Hasmid Investments Pty Ltd, Weis and Schwartz and Commissioner of Taxation

[2001] AATA 365

DECISION AND REASONS FOR DECISION [2001] AATA 365

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos.   VT1999/219, VT1999/221,

TAXATION       APPEALS      DIVISION          )          VT1999/223 and VT1999/224
           Re      HASMID INVESTMENTS PTY LTD, MICHAEL LEOPOLD WEIS, and ANNA SCHWARTZ
  Applicants
           And    COMMISSIONER OF TAXATION
  Respondent

DECISION

Tribunal       Mr B. H. Pascoe, Senior Member

Date4 May 2001

PlaceMelbourne

Direction      The Tribunal affirms the decisions under review in respect of the applications of Mr Weis and Mrs Schwartz (VT1999/221, 223 & 224). The Tribunal sets aside the decision under review in respect of the application of Hasmid Investments Pty Ltd (VT1999/219) and, in its stead, allows the objection against the assessment of income tax for the year ended 30 June 1988 in full. The Tribunal certifies that the proceedings have terminated in a manner favourable to Hasmid Investments Pty Ltd.           

...…(Sgd) B. H. Pascoe…….
  Senior Member
CATCHWORDS
INCOME TAX – distributions of trust income to non-residents – whether valid distribution – whether sham – whether interest on unpaid distributions an allowable deduction – whether amended assessments authorised – whether fraud or evasion – additional tax
Income Tax Assessment Act 1936
Richard Walter Pty Ltd v Commissioner of Taxation 95 ATC 4440
Re Cullen (1946) VLR 47
Stoddart v Nelson (1855) 25 LJ ch 116
Stevenson v Abingdon (1862) 31 Beav. 305
Coplandis Executors v Milne (1908) S.C. 426
Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4681

REASONS FOR DECISION

4 May 2001              Mr B. H. Pascoe, Senior Member

1. These are applications to review decisions of the respondent to disallow objections against assessments and amended assessments of income tax for the years ended 30 June 1986 and 30 June 1988.  The dispute relates to alleged distributions of income to 29 beneficiaries of a trust in the year ended 30 June 1986.  Money was not transferred out of the trust until August 1988 and deductions were claimed by the trust in the years ended 30 June 1987 and 1988 for interest on the unpaid distributions.

2. At the hearing the applicants were represented by Mr M. Moshinsky of counsel and the respondent by Mr T. Murphy of counsel.  There were three applicants, Hasmid Investments Pty Ltd as trustee of the Weis Property Trust; Mr M. Weis and Mrs A. Schwartz.  Evidence was given by Mr M. Weis; his sister, Ms B. Osias; two alleged beneficiaries, Dr R. Landsberg and Dr J. Landsberg; a retired bank manager in Israel, Mr Grunwald and an accountant, Mr J. Franck.  In addition, a statement from another beneficiary, Dr Jessica Landsberg, was tendered by the applicants but she was not available to give evidence at the hearing.

3. In the year ended 30 June 1986, the Weis Property Trust ("the trust") derived a net income of $662,797 made up as follows:

   Distribution from Bob Weis Family Trust  603,482
   Distribution from Stonebay Investment Trust  50,985
   Rent received               15,600
     670,067
   less expenses               7,270
     662,797

The distribution statement included with the income tax return lodged for that year showed a distribution of $35,000 to Mr M. Weis, $3,797 to his then wife, Anna, $19,500 to each of three minor children and $19,500 to each of 29 beneficiaries who were non-residents of Australia.  It is the distribution totalling $565,500 to these non-residents which is the centre of the dispute.  The balance sheet of the trust at 30 June 1986 showed:

Assets

Cash  25
Property – St Kilda  366,147
Loan – Weis Film Pty Ltd  294,102

Stonebay Investments Pty Ltd                       50,985
  711,259

Liabilities

Beneficiaries' Loans  711,234

Net assets               25

During the year ended 30 June 1988, income tax of $5,850 in respect of each of the 29 non-residents was paid and, on 19 August 1988 an amount of $395,850 was transferred by telegraphic transfer to United Mizrachi Bank, Tel Aviv, said to have been $13,650 for each of the 29 non-residents.  During the years ended 30 June 1987 and 1988, interest was credited by the trust to each of the non-residents on the 1986 unpaid distributions.  In 1987 such interest credited and claimed as a deduction amounted to $84,825 and in 1988 totalled $73,515.  The trust had returned a net loss in each of these years.

