Moignard and Commissioner of Taxation (Taxation)
[2017] AATA 1661
•6 October 2017
Moignard and Commissioner of Taxation (Taxation) [2017] AATA 1661 (6 October 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number: 2012/3591
Re:Stephen Moignard
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President K Bean
Date:6 October 2017
Place:Adelaide
The decision under review is set aside and in substitution for that decision it is decided that:
(a) Mr Moignard’s taxable income for the 2008 income year was $160,158.75;
(b)The tax payable on that income, plus Medicare levy and Medicare surcharge, is $55,675.05; and
(c)A 50% base penalty and 20% uplift should also be applied, resulting in a total penalty amount of $33,405.04.
.................[Sgd]..................................
Deputy President K Bean
CATCHWORDSTAXATION – Income tax – Leave to raise new grounds of objection under s 14ZZK of the Taxation Administration Act 1953 – Whether valid determination to distribute trust income – Application of default clause in trust deed – Whether an effective disclaimer – Whether applicant had sufficient knowledge of entitlement disclaimed – Imposition of administrative penalty – Lack of reasonable care or recklessness – Increase of base penalty – Decision under review set aside.
LEGISLATION
Income Tax Assessment Act 1997, ss 6-5, 102-5
Income Tax Assessment Act 1936, s 95, 97
Taxation Administration Act 1953, ss 14ZZK, 284‑7, 284‑90, 284‑220
CASES
Moignard and Commissioner of Taxation [2014] AATA 342
Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148
McLean v Federal Commissioner of Taxation (1996) 66 FCR 105
Clough v Frog (1974) 4 ALR 615
Federal Commissioner of Taxation v Ramsden (2005) 58 ATR 485
Lewski v Commissioner of Taxation [2017] FCAFC 145
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175
Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347
Lady Naas v Westminster Bank Ltd [1940] AC 366
SECONDARY MATERIALS
Taxation Ruling 2011/5
Miscellaneous Taxation Ruling 2008/1
REASONS FOR DECISION
Deputy President K Bean
6 October 2017
The substantive application in this matter relates to the correct income of the applicant, Mr Moignard, during the 2007/2008 tax year. In particular, it concerns whether Mr Moignard was ‘presently entitled’ to certain trust income during that year, such that he incurred a tax liability with respect to it. It is agreed that, apart from any trust income, Mr Moignard had no other income during that year.[1]
[1] Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456, 481.
The matter was first heard by the Tribunal, constituted by Senior Member Dunne, on 26 November 2013, and Senior Member Dunne handed down his decision on 30 May 2014,[2] setting aside the decision under review. However, the Commissioner subsequently appealed that decision to the Federal Court of Australia and that matter was heard before White J on 2 February 2015.
[2] Moignard and Commissioner of Taxation [2014] AATA 342.
On 3 March 2015, his Honour handed down his decision allowing the appeal and remitting the matter to the Tribunal for rehearing.[3] In addition to ordering that the matter be remitted for rehearing “before another member of the Tribunal”, his Honour ordered that “unless proper cause is shown to the Tribunal, no further evidence is to be adduced” at the rehearing.
[3] Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456.
On 23 April 2015, Mr Moignard applied for leave to adduce further evidence[4] and the Commissioner subsequently indicated that he opposed that request.
[4] Applicant’s outline of proposed additional evidence and reasons why leave is sought dated 23 April 2015.
An interlocutory hearing was accordingly held in relation to this issue before me on 3 August 2015. On 30 October 2015, I made the following decision in relation to that application:
The Tribunal decides that Mr Moignard’s application for leave to adduce further evidence at the rehearing of this matter is allowed in part as follows:
1.Leave is granted for Mr Moignard to adduce and rely on one additional document at the rehearing, namely, the “Audit Report” prepared by the Australian Taxation Office in 2003, and obtained by Mr Moignard after the original hearing via a Freedom of Information request; and
2.Leave for Mr Moignard himself to give further evidence at or for the purposes of the rehearing is refused.
I will proceed to outline the relevant history of the application, before identifying the issues which remain to be determined having regard to developments since the matter was remitted to the Tribunal.
RELEVANT HISTORY
In the written submissions for the Commissioner, the relevant history of the matter was accurately summarised as follows:
Subsequent to the commencement of an audit and after a final notice to lodge an income tax return had been issued, the Applicant submitted a nil return in respect of the 2007-2008 year. The Commissioner’s initial assessment dated 13 July 2010 was that no tax was payable. Following the finalisation of the audit the Commissioner issued an amended assessment assessing a tax liability of $243,959.84 (including interest) and imposing a penalty of $187,043.45. In making the amended assessment the Respondent included $480,476 in the applicant’s assessable income for the 2008 (sic) being the net profit made on the sale by the RST of a property in Rupert Street … included in the net income of the RST calculated under ss 95(1) of the Income Tax Assessment Act 1936 (the ‘1936 Act’).
At the original hearing the Respondent maintained that the amended assessment was not excessive, and that the whole of the net income of the trust (the net profit on the sale) was assessable to the Applicant as the beneficiary of the RST who was entitled to all of the income of the trust (specifically had been distributed the whole of that net profit). In the alternative, if there had been no exercise of the trustee discretion to pay, apply or set aside the profit from the sale by the end of the accounting period provided by the trust deed, the Commissioner argued that the default provisions in the trust deed were triggered. These provisions (clauses 3(4) and (5)) had the effect of making the Applicant and each of his two children entitled to the net profit in equal shares.[5]
[5] Respondent’s submissions on rehearing dated 26 February 2016, [4] and [5] (“Respondent’s submissions”).
As acknowledged by the respondent, the central issue in dispute at the original hearing was whether Mr Moignard was presently entitled to the whole or any part of the income of the Rupert Street Trust (“RST”) for the year ended 30 June 2008. There is no dispute that at all relevant times, Mr Moignard was the trustee and also a beneficiary of the RST (later renamed “The Hundred of Comaum Trust” (“HoCT”)).
On appeal, White J concluded that the terms of the trust deed of the RST were relevant to that question. He described the effect of the trust deed as follows:
In short, the RS/HoCT is a discretionary trust by which the trustee may “pay, apply or set aside” the net income of the trust for any one or more of the general beneficiaries or may accumulate that income. If the trustee does not make a valid determination as to the net income of the trust fund by the end of each accounting period, then the trustee holds that income on a separate trust for each of the named default beneficiaries, who include Mr Moignard.[6]
[6] Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456, [44].
