Maurice Hannan Nominees Pty Ltd as Trustee for Maurice Hannan Family Trust and Ors and Commissioner of Taxation
[2004] AATA 1180
•10 November 2004
Administrative
Appeals
Tribunal
DECISIONS AND REASONS FOR DECISIONS [2004] AATA 1180
ADMINISTRATIVE APPEALS TRIBUNAL )
)
TAXATION APPEALS DIVISION ) Re MAURICE HANNAN NOMINESS PTY LTD as Trustee for MAURICE HANNAN FAMILY TRUST – No. QT2002/99-101
RONA HANNAN – No. QT2002/117-118 and QT2002/223
ILANA HANNAN – No. QT2002/115-116 and QT2002/221
MAURICE HANNAN – No. QT2002/127-128 and QT2002/220
Applicants
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member KL Beddoe
Senior Member BJ McCabeDate10 November 2004
PlaceBrisbane
Decision The Tribunal decides:
(a) the objection decisions in relation to the Trustee are set aside and the applicant’s objection is allowed in full;
(b) the objection decisions relating to assessment of income tax payable by the beneficiaries are affirmed;
(c) the objection decisions relating to assessment of penalty tax payable by the beneficiaries are set aside and decisions 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
McPhail v Doulton [1971] AC 424
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) ATC 4111
Ramsden v Federal Commissioner of Taxation [2004] FCA 632
East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 19 ALD 85
Taxation Case X30 (1990) 90 ATC 287
Federal Commissioner of Taxation v Jackson (1990) 90 ATC 4990
Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394
Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274
Vegners v Federal Commissioner of Taxation (1991) 91 ATC 4213
Nguyen v Federal Commissioner of Taxation (1999) 99 ATC 2211
Kajewski v Commissioner of Taxation [2003] ATC 4375
Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Federal Commissioner of Taxation v Ryan [2000] ATC 4079
Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243REASONS FOR DECISIONS
10 November 2004 Senior Member KL Beddoe
Senior Member Bernard McCabe
1. Maurice Hannan Nominees Pty Ltd (“the Trustee”) as Trustee of the Maurice Hannan Family Trust (“the Trust”) seeks review of objection decisions by the respondent in relation to the years of income ended 30 June 1995 to 30 June 1997. The individual applicants who are beneficiaries of the Trust also seek review of objection decisions by the respondent in relation to the relevant years of income.
2. The multitude of applications arises because the respondent has sought to assess the Trustee under section 99A of the Income Tax Assessment Act 1936 (“the Act”) and beneficiaries 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 amended assessments were authorised by section 170 and 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 AE.
7. Further documents were tendered and marked as exhibits and oral evidence was given by John Damian Andrews, Ian Roland Stevens, Ginette Danen Muller, Steven Irvine Hart, Maurice Hannan and Rona Hannan.
8. By deed of settlement dated 3 June 1985, Steven Irvine Hart settled the Maurice Hannan Family Trust, the Trustee being Kentale Pty Ltd and the Specified Beneficiaries in accordance with clause 1 of the deed being the applicants, Maurice Hannan, Rona Hannan and Ilana Nicole Hannan. No General Beneficiaries were nominated. By force of the definition the Specified Beneficiaries were also General Beneficiaries. Without setting out the detail we are satisfied that “General Beneficiaries” was defined to limit the beneficiaries of the Trust to persons real or incorporated with a familial connection to the Specified Beneficiaries.
9. In particular, clause 1(b)(iii) includes in the definition of “General Beneficiary” any entity which the Trustee may from time to time nominate in writing, as a General Beneficiary, the Trustee of any trust or settlement under which any General Beneficiary is a beneficiary whether present or contingent.
10. Kentale Pty Ltd was succeeded by Maurice Hannan Nominees Pty Ltd as Trustee of the Maurice Hannan Family Trust (“the Trustee”).
11. By minutes of meeting held on 27 April 1995, Maurice Hannan and Rona Hannan, as directors of the Trustee, resolved to participate in a real estate investment at Wodonga in the State of Victoria by way of acquisition of 500 units in Northbourne. The directors were authorised to make the application for the units which is also dated 27 April 1995. The application was for 500 units at a cost of $1 per unit in Northbourne.
12. The directors proceeded with the application for units in the belief that it would be a good investment because of their experience to that point in a previous investment (“Hendon”) and other property investments. Both the Northbourne and Hendon investments were promoted by their accountant, Mr Hart.
13. By a deed dated 27 June 1995 the Trustee nominated “Pitt Street No 2 Pty Ltd as Trustee for The Northbourne Holdings Unit Trust” as a General Beneficiary of the Trust with immediate effect.
14. Also on 27 June 1995 the Trustee wrote to the Directors of “Pitt Street No 2 Pty Ltd” as Trustee for Northbourne advising:
(a)“we confirm that our Trust will make a distribution to The Northbourne Holdings Unit Trust for an amount not exceeding $300,000 in the 1994/95 financial year”,
(b)“we confirm a Bank Guarantee from our Trust’s bank in the sum of $105,000 will be put in place in your favour”,
(c)“we enclose the duly executed Acknowledgement of Debt in respect of the sum outstanding”, and
(d)“having agreed to take all relevant steps our Trust can now apply for 300 units in your Trust and we enclose an application for units in that respect.”
