Idlecroft Pty Ltd as Trustee for Simon John Fleury Family Trust and Anor and Commissioner of Taxation

[2004] AATA 1177

Administrative

Appeals

Tribunal

 

DECISIONS AND REASONS FOR DECISIONS [2004] AATA 1177

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          

TAXATION APPEALS  DIVISION

)

Re

IDLECROFT PTY LTD as Trustee for SIMON JOHN FLEURY FAMILY TRUST - No. QT2002/231

SIMON JOHN FLEURY
-  No. QT2002/230

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member KL Beddoe
Senior Member Bernard McCabe

Date10 November 2004  

PlaceBrisbane

Decision

The Tribunal decides:

(a)      the objection decision in relation to the Trustee is set aside and            in lieu thereof the applicant’s objection is allowed in full;

(b)      the objection decision relating to assessment of income tax            payable by Simon John Fleury is affirmed;

(c) the objection decision relating to assessment of penalty tax payable by the said Simon John Fleury is set aside and a decision substituted that penalty tax be assessed in accordance with section 226G of the Act;

(d) there is no basis for exercising the discretion in sub-section 227(3) of the Act; and

(e)      these proceedings have terminated in a manner favourable to the            applicants.

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

KL Beddoe
  Senior Member

CATCHWORDS

TAXATION – appropriation of trust income – review of objection decision – purported appointment of income to beneficiary ineffective – consequences of ineffective appointment of income – decision to assess income of trustee set aside

Income Tax Assessment Act 1936 ss 97, 99A, 100A, 166, 166A, 170, 226G, 226H, 227

BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] ATC 4111
McPhail v Doulton [1971] AC 424
Ramsden v Federal Commissioner of Taxation [2004] FCA 632
East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 19 ALD 85

REASONS FOR DECISIONS

10 November 2004  

Senior Member KL Beddoe

Senior Member Bernard McCabe

1.      Idlecroft Pty Ltd (“the Trustee”) as Trustee of the Simon John Fleury Family Trust (“the Trust”) seeks review of an objection decision by the respondent in relation to the year of income ended 30 June 1996.  The individual applicant who is a beneficiary of the Trust also seeks review of an objection decision by the respondent in relation to the same year of income.

2. The two applications arise because the respondent has sought to assess the Trustee under section 99A of the Income Tax Assessment Act 1936 (“the Act”) and the individual as beneficiary of the Trust under section 97 of the Act in relation to the net income of the Trust.

3. Issues also arise as to whether the respondent was correct in assessing additional taxes in accordance with Part VII of the Act and, if so, whether those assessed additional taxes should be remitted in part or in full.

4.      These matters were heard jointly with other cases which have a common theme of appointment of net income of the relevant family trust to a company correctly described as No 2 Pitt Street Pty Ltd as Trustee of the Northbourne Holdings Unit Trust (“Northbourne”).

5.      At the hearing Mr Russell QC appeared with Mr Bickford for all the applicants and Mr Hack SC appeared with Mr Robertson for the respondent.

6. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal.  There is a generic set of documents marked T1 to T69 and also sets of documents specific to the applicants marked as Exhibit J.

7.      Further documents were tendered and marked as exhibits and oral evidence was given by John Damian Andrews, Ian Roland Stevens, Ginette Danen Muller, Debra Campbell, Steven Irvine Hart and Simon John Fleury.

8.      By deed of settlement dated 14 May 1987, Graham Richard Stoner settled the Simon John Fleury Family Trust, the Trustee being Idlecroft Pty Ltd and the nominated beneficiaries, including Simon John Fleury, set out in the First and Second Schedules of the deed. 

9.      By a deed dated 3 June 1999 Idlecroft Pty Ltd purported to appoint Northbourne as a beneficiary in the Family Trust.  We are satisfied there was no power under the trust deed to make this appointment.

10.     Exhibit J includes copies of minutes of meetings of the directors of Idlecroft Pty Ltd in June 1996 purporting to distribute income and in relation to other matters relating to Northbourne.  The minutes record that Simon John Fleury and Judith Mary Fleury were present as directors of Idlecroft Pty Ltd.