Later in his reasons, his Honour noted:
Having regard to the burden of proof on Mr Moignard, the elements of present entitlement for the purposes of s 97, and the provisions in the trust deed, it was necessary for Mr Moignard to satisfy the AAT that:
(a)he had not made a “determination” of the kind contemplated by clause 3 before the end of the 2007-2008 year to “pay, apply or set aside” the income of the RS/HoCT for his own benefit;
(b)he had before the end of the 2007-2008 year made a valid determination as to the payment, application or setting aside of the trust income to some other beneficiary (so that the default provision in clause 3(4) of the trust deed which would have resulted in him having one-third of the net income was inapplicable).[7]
[7] Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456, [57].
Ultimately, his Honour concluded that the Tribunal as previously constituted had not addressed all of the issues arising for its determination on the review:
In particular, it determined the issue of “present entitlement” without recourse to the trust deed and without addressing, and making the necessary findings of fact concerning, the question of whether Mr Moignard had, in the 2007‑2008 year, made a determination or determinations with respect to the payment, application or setting aside of the net income of the RS/HoCT.[8]
[8] Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456, [73].
The matter was listed for a substantive hearing before me on 29 February 2016 and the parties exchanged outlines of submissions prior to that hearing.
THE COMMISSIONER’S CHANGED POSITION
Significantly, in written submissions filed prior to the hearing, the Commissioner made the following concession:
Since the appeal to the Federal Court, the Commissioner accepts the alternative argument … as correct. It is the only argument advanced on the rehearing. Having reviewed and considered the evidence adduced in the original hearing, the Commissioner submits no appointment or accumulation of trust income was validly made pursuant to the terms of the trust deed during the relevant period.[9]
[9] Respondent’s submissions, [6].
The Commissioner went on to indicate:
The practical result of this is that, by reason of the default clause, the Applicant was presently entitled to one third of the income of the RST for the 2008 year, and thus one third of the net income of the trust (being one third of the profit from the sale of the Collingwood property) was properly included in his assessable income for that year under ss 97(1) of the 1936 Act ie; $160,158 (rather than the full $480,476 net profit amount).[10]
[10] Respondent’s submissions, [7].
The orders sought by the respondent were as follows:
8.The Respondent consents to an order setting aside the Notice of Decision on Objection dated 27 April 2012.
9.The Respondent seeks orders substituting the decision under review and declaring as follows:
9.1the Applicant’s taxable income for the 2008 income year is to be reduced from $480,476 to $160,158;
9.2the tax payable (plus Medicare levy and Medicare Levy Surcharge) is to be reduced from $207,826.10 to $55,675.05;
9.3the administrative penalty is to be reduced from $187,043.45 to $33,405.04 (this is comprised of a penalty of 50% on the tax shortfall of $27,837.53 and a 20% uplift of $5,567.51).[11]
[11] Respondent’s submissions, [9].
SUBMISSIONS AT THE HEARING
Accordingly, the scope of the hearing which took place on 29 February 2016 was much more limited than had been anticipated.
At the hearing, Mr Moignard confirmed, as indicated in his written submissions, that he was aggrieved by the late introduction of the “default clause argument”, which he felt he had not had an adequate opportunity to address by way of evidence or submissions, either at the original hearing or subsequently. He further indicated that he did not abandon his primary argument that he had received no income for the relevant year and therefore no tax was payable. He summarised his position by indicating that his first argument was that the proposed amended assessment was flawed and could not stand, as he had demonstrated an intention to distribute all of the trust income. Alternatively, if the Tribunal found that he had failed to distribute the trust income, he acknowledged the Tribunal should order him to pay the adjusted tax of approximately $55,000, and he accepted that the figure put forward by the Commissioner of $55,675.05 may be correct. However, he strongly resisted the proposition that he should be subject to any penalty, contending that he had not been reckless and there was no basis for a penalty. He confirmed that if the Tribunal found he had not distributed the income, he agreed the outcome should be as set out in paragraphs 8, 9.1 and 9.2 of the respondent’s submissions.
At the hearing, however, Mr Moignard also made reference to the fact that he did not feel that sufficient attention had been given previously to the proper construction of the trust deed. Ultimately, he sought an opportunity to consider and provide further submissions directed to the construction of the trust deed and was granted that opportunity.
SUBMISSIONS AFTER THE HEARING
Mr Moignard’s submissions
Mr Moignard provided further submissions on 4 May 2016. In those submissions he stated:
The Applicant maintains that the substituted amount of $89,080.09 remains excessive, and that his true taxable income for the 2008 financial year was nil as stated in his income tax assessment and objection.[12]
[12] Applicant’s submissions on rehearing after adjournment dated 4 May 2016, [5] (“Applicant’s submissions”).
He added:
The Applicant has throughout this submission limited himself to material already in evidence, however he would be able to produce additional evidence related to the novel issues raised herein if required by the tribunal.[13]
[13] Applicant’s submissions, [6].
In his written submission, Mr Moignard went on to develop a new argument, to the effect that the proceeds of the sale of the Rupert Street property were properly characterised as a capital gain, rather than income.[14]
[14] Applicant’s submissions, [7].
By reference to the trust deed, Mr Moignard submitted that “the restriction on the trustee’s power to distribute ‘by the end of the accounting period’ applies only to distributions of trust income, and not to distributions of trust capital, to which no such restriction applies”.[15] He argued that he recorded the distribution to the Wine Logistics Trust (WLT) of the proceeds from the sale of the Rupert Street property in the RS/HoCT books and records and in the RS/HoCT income tax assessment form for the 2007‑2008 year as a capital distribution, not as a distribution of trust income, and referred me to the RS/HoCT capital gains tax schedule and the HoCT financial report.[16]
[15] Applicant’s submissions, [9].
[16] Applicant’s submissions, [10].
He referred to particular provisions of the RS/HoCT trust deed and argued that the trust deed conferred upon him the power to pay out of capital at any time, without reference to any limits so long as it was prior to the vesting day of 30 June 2086.[17]
[17] Applicant’s submissions; Exhibit R1, T15/157.
