitted to the Tribunal that he obtained no tax benefit in relation to the IET Schemes because the persons who caused the IETs to earn income – which did not include himself – would not have been willing to share income with Mr Grant in the event that such income was subject to taxation.
Alternatively, Mr Grant submitted that, if the Commissioner was correct that he would have obtained a tax benefit by virtue of the IET Schemes, the maximum amount he would have received is the sum of what he was in fact paid by way of loan during the relevant years. On that premise, he submitted, the IETs would first have been distributed to Mr Grant’s trust entities, and then distributed to Mr Grant, his de facto spouse and the balance to a company related to Mr Grant, such that Mr Grant would have received income at a level that attracted income tax at the prevailing company tax rate. This was referred to as the Distribution Formula. It was uncontroversial that trusts connected with Mr Grant received moneys originating in the profits of the IETs between 1997 and 2000. Mr Grant, however, contended that those receipts were loans and that they were forgiven when he left the firm.
As to the IET Schemes, Mr Grant’s outline of closing submissions dated 22 September 2022 contained the following submission, which was heavily footnoted to the evidence and his Amended Statement of Facts Issues and Contentions (SFIC), his response to the Commissioner’s Amended SFIC, and the transcript of the hearing:
Mr Grant was not a promoter of tax arrangements, or an architect of the Practice Trust Scheme or the IET Schemes, and had limited understanding of the NVI Scheme. That was borne out of his lack of understanding of which entities had made loans under the IET Schemes, which resulted in errors in the Lombard Trust’s, and the SNAG 2 Financial Trust’s, financial statements between 1997 and 2000.
(Footnotes omitted.)
Having set out the Commissioner’s contentions in relation to the question of tax benefit and the IET Schemes at some length, Mr Grant’s submission continued:
In relation to the matters relied upon by the Commissioner in respect of IET Schemes, in addition to the matters listed [above] the following matters should be noted. First, unlike the Practice Trust Scheme where monies were distributed to the SNAG Trust by the CHPT prior to those monies passing through the Practice Trust Scheme, the IET Schemes involved monies earned by the IETs passing through the IET Schemes without being first distributed to trusts associated with Mr Grant.
Secondly, the Commissioner’s asserted tax benefit appears premised on income tax planning arrangements generating income from Promotional Activities for the IETs, which would have been distributed to Mr Grant or trusts associated with Mr Grant. But again, Mr Grant was not involved in the Promotional Activities.
Mr Grant’s evidence … shows – that the Promotional Activities involved lump sum billing. The only two Promotional Activities matters which recorded Mr Grant as apparently having no involvement (which Mr Grant explained in his oral evidence), and the other matter involved 2.5 hours of work undertaken by Mr Grant at an hourly rate.
Given the large number of ‘Promotional Activities’ matters provided to the Tribunal by the Commissioner, Mr Grant’s answers in cross-examination support firmly that he had no involvement in promoting any ‘tax arrangements or products’.
Accordingly, it is doubtful that Mr Grant would have earned income through the IETs in the absence of the IET Schemes, because the Firm’s fee earner was not Mr Grant in respect of ‘Promotional Activities’ and a lack of tax deductibility in respect of such income does not lead to the inference that the relevant fee-earning partners would have been willing to share that income with Mr Grant. That is supported by the fact that Mr Grant was asked to leave the Firm in 1999, and that if he didn’t then he (ie, his associated trusts) would be excluded from the Practice Trust and the IETs.
…
Moreover, as noted above:
(a)unlike other Principals of the Firm, Mr Grant was not a promoter of the IET Schemes (or other taxation products or arrangements);
(b)there is good reason to infer that any income earned by the IETs would not have been distributed to Mr Grant if those monies remained taxable in the hands of the person or entity that received them, given Mr Grant’s:
(i) lack of involvement in the in the tax arrangements and products promoted by CHCPLL (or the Firm) whilst Mr Grant was a Principal of the Firm; and
(ii) being invited to leave the Firm on 30 June 1999
(Footnotes omitted.)
Again, each of those submissions was relevantly footnoted – and there was no suggestion made by the Commissioner before us that they were not borne out by the citations.
In his reply submissions before the Tribunal, Mr Grant contended repeatedly that he was not involved in the promotional activities of the IETs, that he was not involved with generating income for them and that the evidence (again, heavily referencing that evidence in footnotes) “firmly supported” that proposition.
The Commissioner contended otherwise. In his Amended SFIC, by way of example only, the Commissioner expressly relied on Mr Grant’s “personal involvement in the Promotional Activities” (a defined term that referred to “tax planning arrangements and products”), Mr Grant’s “role as a director of the relevant trustees for the 2000 IETs” and “the control exercised by [him] … over the 2000 IETs”.
It is also clear that senior counsel for the Commissioner before the Tribunal understood that it was central to the Mr Grant’s case that he had not derived a tax benefit in connection with the IET Scheme because it was not reasonably to be expected that any IET income would have been included in his assessable income for the relevant years because he had no relevant involvement in IET income generating activities. For example, Mr Grant was cross-examined before the Tribunal as follows:
[Ms Wheatley KC] Now Mr Grant, you had said previously that you had no involvement in the promotion of IET Schemes and the like. Is that correct?---I didn’t go to accountant’s offices and promote them or give talks on them, no.
Did you – again, to the best of your recollection, do any work on files within the firm relating to such Schemes?---No, I didn’t. We’ve obviously spoken about that Cam Stewart one.
In terms of the creation of the trusts and the associated entities, Mr Grant, in relation to the IET Schemes, were you involved in that?---No, I didn’t create any of the documents.
In relation to director’s resolutions and trustees resolutions, did you draft any of them?---No.
And the issue was squarely addressed in the Commissioner’s written closing submissions, including as follows:
In circumstances where the trusts Mr Grant controls or controlled were entitled to approximately a one-quarter share of the income of the IETs in the 1997 to 2000 income years and Mr Grant’s direct involvement in and for the IETs (executing various resolutions and the like) and acting for the loss entities by way of powers of attorney, Mr Grant’s claims that he “did not participate personally in the conduct of the Promotional Activities” carried on by the IETs do not detract from his direct involvement in the NVI Schemes. Whether or not Mr Grant participated personally in the promotional activities is not to the point. The Commissioner submits that the Tribunal would find that Mr Grant did participate in the activities of the IETs and the NVI Scheme.
(Footnotes omitted.)
Mr Grant gave evidence that in 2004 (after he no longer believed that he had any accrued personal losses available to him to offset against income), he obtained advice from his accountant as to how he might distribute trust income, and was advised to make distributions “to beneficiaries to pay the lowest tax impost”.
Regrettably, as will be apparent when we turn to them below, not a word of any of the competing submissions or evidence – on matters self-evidently critical to the outcome – were dealt with by the Tribunal in its reasons.
Nor was Mr Grant’s alternative submission that to the extent that the Commissioner was correct in asserting that Mr Grant had obtained a tax benefit by virtue of the Practice Trust Scheme and IET Schemes, the maximum tax benefit was the monies that passed into bank accounts of his associated trust entities from the IETs, being the extent of the monies lent to Mr Grant’s entities after such monies had passed through the IET Schemes.
