Jeannie Kingston and and Commissioner of Taxation
[2012] AATA 898
[2012] AATA 898
Division TAXATION APPEALS DIVISION File Number(s)
2011/0615-17
Re
Jeannie Kingston
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number(s)
2011/0612-14
Re
Trevor Kingston
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President PE Hack SC
Date 19 December 2012 Place Brisbane A. The respondent's objection decision regarding penalty in relation to Mr Trevor Kingston is affirmed.
B. The respondent’s objection decisions regarding liability to taxation are set aside and remitted to the respondent for reconsideration in accordance with directions that,
(i) all of the income of the Kingston Family Trust purportedly distributed to the Bethel Trust was income to which Mr Trevor Kingston was then presently entitled;
(ii) Mrs Jeannie Kingston was not entitled to any of the income of the Kingston Family Trust purportedly distributed to the Bethel Trust.
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Deputy President PE Hack SC
CATCHWORDS
TAXATION – Income tax – tax avoidance scheme – trusts – distribution of income – amendment to original assessments – discretion to remit penalties in whole or in part – decision affirmed, set aside and remitted with directions.
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 170(2)(a)
Taxation Administration Act 1953 (Cth) schedule 1, div 284, s 298-20(1)
CASES
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Dixon (as trustee) v Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264
Re Lack and Federal Commissioner of Taxation [2012] AATA 823REASONS FOR DECISION
Deputy President P E Hack SC
19 December 2012
Introduction
The applicants, Mr Trevor Kingston and Mrs Jeannie Kingston, are farmers. They live at Millmerran on the Darling Downs. In common with a number of local farmers, including the applicants in Re Lack and Federal Commissioner of Taxation[1], they participated in a tax avoidance scheme in the 2002, 2003 and 2004 income years. That scheme was promoted by their accountant, Mr David Mack. The respondent, the Commissioner of Taxation, describes the scheme as a profit-washing scheme.
[1] [2012] AATA 823.
Mr and Mrs Kingston seek a review of the Commissioner’s decisions to disallow their objections to amended assessments for the 2002, 2003 and 2004 income years that attributed to them equally income dealt with in accordance with the scheme.
Much of what had earlier been in issue in these proceedings has now been conceded including concessions by each applicant that the scheme in which they participated was a sham, and that the imposition of shortfall penalty at 50% was appropriate.
Background
The facts are largely agreed[2]. Well prior to their participation in this scheme Mr and Mrs Kingston had set up the Kingston Family Trust, a discretionary trust. Tejay Developments Pty Ltd was the trustee of the Kingston Family Trust at all material times. Mr Kingston, Mrs Kingston and their three children were all discretionary beneficiaries of the Kingston Family Trust. The Kingston Family Trust was a trading trust. It carried on the farming business on behalf of Mr and Mrs Kingston.
[2] See exhibit 9.
In the 2001 income year the income of the Kingston Family Trust was distributed between Mr Kingston, Mrs Kingston and two of their children, Mr Robert Kingston and Ms Jeannie Kingston.
The Bethel Trust was created by deed dated 29 June 2002. It was a unit trust. Lyndon Segovia Pty Ltd was the trustee of the Bethel Trust. Mr Kingston, Mrs Kingston, Lyndon Segovia Pty Ltd and Danbowl Pty Ltd were unit holders of the Bethel Trust. In the 2002, 2003 and 2004 income years Tejay Developments Pty Ltd, as trustee of the Kingston Family Trust, purported to distribute $80,000, $280,000 and $175,000 respectively of the income of the Kingston Family Trust to the Bethel Trust. The balance of the income of the Kingston Family Trust in those years was distributed between Mr Kingston, Mrs Kingston and Mr Robert Kingston.
The incorporation of Lyndon Segovia Pty Ltd, the creation of the Bethel Trust and the distribution to that Trust of income of the Kingston Family Trust in the 2002, 2003 and 2004 income years were all part of the profit-washing scheme suggested by Mr Mack, the Kingston’s accountant.
There is, in the material, a copy of what purports to be minutes of the meeting of the “trustees” of the Kingston Family Trust, said to have been held on 30 June 2002 and attended by Mr Kingston, Mrs Kingston and Mr Robert Kingston which record a resolution that the net income of the Trust for the year ended 30 June 2002 be distributed,
(a)to the Bethel Trust – $80,000;
(b)to Mrs Kingston – $20,000;
(c)to Mr Robert Kingston – $20,000; and
(d)to Mr Kingston – the balance.