Mr Moignard contended that:
the evidence available to the tribunal shows that he had determined to make a capital distribution to the WLT by virtue of his accounting records and income tax assessment lodgements (T50 at page 356, T51 at page 372). As he was distributing what he assumed to be a capital gain as a capital distribution to the WLT, he was thereby governed by the “Trusts of capital” section of the deed (T15 at page 157) and not the “Trusts of Income” section of the deed (T15 at page 156). Clause 3.4 under “Trusts of Income” had no application.[18]
[18] Applicant’s submissions, [15].
He also referred me to cl 33(1) of the deed which provides that any receipt by the trustees:
the value of which is included in the assessable income of the Trust Fund in accordance with the provisions of the Income Tax Assessment Act 1936 shall be deemed to have been received by the trustees on income account and to be income of the Trust Fund and any receipt by the Trustees of any property which is not or the value of which is not included in the assessable income of the Trust Fund in accordance with the provisions of the Act shall be deemed to have been received on capital account and to be part of the capital of the Trust Fund.[19]
[19] Applicant’s submissions, [17].
Mr Moignard asserted in his submission that the effect of this clause was “ambiguous in relation to the current situation”.[20] He went on to contend that the proceeds of the sale were not, as a matter of law, income”, but were, “rather, a capital gain “covered by CGT event A1”.[21] He proceeded to refer to the evidence relating to the events leading up to the sale of the Rupert Street property. He also went on to refer to a number of Taxation Rulings relating to when profit from an isolated transaction is treated as income. Having addressed the effect of some of the authorities and made reference to the evidence, Mr Moignard submitted that “given all the facts, this transaction was a mere realisation of the taxpayer’s asset and falls to be assessed under the CGT provisions of the Act”.[22]
[20] Applicant’s submissions, [18].
[21] Applicant’s submissions, [22].
[22] Applicant’s submissions, [93].
He continued:
The Applicant submits that the sale triggered a CGT event and should not have been characterised by the Respondent as ordinary income. Clause 33(1) operates to deem the receipt as capital of the trust fund in the trustee’s hands, and the distribution of this capital falls under clause 6.1 and 7.51 and not under clause 3.1 and eventually, the default clause 3.4.
The sale of the property from exercising the option should be characterised as CGT event A1, pursuant to section 104-10 of the ITAA 1997:
“(1) CGT event A1 happens if you dispose of a CGT asset.
(2)You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur:
(a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or
(b) merely because of a change of trustee.
(3)The time of the event is:
(a) when you enter into the contract for the disposal; or
(b) if there is no contract – when the change of ownership occurs”.[23]
[23] Applicant’s submissions, [94]‑[95].
He further continued:
The total gains from the CGT event were $480,852 as per the Capital Gains Tax schedule for 2008 – T50 at page 356 – and the net capital gain was the same as per T50 at page 358. The total proceeds were $1,315,000 and the cost base was $834,148. The valuation prior to sale was between $800,000 and $850,000.
At this point, the Rupert St Trust was not a GST registered entity (see T49 at page 339) and the disposal was not a taxable supply. Therefore, no GST should have been payable on the capital proceeds.[24]
[24] Applicant’s submissions, [97]‑[98].
In addition, Mr Moignard contended that he was eligible for “any of the four small business concessions”.[25] He continued:
Under s 152‑C, the Rupert St Trust satisfies the conditions for a 50% CGT tax reduction. Therefore, should it choose to access this reduction, its CGT liability would be halved from $480,852 to $240,426.
Under s 152‑E, the Rupert St Trust satisfies the conditions for a small business roll over as it purchased the Hundred of Comaum Vineyard within 2 years. The purchase price of the vineyard was $500,000 as per T27 at page 45 and T34 at page 253 “Memorandum of Transfer”. The Vineyard was and remains an active asset. The Applicant can roll over the $240,426 of remaining CGT liability against the purchase price of the vineyard, leaving a nil CGT liability for the 2008 financial year.
Therefore, so long as the sale of the factory was a “mere realisation” of the sole asset of the Rupert St Trust, it should have no taxation liability, and it need not make any distribution to WLT or the Applicant.[26]
[25] Applicant’s submissions, [102].
[26] Applicant’s submissions, [103]‑[105].
Mr Moignard summarised his contentions as follows:
The Applicant’s submission contains two alternative calculations each with two outcomes as to what his income should have been for the 2008 financial year:
1)The sale proceeds from the factory auction were correctly characterised by the Applicant as a capital gain and were incorrectly characterised by the Respondent as ordinary income. This inevitably leads to two possible conclusions –
a) that the Applicant’s taxation liability should have been nil due to the operation of the small business concessions available to him; or
b) that the Applicant’s taxation liability should have been nil due to the non‑operation of the default clause in relation to distributions of capital, meaning that the distribution to the WLT was validly made.
2) The sale proceeds from the factory auction were incorrectly characterised by the Applicant as a capital gain and were correctly characterised by the Respondent as ordinary income, which inevitably leads to the following outcomes:
a) that the power of the trustee to treat the receipt as capital even if assessed as ordinary income by the Respondent avoided the operation of the default clause on distributions of capital, meaning that the Applicant’s distribution to the WLT was validly made and the Applicant’s assessable income was thereby nil; or
b) that the default clause of the trust deed was brought into action and the Applicant’s taxation liability was 1/3 of that originally assessed but that the administrative penalty should be reduced to nil on the basis that no reasonable taxpayer could be expected to know that this transaction could be seen as producing ordinary income, and thus it would be unfair to categorize this error as reckless. Thus the tax payable in total should be $55,675.05.[27]
[27] Applicant’s submissions, [106].
The Commissioner’s submissions
In written submissions replying to the applicant’s submissions, the Commissioner addressed the issue of whether the profit on the sale of the Rupert Street property was capital under the trust deed. The Commissioner submitted as follows:
Clause 33 of the Trust Deed has the effect of treating the profit made on the Rupert Street property as income because the amount of the profit is included in the assessable income of the RST under section 6-5 of the ITAA 19973 unless the Trustee declared in writing within 30 days of the making of the profit or on or before the 30 June next thereafter that the provisions of the sub-clause did not operate.
Subclause 7(15) of the Trust Deed provided a power to determine whether receipts or payments from or in connection with real or personal property are to be treated as and credited or debited to income or capital.