The evidence about the Distribution Formula and the submissions made in respect of it were dealt with by the parties at the hearing before the Tribunal mainly under the rubric of the Practice Trust Scheme.
We turn to that evidence and those submissions now.
Mr Grant tendered two expert reports by Mr Paul Laxon OAM. Mr Laxon retired as the Queensland Managing partner of Ernst and Young (EY) in 2018. He was EY’s Oceania Energy and Infrastructure tax leader and was a former leader of the Taxation practice of EY. When he was an employee of EY, he was an Affiliate of the Institute of Chartered Accountants and a Fellow of the Tax Institute of Australia.
Mr Laxon’s first report was relevantly as follows:
Background
I have been requested to provide on opinion for the income years 1997, 1998, 1999, 2000 and 2001 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
2lf Mr Grant didn’t derive the income, who could reasonably be expected to have derived it?
To assist in this matter I have been provided with, inter alia, the following information:
1SFIC file reference 17010092 prepared by Kurt Bragg Australian Government Solicitor;
2A guideline for expert evidence in the AAT.
…
The genesis of the questions I have been asked to opine on is the dispute between the Commissioner of Taxation and Mr Grant regarding the application of Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA1936). Relevantly, those provisions require, inter alia, the identification of a “taxpayer” in respect of whom a determination is made under section 177F (ITAA1936). As is relevant here, such a determination is made to include a whole or part of an amount in “the taxpayers” assessable income for the relevant year of income which has not been so included as a result of the “scheme” with the requisite “purpose” and “tax benefit” having been entered into.
Opinion
I do not believe it is reasonable if the NVI scheme identified by the Commissioner of Taxation had not been entered into, that the relevant income would wholly have been included in Mr Grant’s assessable income. A more likely scenario would be that the income would have been primarily included in the assessable income of other trust beneficiaries (including corporate beneficiaries).
Reasons for Opinion
In providing this opinion I have relied upon how I would have advised Mr Grant to structure his affairs, as well as how I have observed professionals in professional advisory practices structure their affairs.
Specifically, a common focus of professionals in legal, accounting and advisory practices when structuring their affairs is asset protection given the increasingly litigious nature of our society. Such a focus invariably leads to distributing income derived by professional practice and practice service trusts to taxpayers other than the practice professional himself (in this case). Such an approach is directed at the accumulation of assets/wealth in persons/entities other than the professional himself.
A secondary objective in advising on structuring such a professional’s affairs is seeking to achieve an effective tax rate on practice and service income below the individual’s marginal tax rate and specifically no greater than the prevailing corporate tax rate. That process of using discretionary trusts to split income is common and arguably accepted by the Commissioner in the context of professional practices (see for example Taxation Ruling TR 2006/2 in the context of Service Trust arrangements).
The acceptability by the Commissioner of the validity of asset protection motivations is also evident in the context of Everett assignments, and numerous rulings issued by the ATO confirming the acceptability of such arrangements and the non-application of Part IVA of the ITAA 1936. Everett assignments involve the assignment of interests in a (professional) partnership to another entity typically associated with and controlled by the Partner, such as a corporate entity or trustee of a discretionary trust. A secondary objective in such transactions is the effective “splitting of income’ with resulting lower income tax impost than would otherwise be the case.
Given the above objectives and principles, if I were advising Mr Grant in relation to the distribution of the net income of relevant trusts (and absent the schemes having been entered into as set out in the SFIC) as noted in paragraphs 170 and 175 (and noting that no part of such income comprises personal exertion income) I would have suggested the trustee make the following distributions:
a. In 1997 in respect of net income of $491,352 I would have recommended the trustees pay:
i.$80,000 to Steven Grant (tax payable on $50,001 and over, $14,102 plus 47 cents for each $1 over $50,000, = $14,102 plus ($30,000 x 47%) = $28,202. $28,202/80,000 = average tax rate of 35.25% - company tax rate 36%);
ii.$80,000 to his partner; and
iii$331,352 to a company (tax payable 36% = $119,460);
If the prior year loses of $345,845 are allowed (ATO’s SFIC, para 175.), in respect of the balance of the net income of $145,507 I would recommend:
iv.$72,753.50 to Steven Grant, and
v.$72,753.50 to his partner.
b.In the above & below I have assumed his partner had no other income. The taxable income figures are from the ATO’s SFIC, paras 170 & 175.
c.In 1998 in respect of net income of $1,005,669 I would have recommended the trustees pay:
i.$80,000 to Steven Grant (tax payable on $50,001 and over, $14,102 plus 47 cents for each $1 over $50,000, = $14,102 plus ($30,000 x 47%) = $28,202’ $28,202/80,000 = average tax rate of 35.25% -company tax rate 36%);
ii.$80,000 to his partner; and
iii.$845,669 to a company (tax payable 36% = $294,328).
d.In 1999 in respect of net income of $1,123,823 I would have recommended the trustees pay:
i.$80,000 to Steven Grant (tax payable on $50,001 and over, $14,102 plus 47 cents for each $1 over $50,000, = $14,102 plus ($30,000 x 47%) = $28,202. $28,202/80,000 = average tax rate of 35.25% -company tax rate 36%);
ii.$80,000 to his partner; and
iii.$963,823 to a company (tax payable 36% = $334,500)
e.In 2000 in respect of net income of $260,191 l would have recommended the trustees pay:
i.$70,000 to Steven Grant (tax payable on $50,001 and over, $14,102 plus 47 cents for each $1 over $50,000, = $14,102 plus ($20,000 x 47%) = $23,502. $23,502/$70,000 = average tax rate of 35.25% -company tax rate 30%);
ii.$70,000 to his partner; and
iii$120,191 to a company (tax payable 34% = $40,864.94)
f.In 2001 in respect of net income of $69,253 I would have recommended the trustees pay:
i.$69,253 to Steven Grant (tax payable on $60,001 and over, $15,580 plus 47 cents for each $1 over $60,000, = $15,580 plus ($9,253 x 47%) = $15,480. $15,480/$69,253 = average tax rate of 22% - company tax rate 30%).
g.In 2002 in respect of net income of $140,138 I would have recommended the trustees pay:
i. $70,069 to Steven Grant (tax payable on $60,001 and over, $15,580 plus 47 cents for each $1 over $60,000, = $15,580 plus ($10,069 x 47%) = $20,312.43. 20,312170,100 = average tax rate of 29% -company tax rate 30%); and
ii$70,069 to his partner.
The aim of the above would be to ensure the average tax rate paid in each year was similar to the corporate tax rate.
(Footnote omitted.)
Mr Laxon’s supplementary report was relevantly as follows:
I have been provided with the following:
1.GA – Respondent’s Amended Statement of Facts, Issues and Contentions for September 2020;
2. GB – Applicant’s Further Amended Statement of Facts, Issues and Contentions 19 October 2020;
3.GC – Applicant’s Response to Respondent’s Amended Statement of Facts, Issues and Contentions 8 May 2021;
4. GD – Respondent’s Response to Applicant’s Amended Statement of Facts, Issues and Contentions 30 July 2021; and
5. GE – Respondent’s Response to Applicant’s Request for Particulars 31 July 2020.
…
CHANGES TO MY ORIGINAL REPORT
1.Have you ever advised persons engaged in professional advisory practice, such as doctors or lawyers, to utilise discretionary trusts to structure their affairs?