15. The Acknowledgement of Debt stated that $300,000 was due and owing to “Pitt Street No 2 Pty Ltd as Trustee for the Northbourne Holdings Unit Trust” and that the said sum was to be repaid by calendar monthly instalments commencing upon the date as advised by the creditor.
16. The monthly payments were to be at $4,218.00 per calendar month secured by the bank guarantee. The monthly payments were requested to commence in November 1996 in an amount of $7,007. The National Bank of Australia executed a bank guarantee dated 11 July 1997 on account of the Trustee and in favour of Metway Bank Ltd. The amount of $7,007 appears to include an amount for the year of income ended 30 June 1996.
17. Northbourne issued a document entitled “Unit Trust Certificate”, dated “27 April 1995”, certifying that the Trustee is the registered holder of 500 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.
18. By minutes dated 27 June 1995 the directors of the Trustee 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 $300,000
Maurice Hannan – 50% of the balance
Rona Hannan – 50% of the balance”
19. By minutes of meeting held on 30 June 1995 the Trustee resolved that the income of the Trust for the year ended 30 June 1995 be appropriated, set aside and applied to the “beneficiaries” named as “Northbourne Rural Property Trust” and stated as 100%.
20. Clearly, that resolution is inconsistent with the previous resolution dated 27 June 1995.
21. There is a puzzling misdescription of the No 2 Pitt Street Pty Ltd name which we have set out above. The matter proceeded before us on the basis that nothing turned on the misnaming of the company, it being clear as to the company intended to be referred to. Similarly, there was also an apparent misunderstanding of the correct name of the trust for which that company was Trustee.
22. By a “Distribution Notice” dated 26 June 1996, Northbourne advised the Trustee:
“Your right to distribute up to the amount listed below to the Northbourne Holdings Unit Trust in the 1996 Financial Year.
Tax File Number - [deleted]
Amount - $200,000”
23. Also on 26 June 1996, minutes of meeting of the Trustee show that it was resolved that the income of the Trust for the year ended 30 June 1996; be appropriated, set aside and applied to the beneficiaries as follows:
Northbourne - the first $200,000
Maurice Hannan - 50% of the balanceRona Hannan - 50% of the balance
24. That distribution was confirmed by letter to Northbourne dated 26 June 1996 wherein the Trustee confirmed payment over a 10 year period, a bank guarantee to be provided on request, and an acknowledgement of debt was provided in accordance with a resolution of the Trustee recorded in minutes dated 26 June 1996.
25. “Having agreed to take all relevant steps”, the Trustee applied for 200 units in Northbourne.
26. Minutes of a meeting held on 30 June 1997 show that the Trustee resolved that the income of the Trust for the year ended 30 June 1997 be appropriated, set aside and applied to the beneficiaries as follows:
Northbourne - first $35,000
Maurice Hannan - $4,000
Rona Hannan - $2,000
Ilana Nicole Hannan - $5,000Maurice Hannan ) - share balance
Rona Hannan ) equally
27. In its income tax returns for the years of income ended 30 June 1995, 30 June 1996 and 30 June 1997, the Trustee reported the income appointed to Northbourne in accordance with the above resolutions. For the year ended 30 June 1995 the amount distributed to Northbourne was said to be $296,725.
28. When asked by his Counsel what “can you tell us about the Northbourne Rural Property Trust?”, Mr Hannan said that he did not know anything about it. Nor could Mr Hannan explain why there were two minutes of resolutions passed appointing the net income for the year ended 30 June 1995. Subsequent evidence satisfied us that Mr Hannan’s knowledge was confined to the documents presented for signature from time to time.
29. Mr Hannan was extensively cross-examined. He satisfied us that he is an unreliable witness because answers to questions were both evasive and combatitive and intended to be so. Mr Hannan also satisfied us, however, that the purported investment in the shopping centre was also something about which he had very little understanding. That was made clear in his cross-examination.
30. Mr Hannan accepted that the arrangements entered into in 1995 meant that no tax was going to be payable on the net income of the Trust for that year but the impetus for entering the transaction was the distant in time prospect of investment returns on the shopping centre.
31. Mr Hannan also said that although he thought no payments had been made of the monthly instalments of the acknowledged debts, he then agreed, on being shown documents, that payments of lesser amounts had been made by the Trustee as set out in a document attached to his affidavit (Exhibit AF Annexure MH8). At June 1998 the amount unpaid is shown as $17,103.04 while amounts previously paid total $31,549.49. The affidavit evidence of Mr Stevens suggests that a further amount of $2,052.42 was paid in July 1998 (Exhibit E/IRS23 at page 81).
32. Mr Hannan acknowledged that the liquidator of No 2 Pitt Street Pty Ltd is claiming a debt for a substantial sum of money said to be owing by the Trustee, and he acknowledged that the Trustee may have been in default in not paying as agreed in the Acknowledgement of Debt.
33. While he was evasive in his answers, we are satisfied, and find, that Mr Hannan did not conduct any meaningful enquiries in relation to the Trustee’s investment in the shopping centre, preferring to rely on the advice of his accountant, Steven Irvine Hart. Upon questioning in cross-examination, he did accept that he understood the debt owing by the Trustee was in the nature of a limited recourse loan – recovery to be effected by redemption of the Trust’s units in Northbourne and writing back the amounts as income.