There is no evidence that the Trustee made a declaration under Clause 33 or any determination under subclause 7(15).[28]
[28] Respondent’s Reply to applicant’s submissions on rehearing after adjournment dated 20 May 2016 (“Respondent’s reply”), [3]‑[5]; Footnote 3: “Even if the profit was on capital account, to the extent it gave rise to a net capital gain included in the trust’s net income under subsection 95(1) of the ITAA 1936 by reason of being included in assessable income under section 102‑5 of the ITAA 1997, it would also be income of the trust by reason of clause 33 of the Trust Deed”.
The Commissioner also referred to evidence supporting the proposition that Mr Moignard dealt with the profit as trustee of the RST on the basis that it formed part of the distributable income of the RST.[29]
[29] Respondent’s reply, [6].
The Commissioner also indicated “[t]o the extent that the Applicant is attempting to introduce new and different evidence in his most recent written submissions the Respondent objects and submits this is contrary to the Tribunal’s ruling regarding further evidence”.[30] The Commissioner continued:
The Commissioner contends that the profit made on the sale of the Rupert Street property forms part of the net income of the RST as defined in subsection 95(1) of the ITAA 1936 because the amount would be included in the total assessable income of the trust estate if the Trustee were a taxpayer under section 6-5 of the ITAA 1997.
The Commissioner submits that the gain was made on revenue account because the property generating the gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit (i.e. by sale of the property): Federal Commissioner of Taxation v Myer Emporium Ltd (‘Myer’) (1987) 163 CLR 199, at 209‑210.[31]
[30] Respondent’s reply, [8].
[31] Respondent’s reply, [9]‑[10].
The Commissioner summarised the effect of the authorities as follows:
The relevant principles are well established by the authorities:
The proceeds of the sale of a property will be income according to ordinary concepts if the taxpayer had an intention or purpose of profit-making by sale at the time of entering the relevant transaction. This is usually the time of acquisition of the property.
The purpose of profit-making by sale need not be the sole or dominant purpose for which the properties were acquired. It is sufficient that the purpose of acquisition for profit-making by sale is a substantial or at least not insubstantial purpose;
Where property is acquired with the intention a profit be made out of its anticipated increase in value, it does not matter if the particular means by which the profit is to be made is left for subsequent decision provided that the mode of obtaining that profit was contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised.[32]
…
Gibbs J observed in McCormack v FCT (1979) 143 CLR 284 at 302 that:
if the taxpayer’s evidence of the purpose with which he acquired the property is not accepted, and it does not appear from the other evidence on the balance of probabilities that he did not acquire the property for the purpose of profit-making by sale, he will fail to discharge his onus of proof.[33]
[32] Respondent’s reply, [11]; see: Myer at 210; Commissioner of Taxation v Cooling (1990) 22 FCR 43, at 51‑57 per Hill J (with whom Lockhart and Gummow JJ agreed), Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333, per Hill J at 342‑345 (with whom Lockhart and Gummow JJ agreed); Steinberg v Commissioner of Taxation (1975) 134 CLR at 670, 699‑700 and 704‑705, and Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897.
[33] Respondent’s reply, [12].
The Commissioner further submitted:
that the Rupert Street property was acquired by the Trustee of the RST in a commercial transaction for the purpose of profit-making by sale based on an objective analysis of the facts having particular regard to the following matters:
The Applicant as trustee for the RST entered into the contract for the purchase of the Rupert Street property with the intention of immediately selling the property as evidenced by:
—the fact that the Exclusive Auction Authority was entered into on 29 June 2007, being the same day the Applicant as Trustee of the RST had contracted to buy the property …;
—the Applicant’s evidence in chief that he intended to sell the property at the time he acquired the Rupert Street property as trustee of the RST and acquisition of the property with the intent of sale initially constituted the entire reason for the existence of the RST;
A substantial or at least not insubstantial purpose of the Applicant was to make a profit from the sale of the Rupert Street property as can objectively be inferred from the following evidence;
—The Applicant as Trustee of the RST acquired the property at the price of $730,000 per the option agreement … assigned to the Applicant;
—Shortly thereafter the Applicant identified a reserve price for the property in the Exclusive Auction Authority of $1,000,000 dollars;
—The Agent’s estimate of selling price in the Exclusive Auction Authority was between $950,000 and $1,050,000;
—The Applicant had obtained a valuation of the Rupert Street property in July 2006 that valued the property at $925,000 …;
—The financier that had provided short term finance for the transaction valued the property at $1.1 million dollars and the Applicant characterised it as “a safe transaction for the financier” ...;
—The transaction was a commercial transaction for the Applicant as trustee of the RST for the reasons given above and in the context of the wider business objectives of the Applicant for his entity group.[34]
[34] Respondent’s reply, [13] (citations omitted).
With respect to small business concessions, the Commissioner submitted that:
even if the Tribunal found that the profit on the sale of the Rupert Street property were on capital account there is insufficient evidence to establish that the small business concessions in Division 152 of the ITAA 1997 would be available to the Trustee of the RST to reduce any net capital gain arising.[35]
[35] Respondent’s reply, [14].
Mr Moignard’s reply
In his submissions in reply, Mr Moignard contended that the sale of the business’s factory was “an isolated mere realisation of an asset and not part of the taxpayer’s business”.[36]
[36] Applicant’s reply to respondent’s submissions on rehearing after adjournment dated 3 June 2016, (“Applicant’s reply”), [5].
With respect to the absence of a declaration under cl 33 or a determination under cl 7(15), Mr Moignard pointed to the fact that the proceeds were recorded as capital in the contemporaneous books and records of the trust in 2007.[37] He contended that:
The Respondent relies upon
1)A Certificate created by the Applicant as part of his objection in 2011 (which concerned the s101 deeming provision) that mistakenly refers to clauses 3(1)(a) and 3(1)(f) and which should in fact have referred to clause 3 under the alternative heading, “Trusts of Capital”,[38] and
2)The 2007-2008 Financial Report for the RST which reports other income at page 602 of T67, as it should, and then clarifies the meaning of income on page 609 where it reads “Income – Capital Gain (loss) on Sale of Non-current Assets - $397,304”.[39]
[37] Applicant’s reply, [7].
[38] Exhibit R1, T65, p 598.
[39] Applicant’s reply, [8].
He contended that:
All contemporaneous financial records of the trust state that the gain on the sale of the factory was regarded by the trustee as a capital gain on the capital account.[40]
[40] Applicant’s reply, [9].