1. On 19 September 1991 the respondent issued to the trustee a notice under section 264 of the Income Tax Assessment Act 1936 ("the Act") requiring information in relation to the trust and distributions. This was responded to by the accountants and tax agents for the trust on 4 November 1991. On 22 September 1995 assessments and amended assessments were issued to the three applicants. The effect of these was to include in the income of Mrs A. Schwartz (the former wife of Mr M. Weis) an amount of $565,500 in the year ended 30 June 1986 as the default beneficiary of the trust, the respondent having decided that 29 non-resident beneficiaries were not entitled to the income. The respondent then decided to disallow the interest claimed as a deduction by the trust in 1987 and 1988 relative to the non-resident beneficiaries' "loan accounts". The effect of this was to reduce the 1987 loss and convert the 1988 loss to a net income of $157,491. An assessment for the year ended 30 June 1988 was issued to the trustee under section 99A of the Act on this amount. In addition, amended assessments for the same year were issued to Mr Weis and Mrs Schwartz including half of this amount, $78,745, in each of their assessable incomes. Additional tax by way of penalty at the rate of 45 per cent was imposed in each assessment plus a per annum component.

2. The trust was established by deed dated 21 June 1984.  It is a relatively standard discretionary trust.  The "specified beneficiaries" were named as Michael Weis and Anna Weis.  "General beneficiaries" were defined as:

   1.the brothers, sisters, spouses, widows, widowers, children and grandchildren of the specified beneficiaries and the spouses, widows, children, and grandchildren of such brothers and sisters, spouses, children and grandchildren

   2.the parents, grandparents, uncles, aunts, nieces, nephews, or cousins of the specified beneficiaries

   3.any spouses, widows or widowers of any other general beneficiary

The trustee had power to pay, apply or set aside and part of the net income of any year in favour of a general beneficiary or to accumulate any part.  So much of the net income of the trust as was not the subject of a valid and effective determination by the trustee in respect of any accounting period was to be held in trust for the specified beneficiaries in equal shares.

1. Mr M. Weis is a film producer and the principal of a film production business the income of which is in the Bob Weis Family Trust of which a beneficiary is the trust in this proceeding.  He and his then wife Anna, now Mrs Anna Schwartz, were the directors of the trustee company, Hasmid Investments Pty Ltd although Mr Weis said that his wife's involvement was minimal.  He said that his parents survived the war and came to Australia.  Neither parent had brothers or sisters.  Many relatives of his parents are in Israel and Mr Weis said that, prior to 1985, he and his parents had often provided financial support to those relatives.  He said that he first travelled to Israel when he was 13 years old and met many of the relatives.  He has visited many time since, including April 1986, November 1986, May 1987 and June 1988.  Mr Weis said that he knew many of the Israeli relatives well.  In the year ended 30 June 1985, the trust made distributions totalling $49,794 to four of these relatives.  One distribution of $19,500 was to an elderly cousin of Mr Weis' mother.  Three amounts of $10,098 were distributed to the widow of his paternal grandfather, her son and her son's wife.  These distributions were remitted by separate bank cheques payable to the individuals on 5 May 1987.  Mr Weis said that these four beneficiaries were chosen on the basis of need.  He said that, in the 1986 year, he decided to distribute to 29 beneficiaries as the trust had had a successful year financially and he wanted to distribute some of it to "family" in Israel.  Mr Weis dealt in some detail with the degree of relationship of each of these beneficiaries.  At this point it is sufficient to say that 13 beneficiaries were cousins of his mother or children or spouses of such cousins and children.  A further 11 beneficiaries were relatives or spouses of relatives of his father.  Five beneficiaries were the relatives of the former husband of the sister of Mr Weis.  Mr Weis accepted that these five did not satisfy the definition of general beneficiary in the trust deed but said that he had not realised this at the time and considered them to be part of his family.  Mr Weis said that although the financial situation of the Israeli relatives differed, he believed that it was appropriate and equitable to distribute the same amount to each.

2. Mr Weis said that, during his visits to Israel in 1986, he spoke to many of the relatives and advised them of the distribution from the trust. He believed that he told them that the funds would be remitted in the course of the next 12 months. He could not recall the reason for delay in remitting but assumed that it was due to cash flow considerations. He said that it was decided to credit interest on the unpaid distributions or "loan accounts" but could not recall how the rate of interest was arrived at. Mr Weis said that he had spoken and written to Mr Grunwald of the United Mizrachi Bank in Tel Aviv requesting him to pay the appropriate amount to each beneficiary from funds to be transferred by telegraphic transfer. He believed that his sister, Barbara, who was living in Israel provided addresses and account details of each beneficiary to Mr Grunwald. He asked his sister to also obtain signatures from each beneficiary acknowledging receipt and received from her a list with signatures appended. A copy of this list was provided to the respondent in answer to the section 264 notice in 1991. Mr Weis said that he was not aware until recently that the signatures were not genuine but the names had been signed on the list by his sister and her husband. He said that he had made several attempts to obtain from the bank documentary evidence that the funds were paid to the individual beneficiaries without success. He did produce a letter from the bank dated 8 June 2000 confirming the A$395,850 had been received on 22 August 1988 into a transit account and "that the funds were dealt with in accordance with your instructions". Mr Weis said that he had had no prior dealings with Mr Grunwald but believed he had been introduced to him by his accountant, Mr Franck, in Melbourne. He was unable to explain why the funds were remitted at the particular time and in the manner it was done other than that he was very busy at the time and dealing with the difficulties of a divorce. He denied that the movement of the funds to Israel at that time were related to concerns on financial settlement with his former wife. He was unable to recall why no remittance of interest to 30 June 1988 had been made and why no further interest was credited beyond that date.