11.     Exhibit K is an affidavit of Simon John Fleury which includes the following paragraph:

“1.My wife, Judith Mary Fleury, and I are the only two (2) Directors of Idlecroft Pty Ltd (“Idlecroft”) the corporate trustee of the Simon John Fleury Family Trust (the ‘Trust’).  We have, at all material times, been the sole directors of Idlecroft.  My wife and I have been separated since 1993.  Since that date I have been solely concerned with any decision-making in relation to the affairs of the company and its conduct as trustee of the Trust.”

12.     In his oral evidence Mr Fleury said that he and his wife were in a meeting with Debra Campbell at her Alderley office when he signed the various documents dated 3 June 1996.  Given that he swore his wife was at the meetings held on 3 June 1996 we assume the last sentence of the paragraph in the affidavit quoted above was false.

13.     That leads us to query whether any of the documents said to have been signed on 3 June 1996 were intended to be effective.  One of the documents signed on 3 June 1996 was an “acknowledgement of debt” signed in the name of Idlecroft Pty under seal by Simon John Fleury and Judith Mary Fleury.  The debt was said to be owing to Northbourne in an amount of $34,000.

14.     However, in the applicant’s oral evidence Mr Fleury said in effect that Idlecroft Pty Ltd was not liable to pay the debt.  In the course of cross-examination the following interchange occurred:-

“Q:      Now, you say that you firmly believed you had to pay $34,000 to Pitt Street, number 2?  A:  Yes.

Q:Number 2 Pitt Street.  That’s not what you’re saying now though to the liquidator of Number 2 Pitt Street, is it?  A:  How do you mean?

Q:Well, you’re telling the liquidator of Number 2 Pitt Street that you don’t have to pay $34,000?  A:  I’ve had to take legal advice on the matter with the liquidator.

Q:Well, you just told the Tribunal that you firmly believed you had to pay $34,000 to Number 2 Pitt Street, so what’s the problem when Number 2 Pitt Street asks you for that money?  A:  Well, I’ve taken legal advice and - - -

Q:Why did you take legal advice if you firmly believed that you had to pay the money?  A:  Well, the Number 2 Pitt Street project didn’t go as planned and I understand it’s been sold off.

Q:That’s right?  A:  And I’ve been part of the group discussions on procedures from thereon in.

Q:Yes, but you agree that you’ve firmly believed from the outset that you had to pay $34,000 to Number 2 Pitt Street?  A:  That would be my initial – my investment in it, yes.

Q:Plus interest?  A:  Yes.

Q:And, yet, as soon as Number 2 Pitt Street asked for it you don’t pay?  A:  Well, that’s the legal advice I’ve received as part of the group.

Q:So you believe now that you don’t have to pay it?  A:  Well, I’m not sure what the outcome is going to be with it all.

Q:I asked you what you believe now.  Do you believe now you have to pay $34,000 plus interest?  A:  I don’t know.

Q:Well, you’ve told your solicitors that you don’t have to pay $34,000 plus interest, haven’t you?  A:  I’ve acted on advice by attending meetings and things.

Q:But you’ve told your solicitors, Abbott Tout, that you don’t have to pay this money?  A:  Yes.

Q:And your solicitors have told the liquidator that you don’t have to pay this money?  A:  I believe so, yes.

Q:And the explanation that you have given your solicitors for why you don’t have to pay this money is because of the arrangements that are involved with the units in your – your investment units.  Is that - - -?  A:  I’m not sure of the inner workings.

Q:You’re not sure of the inner workings, but that’s what you told your solicitors, you’re not sure of the inner workings but somewhere in the inner workings meant that you didn’t have to pay all that money plus interest now.  You didn’t understand what, but you knew that there was something in the inner workings?  A:  No, I didn’t understand all the finer detail of it all.

Q:But you did tell your solicitors that whatever that detail was it meant that you didn’t now have to pay the liquidator?  A:  Well, I was just acting on legal advice.

Q:No, you tell your solicitors what the true facts are then they tell the liquidator.  So what did you tell your solicitors the true facts were?   A:  I guess I went along with the common thrust of the meeting.