Mr Moignard also pointed out that the question of whether the proceeds were capital or income had not been in issue at any point prior, and asked the Tribunal to revisit its ruling with respect to fresh evidence on the basis that it was unfair not to receive further evidence “after it has become clear that the issues between the parties have significantly changed”.[41]
[41] Applicant’s reply, [20].
He contended:
It is clear that the RST trustee intended the gain to be treated as capital in nature and the Respondent has failed to provide sufficient evidence to overturn this. Therefore, regardless of the outcome of the income versus capital debate, the trust deed clauses under the heading “Trusts of Income” could not operate including the default clause the Respondent relies so heavily upon, and the Applicant has no liability under them.[42]
And:
The Respondent’s main argument against the capital nature of this isolated mere realization is the series of valuations received prior to the auction – none of which even approached the actual auction price achieved.
The Respondent fails to appreciate the uncertainty of such a transaction and also fails to take into consideration the “sunk costs” on improvements made prior to the auction, the high commissions payable, the enormous short term financing costs, the wildly inflated prices quoted by agents touting for listings and the limited time available with which to execute the option and repay the financiers.
All of these factors weigh against the Respondent’s theory, which more than anything depends upon an impossible foreknowledge of the Applicant as to the price that would eventually be obtained.[43]
[42] Applicant’s reply, [13].
[43] Applicant’s reply, [14]‑[16].
Mr Moignard also contended that “[i]n relation to evidence for the availability of these CGT concessions, it is suggested that what is required, if anything, is very limited and could easily be supplied in documentary form”.[44] Mr Moignard also submitted:
It is on this basis that the Respondent (sic) submits that further oral submissions may assist the Tribunal to resolve this matter on the new matters in issue and, failing consent to the Applicant’s position by the Respondent or a decision in favour of the Applicant’s interests by the Tribunal, any other outcome would be incomplete without this opportunity.[45]
[44] Applicant’s reply, [19].
[45] Applicant’s reply, [21].
FURTHER SUBMISSIONS
Having considered these submissions, it became apparent to me that before addressing the substance of Mr Moignard’s new argument, it was necessary to consider whether I should grant him leave to introduce the issue at such a late stage in the proceedings. That question arises by reason of s 14ZZK of the Taxation Administration Act 1953, which provided at the relevant time as follows:
14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving that:
(i)if the taxation decision concerned is an assessment (other than of franking assessment or a starting base assessment) – the assessment is excessive; or
(ii)if the taxation decision concerned is a franking assessment or a starting base assessment – the assessment is incorrect; or
(iii)in any other case – that the taxation decision concerned should not have been made or should have been made differently.
I accordingly wrote to the parties on 21 December 2016, inviting their submissions with respect to whether leave was required. I also asked the Commissioner to indicate whether the Commissioner consented to leave being granted, and “If leave is granted, why the Commissioner says it would not also be appropriate to allow Mr Moignard an opportunity to introduce any additional evidence he wishes to rely upon and/or to develop his submissions in support of this new argument orally”.
Against the possibility that leave was granted, I also invited submissions with respect to the new argument raised by Mr Moignard, that the proceeds from the sale of the property should be characterised as capital rather than income.
In reply, the Commissioner acknowledged that leave was required for Mr Moignard to rely on the “capital argument” and indicated that the Commissioner did not consent to leave being granted. The Commissioner further indicated that if leave was granted, he opposed the applicant adducing further evidence or making further oral submissions. The Commissioner stated “[t]he argument (if it is allowed to proceed) can be made by the applicant in writing”.
The Commissioner acknowledged that with respect to the need for further evidence:
The one exception will arise if the Tribunal were to determine that the gain was on capital account: it is likely then that there is insufficient evidence to permit the Tribunal to reach a view as to the extent to which (if at all) the small business concessions in Division 152 of the ITAA 1997 would apply to reduce the assessable gain. The Commissioner submits however that the Tribunal will not reach the point of considering the application of the concessions as it is abundantly clear that the relevant gain had the quality of a revenue receipt. [46]
[46] Respondent’s correspondence dated 8 February 2017 (“Respondent’s correspondence”), [3].
The Commissioner also added:
if leave is granted, the Tribunal will need to consider whether the profit is included in the net income of the trust for section 95 purposes as a concessionally taxed capital gain or as a revenue receipt as this will affect the quantum of the amount that falls to be taxed. This is so regardless of whether the Tribunal accepts the Commissioner’s construction of the Trust Deed and, in particular, the proposition that there is income within the meaning of the deed (and therefore an amount to which a beneficiary can be presently entitled within the meaning of section 97) so long as there is an assessable profit amount (whether on income or capital account).[47]
[47] Respondent’s correspondence, [5].
For his part, Mr Moignard submitted that it would be unjust not to allow him to agitate the “capital argument”, explaining that the argument:
was not raised in the Applicant’s original objection because the Applicant was objecting to a series of detailed, multi-page “Reasons for Decision” documents issued by the Respondent, not a bare amended assessment or adjustments sheet.[48]
[48] Applicant’s correspondence dated 18 February 2017 (“Applicant’s correspondence”), p 1.
Mr Moignard directed my attention to decisions of the Federal Court to support the proposition that leave should be granted to apply justice between the parties and to ensure the substantial issues are determined.[49]
[49] McLean v Federal Commissioner of Taxation (1996) 66 FCR 106,116.
Mr Moignard contended:
if leave is not granted for the Applicant to refute the Respondent’s “default clause” argument by the introduction of the “capital versus ordinary income” argument, injustice will have occurred and the substantial issues will not have been determined – fundamentally through the failure of the Respondent to follow the practice and procedure of the Tribunal. The Respondent failed to direct the Applicant to the issues that the Respondent would raise. Indeed, in this case the Commissioner has inadvertently led the taxpayer down a wholly irrelevant “rabbit hole”.[50]
And:
While it is true that the Applicant’s “capital versus ordinary income” argument was not raised at the original hearing, the Applicant submits that neither was the respondent’s “default clause” argument validly argued – it is not referred to in the member’s judgement and Applicant was given no opportunity in writing prior to the hearing to assess it whatsoever. Had this occurred, the Applicant’s argument would have appeared earlier.[51]
[50] Applicant’s correspondence, pp 3‑4.
[51] Applicant’s correspondence, p 4.