34. We accept that the Trustee ceased making payments to Northbourne when the directors became aware of relevant enquiries by the respondent’s officers and the Australian Federal Police.
35. The oral evidence of Rona Hannan satisfied us that we should not give any weight to her affidavits – she clearly did not have specific knowledge of the arrangements between the Trustee and Northbourne, preferring to rely on her husband’s advice and without forming an independent informed understanding of her own. She clearly did not understand the transactions entered into by the Trustee, albeit she was a director of the Trustee at all relevant times.
36. On 20 July 2003 Maurice Hannan, Rona Hannan and Ilana Hannan executed documents entitled “Deed of Disclaimer” whereby they purported to disclaim any entitlement to any income of the Trust for the years ended 30 June 1995, 30 June 1996 and 30 June 1997. Each disclaimer was said to be effective on and from 30 June 1995, a date after the date of the Trustee’s resolution of 27 June 1995.
Re Northbourne
37. 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.
38. 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.
39. 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).
40. 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.
41. 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 company controlled No 2 Pitt Street Pty Ltd effectively from probably March 1995.
42. 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.
43. As already noted, the Trustee nominated Northbourne as a General Beneficiary of the Trust by resolution dated 27 June 1995.
44. In pursuance of the scheme, the Trustee appointed income to Northbourne as set out above.
45. 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 trusts 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 trusts by Northbourne.
46. 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.
47. 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. The Trustee provided a guarantee on or about 11 July 1997 for an amount of $100,000.
48. Northbourne 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.
49. 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.
50. 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.
51. 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 go into the scheme the applicant Trustee made decisions which included the investment in the shopping centre. We accept that the investment decision followed the decision to appoint the net income to Northbourne and, we infer, it is unlikely the investment decision was made independently from the decision to appoint the net income to Northbourne. We have come to that conclusion after taking into account the evidence of Mr Hannan in particular. In Exhibit AF, Mr Hannan said at paragraphs 34 and 35:
“…we understood that there was a tax advantage, as we saw it, similar to a negative gearing situation, because of the way in which matters were arranged.
…we saw this as a short term benefit, which would be offset once the property was fully developed because we would be receiving rental income and when the sale was completed and a taxable profit generated.” [sic]
52. In his oral evidence Mr Hannan referred to paragraph 4 of Exhibit AG where he said:
“At no stage did Hart represent to me or to my wife that (the Trust) could participate in the transaction in a manner that sheltered the income of the (Trust) from Taxation liabilities.”
53. In his oral evidence Mr Hannan said in reference to paragraph 4:
“…I suppose, it probably would have been more correct to say, ‘sheltered the income forever’, because it was always acknowledged by myself and known by myself that income tax would be payable sometime … there was never any issue of it not being paid at all.”
54. We are satisfied that Mr Hannan was not there referring to the distributions from the Trust in favour of Northbourne but was referring to the income and capital gains to be generated by the shopping centre development, that is, assessable income expected to be derived in future years of income from the shopping centre development. We are also satisfied, from answers given in cross-examination, that Mr Hannan had not investigated the investment as to its potential profitability and had relied, blindly it seems to us, on advice from Harts.
55. The arrangements entered into by the Trustee have their genesis in advice to the directors of the Trustee by Steven Irvine Hart. Mr Hart was called to give evidence. He answered formal questions but refused to answer questions relevant to the arrangements in question on the grounds that he claimed the privilege against self-incrimination. The basis for this claim is set out in Exhibit 2. The Tribunal accepted that he was not required to answer questions where the privilege was claimed. The Tribunal does not draw any inferences from the fact that Mr Hart claimed the privilege.
Consideration
56. Detailed written submissions were made on behalf of the applicants and the respondent. These were explained and supplemented by oral submissions.
57. By clause 2 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.
58. Clause 3 of the Trust Deed provides for the Trustee to determine the net income of the Trust Fund for each accounting period and may, in its complete discretion, at any time prior to the expiration of each accounting period until the Vesting Day, determine in respect of all or part of the net income for such accounting period to do all or any of the following:
(a)to pay, apply or set aside the net income for any one or more of the General Beneficiaries living or in existence at the time of the Trustee’s determination;
(b)to accumulate the net income; or
(c)to pay, apply or set aside for such charitable purposes as the Trustee may think fit.
59. 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 general beneficiaries as defined), that the quantum of the distribution is appropriate and takes into account the interests, including needs, of all beneficiaries.
60. 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.”
61. In this case the Trustee clearly failed Lord Wilberforce’s test. Northbourne was clearly not a general 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 definition of “general beneficiary”.