Yes. I have advised numerous practice professionals including Partners at EY who sought my advice during my time as EY tax practice Leader in Queensland from 2010 to 2015, and then as Queensland Managing Partner from 2015 to 2018.
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?
Yes. The distribution of income consistent with an overarching asset protection objective and to achieve an efficient economic outcome was commonly sought advice provided to my Partners and other professional services clients.
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?
I would have advised Mr Grant to distribute to his partner, so much of the net income of the trust so that the average rate of tax payable by his partner was no more than 36% (the prevailing corporate tax rate at the time). For example, If Mr Grant’s partner had a taxable income (absent the trust distribution) of $50,000 then I would have advised Mr Grant to distribute $30,000 to his partner and the remainder of the trust’s net income to be distributed to a company.
4.In your previous report, you do not suggest that the relevant trusts should accumulate income. Why is that?
Net income of a trust to which no beneficiary is presently entitled is potentially taxed at the top marginal individual tax rate (which was in excess of the prevailing corporate tax rate) pursuant to Section 99/99A of the Income Tax Assessment Act (and the relevant provision in the Income Tax Rates Act 1986- “Rating Act”).
…
Mr Laxon was not cross-examined.
Mr Grant subsequently adopted a method of distribution of trust income in line with that advice, so that the tax rate “across the board” did not exceed the company tax rate.
Mr Grant’s evidence along those lines included the following.
First, in one of his statements to the Tribunal, he said as follows:
TAKING ADVICE AND GIVING TAX ADVICE
ln the years:
9.1 1997 and 1998 - Davey & Co Accountants;
9.2 1999 and 2000 - Chris Newman, Newmans Accountants;
9.3 2001to 2003 - Kel Peters, Accountant;
9.4 2004 and subsequent - John Biggs Accountants.
I took advice from each of the above in respect of my related Trusts and Company’s tax returns. John Biggs gave me advice in 2004 and subsequently about making distributions from the Grants Lawyers Trust and the SG Practice Trust (which I had by then established) to beneficiaries to pay the lowest tax impost.
I typically met with the advisors in March/April each year to talk about my financial position, the preparation of accounts and the like. I also had conversations by telephone as the close of a financial year approached.
Since 2004 I personally gave advice to professional clients that operated through a Trust about the flexibility of the income distribution which can be made by a Trust including making distributions to family members and to any available company so that the marginal tax rate “across the board” did not exceed the company tax rate.
ln the 2004-2019 tax years the Grants Lawyers Trust (GLT) and my interest in the Merthyr Law business operated through the SG Practice Trust (subsequently renamed the MD & NV Trust) (SGPT).
ln those years the trust made distributions to other trusts that I controlled, to my sister Nicole Grant, my partners and to the AMDG Finance Ltd Partnership so that the marginal tax rate “across the board” did not exceed the company tax rate at the time.
The returns for the GLT for 2004 and 2006 are attached & marked SG1.
I did not accumulate income in any trust because the highest marginal tax rate would apply to any undistributed net income of the trust.
Mr Grant was not cross-examined about that evidence. It was also raised as an issue in his Amended SFIC under a heading which reads “Tax that would have been paid if no ‘scheme’” and picks up Mr Laxon’s uncontested evidence.
Mr Grant’s closing written submissions to the Tribunal summarised the case contended for and the relevance of that evidence in particular (among other evidence) to both the Practice Trust and IET Schemes as follows:
In summary, the following objective matters are relevant to any alternative postulate concerning income distribution from monies that were, or which might have been, paid to the SNAG Trust, the Lombard Trust or the SNAG 2 Finance Trust, and ultimately distributed to Mr Grant, had the Practice Trust Scheme and IET Schemes not existed:
(a)owing to the Firm’s misfortunes in 1990, Mr Grant did not want to accrue assets or income in his own name, a matter which underpinned the Restructure;
(b)in accordance with that premise, Mr Grant subsequently accrued assets in companies and trusts, rather than in his own name;
(c)in the 1994 to 1996 income tax years the CHPT distributed income to the SNAG Trust, which distributed income to CHOUT by reason of CHOUT having accrued tax losses (and Mr Grant and the Firm’s other Principals having assumed CHOUT’s debts);
(d)the SNAG Trust utilised the Practice Trust Scheme and the IET Schemes between 1997 and 2000, on the basis that Mr Grant believed that those schemes were lawful;
(e)Mr Grant sought to utilise the Accrued Personal Losses in the years 2000 to 2002, upon the belief that those losses were still available;
(f)the Restructure involved applying to the QLS for permission to engage in a Unit Trust structure which passed income to discretionary trusts that permitted the Firm’s Principals to share income with (inter alia) their spouses;
(g)each of the Lombard Trust Deed, the SNAG Trust Deed and the SNAG 2 Finance Trust Deed named Mr Grant and his spouse as a primary beneficiary, the SNAG 2 Finance Trust Deed also expressly including “de facto partner” (although, it is submitted, being surplusage);
(h)Mr Grant had a de facto partner in each of the 1997 to 2002 income tax years with whom he could have shared income distributed by the SNAG Trust, the Lombard Trust or the SNAG 2 Finance Trust;
(i)there existed at least two companies to whom Mr Grant could have distributed income – Wood Duck Pty Ltd and A Tough Row to Hoe Pty Ltd;
(j)the unchallenged expert opinion from a vastly experienced accountant is that the distribution of income from discretionary trust to spouses and to companies in order to achieve a tax rate “across the board” no higher than the prevailing corporate tax rate is a frequent practice that he had advised;
(k)Mr Grant, soon after leaving the Firm:
(i)received and followed accountants’ advice to distribute income derived from Grants Law Trust in the manner that he says he would have distributed trust derived income in the 1997 to 2002 income years, if the Practice Trust Scheme and the IET Schemes had not existed; and
(ii) himself provided such advice to others.
(Footnotes omitted.)
The Commissioner’s submissions to the contrary, including dealing with Mr Laxon’s evidence, occupy more than seven pages, and appear in his outline of final submissions before the Tribunal under the heading “Mr Grant’s Counterfactual”, and include the following:
…
The Commissioner in response submits that Mr Grant’s counterfactual does not rise beyond mere speculation as it is not supported by the substratum of foundational facts. Mr Grant does not have a history of distributing income to himself up to a certain level, his spouse/partner (again to a certain level), or other corporate beneficiaries so that the tax rate paid is only that of the corporate rate.
…
A flaw in Mr Grant’s counterfactual in respect of the Practice Amounts is that it is not expressed to be constrained by or to take into account any limitation on profit sharing of the income of the Practice Trust as approved by the QLS. He has provided no objective evidence in support of any such arrangement available to him. There is no evidence regarding the entity “Rosefall Pty Ltd” or of “some other entity controlled by the Applicant”. That evidence would have needed to explain how the constraints of the QLS approval could be overcome. As was the case in FCA Hart, an important factor supporting the Commissioner’s counterfactual is a presumption that Mr Grant, as a solicitor of long-standing, would not knowingly break the law. That conclusion necessarily precludes distributions of trust income from the SNAG Trust beyond the entities approved by the QLS, and the evidence does not reveal a history of payments being made to other persons in the pool of entities approved by the QLS, other than to Mr Grant himself. The Commissioner makes this submission despite Mr Grant accepting in cross-examination that the distributions that had already been made and beneficiaries appointed by the terms of the Practice Trust Deed and the SNAG Trust Deed were beyond the terms of the 29 January 1993 QLS approval to share receipts.