Q:Which meeting was this?  A:  There’s been a lot of meetings on Number 2 Pitt Street over recent years.”

15.     We conclude from that exchange that Mr Fleury had no real understanding of the transactions said to have been entered into by Idlecroft Pty Ltd and he merely signed documents put in front of him by Ms Campbell.  We are not satisfied that Mr Fleury gave any consideration to the actual effect of the arrangements being entered into and was only concerned to ensure that a probable income tax liability was avoided or, as he says, “a short term benefit” (Exhibit K).

16.     Northbourne issued a document entitled “Unit Trust Certificate”, dated 30 June 1996, certifying that the Trustee is the registered holder of 34 ordinary units “in the trust specified herein” to which was affixed the common seal of No 2 Pitt Street Pty Ltd in its capacity as Trustee for the Northbourne Holdings Unit Trust.

17.     By minutes dated 3 June 1996 the directors of the Trustee had resolved that the income of the Trust for the year of income ended 30 June 1995 be appropriated, set aside and applied to the beneficiaries:-

“Pitt Street No 2 Pty Ltd as Trustee for the Northbourne Holdings Unit Trust – the first $34,000

Steve Glenn Fleury – the next $416

A.L. Fleury – the next $416

Simon John Fleury – the balance.”

18.     In its income tax returns for the years of income ended 30 June 1996, the Trustee reported the income appointed to Northbourne as $34,000. 

Re Northbourne

19.     The Northbourne Holdings Unit Trust (“Northbourne”) was established by deed in 1989 (Exhibit F) for the purpose of acquiring and redeveloping real property known as No 22 Pitt Street, Sydney.

20.     For reasons not apparent to us and not relevant to these proceedings, the investment was unsuccessful and Northbourne incurred substantial losses.  The 20 issued units were held for the benefit of Northbourne Rural Property Trust.

21.     At all relevant times No 2 Pitt Street Pty Ltd was the Trustee (initially the company was known as Northbourne Holdings Pty Ltd but nothing turns on the change of name).

22.     In or about 1995 (probably March 1995), Harts Consulting Pty Ltd (“Harts”), a company controlled by Steven Irvine Hart, acquired the units in Northbourne and the two shares issued in No 2 Pitt Street Pty Ltd.  It is reasonable to infer, and we do, that the purchase of Northbourne was for the purpose of getting access to approximately $13.5 million in accumulated losses resulting from the unsuccessful Pitt Street development.  Northbourne does not appear to have had any commercial value at March 1995 or at any time immediately thereafter except for any value of tax losses.

23.     While the evidence of Mr Stevens made it apparent to us that proper process was not a strong point of Harts so that it could be said that the share transfer was not properly executed, we accept that the Harts controlled No 2 Pitt Street Pty Ltd effectively from probably March 1995.

24.     In the years of income ended 30 June 1995 through to 30 June 1999, Harts promoted a scheme whereby Trustees of family trusts were invited to acquire units in Northbourne on the basis of one unit for each $1,000 of net income of the family trust appointed to Northbourne.  Essential to this arrangement was the need for the Trustees of the family trusts to add Northbourne as a general beneficiary of the family trust.  Fees at 12% were payable to Harts.

25.     As already noted, the Trustee nominated Northbourne as a beneficiary of the Trust by deed dated 3 June 1999. 

26.     In pursuance of the scheme, the Trustee appointed income to Northbourne as set out above.

27.     On the basis of the evidence of Mr Stevens, Ms Campbell and Exhibit G, we are satisfied that there was no intention that the family trust would be required to repay the acknowledged debts, being the unpaid distributions in favour of Northbourne.  Northbourne had limited recourse only for unpaid amounts, being the right to redeem the units issued to the family trust by Northbourne.

28.     Northbourne, guided by Harts, purported to enter into contracts for the purchase of the Birralee Shopping Centre.  The respondent initially contested that the shopping centre was never purchased.  Certainly Harts represented that the purchase had taken place in stages with completion by December 1997 (Exhibit F).  The documents before the Tribunal are not complete as to purchase of the shopping centre and shops, but we are satisfied that it is more likely than not that Northbourne had contracted to purchase the centre.  We are uncertain as to actual dates of purchase but note that the report in Exhibit H by Ms Muller indicates date of purchase as 5 July 1996 for $2.8 million.  We are satisfied that is in relation to the Centre but does not include the purchase of some strata title shops.  It is apparent, however, that final settlement in the purchase of the shopping centre and shops did not occur until February 1998 with a payment of $4.2 million funded by borrowing from Metway Bank.