3. Mr Weis said that he and his wife, Anna, had separated in 1987 and divorced in 1988.  They have had minimal contact since and he described the current relationship as "hostile".  As a result, he had not asked her to give evidence.  He said, further, that her involvement in the decision to distribute to Israeli relatives was minimal, no distributions were made to her relatives and he had indemnified her for any liability accruing to her as a result of the present dispute with the respondent.

4. Mrs Barbara Osias is the sister of Mr Weis and has lived in Israel since 1976.  She recalled receiving a document with a list of 29 names from her brother in August 1988.  All of the names on the list were familiar to her as relations living in Israel.  Mrs Osias said that her brother asked her to liaise with Mr Grunwald and obtain the signature of each person on the list confirming that they had received the money.  She thought she may have provided Mr Grunwald with addresses or bank details of the persons on the list.  She said that she called on Mr Grunwald at his home.  At the time she was just recovering from the birth of her third son and she said that she was annoyed with her brother expecting her to travel around obtaining signatures.  As a result, Mrs Osias said that she telephoned each person, asked if they had received the money and then she or her husband appended a signature purporting to be that of the person against the name.  She said that she did not tell her brother of this subterfuge until recently.  Mrs Osias said that she had received money regularly from family trusts and was aware that her parents had assisted the Israeli relatives financially.  She was not concerned at not being on the list of beneficiaries herself.

5. Mr Grunwald gave evidence by telephone from Israel.  He is now 77 years of age and retired but, in August 1988 was the manager of the foreign investors section of the United Mizrachi Bank Ltd in Tel Aviv.  To the best of his recollection, he had received a letter of 15 July 1988 from Mr Weis advising of funds to be sent to him and an attached list of names.  He assumed that he had passed the letter to a staff member who would have dealt with it and he did not deal with the matter personally.  He could not recall the account to which the funds were credited nor how many payments were made to the individuals.  He could not recall ever meeting Mrs Barbara Osias, although acknowledged that she would not have needed to see him personally.  He was definite that she did not see him at home as he never sees clients at home.  He could not recall any prior discussion with Mr Weis.

6. Dr Roy Landsberg resides in Israel.  He had provided a written statement prior to the hearing and gave evidence in person.  He said that he had known Mr Weis since he was about two years old.  His father and the mother of Mr Weis were first cousins.  Dr Landsberg said that both he and his wife received a payment in 1988.  He was uncertain as to the precise amount but believed it was between 18,000 and 20,000 Israeli shekels each.  He recalled that a person rang from a bank to obtain account details.  He said that Mrs Barbara Osias called soon after to verify that the money had been received and agreed that she could sign on his behalf that he had so received the money.  He maintained that Mr Weis had told him that he was sending money from a trust in 1986 but there would be some delay.  Dr Landsberg said that, while they were not poor, the money was a great help and meant that he could afford to replace his car with a new one.  While he said that he had some understanding that there was still some money in the trust he did not see it as his money and would not be comfortable to ask for it.  There had been no discussion regarding any interest on any amounts.  Dr Landsberg recalled signing a document in March 1999 when Mr Weis visited him in Chicago.  However, he said that he had not asked why and, as he regarded Mr Weis as a family member, had signed the document without question.  He said that it did not mean much to him and did not regard it as his business.  The document in question was a formal two page document acknowledging entitlement to a distribution in 1986 and interest credited in 1987 and 1988 and having received a remittance in 1989 and tax paid on his behalf.

7. Dr Jacob Landsberg provided a written statement prior to the hearing and gave evidence by video link from Israel.  His statement and evidence was in similar terms to that given by his brother Dr Roy Landsberg.  He could not recall the reason give for the delay in remitting his trust distribution.  He also signed a document in March 1999 at the request of Mr Weis acknowledging the distribution, interest credited and the remittance.  He said that he had looked at it and had a general understanding of it but said that he was too shy to say that he did not understand the document.  He did not believe that he was owed any money by the trust at present.

8. A statement by Dr Jessica Landsberg, wife of Dr Roy Landsberg, was provided prior to the hearing.  It was in similar terms to those provided by her husband and brother-in-law, Dr Jacob Landsberg.  She was not available to give oral evidence or for cross-examination.