62. That definition reads as follows:
“1(b) The ‘General Beneficiaries’ means:
(i)the Specified Beneficiary and the Specified Beneficiaries;
(ii)the brothers and sisters, spouses, children and grandchildren of the Specified Beneficiary or Specified Beneficiaries and the spouses children and grandchildren of such brothers and sisters, spouse, children and grandchildren; and
(iii)any of the following entities whether formed in Australia or elsewhere which the Trustees may from time to time in writing nominate as a General Beneficiary (subject to Clause 10 hereof) namely:
Athe Trustees (in their Capacity as such) of any trust or settlement (called an eligible Trust) under which any General Beneficiary hereinbefore referred to is a beneficiary whether present or contingent;
Bany corporation (called an eligible corporation) at least one share in which is owned by any General Beneficiary hereinbefore referred to or by the Trustees of an eligible Trust;
Cany other legal entity at least one share or other interest (whether present or contingent) in which is owned or held by any General Beneficiary hereinbefore referred to or by the Trustee of an eligible Trust or by any eligible corporation;
(iv)such additional persons corporations and Trusts (if any) as are named and described or defined in the Schedule as additions to the class of General beneficiaries;
PROVIDED HOWEVER that:
(1) Any person from time to time being the Settlor the Guardian the Appointor or the Trustee or Trustees hereof or any other person or corporation settling property on the Trusts of the Settlement (herein called “an excluded person”) and also
(2) Any corporation in which and the Trustees of any Trust in or under which and any other legal entity in which any excluded person has any actual or contingent beneficial interest so long as such interest continues are excluded from the class of general beneficiaries –
Aunless specifically included in the Schedule as a Specified Beneficiary; or
Bfor all purposes except as an Additional Income Beneficiary if specifically included as such in the Schedule;
PROVIDED FURTHER that the Trustees at any time and from time to time may declare in writing (subject to Clause 10 hereof and not otherwise) that any person who would otherwise be a General Beneficiary under paragraphs (i), (ii), (iii) or (iv) of this sub clause (b) shall be excluded from the class of General Beneficiaries and shall as from the date of making each declaration be modified accordingly but so that this power shall not be capable of being exercised so as to derogate from any interest to which such General Beneficiary has previously become indefeasibly entitled whether in possession or reversion or otherwise;”
63. Insofar as it may be said that the Trustee was a beneficiary of Northbourne, we are satisfied that the Trustee itself is not within the defined meaning of General Beneficiary so that the fact of it being a beneficiary in Northbourne does not thereby make the Trustee a General Beneficiary as defined. 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 General Beneficiary as defined. That intention is evident from construction of the definition itself.
64. We are satisfied, as submitted for the applicants, that the purported nomination of Northbourne as a General Beneficiary was ineffective. It follows that there was not an effective appointment of net income to Northbourne in the years of income before the Tribunal.
65. Without more, clause 3(e) of the Trust Deed would apply. It reads:
“Subject to the provisions of Clause 29 hereof 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 effectively made at or prior to the end of such Accounting Period pursuant to paragraph (b) of this Clause in Trust successively for the persons described in paragraphs (a), (b) and (c) of Clause 4 hereof as though the last day of such Accounting Period were the Vesting Day.”
66. Clause 29 provides, in effect, for the Trustee to make a declaration that clause 3(e) does not apply to some or all of the net income of an accounting period. No such declaration has been made on the material before us.
67. Clause 4 is an extensive provision which we need not set out. In the context of these matters its general effect is that the takers in default of an ineffective determination of appointment of net income, are the Specified Beneficiaries taking in equal shares.
68. The Specified Beneficiaries are the three personal applicants:
§Maurice Hannan
§Rona Hannan
§Ilana Nicole Hannan
69. Insofar as the minutes of the Trustee dated:
§27 June 1995 (Exhibit E: IRS-23/56)
§30 June 1995 (T6/49)
§26 June 1996 (T8/61)
§30 June 1997 (T11/76)
suggest either that the balance of the net income or any amount included in the assessable income of the Trust are deemed to be distributed “in the same proportions as listed above” or similar wording, we are satisfied those resolutions are ineffective on their face. This is because each of the resolutions clearly intend a distribution to Northbourne. Such a purported appointment of income is beyond the power of the Trustee so that 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.
70. We are satisfied that because those resolutions were ineffective, clause 3(e) of the Deed of Settlement operated so that the default beneficiaries (that is, the Specified Beneficiaries) became presently entitled, at 30 June of each year of income, to the net income of that year of income in equal shares, that is, 33⅓% of net income each. 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 BRK (Bris) Pty Ltd v Federal Commissioner of Taxation [2001] ATC 4111 at paragraph 38.
71. 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.
72. In Ramsden v Federal Commissioner of Taxation [2004] ATC 4659, 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.”
73. Accepting, as we do, that the purported nomination of Northbourne as a beneficiary was ineffective, and accepting that the Trustee did not determine to accumulate any of the net income in each relevant year of income, there was default by the Trustee in respect of the net income said to have been appointed to Northbourne during each year of income.
74. It follows, in our view, that the Trustee holds so much of the net income, in respect of which no effective determination was made, for the beneficiaries described in clauses 4(a), 4(b) and 4(c) successfully as though the last day of each accounting period (here the same as the year of income) was the Vesting Day.
75. Clause 4(a) is the primary clause and has the effect of appointing the net income, in default of an effective determination, to the Specified Beneficiaries, that is:
§ Maurice Hannan
§ Rona Hannan
§ Ilana Nicole Hannan
in equal shares as tenants-in-common.
76. In coming to that view we have accepted the submission for the applicant to the effect that the residual income provisions of the distribution minutes do not apply to amounts 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 debts owing to Northbourne except for the unpaid purported appointments of net income in favour of Northbourne.