29.     The borrowing by Northbourne from Metway Bank was secured by bank guarantees to be provided by the unit holders in Northbourne, that is, the respective Trustees of the family trusts including the present applicant Trustee. 

30.     Northbound instituted proceedings in the Supreme Court of Victoria regarding matters arising out of the Birralee project.  Copies of two judgments by Balmford J are part of Exhibit B.  We have read the judgments but nothing arises from them in the context of this matter other than to explain one of the factors delaying the Birralee development.

31.     The investment scheme for the Birralee Shopping Centre did not promise any profit to the unit holders in Northbourne until the tenth year of the scheme.  It is apparent to us from the material before us that any ultimate return to unit holders depended on a successful sale of the shopping centre after, it may be assumed, ten years.

32.     We are satisfied that the applicant Trustee was motivated by two factors when entering into the arrangements proposed by Harts, namely:-

(a)      the projected ultimate return; and

(b)the understanding that income tax payments would be deferred for up to ten years.

33.     In the ultimate, the development of the shopping centre failed and the company is in liquidation.  Northbourne’s investment in the development appears to be worthless.  That is not to say that the shopping centre was other than a reality – it was probably overly ambitious in its concept but we accept that the proposal put to the Trustee was such that it could not be foretold to be a failure.  In deciding to enter into the arrangements relating to Northbourne Mr Fleury appears to have been influenced not only by Ms Campbell but also by what he called the success of the Hendon Investment.  In BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] ATC 4111 Cooper J deals with some aspects of investments in the Hendon Trust. We do not pursue the question as to whether it was a successful investment – Mr Fleury said it was up to a point. He also expected there would be a “tax advantage”.

34.     The arrangements entered into by the Trustee have their genesis in advice to the directors of the Trustee by Debra Campbell.  Ms Campbell was called to give evidence.  She is an accountant previously employed by Harts Accounting Group and she provided accounting services to Mr Fleury and Idlecroft Pty Ltd.  She said she gave advice about the Northbourne arrangement on the basis of what she had been told by Steve Hart.  However, in her evidence before the Tribunal she said in effect that she did not have details of how the Northbourne arrangements were established and she could no longer remember detail as to her discussions with clients such as Mr Fleury.  Generally, Ms Campbell’s evidence was unhelpful.  She was unable to identify Exhibit G.

Consideration

35.     Detailed written submissions were made on behalf of the applicants and the respondent.  These were explained and supplemented by oral submissions.

36.     By clause 3 of the Deed of Settlement (“Trust Deed”) the Trustee stood possessed of the Trust Fund as defined and income thereof upon the trusts and subject to the powers and provisions expressed in the Trust Deed.

37.     Clause 3(1) of the Trust Deed provides for the Trustee to distribute income of the Trust Fund, in its complete discretion, at any time prior to the end of each financial year until the vesting date and determine to distribute in respect of all or part of the net income for such financial year at its absolute discretion for the benefit of the beneficiaries.

38.     We understand, as a question of law, that where a Trustee exercising its discretion decides to distribute the net income of the trust, the Trustee must ensure that a proposed appointee is within the range of beneficiaries (in this case as specified in the First and Second Schedules) that the quantum of the distribution is appropriate and takes into account the interests, including needs, of all beneficiaries.

39.     In McPhail v Doulton [1971] AC 424 at 449 Lord Wilberforce expressed the law as follows:-

“Any Trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, the particular grant was appropriate.”