There are similar minutes in relation to the 2003 income year by which the “trustees” resolved to distribute $280,000 of income of the Kingston Family Trust to the Bethel Trust, $20,000 to each of Mrs Kingston and Mr Robert Kingston and the balance to Mr Kingston. In the 2004 income year the minutes record a resolution, again in similar terms, for a distribution of $175,000 to the Bethel Trust, $22,035 to Mrs Kingston and Mr Robert Kingston and the balance to Mr Kingston.
There are, as well, what purport to be minutes of meetings of the “trustees” of the Bethel Trust, attended by Mr Kingston, Mrs Kingston and Mr Robert Kingston, said to have been held on 30 June 2002, 2003 and 2004 which record resolutions that the net income of that trust be distributed to Danbowl Pty Ltd. It is not in dispute that, despite those minutes, only 15% of the notional distribution was paid to Danbowl Pty Ltd. I infer that amount to be the promoter’s fee for setting up the profit-washing scheme. The balance remained available for the use and benefit of Mr and Mrs Kingston.
Mr and Mrs Kingston lodged returns for the 2002, 2003, and 2004 income years on the basis of distributions recorded in the Kingston Family Trust minutes in 2002, 2003 and 2004. The returns were assessed as lodged. In September 2009, more than four years after the original assessments were made, the Commissioner made amended assessments increasing the taxable income of each of Mr and Mrs Kingston by $40,000 in the 2002 income year, $140,000 in the 2003 income year and $87,500 in the 2004 income year. In the same month the Commissioner made assessments of shortfall penalty against both Mr and Mrs Kingston on the basis of 50% of the tax shortfall.
On 16 November 2007 a liquidator was appointed to Lyndon Segovia Pty Ltd which, by then, had changed its name to AGB Farms Pty Ltd. That company was deregistered on 3 June 2009.
On 3 August 2010 Mr and Mrs Kingston objected to the assessments. The objections were wholly disallowed on 15 December 2010. These proceedings followed shortly thereafter.
Mr and Mrs Kingston concede that the scheme that they entered into was a sham and that it is appropriate to disregard the entities Lyndon Segovia Pty Ltd and the Bethel Trust. The concession was plainly correct. They also concede that section 100A of the Income Tax Assessment Act 1936 (Cth) does not apply because the scheme is one to which Part IVA of the same Act applies.
The issues
Three issues fall for consideration;
(a)how should the income purportedly distributed to the Bethel Trust be dealt with;
(b)did the Commissioner have power to amend original assessments made in respect of Mr and Mrs Kingston's taxable income in the 2002, 2003 and 2004 income years; and,
(c)should the discretion to remit the penalties be exercised either wholly or in part.
The distribution
Mr and Mrs Kingston's original submission was that the income purportedly distributed to the Bethel Trust for the 2002, 2003 and 2004 income years “remains undistributed” as at 30 June of each of those years. Clause 4.2 of the trust deed of the Kingston Family Trust, they submitted, had the effect that “those monies are deemed to be held by the trustee, Tejay Developments Pty Ltd, on trust for the primary beneficiaries”. Thus, they submitted, “the proper incidence of taxation therefore falls on Tejay Developments and not on the Applicants”.
I am unable to agree. And they now resile from that submission in any event[3].
[3] See their supplementary submissions dated 27 Nov 2012.
Clause 4.2 of the trust deed is in conventional terms. It provides[4],
The Trustee may at any time prior to the expiration of any accounting period which ends before or upon the Vesting Day determine with respect to all or any parts of the Net Income of the Trust Fund of such period:
(i)to pay apply or set aside the same or any part thereof for all or one or more of the Beneficiaries living or in existence at the time of the determination and/or;
(ii)To accumulate the same or any part thereof.
PROVIDED THAT if the Trustee shall not by or at the end of any accounting period have exercised its discretion to pay apply set aside or accumulate the whole or any part of such Net Income in the manner aforesaid then the Trustee shall hold the Net Income not so paid applied set aside or accumulated for that accounting period in trust for such of the Primary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares.