77. 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.
78. 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.
79. 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.
80. So instructed, we are satisfied section 100A has no effect on the facts of this case given that we are satisfied that it is the default beneficiaries, and not Northbourne, who were presently entitled to the net income sought to be appointed to Northbourne. We are further satisfied, for the reasons given by Spender J in Ramsden, that the default beneficiaries were so presently entitled in the respective years of income, the Trustee having made no decision to accumulate the net income of each year of income.
81. Each of the default beneficiaries has purported to disclaim any entitlement to any income of the Trust for the years ended 30 June 1995, 30 June 1996 and 30 June 1997, except such as may have been specifically paid to or applied for the benefit of the beneficiary and, in particular, purported to disclaim any entitlement to any income which might otherwise have accrued under clause 3(e) of the Deed of Settlement.
82. As set out in paragraph 63 above, clause 3(e) provides that any net income not the subject of an effective determination is to be held on trust successively for the persons described in paragraphs (a), (b) and (c) of clause 4.
83. We note that it is not suggested that the Trustee made a determination within the terms of clause 29 of the Trust Deed. In general terms such a determination would have the effect that clause 3(e) would not apply to so much of the net income for an accounting period for which there was not an effective determination pursuant to clause 3(b).
84. Paragraph 4(a) relevantly provides for the benefit of the specified beneficiaries being the personal applicants.
85. Paragraph 4(b) provides for siblings of specified beneficiaries and paragraph 4(c) provides for next of kin of specified charitable purposes.
86. The applicants submit, in effect, that a beneficiary under a discretionary trust is entitled to disclaim any income appointed to the beneficiary in a particular year, while not in any way precluding the Trustee from giving consideration to the appointment of income to that same beneficiary in another year. The applicants submit that the decision of the Tribunal in Taxation Case X30 (1990) 90 ATC 287 is wrong in law.
87. As the respondent points out the disclaimers were executed after the objection decisions under review had been made (in May 2002). The disclaimers are dated 20 July 2003 – a date later than the institution of the proceedings in this Tribunal and more than three years after the respondent notified the assessments before the Tribunal.
88. The respondent submits that the disclaimers, having been executed after the date of the respondent’s objection decisions, are not relevant to these proceedings. In Jackson v Federal Commissioner of Taxation (1990) 90 ATC 4990, Burchett and Von Doussa JJ agreed with reasons given by Hill J which included the following at pages 5005-6 where Hill J, after citing authorities said:
“The passages cited point out with some force that it is for the taxpayer to show that the assessment objected to is excessive. They do not, however, support the view that the issue before the Court or a tribunal is other than the review of the objection decision. To succeed in that review the taxpayer must, conformably with Dalco and with sec. 190(b) of the Act, show that the assessment does not represent his true tax liability, but the review or appeal, as the case may be, is not, as other proceedings in the law are not, wholly unconfined; it must be limited to events affecting that substantial liability no later than the date upon which the objection decision is made.”
89. It is obvious, on the facts, that the respondent could not have considered the disclaimers when making the objection decisions because they had not been executed.
90. We have considered whether we should take the disclaimers into account because of their expressed retrospective effect.
91. We doubt that a disclaimer can apply retrospectively where, on the facts of these cases, the donee has been aware of the ineffective appointment of income and the claimed operation of default provisions, however imperfectedly understood. It took the beneficiaries more than three years to say, in effect, “no – that is not mine because I have disclaimed”.
92. In our view, whatever may be the effect of the disclaimers they did not have the effect of ceasing present entitlement up to the time of the objection decisions because they:
(a) were not made in a timely manner to rebut the operation of clause 3(e); or
(b)did not effect any change in the operation of clause 3(e) at the time of the objection decision; or
(c) were not relevant to a review of the objection decision.
93. In Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394, Latham CJ considered an appeal from the Taxation Board of Review concerning assessment of income said to have been derived by a trust created in favour of the taxpayer’s former wife. The appeal was allowed on the basis that the trust had not been created.
94. However, his Honour also considered whether the taxpayer should succeed because the trust net income was for the benefit of the taxpayer’s former wife if the creation of the trust is assumed.
95. At page 401 his Honour said:
“If, however, it were held that a trust had been created by the transfer of the shares with the intention of conferring benefits upon Mrs Corfield and some sufficiently identifiable members of the taxpayer’s family, the case for the taxpayer would nevertheless fail because, as Holroyd J in Townson v Tickell (1) said (speaking of a devise): ‘I think that an estate cannot be forced on a man. A devise, however, being prima facie for the devisee’s benefit, he is supposed to assent to it, until he does some act to show his dissent. The law presumes that he will assent until the contrary be proved; when the contrary, however, is proved, it shows that he never did assent to the devise, and, consequently, that the state never was in him’.”
96. That Holroyd J was being cited with approval is made clear at page 402 where Latham CJ said:
“The result, therefore, is that, even if the evidence were sufficient to establish a trust in favour of Mrs Corfield in the absence of evidence of dissent, the dissent which is proved makes it impossible to hold that a trust in her favour continued to exist. Accordingly, there was a resulting trust of the shares in favour of the taxpayer, and the dividends received from the shares, together with the small sums of interest paid by Cornell Ltd on retained moneys, were the income of the taxpayer.”