40.     In this case the Trustee clearly failed Lord Wilberforce’s test.  Northbourne was not and could not be a beneficiary and therefore it was not within the Trustee’s power to appoint income to it.  We have come to that conclusion because we are satisfied that Northbourne was not an entity contemplated by the respective schedules.  Insofar as it may be said that the Trustee was a beneficiary of Northbourne, we are satisfied that the Trustee itself is not a beneficiary. The fact the Trustee was a beneficiary in Northbourne (which we doubt) does not thereby make the Trustee a beneficiary in the Fleury Family Trust.  Whatever doubts may exist as to the certainty of the definition should be resolved on the basis that there is a clear intention that the Trustee would not be a beneficiary.  That intention is evident from the respective schedules.

41.     We are satisfied, as submitted for the applicants, that the purported nomination of Northbourne as a beneficiary was ineffective.  It follows that there was no effective appointment of net income to Northbourne in the year of income before the Tribunal.

42.     Clause 3(1) of the deed includes the following:

“….and in the event of the Trustee failing to make any such determination as aforesaid with respect to the income or any proportion thereof then such income or such portion (as the case may be) shall be held upon trust absolutely for the beneficiaries (or if there shall be none living at the end of any financial year for the nominated charity) in equal shares as tenants in common.  It is hereby expressly declared that any beneficiary in whose favour any such determination as to income as aforesaid is made or any beneficiary who becomes entitled to income in default of any such determination shall be absolutely and presently entitled to such income.”

43.     Insofar as the minute of the Trustee dated 3 June 1996 suggests either that the balance of the net income or any amount included in the assessable income of the Trust is deemed to be distributed “in the same proportions as listed above”, we are satisfied that resolution is ineffective on its face.  This is because the resolution clearly intends a distribution to Northbourne.  Such a purported appointment of income is beyond the power of the Trustee so that part of the resolution can have no further effect.  There is nothing in the material to suggest that the Trustee ever intended to accumulate the net income in any relevant year of income.

44.     The dicta of Cooper J in the BRK case at 4119 (paragraph 14) is equally apposite to this case. His Honour said:

“14.     A comparison of the terms of the resolutions passed by the applicant on 28 June 1993, and the nomination of appointments which preceded them, indicates that they were not prepared by reference to the Deed which contains the trusts and powers of the Trust.  The applicant, as trustee under the Trust, had no power to appoint WCC and Astion Pty Ltd as beneficiaries entitled to benefit from the trusts provided for in the Deed.  The applicant had no power to appoint any income in any income year to WCC as it was outside the class eligible to be the object of an appointment of income under the terms of the Trust:  In re Gulbenkian’s Settlements [1970] AC 508 at 518;  In re Hays Settlement Trusts [1982] 1 WLR 202 at 210.”

45.     Accepting, as we do, that the purported distribution to Northbourne was of no effect we do not accept that the remainder of the resolution appointing income to other beneficiaries was also void and of no effect.  We take the view the trustee was in default as to the nominated amount of the first $34,000 as to nomination of the beneficiary but not in default of making a determination so as to enliven the default provision in clause 3(1) of the deed.

46.     In our view the resolution of 3 June 1996 intended to appoint all of the income for the year ended 30 June 1996 to the beneficiaries nominated.  Northbourne not being a beneficiary, the resolution should be read as applying the net income for the year as follows:-

§  Steve Glenn Fleury      $416

§  A.L. Fleury  $416

§  Simon John Fleury       the balance

47.     Insofar as it is suggested that the beneficiaries only became presently entitled after midnight on 30 June of each year of income, we do not follow what was said by Cooper J in the BRK case at paragraph 38.

48.     In the BRK case the Trustee was Trustee of a discretionary trust with power to accumulate income or to distribute income to the beneficiaries set out in the schedule to the Trust Deed at the discretion of the Trustee.  To the extent that the Trustee had not decided to accumulate income and had not decided to distribute income during the year of income, the Trustee was held to have a reasonable time after the last day of the year of income to exercise the duty to consider whether net income should be accumulated and/or distributed before the default clause in the Trust Deed took effect. That is, the default clause did not require the discretions as to accumulation and distribution to be exercised within the relevant year of income.