(Footnotes omitted.)
On the question of Mr Grant’s evidence about what he did after the income years under review, the following submission was made:
To the extent that Mr Grant seeks to rely on events after the income years under review, that cannot assist his counterfactual. Events after the relevant income years do not provide a foundation for a counterfactual, because the foundational facts are properly facts that occurred prior to the relevant income years, rather than after the relevant income years. Thus, the distributions of the Grant’s Lawyers Trust in the 2004 and 2006 income years that Mr Grant refers to in his Supplementary Statement dated 27 October 2021 do not assist him.
Accordingly, it is reasonable on the evidence to expect that, in the absence of the NVI Schemes, Mr Grant would have taken a financial benefit from the income generated by the Cleary Hoare legal practice attributable to his share, by reason of him holding special units in the Practice Trust. That expectation is reasonable, “he had to live” and he was effectively using those funds for his personal expenses. That the application of the Commissioner’s counterfactual may be unpalatable to Mr Grant and something that he would prefer not to have done because tax would be payable on such amounts, does not render it unreasonable or a mere possibility.
(Footnotes omitted, original emphasis.)
The submission continued:
Mr Grant has not articulated any commercial purpose for the steps that comprise the NVI Scheme. To the extent that Mr Grant might assert that it is commercially naïve to contend that the income of the SNAG Trust or SNAG No 2 would have been distributed to him personally, that it was sound commercial practice to keep assets and risk separated, and that it was a fundamental principle of asset protection that the person at risk does not accumulate wealth or derive income, this is not supported by evidence. In this regard, it was also observed in FCA Hart that there is an important distinction between asset protection by the legal and equitable ownership of tangible assets and the protection of more transient year-by-year cash or chose in action assets, received by way of income, a loan or otherwise.
As to any asserted purpose of asset protection, assessed objectively, the structure of the Practice Trust, including the manner in which ordinary unitholders were either discretionary trusts with corporate trustees or corporate entities, already gave a significant degree of protection against potential claims.
Mr Grant’s assertion that the income would not have been distributed to him or anyone else so as to cause them to have a higher marginal tax rate than the corporate tax rate cannot be accepted as Mr Grant has no proven past history of distributing to any other family members or other entities and no evidence of other history to rely upon. That is, it is mere speculation by Mr Grant to suggest this distribution. This notion of speculation is further supported by the introduction by Mr Grant in the Applicant’s Opening of another entity, Rosefall Pty Ltd, an entity not previously raised by Mr Grant.
Further, as to Mr Grant’s suggestion that it is naïve to suggest that he would have received all of the income personally, naivety and commerciality have little or no part to play unless there is shown to be a sound commercial basis for an alternative transaction taking place without tax consequences. As Bromwich J put it in FCA Hart, “if the choice was between not having the use and benefit of any money at all, ever, or only having it net of tax, then the net income was the better, and indeed necessary-for living, outcome than no money at all.”
(Footnotes omitted.)
The Commissioner then turned to Mr Laxon’s evidence:
In support of his applications for review, Mr Grant relies upon the expert report and supplementary expert report of Mr Paul Laxon dated 30 January 2020 and 27 October 2021 respectively.
Mr Laxon’s expert report at page 1 under the heading ‘Opinion’ states his opinion [which is then set out].
Mr Laxon then gives his reasons for his opinion [which is then set out].
Mr Laxon opines (at p 2) that asset protection is a “common focus” of professionals in legal, accounting and advisory practices, which “invariably leads to distributing income by professional practice and practice service trusts to taxpayers other than the practice professional”. He also states (at p 2) a secondary objective as being to achieve an effective tax rate on practice and service income that is no greater than the corporate tax rate.
On the basis of his general observations, he then states (at pp 2-3) that if he “were advising Mr Grant in relation to the distribution of the net income of relevant trusts (and absent the schemes having been entered into as set out in the SFIC) as noted in paragraphs 170 and 175…” that he “would have suggested that the trustee make the following distributions: …”. Mr Laxon then sets out a proposed distribution in each income year such that no single taxpayer pays more than the company tax rate, in a manner equivalent to that proposed by Mr Grant in the AASFIC at Part F in paragraphs [1] to [6].
There are three reasons why Mr Laxon’s evidence should be given no weight.
First, it lacks precision. Neither the “relevant income” nor the “other trust beneficiaries” are defined or otherwise identified. It is unclear, for instance, whether Mr Laxon refers to Mr Grant’s share of the income of the Practice Trust or the income of the SNAG Trust and whether Mr Laxon meant to include Mr Grant’s share of the income derived by the IETs. That is, the observations are at such a high level of generality as to be unhelpful.
Secondly, the report does not provide any rationale for the opinion it contains that is referable to the underlying substratum of foundational facts. The report is not based on a history of distributions to a particular person or entity that falls within the class of persons approved by the QLS or any other pertinent circumstances. It is not based on a history of distribution in each income year such that no single taxpayer pays more than the company tax rate. It is not open to Mr Laxon to simply “swear the issue” by providing what he may consider to be a complete answer to the question in issue based on his speculation as to what might have occurred without drawing an opinion from the foundational facts. This is exactly what Greenwood J in McCutcheon and the Full Court in RCI warned would not be sufficient to discharge the onus. Mr Laxon’s supplementary expert report does not remedy these matters. The report is thus speculation.
Thirdly, Mr Laxon’s evidence does not assist the Tribunal because it is an opinion as to how he would have advised Mr Grant in the absence of the NVI Schemes, not an opinion as to what would have happened in the absence of the schemes. It is thus not, in the words of the High Court in Peabody “a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out”.
As Mr Laxon’s reports provide no more than imprecise speculation, the reports are not relevant to resolving the issues in dispute. The Commissioner submits that the Tribunal would find that Mr Laxon’s reports, although permitted into evidence in the Tribunal (it not being bound by the rules of evidence) is not actually relevant to the issues that the Tribunal must decide and therefore it is submitted that the Tribunal would find that it affords no weight to the evidence of Mr Laxon.
(Footnotes omitted.)
The Commissioner’s submissions then returned to Mr Grant’s evidence on the topic:
Mr Grant, himself also seeks to give similar evidence. That evidence, suffers from the same difficulty, it is not referable to the underlying substratum of foundational facts.
Thus, it is submitted that Mr Grant’s speculative counterfactual is not sufficient to discharge his onus. It is not a reasonable prediction of what would have happened or what might reasonably be expected to happen had the NVI Schemes not been carried out.
In all of the circumstances, it is submitted that the Tribunal would find that Mr Grant has not discharged his onus to establish that the Practice Amounts and the IET Amounts did not constitute a tax benefit that he enjoyed in the relevant income years, for the purposes of s 177C(1) of the ITAA 1936.
(Footnote omitted.)