The expression “Primary Beneficiaries” was defined in clause 1.11 (i) of the trust deed to mean Trevor John Kingston.
[4] The trust deed is reproduced at Appendix 5 of exhibit 5.
Neither party suggests that the distributions otherwise made by Tejay Developments Pty Ltd as trustee on 30 June each year were ineffective. It is only the purported distribution to the Bethel Trust which is accepted as being ineffective. That being so, the effect of clause 4.2 is that in each year that part of the net income of the Kingston Family Trust which had not been effectually paid was held by the trustee on trust for Mr Kingston. By virtue of s 97(1) of the Income Tax Assessment Act 1936 the assessable income of the beneficiary of a trust estate who is not under any legal disability includes the share of the net income of that trust estate to which that beneficiary is presently entitled. The decision in Harmer v Federal Commissioner of Taxation[5] establishes that the beneficiary is “presently entitled” if and only if,
(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.
[5] (1991) 173 CLR 264, 271.
Accordingly, Mr Kingston was presently entitled, by virtue of clause 4.2, to the sums purportedly distributed to the Bethel Trust. Thus, in my view, all of the income of the Kingston Family Trust purportedly distributed to the Bethel Trust in each of the 2002, 2003 and 2004 income years, was income to which Mr Kingston was then presently entitled. It follows that Mrs Kingston was not entitled to any of that income.
The Commissioner has a different argument. He submits that the evidence demonstrates that there were two sets of financial records prepared for each of the years in issue, one set reflecting the “sham arrangement involving the Bethel Trust” and the other being a “true record of the distributions from the Kingston Family Trust”. The Commissioner points to the report of Mr Aaron Lavell, an accountant, who undertook a calculation of the trust distributions in each of the 2002, 2003 and 2004 years on the assumptions that the distributions to the Bethel Trust had not taken place and that the net income of the Kingston Family Trust had been distributed to Mr Kingston, Mrs Kingston and Mr Robert Kingston in the same proportions as the 2001 net income of that trust had been distributed. An appendix to that report, so the Commissioner submits, demonstrates that in the 2003 and 2004 years all of the trading profit of the Kingston Family Trust was distributed between Mr Kingston, Mrs Kingston and Mr Robert Kingston. And the Commissioner submits that “[i]t can be assumed that distributions, in the same percentages, were made by the Trustee in the 2002 tax year”.
I accept that the Commissioner now has access to material not in his possession at the time of the audit and resulting amended assessments. But I am unable to see how it is open to me to rewrite history in this manner. There is no doubt that Mr and Mrs Kingston (or perhaps their accountant, Mr Mack) had little regard to substance but the case that the Commissioner now advances was not one raised with them in cross-examination nor were they (or Mr Robert Kingston) on notice that the Commissioner would be advancing his case in this way. As it seems to me it is preferable to proceed on the basis dictated by the trust deed rather than on the basis of an untested reconstruction. If Mr Kingston regards the result as inequitable, as between beneficiaries, he has remedies in trust law against them.
The power to amend
At the time of the amendments made here the power to amend was set out in s 170(2)(a) of the Income Tax Assessment Act 1936. It provided,
Subject to this section, where there has been an avoidance of tax, the Commissioner may:
(a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion – at any time;
(b) …
amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment.
Mr and Mrs Kingston accept that there has been an avoidance of tax[6]. But they contend that the evasion has not due to fraud or evasion. There is no allegation of fraud, they say, and no evidence to support such a finding, and the evidence does not support the conclusion that that the avoidance of tax is due to evasion.
[6] Exhibit 10, paragraph 6.
Both parties made reference to the following observations of Dixon J in Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW)[7]:
I think it is unwise to attempt to define the word “evasion”. The context of s. 210(2) shows that it means more than avoid and also more than a mere withholding of information on the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.
Mr and Mrs Kingston’s submissions drew attention to their inexperience in taxation matters, a claimed genuine belief that the taxation obligations were being attended to by Mr Mack and a claimed unawareness on their part of the extent of their financial position and dealings. It was also submitted that they were not of a character to deliberately not declare income.
[7] (1949) 79 CLR 296, 313.