97. In Cornell the dissent was notified upon Mrs Corfield’s solicitors becoming aware of the supposed trust for her benefit.
98. In Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274 the Federal Court (Gummow J) allowed an appeal against a decision of the Tribunal to the effect that the beneficiary being not aware of the existence of a trust and that she was an object of the discretionary trust, the income was not her assessable income. His Honour said, in effect, that the taxpayer had acknowledged the existence of her interest in the trust and received income. The decision was upheld on appeal to the Full Court ((1991) 91 ATC 4213).
99. As Senior Member Beddoe said in Nguyen v Federal Commissioner of Taxation (1999) 99 ATC 2211 at 2217 this is not a case of disclaimer upon becoming aware of an interest in the trust fund. This is an attempt to undo the past, an attempt destined to be ineffective in relation to income derived in earlier years. In the circumstances of this case it is reasonable to infer that the beneficiaries knew they may become presently entitled to the net income of each year of income unless the Trustee either decided to accumulate or, as it transpired, took some other step to avoid their present entitlement. That other step was to purport to introduce Northbourne as a beneficiary presently entitled to net income. That step failed in its purpose and the beneficiaries’ expectation that they may become presently entitled was realised. In our view a retrospective disclaimer in those circumstances is ineffective. Whether a court would allow the Trustee to redo the resolution of the net income in each year of income is not something this Tribunal can decide.
100. In relation to the amended assessments the respondent has conveniently set out the history of the notified assessments in its written submissions as follows (we have quoted - with amendments - from the written submission):
“339Maurice Hannan Nominees Pty Ltd (Trustee) as trustee lodged its 1995 income tax return on or about 3 July 1996 disclosing a total net income of $296,725.00 distributed to Northbourne Rural Property Trust [sic].
340Trustee lodged its 1996 income tax return on or about 27 February 1998 disclosing a total net income of $156,022.00 all of which was said to have been distributed to Northbourne.
341Trustee lodged its 1997 income tax return on or about 23 March 1999 disclosing a total net income of $45,518.00 distributed as follows:
(a)Maurice Hannan - $4,000.00;
(b)Northbourne - $35,000.00;
(c)Ilana Hannan - $4,518.00; and
(d)Mrs Hannan - $2,000.00.
342On 29 May 2000 the Respondent made an assessment in respect of Trustee for the 1995 year showing a taxable income of $302,726.00 and served notice of that assessment on Trustee.
343On 29 May 2000 the Respondent made an assessment in respect of Trustee for the 1996 year showing a taxable income of $161,333.00 and served notice of that assessment on Trustee.
344On 29 May 2000 the Respondent made an assessment in respect of Trustee for the 1997 year showing a taxable income of $35,000.00 and served notice of that assessment on Trustee.
345In the case of each of the assessments additional penalty tax was imposed in accordance with s.226H of the Act.
346Trustee lodged a notice of objection to each of the assessments on or about 18 July 2000.
347The Respondent disallowed each objection and advised Trustee of that fact by letter dated 10 May 2002.
348Mrs Rona Hannan (Mrs Hannan) lodged her 1995 income tax return on or about 1 July 1996 disclosing a taxable income of $5,904.00.
349Thereafter the Respondent issued a document showing a taxable income of Mrs Hannan of $5,904.00 and nil tax payable thereon and served that notice by post on Mrs Hannan.
350Mrs Hannan lodged her 1996 income tax return on or about 24 February 1998 disclosing a taxable income of $5,606.00.
351Thereafter the Respondent issued a document showing a taxable income of Mrs Hannan of $5,606.00 and nil tax payable thereon and served that notice by post on Mrs Hannan.
352Mrs Hannan lodged her 1997 income tax return on or about 18 March 1999 disclosing a taxable income of $5,669.00.
353On 26 March 1999 the Respondent issued a document showing a taxable income of Mrs Hannan of $5,669.00 and nil tax payable thereon and served that notice by post on Mrs Hannan.
354On 26 April 2002 the Respondent made an assessment in respect of Mrs Hannan for the 1995 year and increased her taxable income by $100,908.00 to $106,812.00.
355On 13 March 2002 the Respondent made an assessment in respect of Mrs Hannan for the 1996 year and increased her taxable income by $80,666.00 to $86,272.00.
356On 22 February 2001 the Respondent made an assessment in respect of Mrs Hannan for the 1997 year and increased her taxable income to $130,428.00.
357On 13 March 2002 the Respondent made an amended assessment in respect of Mrs Hannan for the 1997 year and increased her taxable income by $17,500.00 to $147,928.00.
358In the case of each of the assessments additional penalty tax was imposed in accordance with s.226H of the Act.
359Mrs Hannan lodged a notice of objection to the 1995 assessment on or about 17 June 2002.
360Mrs Hannan lodged a notice of objection to the 1996 assessment and the 1997 amended assessment on or about 10 May 2002.
361The Respondent disallowed the objections and advised Mrs Hannan of that fact by letters dated 13 June 2002 (1996 assessment and 1997 amended assessment) and 15 August 2002 (1995 assessment).