9. Mr Franck provided a written statement prior to the hearing and gave evidence personally at the hearing. He is a Chartered Accountant and was responsible for the accounts and income tax returns for Mr Weis and trusts associated with him. He said that the income tax returns of the applicant trust and the resolution of the trustee recording distributions of income in the 1986 year were prepared in his office on the information provided by Mr Weis. He did not know any of the beneficiaries personally. Loan accounts were established in the books of the trust and amounts credited to each of the beneficiaries. Mr Franck said that he explained to Mr Weis that the beneficiaries had a legal entitlement to the money distributed to them and it was his understanding that Mr Weis intended that the funds would be remitted in due course. The interest credited in 1987 and 1988 was said to have been a reasonable, commercial rate agreed by Mr Franck and Mr Weis. Mr Franck had no involvement in the remittance of funds in August 1988. He said that the list of beneficiaries with signatures appended was sent to the respondent with the response to the section 264 notice in November 1991 and he had no reason to believe at the time that the signatures were not those of the beneficiaries. Mr Franck said that he had a close association with Mr Weis and would have met with him any times during a year. He assumed that the amount of $19,500 per beneficiary was chosen because this amount in the last bracket of income before an increase of the rate of tax to 30 per cent. Mr Franck assumed that he had recommended the United Mizrachi Bank to Mr Weis having been a director of a company associated with the bank until approximately 1990. He accepted that reasons for delay in remitting money to the non-resident beneficiaries, given in the response to the section 264 notice, may have been a relatively standard wording given the number of such notices received in relation to many clients distributing trust income to non-resident beneficiaries. The response had stated that the "beneficiaries requested their entitlement be invested in the trust in Australia due to their country's economic instability and perceived A$ currency benefits". Mr Franck had no specific memory of reasons given by Mr Weis but accepted that it may well have been caused by cash flow limitations. He said that he had not been involved in the property settlement with the former wife of Mr Weis and had no recollection of any discussion with her.

10. It was submitted for the applicants that the distributions by the trustee out of the 1986 income were genuine distributions to the persons named.  It was said that the beneficiaries were aware of their entitlements, income tax was paid on their behalf and the balance remitted to them.  The fact that Mr Weis knew each of the beneficiaries well, regarded them as family, travelled to Israel regularly, had little family in Australia and both he and his parents had often supported family members in Israel was said to support the view that the trust distributions were genuine.  It was accepted that five of the 29 non-resident beneficiaries were not within the definition of general beneficiaries in the trust deed but it was submitted that this was a genuine mistake of Mr Weis.  Mr Moshinsky argued that the remaining 24 non-resident beneficiaries satisfied the definition, in that first cousins once removed and second cousins were "cousins" for the purposes of the trust deed and a half-uncle and grand-uncle were "uncles" for the purposes of the deed.  The fact that Mr Weis had no first cousins when the trust deed was drawn up was said to support a broader rather than a narrower construction of the meaning of these words.  It was submitted further that, to the extent that the Tribunal finds that any of the non-residents were not entitled to income of the trust, any assessment of the relevant income to Mrs Schwartz was out of time and not valid, the amended assessment having been issued more than six years after tax was due and payable under her original assessment for the 1986 year.  Whilst arguing that the interest claimed in 1987 and 1988 was an allowable deduction, Mr Moshinsky again submitted that, if not so allowable, any amended assessment for Mr Weis was out of time and invalid.  Finally, it was submitted for the applicant that the additional tax included in the amended assessment was excessive and that the substantial tax previously paid on account of the non-residents should be taken into account.

1. For the respondent it was submitted that the purported entitlements of the non-resident beneficiaries was a sham. It was said that the remoteness of the relationship of many alleged beneficiaries, the number of alleged beneficiaries, the substantial proportion of the year's income distributed, the payment of the same amount irrespective of need, the effect of tax rates on the individual amounts, the alleged distributions in one year only and the lack of documentary evidence of funds being remitted to the alleged beneficiaries pointed to the alleged distributions not being genuine. Mr Murphy argued that the substantial expenditure on renovations to a home and the divorce proceedings occurring soon after the relevant year end could be seen as likely reasons for the purported distributions. It was submitted further that beneficiaries under the deed were limited to first cousins, uncles, aunts, etc of the specified beneficiaries and only one alleged non-resident beneficiary was included in the definition. In relation to the claim for interest, there was no loan agreement or agreement to pay interest and the funds were not used by the trustee to produce assessable income. Alternatively, it was argued that a deduction for interest is denied by the thin capitalisation provisions of Division 16F of Part III of the Act. Finally it was submitted that the amended assessments to Mrs Schwartz and Mr Weis were validly issued as there had been avoidance of tax due to fraud or evasion.

2. The primary issue in this case is whether any or all of the non-residents were presently entitled to a share of the net income of the trust in the year in which they were said to have been beneficiaries.  For the purpose of determining that issue it is appropriate to consider the question of whether the purported creation of entitlements was a sham.  The applicable law in cases where sham is argued was set out by Tamberlin J in the decision of the Federal Court in Richard Walter Pty Ltd v Commissioner of Taxation 95 ATC 4440. His Honour said (at p. 4449 and following):

   "There is no dispute between the parties as to the applicable law which is conveniently summarised and set out in Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449 at 454 where Lockhart J said:

   'A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be.  It is a spurious imitation, a counterfeit, a disguise or a false front.  It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not.  It is something which is false or deceptive.'