Mr Moignard further contended:
Determining that this case cannot be comprehensively dealt with unless the “capital versus ordinary income” argument is heard necessarily entails granting leave to introduce relevant evidence. In any event, the Applicant says that all the relevant documents are already in evidence and no further oral evidence is required to be given (unless required by the Tribunal).[52]
And:
The Applicant further notes that should leave not be granted, he should not be prevented from raising the “capital versus ordinary income” argument in a new objection against the same assessment as res judica [sic] will not apply to an issue not argued. Also, where an objection decision has been made in relation to a particular in an original assessment a taxpayer may object against that assessment in relation to a different particular and the Commissioner would not be functus officio – TR 2011/5.
Therefore, should the Tribunal disallow the “capital versus ordinary income” argument, the Applicant seeks leave to object out of time to raise this issue in a new objection against this amended assessment.[53]
[52] Applicant’s correspondence, p 5.
[53] Applicant’s correspondence, p 5.
Mr Moignard has further submitted:
Given the long and torturous history of this objection, it would seem inefficient to force the parties back to the beginning over the remaining disputed taxation amount – which has dwindled to some $80,000 from the original $480,000 demanded by the Respondent. The Applicant submits the matter should be determined by the Tribunal utilizing all the means it has open to it so as to do justice between the parties, and justice in this case cannot mean willfully ignoring the “capital versus ordinary income” argument it has already received – especially if procedure demands that this argument will never otherwise find a means to be heard.[54]
[54] Applicant’s correspondence, p 5.
ISSUES
Having regard to all of the above, the issues which now fall for my determination include the following:
(i)Whether I should grant leave to Mr Moignard pursuant to s 14ZZK to rely upon the “capital argument”?
(ii)If so, whether I should also grant leave to allow Mr Moignard to provide further evidence or oral submissions and/or convene a further hearing?
(iii)If the “capital argument” is permitted, whether the proceeds of the sale of the Rupert Street property are properly characterised as “capital” or “income”?
(iv)If they were properly characterised as income, whether any part of that income was assessable in Mr Moignard’s hands in the 2007‑2008 tax year, in particular by reference to the default clause in the relevant trust deed; and
(v)If so, what, if any, administrative penalty should apply?
SHOULD LEAVE BE GIVEN UNDER s 14ZZK?
Relevant history
As Mr Moignard has pointed out, this matter has had a “long and torturous history”.
Mr Moignard’s tax liability for the 2007‑2008 year was first determined by the Commissioner in a decision dated 23 April 2010.[55] In that decision, the delegate acknowledged that one of the issues (Issue No.2) was:
Is the profit derived from the sale of the property at … for the year ended 30 June 2008 to be treated as income under ordinary concepts pursuant to subsection 6‑5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
[55] Exhibit R2, T42/284.
With respect to this issue, the delegate determined that the proceeds were ordinary income, although the delegate acknowledged the alternative argument:
For completeness, it is also noted that there is a possible alternative view that the profits or gains treated as income under Issue No.2 could instead be capital gains. While this is not the Commissioner’s preferred view, it is noted that the outcome would be the same as under paragraph 95 as you would still be assessable on the whole of the amount of the capital gains arising from the commercial property under Section 97 as a beneficiary of the Rupert Street Trust.[56]
[56] Exhibit R2, T43/298.
The delegate also noted in a footnote “the profit derived on the sale of the Rupert Street property appears to be reported as a capital gain of $397,304 in the financial report and trust tax return provided at objection”.[57]
[57] Exhibit R1, T2/13 at Footnote 21.
In his original objection, dated 5 April 2011, Mr Moignard did not object to this aspect of the assessment, indicating:
In particular, I am objecting to your decisions on issue number 3 in your “Reasons for our decision dated 23 April 2010, and issue number 1 in your “Reasons for our decision dated 9 February 2011”.
While I do not agree with the Commissioner’s findings on most of the other issues raised, it seems that a successful reconsideration of this issue will resolve the tax related liability without recourse to detailed objections as to the balance.[58]
[58] Exhibit R1, T7/95.
In the objection decision issued on 4 April 2011, the delegate noted:
In your objection, you have not disputed the Commissioner’s decision to treat the profit derived on the sale of the Rupert Street property as ordinary income of the Rupert Street Trust under section 6‑5 of the ITAA 1936. Therefore, the Commissioner’s decision in relation to this issue will stand.[59]
[59] Exhibit R1, T2/13.
The initial hearing before Senior Member Dunne in November 2013 also proceeded on the basis that the proceeds were ordinary income, and this issue was not raised in the context of the appeal heard by White J in February 2015 (and nor could it have been). I note Mr Moignard was legally represented in the Federal Court proceedings.
In some of his submissions, Mr Moignard has indicated that the “capital argument” has been raised by him in response to the Commissioner’s late reliance upon the “default clause argument”. However, as I indicated in my interlocutory decision in Moignard and Commissioner of Taxation [2015] AATA 841, in my view the “default clause argument” was squarely raised by the Commissioner at the original hearing:
As I have indicated above, based on my review of the transcript of the hearing of 26 November 2013, I have concluded that Ms Clark clearly articulated the Commissioner’s alternative argument based on the default provisions of the trust deed, in combination with the absence of any distribution of the relevant trust income during the 2007/2008 tax year. In addition, Mr Moignard addressed both in his evidence and submissions, the question of what distributions were made from the RST at the relevant time, and when he made those distributions. He also addressed the issues of what the amount of the distributions was and how they were recorded.
Mr Moignard not only gave evidence on all of those topics, on my reading of the transcript, he also understood that the question of what distributions were made was potentially relevant to the application of the trust deed, including the default clause. More importantly, he was given every opportunity to explain what the correct factual position was during the relevant tax year.[60]
[60] Moignard and Commissioner of Taxation [2015] AATA 841, [54] and [55].
I note that the default clause argument was acknowledged by the previous Tribunal in its Reasons for Decision.[61] The Federal Court also noted that at the Tribunal hearing, “counsel for the Commissioner submitted expressly that, if it was found that Mr Moignard had not made a distribution to himself personally, then the Commissioner relied upon the default distribution provision in clause 3(4) and (5) of the trust deed”.[62]
[61] Moignard vFederal Commissioner of Taxation [2014] AATA 342, [68].
[62] Federal Commissioner of Taxation v Moignard, (2015) 228 FCR 456, 470, [62].