362Ms Ilana Hannan (Ilana Hannan) lodged her 1995 income tax return on or about 1 July 1996 disclosing a taxable income of $6,040.00.
363Thereafter the Respondent issued a document showing a taxable income of Ilana Hannan $6,040.00 and nil tax payable thereon and served that notice by post on Ilana Hannan.
364Ilana Hannan lodged her 1996 income tax return on or about 24 February 1998 disclosing a taxable income of $4,299.00.
365On 3 March 1998 the Respondent issued a refund notice showing a taxable income of Ilana Hannan of $4,299.00 and nil tax payable thereon and served that notice by post on Ilana Hannan on or shortly after that date.
366Ilana Hannan lodged her 1997 income tax return on or about 18 March 1999 disclosing a taxable income of $5,589.00.
367 On 26 March 1999 the Respondent issued a document showing a taxable income of Ilana Hannan of $5,589.00 and nil tax payable thereon and served that notice by post on Ilana Hannan.
368On 23 April 2002 the Respondent made an assessment in respect of Ilana Hannan for the 1995 year and increased her taxable income by $100,908.00 to $106,948.00.
369On 12 March 2002 the Respondent made an assessment in respect of Ilana Hannan for the 1996 year and increased her taxable income by $53,777.00 to $58,076.00.
370On 16 February 2000 the Respondent issued a Refund Notice to Ilana Hannan for the 1997 year showing her taxable income as $1,533.00 and with no tax payable thereon.
371On 22 February 2001 the Respondent issued a Non-Taxable Advice to Ilana Hannan for the 1997 year showing her taxable income as $2,015.00 and with no tax payable thereon.
372On 12 March 2002 the Respondent made an assessment in respect of Ilana Hannan for the 1997 year and increased her taxable income by $11,666.00 to $13,681.00.
373In the case of each of the assessments additional penalty tax was imposed in accordance with s.226H of the Act.
374Ilana Hannan lodged a notice of objection to the 1995 assessment on or about 17 June 2002.
375Ilana Hannan lodged a notice of objection to the 1996 assessment and the 1997 amended assessment on or about 10 May 2002.
376The Respondent disallowed the objections and advised Ilana Hannan of that fact by letters dated 13 June 2002 (1996 assessment and 1997 amended assessment) and 15 August 2002 (1995 assessment).
377Mr Maurice Hannan (Mr Hannan) lodged his 1995 income tax return on or about 1 July 1996 disclosing a taxable income of $20,045.00.
378The Respondent made an assessment showing a taxable income of Mr Hannan for the 1995 year of $20,045.00 on 9 July 1996 and served that notice by post on Mr Hannan.
379Mr Hannan lodged his 1996 income tax return on or about 24 February 1998 disclosing a taxable income of $29,656.00.
380Thereafter on 17 March 1998 the Respondent made an assessment showing a taxable income of Mr Hannan for the 1996 year of $29,656.00 and served that notice and attached refund cheque by post on Mr Hannan.
381Mr Hannan lodged his 1997 income tax return on or about 18 March 1999 disclosing a taxable income of $11,532.00.
382On 29 March 1999 the Respondent made an assessment showing a taxable income for Mr Hannan for the 1997 year of $11,532.00 and served that notice and attached refund cheque by post on Mr Hannan.
383On 23 April 2002 the Respondent made an amended assessment in respect of Mr Hannan for the 1995 year and increased his taxable income by $100,908.00 to $120,953.00.
384On 13 March 2002 the Respondent made an amended assessment in respect of Mr Hannan for the 1996 year and increased his taxable income by $80,666.00 to $110,322.00 and served that notice on Mr Hannan by post at his address for service in the records of the Respondent.
385On 22 February 2001 the Respondent made an amended assessment in respect of Mr Hannan for the 1997 year and increased his taxable income to $136,291.00.
386On 13 March 2002 the Respondent made a further amended assessment in respect of Mr Hannan for the 1997 year and increased his taxable income by $17,500.00 to $153,791.00.
387In the case of each of the assessments additional penalty tax was imposed in accordance with s.226H of the Act.
388Mr Hannan lodged a notice of objection to the 1995 amended assessment on or about 17 June 2002.
389Mr Hannan lodged a notice of objection to the 1996 amended assessment and the second 1997 amended assessment on or about 10 May 2002.
390The Respondent disallowed the objections and advised Mr Hannan of that fact by letters dated 20 June 2002 (1996 amended assessment and second 1997 amended assessment) and 15 August 2002 (1995 amended assessment).”
101. In the context of the beneficiaries the respondent shall make an assessment of the amount of the taxable income and the tax payable thereon from the returns and from any other information in the respondent’s possession (section 166 of the Act). No issue of deemed assessments arises in relation to the beneficiaries because they are not a relevant entity for the purposes of section 166A.
102. Each of the beneficiaries failed to disclose in their income tax returns that they were presently entitled to a share of net income for the respective years of income due to the operation of clause 3(e) of the Trust Deed. The result was that there was an avoidance of tax.