   His Honour went on ( at 454-455) to set out a number of guidelines, the substance of which is as follows:

   1.The fact that the transaction involved a 'round robin' of cheques does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques.

   2.The artificiality of the transaction does not give rise to its characterisation as a sham or to the characterisation of the constituent documents as a sham so long as each document 'had the effect that it purported to have', and so long as none of the documents purported 'to do something different from what the parties had agreed to do'.

   3.The complexity of the transaction does not in itself establish its character as a sham.

   4.A purported disposal of property or purported creation of a debt may be a sham where donor and donee or lender and debtor do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property.

   5.The fact that a transaction may have been intended to present a shield against creditors does not, absent the transaction being set aside under the Bankruptcy Act 1966 (Cth), for example, characterise it as a sham. Transactions may in themselves be legally effective although intended to achieve an unacceptable purpose. The essential question seems to be whether what has been done has been genuinely done.

   6.Circumstances giving rise to suspicion do not establish a transaction as a sham unless it can be shown that the outward and visible form does not coincide with the inward and substantial truth.

   Other relevant guidance is to be found in Snook v London and West Riding Investments Ltd (1967) 2 QB 786 at 802; Allsene Pty Ltd v Federal Commissioner of Taxation (1989) 89 ATC 5333; Esanda Ltd v Burgess (1984) 2 NSWLR 139 at 144, 146 and 153.
   In Cranstoun v Federal Commissioner of Taxation (1984) 75 FLR 220 at 228, Carter J said:

   'If two persons sign a document which on its face purports to be a loan agreement evidencing a loan from one to the other for $180,000 but it is agreed either expressly or impliedly that the document is intended to give the appearance only of a loan transaction then it is, in my view, a sham; it is something devised to delude, it is a trick or a hoax, an imposture, it is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit ....However one defines it, it is in law nothing, nor, in my view, can it be elevated to be something which the law will recognise and enforce merely because documents which are drawn in legal language appear, a series of book-keeping entries is made and extensive use made of the banking system involving debits and credits of the order of hundreds of thousands of dollars.  No amount of professional ingenuity will make the agreement into what in fact it is not if the parties do not so intend.'

   The central feature of a loan transaction is that the parties must intend that the whole of the moneys lent should be repaid.  In the present proceedings, I do not consider there was ever intended to be, nor was there, any such obligation created.  See Ferguson v O'Neill (1943) VLR 30 at 32."

In that case His Honour was dealing with an alleged loan and a question of whether money received by the company was a loan or income.  Here we are dealing with an alleged creation of a present entitlement to income of a trust estate.  It is submitted at times that, in all of the decided cases on sham, there were two parties involved and here one party created rights which cannot be defeated unilaterally so that a finding of sham is not possible.  While this may be true when the transaction involves a specific action by each of two parties, such as the execution of a loan agreement, it is not true when the matter under consideration is the unilateral act of one party which seeks to attribute income to another who is not within the jurisdiction and is not aware of his or her rights.  It may well be an adequate defence against a contention of sham if the other party consented or was aware of such attribution and received the income.

1. It is of some relevance in this case that the distributions from the trust to four non-resident beneficiaries out of the 1985 income was made by four separate bank cheques payable to each individual beneficiary.  The purported distribution out of the 1986 income to 29 beneficiaries was made by one amount transferred to the Israeli bank.  There is no objective evidence of the specific instructions given to and complied with by the bank.  Mr Weis said that he sent a letter with a list of the names.  This showed no addresses, bank account details or any other information to allow the bank to properly deal with the funds.  Mr Weis said that he asked his sister to provide details to Mr Grunwald.  She thought that she had provided addresses or bank details delivered to his house.  How she would know such details was not explained.  Mr Grunwald denied that she had called at his house.  Drs Roy, Jacob and Jessica Landsberg said that somebody from the bank rang to obtain bank account details.  To say the least, the process suggested a relatively lax approach to the disbursement of nearly $400,000.  No evidence of confirmation by the bank of having dealt with the funds in accordance with the alleged instructions could be produced other than the letter of 8 June 2000 which stated simply that $395,850 was received into a transit account and "dealt with in accordance with your instructions".  Mr Grunwald assumed a staff member had dealt with it, assumed the money had arrived, could not recall the account credited, could not recall how the funds were disbursed and assumed beneficiaries would have signed some bank document acknowledging receipt.  There is no criticism of Mr Grunwald given that the funds were transferred some 12 years prior and he has retired from the bank.  However, it is difficult to believe that his was the best evidence available.  While it is a small point, perhaps, it is difficult to believe that there was no bank charges for handling the transaction but no mention of any provision to meet such charges has been made.