Mr Grant’s reply submissions respond at some length to the Commissioner’s submissions about Mr Laxon’s and Mr Grant’s evidence about the “counterfactual”. Each of the paragraph numbers mentioned in the following passages is quoted above:
As to ROFS [302] - [306] again this appears to be a reiteration of the Commissioner’s arguments under s 97 of the ITAA 1936 and s 6-5 of the ITAA 1997, and pays too little or no regard to the matters set out at AOFS [217] - [221], and [133] - [135] above.
As to ROFS [307] - [313]:
(a)in his Amended Expert Report, Mr Laxon identifies that he is asked to opine on the relevant income if the scheme identified by the Commissioner – the NVI Scheme (which encompasses both the Practice Trust Scheme and the IET Schemes) – had not been entered into;
(b)notes that assessments were made to include a whole or part of an amount in the taxpayer’s assessable income for the relevant year of income which has been so included as a result of the scheme;
(c)said, in the context of the matters above, “I do not believe it is reasonable if the NVI Scheme identified by the Commissioner… had not been entered into, that the relevant income would have been included in Mr Grant’s assessable income. A more likely scenario would be that the income would have been primarily included in the assessable income of other trust beneficiaries (including corporate beneficiaries)”; and
(d)said further that, if he were advising Mr Grant, he would have advised distribution between Mr Grant, “his partner” and “a company”, in order to diminish the income tax burden.
Accordingly, it is plain that Mr Laxon:
(a)was referring to the income assessed against Mr Grant by the Commissioner on account of the NVI Scheme which, again, encompassed both the Practice Trust Scheme and the IET Schemes; and
(b)was speaking of advice he would have provided as to prospective beneficiaries for distribution. Moreover, it is plain that Mr Grant had a de facto partner in each of the 1997 to 2002 income years, and controlled at least two companies to whom distributions might have been made – Wood Duck and A Tough Row to Hoe – such that the prospective beneficiaries identified by Mr Laxon had actual counterparts at relevant times.
As to ROFS [314]-[316], Mr Laxon does not “swear the issue”; rather, Mr Laxon says what he would have advised Mr Grant as to appropriate distributions in the 1997 to 2002 income years. It remains for the Tribunal to determine whether Mr Grant would likely have received such advice, and whether Mr Grant would have likely followed it. Contrary to the Commissioner’s apparent suggestion, for Mr Laxon to determine what Mr Grant would have done based on any historical conduct on the part of Mr Grant, or to give an opinion about “what would have happened in the absence of the schemes”, would have been an untoward intrusion on the Tribunal’s task.
As to ROFS [317], it is entirely proper for Mr Grant to say what he would have done in the absence of the Practice Trust Scheme and the IET Schemes. Again, it is the Tribunal’s task to determine what would have happened but for the scheme, having regard to all the evidence.
Mr Grant refutes ROFS [318]-[319], for the reason outlined at [113]-[140] above.
As to the Commissioner’s submission that no regard should be had to Mr Grant’s evidence on how he conducted his affairs after the income years under review, he made submissions in reply, which included the following:
ROFS [301] is wrong. As stated at AOFS [214], between 1994 and 2002 Mr Grant caused trust distributions to be made on a tax-effective basis that Mr Grant believed was lawful, and also believed that he had not exhausted the Accrued Personal Losses prior to the 2002 income year. Accordingly, there is no basis to “criticise” Mr Grant on the basis of no earlier history of distributions to other persons in order to limit income tax payable to the prevailing corporate tax rate. What is relevant is what Mr Grant did after he believed the Accrued Personal Losses had been exhausted. In that regard, Mr Grant’s unchallenged evidence is that:
(a) Mr Grant’s law firm operated through a trust structure;
(b)he was advised to make distributions from trusts to beneficiaries to pay the lowest income tax impost; and
(c) he followed that advice in the 2004 to 2019 income years.
That Mr Grant would receive, and follow, advice from tax practitioners as to steps to reduce income tax in the 1997 income year and subsequently sits comfortably with the utilisation of the Practice Trust Scheme and IET Schemes in the 1997 to 1999 income years by Mr Grant’s associated entities.
We turn now to the Tribunal’s reasons.
THE TRIBUNAL’S REASONS
The Tribunal dealt at some length with a number of issues that are not the subject of this appeal, and about which there is no longer any controversy. Its reasons about the critical questions before it are, to say the least, brief. The reasons relevantly commence as follows:
39The 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.
We interpolate that Mr Laxon was an experienced accountant, not a lawyer.
The Tribunal then quoted the five questions Mr Laxon was asked to opine on, and concluded:
40The 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.
Having set out some factual matters, the Tribunal turned to the IETs, as follows:
86Between approximately 1 May 1994 and 23 March 2000, the principals of Cleary Hoare, including the Applicant, established or caused to be established the IETs.
87Each 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.
88Each IET participated in the IET NVI Schemes detailed below and had the capacity to do so.
Consideration of Part IVA commences at [128] of the Tribunal’s reasons. Having set out at considerable length a description of the schemes, the Tribunal gave this “summary”:
153In summary, the IET Scheme for each of the 1997 to 2000 Years filtered or flowed IET income through a sequence of trusts to a company that had available current or carried forward losses and through that company to other entities. Ultimately the money representing the IET income, less effectively commissions paid for the use of accumulated company losses, was filtered or flowed back to entities connected with Cleary Hoare principals and Collie and available for use by those entities. The money representing the entitlement created in favour of the loss company either passed to the loss company and the majority of it almost immediately passed on to the next entity in the scheme, or, beyond the commission, never came into the possession of the loss company at all. It is not apparent that the Commissioner has sought to assess the on-payment by the loss company, or what might be termed distribution by the loss company, as a taxable dividend.
154The steps involved in the IET processes quite clearly had three purposes: one to avoid the operation of the then terms of s 100A of the 1936 Assessment Act, another to avoid creating a tax benefit within the meaning of the then terms of s 177C(1)(a), and another to deliver the IET profits (less loss company commission) to entities connected with Cleary Hoare principals and Mr Collie. The basis upon which no tax benefit was thought to be created was that the arrangements were thought, and are so contended, not to allow ready identification of a taxpayer who would be a presumed recipient of the originating trust (in this case the 1997 IET NVI Scheme, the IET 1998 Scheme the 1999 IET NVI Scheme and the 2000 IET NVI Scheme) distribution due to an absence of a prior pattern of distributions.
155Again, the applicant largely agrees that the steps outlined in each scheme were taken and can be accepted as disputing the description of the final step. While expressed generically, the final step in each scheme involves placing money to the benefit, use or advantage (whether to repay debt or otherwise) of an entity connected with the applicant.
(Footnotes omitted.)
Having then set out some tables explaining “how the Commissioner determined that the IET income was processed through the IET NVI Schemes” (at [168]), the Tribunal identified the “critical income … in dispute” as having “its origins in the activities of discretionary trusts”. The Tribunal continued:
173In the present circumstances given that it is trust income that has been directed through the NVI scheme the appropriate approach to determining the measure of any tax benefit begins with the amount of the net income of the relevant trust whose income has been processed by the scheme and then to work out the taxpayer who would otherwise have been reasonably regarded as liable to have been assessed and the proportion of such responsibility. That approach most closely aligns with identifying the trust s 95 net income and allocating those amounts …
(Footnote omitted.)