49.     In Ramsden v Federal Commissioner of Taxation [2004] FCA 632, Spender J said at paragraphs 32 to 37 as follows:-

“32.     I do not agree that because the Trustee had had until the last instant of the 1996 year to exercise its discretion, the effect of the default clause would be to include the income in the default beneficiaries’ taxable income, not in 1996 year but in the next year of income.  I respectfully am unable to agree with the observations of Cooper J at 356 in this aspect of his Honour’s judgment in BRK (Bris), namely that where the discretion to the Trustee remained open until the last moment of the income year to exercise:

‘Default, in these circumstances, would not have occurred until the income year had expired.  Thereafter, if the default proviso were effective and valid, it would have taken effect according to its tenor.  The consequence would be that in the subsequent financial year, the default beneficiaries would become entitled to income of the Trust earned in the previous financial year.  However, the position would remain that as at the end of the financial year, there was no beneficiary presently entitled to the income.’ 

33.      The default clause in the Trust Deed, cl 3(e), is similar to the clauses in the trust deeds considered in Commissioner of Taxation v Marbray Nominees Pty Ltd (1985) 81 FLR 280 (“Marbray”) and East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 (“East Finchley”).   Clause 3(4) of the Trust Deed considered in Marbray provided:

‘The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectually made in relation to such Accounting Period in trust successively for the persons described in sub-clauses (1) (2) (3) and (4) of clause 4 hereof.’

34.      Tadgell J in Marbray said, at 292:

‘Clause 3(4) is obviously intended to be capable of operation upon the net income of the trust fund from year to year, save in so far as that income is not the subject of a determination pursuant to cl 3(1) to pay or apply it or to set it aside or accumulate it.  Clause 3(4) and (5) could not so operate if the expression “person described” in cl 3(4) were construed to mean, in effect, “the Specified Beneficiaries who shall be living on the Vesting Day”.  Clause 3(4) is not concerned at all with the factual position on the Vesting Day.  It is concerned to identify individuals, alive at the time it operates, by reference to their description in cl 4 and not by reference to their condition on the Vesting Day.

It follows that, in accordance with the deed, the respondent held the net income of the trust in each of the two years in question on trust for the specified beneficiaries.’

35.      Clause 4.2 of the relevant Trust Deed considered in East Finchley provided:

In the event that the Trustee shall fail to make an effective determination in accordance with cl 4.1 hereof prior to midnight on the last day of any accounting period then any such income not paid or applied or set aside or accumulated (hereinafter called “the undistributed income”), or, where a determination has been made under cl 4.1 to accumulate income and such accumulation would be void then the Trustee shall hold the undistributed income upon trust for the persons successively described in paras (a) to (e) of the second schedule as shall then be living and if more than one in any paragraph in equal shares …’

36.      Hill J said at 468:

‘Should it have turned out that the resolution was either legally ineffective to constitute present entitlement in the overseas beneficiaries or if it should have been the case that the discussion as to the overseas beneficiaries never happened or indeed if it had been the case that the resolution was a sham intended as a disguise to deceive the Commissioner or that the acts done by Dr Thomas overseas were a sham, then the consequence would be that the default beneficiary clause would have come into operation and the beneficiaries entitled under it would have been presently entitled to the whole of the income of the estate not otherwise disposed of by the resolution to the immediate family of Dr Thomas. This being the case there would have been no part of the net income of the trust estate that had not been dealt with either under s 97 or 98 with the consequence that s 99A of the Act could not have applied and the assessment would have been shown to have been excessive.’

37.      In each of Marbray and East Finchley, the court indicated that the income for the relevant year, where there was an ineffectual appointment by 30 June, went to the takers in default.”

50.     In coming to our view we have accepted the submission for the applicant to the effect that the residual income provision of the distribution minute does not apply to the $34,000 purported to have been appointed to Northbourne.  The Trustee intended that the distribution of net income to Northbourne have effect and the whole of the arrangements entered into by the Trustee with Northbourne can only be explained by the Trustee having that intention.  Clearly, there was no basis for the Trustee to acknowledge the debt owing to Northbourne except for the unpaid purported appointments of net income in favour of Northbourne.

51.     In East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 19 ALD 85, the issue was whether the taxpayer company had been correctly assessed in accordance with section 99A of the Act. The company was Trustee of a discretionary trust. The company, as Trustee, purported to determine a distribution of net income to non-resident beneficiaries. The Commissioner assessed the company on the basis that the purported distributions were made in connection with a reimbursement agreement.