2. In considering the likely validity of the alleged distributions it is relevant to note that the only evidence other than from Mr Weis was from his sister and two brothers from one family who were of a similar age to Mr Weis.  Both Drs. Landsberg had signed acknowledgments of entitlements and loan accounts in 1999.  It was clear from the evidence of both of them that they had asked no questions about the document, had signed the document because Mr Weis asked them to, did not necessarily understand the document and did not regard any alleged balance owing as being their money.  Four other alleged beneficiaries signed identical documents but did not give evidence at the hearing.  Three of these four were also Landsbergs.

3. A further factor which could be seen as relevant is that, in the year ended 30 June 1987, the trust expended over $500,000 in addition to a residential property in St Kilda.  Part of the property was sold in February 1988 for $500,000.  It appears likely that the trust was in no position to distribute the $565,500 to the non-resident beneficiaries after the 1986 year of income given the expenditure incurred in that subsequent year of income.  While it may well have been contemplated that a partial sale would eventually recoup that expenditure, these facts do not sit readily with the expressed view of assisting those distant relatives in Israel after a profitable business year.  While Mr Murphy sought to suggest that the concurrent and apparently acrimonious divorce settlement negotiations were also relevant to indicate a likelihood of wanting to create entitlements to a large amount of the trusts assets in the hands of non-resident relatives of Mr Weis, I am unable to make any judgement on any significance of the divorce other than to note it as a fact at the time.

4. On balance, I do not accept the evidence of Mr Weis or his relatives that there was an intention to provide the 29 non-residents with an entitlement to income from the trust nor that the relevant funds were paid to them.  The fact that such a large distribution was made in one year only, the choice of 29 separate and, in many cases, distant relatives, the equal amounts of $19,500 each, the disparity and vagueness of evidence as to how the alleged remittance in 1988 reached the various beneficiaries, the apparent laxity in the method by which the alleged remittance was done, the disparity and vagueness of alleged reasons for the two year delay in remitting the alleged entitlements and the coincidences of major residential renovations and divorce settlement all lead to the conclusion that the alleged entitlements were not genuine and not intended to provide benefits to the non-residents named in the resolution of the trustee.  A further factor relevant to forming this view is the apparent disregard of the terms of the trust by including as alleged beneficiaries, five persons related to the former husband of the sister of Mr Weis who were clearly outside the class of general beneficiaries under the trust.  Their inclusion and the relative remoteness of connections with other alleged beneficiaries lead to the view that Mr Weis included most if not all persons with whom he could claim a connection in Israel so as to keep the individual amounts to a tax effective $19,500 each.  In my view, the resolution purporting to give entitlements to the 29 non-resident beneficiaries was designed to retain the maximum amount within the trust for the benefit of Mr Weis and his immediate family.

5. Having found that the alleged distributions were a sham and created no valid entitlements to income in favour of the 29 non-residents, it is unnecessary to deal with the submission that the majority of the alleged beneficiaries were not beneficiaries under the trust deed.  Suffice it to say that, if this question had been critical to a decision, I would find that the narrower definition of "cousin", "uncle" and "aunt" should apply to the definition of beneficiary in this trust.  Mr Moshinsky relied on the decision in Re Cullen (1946) VLR 47 to support a wider interpretation to include second cousins, first cousins once removed, half-uncles, etc.  However, that case was concerned with a devise to "my cousin William Cullen" where there was both a first cousin and a first cousin once removed with the same name.  Here there is a greater relativity to Stoddart v Nelson (1855) 25 LJ Ch 116, Stevenson v Abingdon (1862) 31 Beav. 305 and Coplandis Executors v Milne (1908) S.C. 426 where the courts were influenced by the effect of a wider use of the words multiplying the number of potential beneficiaries to a more or less indefinite degree.  A study of the family tree produced by Mr Weis demonstrates the lack of certainty which a wider definition would produce.

6. Again, having found that no entitlements to income existed in the hands of the 29 non-residents, it follows that no amounts were due to them on which interest could be payable.  Even if the alleged distributions had been valid, the unremitted amounts would not be loans but amounts held by the trustee under separate trusts for each individual.  There is no evidence that such amounts were invested so as to produce any part of the subsequent income of the trust so as to provide any further entitlement to income and, effectively, reduce that income.  Consequently, there can be no allowable deductions in the 1987 and 1988 years for alleged "interest".