103. To the extent that it is necessary to so decide (that is in application QT2002/220), we are satisfied that the avoidance of tax was due to evasion of tax by the Trustee’s appointment of net income to Northbourne in the 1995 year of income but with the evident intent that the said net income not be paid to Northbourne, and we so find. It follows, in our view, that paragraph 170(2)(a) of the Act authorised the making of the amended assessment because the only apparent explanation of the Trustee’s action was to avoid payment of tax by the Trustee and the beneficiaries on net income of the Trust said to have been appointed to Northbourne but in fact derived by the beneficiaries.
104. In coming to that conclusion we have been instructed by the dicta of Drummond J in Kajewski v Commissioner of Taxation [2003] ATC 4375 at page 4400 paragraph 111 where his Honour also referred to the judgment of Dixon J in Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 313 as follows:
“Dixon J, said of the word ‘evasion’ in a statute not materially different from s 170(2) in words applicable to this provision:
“…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 or 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.””
105. In Federal Commissioner of Taxation v Ryan [2000] ATC 4079, the High Court reconsidered the earlier decision in Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 where the High Court had “decided that the preparation and issue of the refund advice sent to the taxpayer….which said that no tax was payable, was not the making of an assessment within the meaning of the Act”.
106. In Ryan the respondent had notified a “refund notice” in December 1987 and then notified an assessment for tax due and payable in February 1994, that is, more than six years after the notification of the refund. Decisions in the Federal Court had not followed the decision in Batagol. On appeal in the High Court the respondent contended that sub-section 170(3) of the Act as it then read, did not preclude the making of the assessment.
107. Sub-section 170(3) of the Act, as it was relevant to the decision in Ryan, read as follows:
“Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.”
108. In Ryan at ATC 4086 the joint judgment of Gleeson CJ, Gummow and Hayne JJ, after citing previous decisions said:
“31. …The Full Court in Batagol dealt with a case stated by a single justice pursuant to s 18 of the Judiciary Act 1903 (Cth). The facts stated in the case related to three years of income – the years ended 30 June 1952, 1953 and 1954. The taxpayer lodged returns of income for each of those years. The case stated revealed that officers of the Commissioner had examined each of the taxpayer’s returns and, in respect of each year, formed the opinion that, by reason of accrued losses carried forward, the taxpayer was not assessable to tax upon the return, although it disclosed what would otherwise be a taxable income. That is, in each of the three years in question the Commissioner ascertained the taxpayer’s taxable income and ascertained that no tax was payable on it. Each return was noted accordingly but no notice of this conclusion was given to the taxpayer in respect of either the 1952 or 1953 tax years.
32. In April 1955, the Commissioner sent to the taxpayer a ‘refund advice’ and a cheque for an amount equal to the instalments of tax that had been deducted from sums earned by the taxpayer during the 1954 tax year and remitted to the Commissioner. The refund notice ‘contained the statement that no tax was payable on the income shown in the return’.
33. In June 1955, the Commissioner issued notices of assessment to the taxpayer. Each notice stated an amount of tax payable in respect of the taxpayer’s taxable income in each of the three years. The questions stated for the opinion of the Full Court included whether, prior to the assessments the subject of the June 1955 notices, ‘the Commissioner [had] made an assessment within the meaning of the Act in respect of the taxpayer’ for any of the three years and whether the Commissioner had power to make the assessment the subject of the notice in respect of each of the three years. The Court answered the former question ‘no’ in respect of each year and the latter question ‘yes’ in respect of each year. That is, the Court decided that the preparation and issue of the refund advice sent to the taxpayer in April 1955, a refund statement which said that no tax was payable, was not the making of an assessment within the meaning of the Act.”
109. While the applicant seeks to distinguish the Batagol and Ryan cases from the circumstances of Ilana Hannan because she had the benefit of rebates not considered in those cases, we are not satisfied we should make that distinction.
110. 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.
111. 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.
112. 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.
113. It is also submitted that the applicant beneficiaries were personally reckless in accepting the advice of Mr Hart 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.
114. In the context of the beneficiaries we are of the view that their conduct must be considered separately to the conduct of the Trustee when considering the individual tax returns lodged by the beneficiaries. While the conduct of the tax agent may be relevant we are unable in these cases 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.
115. We are satisfied, however, that there was a lack of reasonable care by both the beneficiaries and the tax agent in relation to the beneficiaries’ income tax returns. This is because both seem to have disregarded the effect of the Trust Deed in preparing the relevant income tax returns and, in particular, failed to recognise that the appointment of net income to Northbourne had not been made in accordance with the Trust Deed.
116. In our view the beneficiaries and the tax agent displayed a lack of reasonable care in lodging the income tax returns so that there was a resulting tax shortfall in relation to the beneficiaries. 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 in these matters. The evident lack of reasonable care does not justify any favourable exercise or discretion (section 227(3)).
117. For these reasons the Tribunal makes decisions to the effect that:
(a)the objection decisions assessing the Trustee under sections 169 as liable under section 99A be set aside, and decides in each application that the applicant’s objection be allowed in full;
(b)the objection decisions relating to assessment of income tax payable by the beneficiaries will be affirmed;
(c)the objection decisions relating to assessment of penalty tax payable by the beneficiaries are set aside and decisions 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 117 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member KL Beddoe and Senior Member BJ McCabe
Signed: T Ritchie
... Associate
Dates of Hearing 18-26 September 2003 and 27 October 2003
Date of Decision 10 November 2004
Counsel for the Applicant 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
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