52.     The case proceeded on the assumption that the non-resident persons, the object of the Trustee’s determination, were, in fact, beneficiaries of the Trust.  In that sense it is different to the present case because the applicants have not sought to argue that the appointment of income to Northbourne was effective.

53. In the course of his judgment, Hill J made it clear (ALD 87) that where there is no present entitlement to net income vesting in the relevant persons, then section 100A of the Act has no operation.

54. So instructed, we are satisfied section 100A has no effect on the facts of this case given that we are satisfied that it is Simon John Fleury, and not Northbourne, who is presently entitled to the balance of the net income including that sought to be appointed to Northbourne. The beneficiaries were so presently entitled in the 1996 year of income, the Trustee having made no decision to accumulate the net income of that year of income.

55. While the applicant Simon John Fleury objected to the amended assessment on grounds that included it was not authorised, we are satisfied that paragraph 170(2)(b)(ii) of the Act has been satisfied and the amended assessment is authorised.

56. Section 226H of the Act provides, subject to Part VII, that if a taxpayer has a tax shortfall for a year and the shortfall, or part of it, was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of the Act or Regulations then the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part of it.

57. Sub-section 227(3) of the Act provides for a discretion to remit the whole or any part of additional tax payable under a provision in Part VII.

58.     The respondent submits that the required recklessness arose from the recklessness of Mr Hart (and it might be added – his organisation) as tax agent for the Trustee (and the other applicants).  It is submitted that Mr Hart was reckless as to the tax consequences of the scheme.

59.     It is also submitted that the applicant beneficiaries generally were personally reckless in accepting the advice of Harts, including advice transmitted through Ms Campbell, to whom they were giving 12% of the distributions for entry into the scheme.  The respondent also made other submissions about the applicants being grossly careless.

60. In the context of Mr Fleury we are of the view that his conduct must be considered separately to the conduct of the Trustee when considering the individual tax return lodged by him. While the conduct of the tax agent may be relevant we are unable to come to a fair view of the conduct of Mr Hart and his organisation. In particular, we are unable to come to any view as to the conduct of Mr Hart in the context of his clients’ financial affairs on the one hand and his clients’ income tax affairs on the other hand. We are therefore unable to be satisfied that there was relevant conduct that could be described as reckless in the terms of section 226H.

61.     We are satisfied, however, that there was a lack of reasonable care by Mr Fleury and Ms Campbell in relation to the effect of the Trust Deed in preparing the relevant income tax return and, in particular, they failed to recognise that the appointment of net income to Northbourne had not been made in accordance with the Trust Deed.

62. In our view Mr Fleury and the tax agent displayed a lack of reasonable care in lodging the income tax return so that there was a resulting tax shortfall in relation to Mr Fleury. That satisfies us that the appropriate provision is section 226G of the Act. That section assesses penalty tax where a tax shortfall is caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or the Income Tax Regulations.  We are satisfied that was the case here.  The evident lack of reasonable care does not justify any favourable exercise or discretion (section 227(3)).

63.     For these reasons the Tribunal decides that:-

(a)the objection decision in relation to the Trustee is set aside and the applicant’s objection be allowed in full;

(b)the objection decision relating to assessment of income tax payable by Mr Fleury will be affirmed;

(c)the objection decision relating to assessment of penalty tax payable by Mr Fleury is set aside and a decision substituted that penalty tax be assessed in accordance with section 226G of the Act;

(d)there is no basis for exercising the discretion in sub-section 227(3) of the Act; and

(e)these proceedings have terminated in a manner favourable to the applicants.

I certify that the 63 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe and Senior Member Bernard McCabe

Signed: S Appleton

Associate

Date/s of Hearing  18-26 September 2003 and 27 October 2003
Date of Decision  10 November 2004
Counsel for the Applicant         Mr Russell QC and Mr Bickford
Solicitor for the Applicant          Abbott Tout
Counsel for the Respondent     Mr Hack SC and Mr Robertson
Solicitor for the Respondent     ATO Legal Practice