Nevertheless, Mr Moignard did not raise the “capital argument” at any time before the substantive hearing before me on 29 February 2016, or at that hearing. It first emerged in his written submissions after that hearing, in the circumstances outlined above.
Competing considerations
I must of course exercise the discretion given by s 14ZZK having regard to the relevant considerations and applicable principles,[63] and the purpose of the provision, being in part to avoid injustice.[64] However, I must also do so in highly unusual circumstances where some of the competing considerations are of a kind which do not often arise.
[63] Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148, 156.
[64] McLean v Federal Commissioner of Taxation (1996) 66 FCR 106.
I acknowledge that there are some relevant considerations weighing in favour of granting leave to Mr Moignard to introduce his new argument, even at such a late stage. These include:
(a)In his original objection, he expressed disagreement with other aspects of the Commissioner’s assessment, beyond those he formally objected to. However, he did not fully articulate his other possible objections, apparently because he believed his formal objections, if accepted, would result in a nil assessment;
(b)The issue is a fundamental one and the Commissioner acknowledges that if Mr Moignard’s argument is accepted, this may significantly change the assessment. It follows that determining the “default clause” issue without first addressing this issue may not result in the correct outcome and could ultimately prove to have been a wasteful exercise;[65]
(c)The Commissioner has not indicated that he is not in a position to address the argument, and has attempted to do so;
(d)From the point of view of convenience and efficiency, there are likely to be advantages to the Tribunal addressing this issue as part of this application, rather than leaving it to Mr Moignard to potentially raise it in a separate objection; and
(e)Mr Moignard has not been legally represented in the context of the Tribunal proceedings, although he was in the Federal Court proceedings.
[65] Clough v Frog (1974) 4 ALR, 615, 618.
However, there are also a number of weighty considerations which tend to militate against granting leave. These include:
(a)Mr Moignard has raised this issue for the first time in written submissions filed after:
- the original hearing;
- the Federal Court appeal; and
- the final hearing in the remitted matter.
In my view, there is a strong argument to say that the introduction of a completely new substantive argument (inconsistent with the arguments previously put)[66] after the completion of not one but two substantive Tribunal hearings and a Federal Court appeal is inconsistent with the objective behind s 14ZZK, and would tend to defeat the intention of that provision, as well as further delaying the determination of an already protracted matter which has now been on foot for five years. In this context, I note that the current less permissive approach to the power of amendment in litigation is applicable to the s 144ZK discretion.[67] I also note the observation of the High Court in Aon Risk that “[m]uch may depend upon the point the litigation has reached relative to trial when the application to amend is made”;[68]
(b)The Federal Court has ordered that, other than with leave of the Tribunal, no new evidence is to be adduced in this matter. I have also already ruled that, aside from a particular document, leave would not be given to introduce other new evidence. It would be inconsistent with what was contemplated and intended by each of those rulings for leave to now be given to Mr Moignard to introduce evidence directed to the “capital argument”, including as to his intentions in purchasing and selling the Rupert Street property. As I observed in my interlocutory ruling in this matter, one of the purposes of the Court’s order is likely to have been to avoid a situation in which evidence may be given in circumstances where it may be influenced or seen to be influenced by a desire to support a particular legal argument. That would clearly be a risk if leave was given to Mr Moignard to introduce new evidence now;
(c)If leave were granted to put the new argument, but not to introduce further evidence, this would give rise to a very untidy and in many ways unsatisfactory situation. Whilst he has indicated that the new argument can be dealt with on the existing evidence, to some degree Mr Moignard has already attempted to introduce new evidence in the course of his written submissions. Mr Moignard has asserted relevant factual matters at paragraphs [24], [25], [26], [27], [28], [29], [30], [31], [32], [33], [34], [35], [36], [37], [38], [39], [40] and [41] of his “Submission on Rehearing After Adjournment”. Some of those factual assertions are supported by reference to documents which are already in evidence, but many are not. The factual assertions made include statements as to his state of mind and intentions at the time of and preceding the sale of the Rupert Street property, and there is a degree of inconsistency between some of those assertions and his evidence at the original hearing.[69] In his submissions following the substantive hearing before me, Mr Moignard also requested an opportunity to provide fresh evidence directed to the “capital argument” and submitted that it would be unfair for the Tribunal not to receive further evidence given the significant change in the issues;[70]
(d)Mr Moignard is legally trained and has a sophisticated understanding of the tax law;
(e)Noting that the High Court in Aon Risk held that the exercise of the discretion will require a satisfactory explanation,[71] Mr Moignard’s explanation for the delay in raising the issue is not especially convincing (given the Commissioner first raised the “default clause” argument at the original Tribunal hearing);
(f)As Mr Moignard has acknowledged, a refusal of leave would not leave him with no opportunity to pursue this issue should he wish to. As the “capital argument” was not raised in his original objection, it is my understanding that he could raise this in a fresh objection to the original assessment, albeit he would be out of time and require an extension.[72] I acknowledge this is an inferior remedy from his point of view, but he would not be left in a position where he could no longer pursue the argument at all;
(g)Notwithstanding the above possibility of a fresh objection being lodged, the Commissioner does not consent to the Tribunal also dealing with this issue, and objects to further evidence being introduced;
(h)Both parties acknowledge that if leave were granted and Mr Moignard’s argument was accepted, there would potentially be a need for further evidence, at least with respect to the small business concessions issue; and
(i)Granting leave would carry with it the possibility of an outcome being arrived at which is inconsistent with Justice White’s decision in the Federal Court appeal.
[66] For example, in the Federal Court proceedings counsel for Mr Moignard initially argued that the certificate “could be regarded as a certificate to which cl 3(2)(f) of the trust deed referred: Federal Commissioner of Taxation v Moignard (2015) 228 FCR 456, 473.
[67] Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; Lewski v Commissioner of Taxation [2017] FCAFC 145, [126].
[68] At [102].
[69] Respondent’s reply, [8].
[70] Applicant’s outline of proposed additional evidence, [20].
[71] Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175, 215, [102].
[72] Taxation Ruling TR 2011/5, [33]; Taxation Administration Act 1953, s 14ZW.
Ultimately, one of the most important considerations, in my view, is the practical effect of granting leave.