At [176], the Tribunal turned to the principal question involving Part IVA that was in dispute, namely tax benefit.
The Tribunal then set out extensive passages from the judgment of Edmonds J in Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325 and some passages from the judgment of the Full Court in Hart v Federal Commissioner of Taxation (2018) 261 FCR 406, which referred also to the judgment of the Full Court in RCI Pty Limited v Federal Commissioner of Taxation [2011] FCAFC 104; (2018) 84 ATR 785 and continued:
178The parties vigorously dispute how the (sic) these rules apply in the present circumstances: the Commissioner contending that these rules reveal the tax benefits for the applicant as identified in the Part IVA determinations and the applicant contending that a tax benefit cannot be identified for him at all.
179It is clear that the applicant can point to a context involving undisputed facts which provide a contextual foundation for the asserted need to take steps directed to asset protection goals. The applicant says that someone in that position would participate for good reason in a scheme that ensured that money and wealth never came to him personally. One can readily see that that is a subjective response to what are rather unusual circumstances. This is said to be a case of more than a mere or bald assertion that steps were taken to service asset protection goals. Consequently, on the applicant’s case, it can be said that the contextual corroboration principle noted in the Ashwick and RCI decisions are met in leading to the proposition that because it cannot be predicated that the applicant as an individual would have received the taxable amounts, it cannot be said that he had a tax benefit susceptible to cancellation under Part IVA.
180Absent the outcome in Hart, these propositions might have some force.
181The relevant test is not subjective. The necessary enquiry is an objective one and the question to be asked is whether it could reasonably be expected objectively that the taxable income would have found its way back to the applicant. In circumstances where the profits of the enterprise that are sheltered from tax through the scheme were profits from a business enterprise relying on the applicant’s acumen and knowledge objectively it is not unreasonable to expect that some or all of that profit would have come back to the applicant. In the circumstances that hypothesis is regarded as sufficiently reliable to be reasonable. It is clear that the scheme articulated by the Commissioner was intended to leave the income of the businesses whose success was the product at least in part of the applicant’s efforts and acumen were intended to be completely sheltered from tax liability in anybody’s hands. The applicant is undoubtedly one of the group whose exposure to income tax liability was sheltered by the scheme.
182The applicant contends that the income would have been distributed to family members and himself to a point and then to companies. That is a speculative contention. When these schemes were entered into and carried out, there was nothing revealed to support the reliability of the contention.
183In circumstances where the applicant cannot definitively show that a different taxpayer would have included the relevant amounts in their assessable income, rather there is speculation in a manner similar to what was before the Court in Hart.
184In Hart’s case both the trial judge and the Full Court were concerned with effectively the same propositions being advanced by the applicant in the present proceedings. Hart had endured economic misfortune in the form of a bankruptcy, Hart was involved in developing and marketing or promoting tax avoidance and minimisation arrangements and could naturally have attracted the attention of the ATO. It was asserted that asset protection motivated the arrangements entered into and the arrangements made for entities connected with Hart to receive and then deal with income that had its origins in the CHPT and in the IET consulting businesses associated with the CHPT practice or the principals of that practice.
185In Hart the Court concluded that there was a tax benefit and that the assertions as to other taxpayers being the logical recipients of those taxable amounts were insufficient to establish that Mr Hart did not enjoy the tax benefit. Further the Court observed that in circumstances where it is said to be not possible to predict the recipient of the taxable amounts by way of the alternative postulate makes it more difficult for a taxpayer to contend reliably, or sufficiently reliably, that the taxpayer would not have received those taxable amounts.
186The Full Court endorsed these propositions.
187The present circumstances do not involve any material difference to those of Hart.
188Far from being clearly wrong, it can be predicted with sufficient reliability so as to meet the reasonable expectation threshold that a principal in an organisation conducting a business would be the recipient of that taxable income apart from the scheme having been entered into or carried out. The Full Court’s observations in Hart at [88] bear this out: (sic)
(Footnotes omitted.)
That is the sum total of any relevant consideration of the parties’ competing submissions.
CONSIDERATION
Tax benefit
There was no dispute about the principles that govern the nature and content of a Tribunal’s obligation to give reasons, and its obligation to have regard to material evidence and submissions.
The starting point is s 43(2B) of the AAT Act. It provides: “Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based”.
In Copperart Pty Ltd v Commissioner of Taxation (1993) ALD 377; (1993) 26 ATR 327, Hill J said the following about the obligation of a tribunal under s 43(2B):
The failure of the tribunal to make findings of material facts constitutes a breach of s 43(2B) … and an error of law, justifying the setting aside of the tribunal’s decision and the remission of the matter to the tribunal for reconsideration ... The obligation under s 43(2B) is not satisfied by a statement of the tribunal’s conclusion of fact. The parties are entitled to know what evidence the tribunal accepted and what evidence it took into account. Likewise, the parties are entitled to know what evidence the tribunal rejected. Without this knowledge the parties will have but an incomplete idea of the tribunal’s process of reasoning and a lessened respect for the tribunal’s decision-making process.
Apart from the fact that the failure of the tribunal to make findings of fact constitutes an error of law entitling the applicant to succeed in its appeal, the failure to make those findings makes it difficult for me to set out what the relevant facts are upon which the appeal itself turns …
(Citations omitted.)
In Statham v Federal Commissioner of Taxation [1988] FCA 463; (1988) 20 ATR 228 at 230, Woodward, Lockhart and Hartigan JJ said:
It is timely for this court to state that it is the duty of the tribunal, when reviewing the Commissioner’s disallowance of objections under the Act, to make clear and full findings on material questions of fact, referring to the evidence or other material on which those findings were based: see Administrative Appeals Tribunal Act 1975 (Cth) s 43(2B). That duty must be performed by the tribunal, although the court does not hold the tribunal’s reasons for decision to a standard of perfection … Not least of the reasons for requiring the tribunal to reach adequate findings of fact is the difficulty of the court determining an appeal on a question of law under s 44 of the Administrative Appeals Tribunal Act where such findings have not been or not adequately been made.
(Citations omitted.)
As Rares and Robertson JJ said in Minister for Immigration and Border Protection v Maioha (2018) 267 FCR 643 at [45], “[w]hat is required is the reality of consideration by the decision-maker. On judicial review the Court must therefore assess, in a qualitative way, whether the decision-maker has as a matter of substance had regard to the representations put”.
And as Jenkinson J explained in Dennis Willcox vFederal Commissioner of Taxation (1988) 79 ALR 267 at 277 (Woodward and Foster JJ agreeing) a failure by a tribunal to carry out its duty to consider and determine each question of law and fact relevant to the determination or the failure to carry out the duty imposed by s 43(2) of the AAT Act produces “a miscarriage of justice by preventing this court from affording the parties a determination whether the tribunal’s decision was vitiated by error of law”.
In this case there was a wholesale failure of the Tribunal to have regard to material evidence, to weigh in the balance competing submissions, and to provide adequate reasons for any of its conclusions.
First, it was plainly insufficient in the face of the submissions made by Mr Grant about Mr Laxon’s evidence to recognise that the evidence was “supportive of [Mr Grant]’s case” and then reject it because the Tribunal was “not assisted by it”. Evidence is routinely given in Part IVA cases of alternate postulates or counterfactuals. Such evidence necessarily involves an element of speculation, but that does not necessarily make it speculative. Compare Federal Commissioner of Taxation v Futuris Corporation (2012) 205 FCR 274 at [79] (Kenny, Stone and Logan JJ).