7. As no valid entitlements to the 29 non-residents were created by the resolution dealing with income of the 1986 year and that resolution provided for the balance of income of the year to be appropriated, set aside and applied for the benefit of Anna Weis (now Anna Schwartz), the respondent has correctly assessed her. The question then arises as to whether the amended assessment was validly made under section 170 of the Act. Being outside six years from the due date of the original assessment requires a finding that there had been an avoidance of tax due to the "fraud or evasion". Having found that there was an attempt to attribute income to non-resident beneficiaries and that the purported resolution was a sham, I have no difficulty in finding that there was an avoidance of tax and that avoidance was due to fraud or evasion. False statements and representations were made. It was argued that such statements or representations were not made by Mrs Schwartz, the particular taxpayer concerned. However, she did not give evidence, and, while I accept the reasons given for her non-appearance, I cannot be satisfied that she was not a party to the resolution. She was a director of the trustee company which made the resolution. In any event, it is not necessary that the particular taxpayer is guilty of fraud or evasion provided that the avoidance of tax was due to fraud or evasion and the taxpayer would have benefit from such avoidance of tax.

8. Having found that there was no allowable deduction for interest in the 1987 and 1988 years, the net income of the trust in the 1988 year was $157,491. Under the terms of the trust deed, any net income of the trust not subject to a valid and effective determination by the trustees to distribute or accumulate was to be held "in trust absolutely for the same person and in the same proportions as the Trustee would hold corpus… if the vesting day were the same date as the date of expiry of that Accounting Period". Under clause 4 of the deed such persons were the specified beneficiaries Mr Weis and Mrs Schwartz. Consequently the only valid assessments of that income were those which included the half share in each of the individual's assessable income of the year ended 30 June 1988. It follows that the assessment issued to the trustee under section 99A of the Act was not valid and the objection to that assessment should be allowed in full. For reasons similar to those expressed earlier, I am of the view that the amended assessments issued to the two individuals were authorised by section 170. There were no valid entitlements which could give rise to the alleged loan accounts. Even if the trustee believed that there were valid entitlements, the terms of the trust deed and the resolution required that they be held as a separate trust fund. There was no evidence that any of the undistributed funds were used to produce assessable income. It would appear that interest was credited and claimed with no thought as to the terms of the trust deed of the relationship to assessable income.

9. The final issue in these matters was the question of additional tax or penalties imposed by the respondent in the amended assessments in dispute.  Mr Moshinsky submitted that penalties were not appropriate.  It was argued that substantial sums had been paid by way of withholding tax and income tax on income said to have been derived by the non-residents in the relevant years.  Whilst, I have some sympathy with the concern at the apparent lack of recognition of tax already paid by, and on behalf of, taxpayers where the respondent is now seeking payment of tax on the same amount from other taxpayers, it is difficult to find that an amount of tax paid by one person should be taken into consideration in ascertaining the liability of another.  I can make findings in relation to those applicants who are before me.  At the conclusion of the hearing on 25 August 2000 it was proposed that the question of additional tax not be determined until submissions could be made by the parties after the Tribunal had reached its findings of fact on the main substantive issues.  To that end, I made the foregoing findings available to the parties for submissions on the question of additional tax prior to handing down the decision.

10. At a resumed hearing of these applications on 20 March 2001 submissions were made by both parties as to the question of additional tax. It was submitted for the applicants that any additional tax should be levied on the trustee of the Weis Property Trust pursuant to section 223(4) of the Act and not on the individual beneficiaries, Mr Weis and Mrs Schwartz. This provision states:

    "223(4)      Where—

    (a)      a trustee of a trust estate—

    (i)    makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or

    (ii)   omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular,

    being a statement relating to, or to the affairs of, the trust estate; and

    (b)      the tax properly payable by a person who is or has been a beneficiary of the trust estate exceeds the tax that would have been payable by the last-mentioned person if it were assessed on the basis that the statement were not false or misleading, as the case may be,

    the trustee is personally liable to pay, by way of penalty, additional tax equal to double the amount of the excess."

This provision was considered by Sundberg J in Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4681 who rejected similar arguments. His Honour found that the power to impose additional tax on the trustee does not preclude the imposition of additional tax on the beneficiary but may well be a factor in determining the quantum of additional tax and remission of additional tax under section 227. In that case, as in this matter, no additional tax has been imposed on the trustee as a consequence of this decision as the objection against such assessment for the year ended 30 June 1988 is to be allowed in full.

1. It was submitted further by Mr Moshinsky that no additional tax should be imposed on the amended assessments for the years ended 30 June 1986 and 1988 for Mrs Schwartz, as her involvement in the relevant transaction was minimal and formal.  It was said that there was no reason to think that Mrs Schwartz knew that the resolutions to distribute income to non-residents or to credit them with interest on unpaid distributions were invalid or that there was any omission from her return.  For the respondent, it was submitted that, while Mr Weis was the major active participant in the purported distributions to the non-residents, the evidence had been that the resolutions were discussed with Mrs Schwartz and she, as a director of the trustee company, had agreed with them.  It was further submitted that, as Mr Weis was liable to indemnify Mrs Schwartz for any taxation liability arising from the trust distribution, any reduction in penalty would benefit Mr Weis who was the perpetrator of the sham transactions.