I can accept that Mr and Mrs Kingston were inexperienced but the evidence does not make good the balance of the matters asserted on their behalf. Mr Kingston's evidence was plainly to the effect that he simply had no understanding of what was being promoted by Mr Mack and that he relied, mistakenly as it transpired, on his son’s understanding of matters. Mrs Kingston similarly had no understanding and left matters entirely to her husband. I place no weight at all on the witness statements of Mr and Mrs Kingston; they are relevantly identical one with another and with all of the witness statements prepared by other participants in this scheme. The comparison between what was said in the witness statements and what was said by Mr and Mrs Kingston in their oral evidence was stark.
This also is a plain case of evasion. Mr and Mrs Kingston accept that the scheme was a sham, that is, that the documents signed by them were not intended to take effect according to their tenor. They accept that they entered into arrangements about which they had no understanding in circumstances where it is plain that their tax agent did not disclose the details of the arrangements to the Commissioner. I do not accept that they could have held any genuine view that the arrangements entered into were a legitimate way of minimising tax. Over the three years in issue amounts in excess of $400,000 were supposedly distributed to an introduced trust in circumstances where Mr and Mrs Kingston retained the use and benefit of the vast bulk of those funds.
I am satisfied that there was evasion on the part of Mr and Mrs Kingston but, in any event, on the part of Mr Mack for whom they were responsible. That evasion caused an avoidance of tax. In those circumstances I am satisfied that the Commission's power to amend was enlivened.
Remission of penalties
Division 284 of Schedule 1 to the Taxation Administration Act 1953 (Cth) sets out the circumstances in which administrative penalties apply for, amongst other things, making false or misleading statements. It will suffice for present purposes to say that penalties are imposed by that Act by reference to a characterisation of conduct causing the taxation shortfall. Where the shortfall results from an intentional disregard of taxation law the basic penalty amount is 75% of the shortfall; recklessness warrants a penalty at 50% of the shortfall and the failure to take reasonable care leads to a 25% penalty. Those penalties may be increased by aggravating factors or reduced by mitigating factors.
The power in issue in the present case is that conferred by s 298-20(1) of Schedule 1 to the Taxation Administration Act in these terms,
The Commissioner may remit all or part of the penalty.
In Dixon (as trustee) v Commissioner of Taxation[8] the Full Court, in remitting a decision on the remission of penalty to the Tribunal, described the task in these terms,
The matter should have been remitted to the Tribunal for consideration of the question of whether any part of the penalty should be remitted on the basis that the outcome is harsh, having regard to the particular circumstances of the Taxpayer.
[8] [2008] FCAFC 54; (2008) 167 FCR 287 at [26].
These submissions on behalf of Mr and Mrs Kingston point to the following circumstances which they say lead to the conclusion that the failure to exercise the discretion to remit is, in all the circumstances, harsh:
(a)their lack of understanding and reliance on the agent;
(b)assurances said to have been received from the tax agent; and,
(c)the failure of the tax agent to express their true intentions.
The last of these may be readily dealt with. It seizes upon a submission made by the Commissioner that the documents prepared by Mr Mack did not express the applicants’ true intentions. The submission does not help Mr and Mrs Kingston. The documents were simply part of the facade that Mr and Mrs Kingston and Mr Mack created. Moreover I do not accept their evidence about the assurances said to have been received from Mr Mack. I do not propose to repeat what I have earlier said on the subject. Finally a lack of understanding and reliance upon the agent is likely to be a common enough occurrence. Nothing in the circumstances operates harshly in my view.
Conclusion
It follows that the objection decisions should be allowed to the extent necessary to reflect the conclusions set out in paragraph 19 above. The objection decision regarding penalty ought be affirmed in the case of Mr Kingston. The penalty assessment involving Mrs Kingston will fall away given the earlier conclusion on liability to taxation..
I certify that the preceding 31 (thirty-one) paragraphs are a true copy of the reasons for the decision herein of ........................................................................
Associate
Dated 19 December 2012
Dates of hearing
Date final submissions received
25 September 2012 & 30 October 2012
29 November 2012
Counsel for the applicants Mr H Mirza (25 September 2012 only) Solicitors for the applicants Worcester & Co Counsel for the respondent Ms E Ford Solicitors for the respondent ATO Legal Practice
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Shortfall Penalty
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Tax Avoidance Scheme
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Sham Transactions
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Trust Distribution
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Tax Agent Liability
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