Their Honours said in that case at [79]-[80] about the evidence adduced by the taxpayer of an expert accountant and corporate financier:
There was, of course an element of speculation involved in Mr Duivenvoorde’s analysis. But it was not mere speculation. It was a prediction based on given facts, established market values, calculations based on unchallenged financial data, a stated goal and the application of Mr Duivenvoorde’s expertise in corporate finance and his experience as a chartered accountant. The definition of “tax benefit” in s 177C(1)(a) requires that there be a prediction as to what “might reasonably be expected to have been included in the assessable income of the taxpayer”. That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but sufficiently reliable for it to be regarded as reasonable …
The reliability of a prediction might be established by direct evidence of contemporaneous consideration of the alternative postulate; or by evidence from company officers as to established commercial parameters for sale and whether the alternative postulate met those parameters; or evidence from those who were involved in the transactions challenged under Pt IVA. But that is not the only way to establish reliability. To the extent that the Commissioner submits that it is only by such direct evidence that a reliable prediction can be made, we reject that submission.
(Citations omitted.)
Secondly, it was not open to the Tribunal to dismiss out of hand, as “a speculative contention”, Mr Grant’s submission and evidence about how he managed his affairs after 2004. As Gageler J (as his Honour then was) said in Paciocco v ANZ Banking Group Ltd (2016) 258 CLR 525 at [169]:
The evidence of Mr Regan was not wholly irrelevant to the inquiry to be undertaken. That Mr Regan focused, ex post, on costs incurred by ANZ in consequence of late payment by Mr Paciocco was not of itself a reason for discounting the value of his evidence. As has been recognised in a variety of contexts, evidence of the later occurrence of an event can be probative of the earlier probability of that event occurring.
(Citations omitted.)
So it is here. Mr Grant’s evidence on this question was not “wholly irrelevant” and it had to be considered by the Tribunal, not brushed aside without explanation.
Thirdly, the Tribunal’s finding that the conducting of the IETs’ business involved his “acumen and knowledge” made no mention of, let alone gave proper consideration to, Mr Grant’s evidence and submissions that he had no role to play in that business and that, given that he did not contribute to its profit making activities, it was most unlikely that the persons who did would share it with him.
Those reasons are enough on their own to warrant the appeal being allowed.
There are, however, a number of other errors in the Tribunal’s reasons.
As Mr Grant submits, the Tribunal was wrong to find that Hart decides that it is necessary for a taxpayer “definitively” to show that a different taxpayer would have included the relevant amounts in their assessable income. That is not what the case says, and is not what s 177C(1)(a) contemplates.
The Tribunal was also wrong to consider itself bound by the decision of the Full Court in Hart. Its conclusion that Mr Grant’s case “does not involve any material difference” to Hart is a proposition that does not emerge from any finding of fact made by the Tribunal.
And more fundamentally, as in Collie, the Tribunal never posed, let alone answered, the question posited by s 177C of the ITAA 1936. As in Collie’s case, it was incumbent on the Tribunal to ask and answer that question with reference to the competing evidence and submissions, but it did neither.
The deferral question
In the event that he failed before the Tribunal, Mr Grant sought to incorporate an exercise of the power under s 255-10 of Schedule 1 to the TAA. It provides:
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 Tribunal acceded to the Commissioner’s submission that the Tribunal had no power to make a deferral order, reasoning as follows:
205The respondent resists this endeavour and urges the Tribunal to conclude that it does not have jurisdiction to entertain the applicant’s request.
206Whilst 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 [sic] s 255-10 deferment.
207The 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.
208As persuasive as the applicant’s submissions are, the authorities to which the applicant points 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.
(Footnote omitted.)
Although the Tribunal’s reasons on this point are not a model of clarity, the conclusion is correct.
As Keane CJ and Gordon J explained in Federal Commissioner of Taxation v Administrative Appeals Tribunal (2011) 191 FCR 400 at [14]-[17] (Federal Commissioner of Taxation v AAT):
The AAT has jurisdiction to review decisions only where an enactment authorises it to do so: s 25(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act). Part IVC of the TAA provides that a person may make a taxation objection and apply to the AAT for review of a “reviewable objection decision”. The AAT has jurisdiction to review only decisions that are reviewable objection decisions.
Part IVC of the TAA contains the objection, review and appeal procedures to be followed if a person dissatisfied with a “taxation decision” made under a Commonwealth Tax Act wants to challenge that decision. It was inserted into the TAA by the Taxation Laws Amendment Act (No 3) 1991 (Cth). Part IVC commenced on 1 March 1992. Part IVC was described in the explanatory memorandum that accompanied the amending bill as:
One set of generic, modern language provisions governing taxation objection, review and appeal procedures will be included in the [TAA] … These changes will apply to all taxation decisions made on or after 1 March 1992 (the date fixed for proclamation), including decisions in relation to assessments made before that date …
The text of Pt IVC of the TAA makes plain that for the Part to apply there are two requirements. First, there must have been a “taxation decision”. A “taxation decision” is defined in s 14ZQ of the TAA as “the assessment, determination, notice or decision against which a taxation objection may be, or has been, made”. Second, there must be a provision of another Act or of regulations which provides that a person who is dissatisfied with that taxation decision may object against it in the manner set out in Pt IVC. In this regard, s 14ZL(1) provides:
This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision … may object against it in the manner set out in this Part.
It is the objection to a taxation decision which is known as a “taxation objection”: s 14ZL(2) of the TAA.
As their Honours went on to explain (at [18]), Part IVC of the TAA enables taxpayers to seek review of some decisions made by the Commissioner under that Part, while leaving taxpayers to exercise other rights of review (such as under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act)) in relation to other decisions. The distinction between those two categories of decision is achieved through the definition of “taxation decision”.
The first category of decisions which constitutes a “taxation decision” against which a person who is dissatisfied with that taxation decision may object in the manner set out in Part IVC of the TAA includes ss 45D(4), 82KL(9), 102UR(5), 128P, 136AF(6), 175A, 177EA(9), 177EB(9) and 177F(7) of the ITAA36. As to the Income Tax Assessment Act 1997 (Cth) see eg ss 87-5, 197-80(5), 202-85(6), 203-55(7), 204-55, 207-136, 214-80, 220-50(3), 250-95(3), 820-965, and 974-112(5).
Critically for current purposes, in each case, the provision is in substantially the same terms providing: “[i]f a taxpayer to whom a determination relates is dissatisfied with the determination, the taxpayer may object against it in the manner set out in Part IVC of the [TAA]”.
But, as their Honours explained in Federal Commissioner of Taxation v AAT (at [20]), other provisions of taxing Acts empower the Commissioner:
to make a decision or determination but which do not provide that a person affected may object under Pt IVC of the TAA. As a result, those decisions are not within the definition of a “taxation decision” for the purposes of Pt IVC and Pt IVC does not apply to them. The affected person must seek another remedy. Provisions which empower the commissioner to make a decision to which Pt IVC does not apply are not unusual.