2. The final submission relevant to the additional tax was that appropriate recognition should be given to the fact that significant amounts of tax had been paid by the trustee by way of income tax on account of the non-residents and withholding tax on the alleged interest credited to them.  Given the findings of the Tribunal, there was no liability for such amounts.  For the respondent it was conceded that the non-resident income tax and withholding tax would be refunded to the trustee.  It was noted that there is no mechanism for offsetting refunds due to one taxpayer, the trustee, against income tax due by another taxpayer, the resident beneficiaries.

3. The additional tax imposed by the respondent in the amended assessments of Mrs Schwartz for the years ended 30 June 1986 and 30 June 1988 was said to have been in two parts. One part described as the "culpability penalty" was imposed at the rate of 45% of the tax shortfall. The other part described as the "interest component" was calculated at a rate per annum on the tax shortfall from the date on which the tax would have been due and payable to 31 August 1995. The effect of this two part penalty was that the additional tax for the 1996 year represented 142.7% of the tax shortfall and for the 1988 year, 102.5%. Additional tax for the relevant years was imposed under section 223 of the Act which provided for a liability equal to 200% of a tax shortfall arising from a false or misleading statement. Section 227 provided a discretion to the respondent to remit all or any part of such additional tax. It is noted that neither party referred to section 170AA(2) which, for years of income up to and including the year ended 30 June 1992, provided that interest was not payable where a taxpayer was liable to a penalty under section 223. As a result, the respondent cannot impose interest as such on the tax shortfall arising from the amended assessments for the year ended 30 June 1986 and 1988. Consequently, it must be assumed that the calculation of an interest component of the additional tax was used by the respondent as a method of exercising the discretion under section 227 to remit additional tax under section 223 from 200% to 142.7% and 102.5% respectively and it is these percentages which the Tribunal, standing in the shoes of the respondent, is to consider when determining whether any further amount of additional tax should be remitted.

4. For the years ended 30 June 1993 and subsequent years, Part VII of the Act provides for specific percentages of a tax shortfall depending on the circumstances which had caused such shortfall to arise. There is no provision for the time value of the amount of the tax shortfall and the recognition of this is now in amended section 170AA to provide for interest in addition to the flat rate culpability component. It is not unreasonable to regard the former sections 223 and 227 as being appropriate to allow recognition of the period of time between the date of an amended assessment and the date when the liability for income tax would have been incurred. If the post-1992 amendments had been in force and applicable to the amended assessments involved here, it can be assumed that section 226H would have applied imposing a 50% penalty in addition to interest under section 170AA.

5. Mr Moshinsky made no submissions relative to the additional tax imposed in the amended assessment of Mr Weis for the year ended 30 June 1988.  The primary thrust of his submission was that Mrs Schwartz had only a minimal or formal involvement in the purported distributions to non-residents, the non-residents were all related to her former husband, the relevant income was generated from her former husband's film business and the additional income was assessed to her as a result of default provisions of the 1986 resolution or the trust deed.  It was argued that an interest only penalty was appropriate in those circumstances.  It was said that the indemnity for the tax by Mr Weis so that the monetary liability was his, was irrelevant and could not be taken into account.

6. The question here is whether or not the Tribunal should exercise a discretion to further remit the additional tax imposed by section 223. In my view, it is relevant to consider who was the real beneficiary of the funds purportedly distributed to the non-residents and who is to bear the liability for tax. Without the evidence of Mrs Schwartz, any other details of the financial arrangements following the divorce and knowledge of what happened to the funds remitted to Israel, it must be assumed that the benefit of the relevant income was to Mr Weis. As a result of the indemnity to his former wife he is liable for the tax. If Mrs Schwartz had remained liable for the tax, I would be reluctant to further remit the additional tax as without her evidence, I must assume that she was aware of and agreed to the purported distributions. The evidence of Mr Weis was that he discussed them with her. However, given that Mr Weis, the prime architect and expected beneficiary of the arrangement, is the person ultimately liable, I see no reason to further remit the additional tax levied in the amended assessments in the name of Mrs Schwartz for the years ended 30 June 1986 and 1988.

7. It follows that the decision under review in respect of Hasmid Investments Pty Ltd as trustee of the Weis Property Trust should be set aside and in its stead the objection against the assessment of income tax for the year ended 30 June 1988 is allowed in full.  The decisions under review in respect of Mr Weis and Mrs Schwartz should be affirmed.

   I certify that the thirty-four (34) preceding paragraphs are a true copy of the reasons for the decision herein of 

   Mr B. H. Pascoe, Senior Member

   Signed:         .......Lou Coffey....................................
     Personal Assistant

   Date/s of Hearing  16, 24 & 25 August 2000 & 20 March 2001
   Date of Decision  4 May 2001
   Counsel for the Applicant        Mr M. Moshinsky
   Solicitor for the Applicant         Arnold Bloch Leibler
   Counsel for the Respondent    Mr T. Murphy
   Solicitor for the Respondent    ATO Legal Practice