In the case of section 255-10 of Schedule 1 to the TAA, there is no provision allowing a taxpayer to object to the Commissioner’s refusal to “defer the time at which an amount of a tax-related liability is … due and payable” under Pt IVC of the TAA.
As the Commissioner submitted, such refusal can be challenged by way of judicial review (including under the ADJR Act).
The result is consistent with the fact that a decision not to remit, either in whole or in part, shortfall interest charge or general interest charge pursuant to s 8AAG of the TAA may affect the liability of a taxpayer, but nonetheless may not be challenged by proceedings brought under Pt IVC (even though the amount of the liability often appears on the notice of assessment itself): see Federal Commissioner of Taxation v AAT at [22].
Mr Grant’s reliance on the decisions in Commonwealth Bank Officers Superannuation Corp Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427 (Finn, Emmett and Edmonds JJ); and Federal Commissioner of Taxation v Apted (2021) 284 FCR 93 (Allsop CJ, Logan and Thawley JJ) is misplaced. Those cases are readily distinguishable.
In the former case, (i) the consideration of the method to be adopted for working out the relevant amounts of surchargeable contributions was an essential part of the assessment process, and (ii) there was no effective review of the exercise of the relevant discretion if the Tribunal could not exercise it.
In the latter case, s 13(1) of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) expressly provided as follows:
13 Review of the Commissioner’s decision
(1)An entity who is dissatisfied with a decision covered by subsection (2) may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953.
(2)This subsection covers the following decisions of the Commissioner under this Act:
(a)a decision that the entity is not entitled to a Coronavirus economic response payment for a period;
…
So that case fell within the first category identified in Federal Commissioner of Taxation v AAT, viz as one involving a “taxation decision” against which a person who is dissatisfied may object in the manner set out in Pt IVC of the TAA.
As we have explained, absent such a provision here, the case falls within the second category, such that the AAT did not have jurisdiction or power to review it.
Ground 15 in Mr Grant’s amended supplementary notice of appeal must therefore be rejected.
DISPOSITION
It follows that the proceeding will have to be remitted to the Administrative Review Tribunal (ART) for rehearing of two issues:
(1)whether Mr Grant had assessable amounts in respect of the CH Practice Trust taxable income for the 1997 to 2002 tax years pursuant to Part IVA of the ITAA 1936; and
(2)whether Mr Grant had assessment amounts in respect of the IET taxable income for the 1997 to 2000 tax years pursuant to Part IVA of ITAA 1936.
To be clear, all other issues are beyond the scope of the remitter, and the findings made by the Tribunal in respect of such issues will not be re-opened. These issues include, but are not limited to, the issue of dominant purpose, the findings set out at [116] below, and the assessment of penalty applied to the corrected shortfalls in tax payable by Mr Grant.
The only order that the Tribunal made was that “[t]he objection decisions under review are set aside and remitted to the Commissioner to be remade in accordance with these reasons”.
The order was in those terms because Mr Grant had been partially successful. The Tribunal accepted Mr Grant’s submission that at least some of the amounts received by the entities associated with him as part of the Practice Trust Scheme and IET Schemes were loans which were released when he departed from Cleary Hoare in 1999, and that these entities also made loans to Mr Grant. The Tribunal also accepted that Mr Grant did not earn income by way of distributions from the CH Practice Trust or SNAG Trust in the years 1994 to 1999, and the accrued personal losses were still available to him in the 1997 tax year.
The parties agreed that if the appeal was allowed, and the proceeding remitted, the remitter will oblige the ART to consider the remitted questions afresh. The hearing is not to be a continuation of the hearing before the Tribunal. That means that no party will be bound by how they conducted their case before the Tribunal and that, subject to the views of the ART, either party would be permitted to adduce further evidence or make further submissions.
As Gray J (with whom Keely J agreed) said in Blackman v Commissioner v Taxation (1993) 43 FCR 449 at 455-6:
The obligation of the tribunal to find facts is not diminished where there has been a successful appeal to the Federal Court of Australia under s 44 of the Administrative Appeals Tribunal Act. If the court allows the appeal, sets aside the decision of the tribunal, and remits the case to be heard and decided again, the tribunal retains its responsibility to find the facts. If, as is usually the case, the remitted matter is heard and decided by a tribunal differently constituted from the tribunal whose decision was the subject of the successful appeal, the differently constituted tribunal will have to find facts. In the exercise of its powers, and subject to the submissions of the parties, the tribunal may decide to act on the finding of fact made by the earlier tribunal, or some of them. It may decide, as the learned senior member did in the present case, to rely upon evidence which was before the earlier tribunal. It may decide that the proper course is to receive all or some evidence afresh. The parties might agree that some or all of the findings of fact previously made are to be treated as findings of fact by the tribunal. The order of the Court may limit the ambit of the issues with which the tribunal is to deal upon a case being remitted. The order of Jenkinson J in the present case cannot be construed as containing such a limitation. The course which the tribunal takes in relation to any case will depend on the circumstances of that case, but it will be the responsibility of the tribunal which ultimately decides the case to determine for itself the facts.
In our view, in this case there would be much to be said for the preparation of new submissions tailored to the issues that are to be addressed, because of the sheer volume of the material before the Tribunal that dealt with a range of questions about which there is no longer any controversy. But, for the reasons given by Gray J in Blackman, that is a matter for the ART member to whom the matter is remitted.
The Commissioner sought an order similar to that made in Gomeroi People v Santos NSW Pty Ltd (No 2) (2024) 303 FCR 255 (“The matter is to be determined by the Tribunal without further evidence, subject only to proper cause being shown for the adducing of further evidence and the Tribunal being satisfied it is appropriate to permit further evidence to be adduced”). We are not inclined to make such an order here, because we would not seek to fetter the ART or the parties by imposing what in this case would be an arbitrary presumption.
The parties briefly addressed the question of costs in their written submissions. However, during oral address it was agreed that they should be permitted to make short written submissions on the question. We will make an order accordingly.
That we are compelled to remit for rehearing critical matters about which the parties have been in dispute for over 20 years is a truly lamentable state of affairs, but we are left with no choice in the matter. As we explain in Collie at [59], it is not possible for the Court sitting on an appeal such as this to decide the array of factual matters underpinning the critical legal issues that remain in dispute.
We will therefore make the following orders:
(1)The appeal be allowed.
(2)The decision of the Administrative Appeals Tribunal dated 12 March 2024 be set aside.
(3)The proceeding be remitted to the Administrative Review Tribunal for the hearing and determination of the following questions:
(a)whether the applicant had assessable amounts in respect of the Cleary Hoare Practice Trust taxable income for the 1997 to 2002 tax years pursuant to Part IVA of the ITAA 1936; and
(b)whether the applicant had assessment amounts in respect of the Income Earning Trusts taxable income for the 1997 to 2000 tax years pursuant to Part IVA of ITAA 1936.
(4)On or before 4.00pm on 31 January 2025, the applicant is to file and serve written submissions not exceeding three pages on the question of costs.
(5)On or before 4.00pm on 7 February 2025, the respondent is to file and serve responsive written submissions not exceeding three pages on the question of the costs.
(6)The question of the costs of the appeal will be determined on the papers.
I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices O’Callaghan, McEvoy and Needham. Associate:
Dated: 19 December 2024
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