If the “capital argument” could fairly and appropriately have been dealt with on the basis of the existing evidence, there may have been a reasonable argument for granting leave, even at such a late stage. However, in my view, if leave were granted to introduce this argument now, as a matter of fairness leave would also need to be granted to allow Mr Moignard to adduce further evidence of the kind he has alluded to in his written submissions, and so as to allow the Commissioner to test that evidence. Granting leave would therefore entail a further exchange of material and contentions, and yet another substantive hearing directed at exploring Mr Moignard’s purpose in purchasing the property, and other matters relevant to the “capital argument” which were not centrally relevant to the issues previously agitated. There is a serious risk in my view that if I were to attempt to determine the capital argument without further evidence, this would entail unfairness to the losing party.
However, given this application has already been on foot for five years, and in the circumstances outlined above, it is untenable in my view for the Tribunal to now embark on the process which would be required to allow the new argument to be properly and fairly considered, namely receiving further evidence and submissions, and convening a further hearing.
That being the case, and having regard in particular to the history of the matter, the orders made by the Federal Court, the Commissioner’s position, and the very late stage at which the issue has been raised, I have decided not to grant leave to Mr Moignard to introduce the “capital argument”.
WHAT IS MR MOIGNARD’S TAX LIABILITY?
Section 97 of the Income Tax Assessment Act 1936 relevantly provides as follows:
Beneficiary not under any legal disability
(1)Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
(a)the assessable income of the beneficiary shall include:
(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.[73]
[73] Income Tax Assessment Act 1936, s 97(1).
As I have already noted, in its decision on the appeal, the Court characterised the issues for determination by the Tribunal as follows:
Having regard to the burden of proof on Mr Moignard, the elements of present entitlement for the purposes of s 97, and the provisions in the trust deed, it was necessary for Mr Moignard to satisfy the AAT that:
(a)he had not made a “determination” of the kind contemplated by clause 3 before the end of the 2007-2008 year to “pay, apply or set aside” the income of the RS/HoCT for his own benefit;
(b)he had before the end of the 2007-2008 year made a valid determination as to the payment, application or setting aside of the trust income to some other beneficiary (so that the default provision in clause 3(4) of the trust deed which would have resulted in him having one-third of the net income was inapplicable).[74]
[74] Moignard (2015) 228 FCR 456, [57].
The Commissioner now contends that no appointment or accumulation of trust income was validly made pursuant to the terms of the trust deed during the relevant period, that is, before the end of the 2008 financial year.
At the hearing before Senior Member Dunne, Mr Moignard claimed that he had made a determination to distribute the net income of the RST to the WLT, and this was later evidenced by a certificate signed by Mr Moignard in April 2011.[75]
[75] Exhibit R3, T105/772.
In his submissions provided in advance of the substantive hearing before me, Mr Moignard confirmed that his primary argument remained that “he did in fact effectively distribute all of the net trust income of the RS/HOCT to the Wine Logistics Trust”.[76] However, his alternative argument was that “if the default clause of the trust deed did operate, the amount assessed by the Commissioner was excessive being $51,671.10 versus $195,814.20”.[77] Mr Moignard concluded those submissions with a paragraph which suggested that he was not in fact contesting or resisting the Commissioner’s revised position based on the default clause argument:
In conclusion, the taxpayer’s objection, when read in the light of the Commissioner’s withdrawal of the s.101 argument and its replacement with the default clause argument, coupled with the inclusion of the taxpayer’s acceptance of both the default clause operation and the quantum of tax payable under it, leaves an assessment that cannot be anything but excessive. It stands, demanding tax of $430,903.29, on legs that support only $51,671.10.[78]
[76] Applicant’s submission on rehearing dated 26 February 2016 (“Applicant’s submission on rehearing”), [18].
[77] Applicant’s submission on rehearing, [18].
[78] Applicant’s submission on rehearing, [52].
However, at the hearing on 29 February 2016, he again reiterated that his primary argument was that he did demonstrate an intention to distribute the whole of the net income of the trust, although he did not develop that submission or refer to any evidence in support of it.
It follows from the position ultimately adopted by Mr Moignard at the hearing that it is necessary for me to formally determine all of the relevant issues.
Was there a valid distribution of trust income under cl 3(1) of the trust deed, during the 2007‑2008 year?
I note the respondent submits that:
no valid determination by the Applicant as trustee of the RST was made during the 2008 year, either to pay, apply or set aside, or accumulate any of the income of the trust for that year. In fact, no decision was made at all about how to treat the profit derived by the RST from the sale of the …property forming part of the trust income until after the accounting period had expired.[79]
[79] Respondent’s submissions, [27].
The respondent further submits:
The Applicant’s written resolution made in April 2011 (Exhibit R3, T105) was not effective to appoint income of the trust for the 2008 year because it was made after the relevant accounting period (ending 30 June 2008). Similarly the Respondent submits the “certificate” dated 4 April 2011 (Exhibit R3, T65) is not evidence of a distribution during the accounting period.[80]
[80] Respondent’s submissions, [28].
I have also had regard to the following matters, noted by White J in his reasons:
(b)Mr Moignard's claim at [140] of his final submission that some of the proceeds of the cheque of $822,435.56 had been “loaned” to other group entities and recorded in the books and records of those entities as trust funds of the RS/HoCT, is, on one view, inconsistent with his having made a determination or determinations to distribute all the proceeds to the WLT.
(c)Mr Moignard's claim at [148] of his final submission that there were “loans” from the RS/HoCT funds to himself in his personal capacity to pay off credit card debts and the like, is a matter which, if true, was seemingly inconsistent not only with the distribution of the moneys to Mr Moignard in his personal capacity but with the distribution of the whole of the funds to the WLT.
(d)Mr Moignard's claim at [162] of his final submission that he had intended the RS/HoCT, as at 1 January 2008, “to have absorbed” the WLT business and his claim at [171] that “the [WLT] business was effectively merged into the [RS/HoCT] in 2008”. In his cross-examination Mr Moignard said that he held the view that “I was combining the wine businesses into one trust”. In addition, Mr Moignard had provided the Commissioner with documents indicating that there may have been a transfer in 2008 of the business of WLT to the RS/HoCT. In 2010 the Commissioner rejected Mr Moignard's claim that there had been a merger of the two trusts, but Mr Moignard's asserted belief in 2008 was seemingly inconsistent with him having made a determination at that time to distribute assets from the RS/HoCT to the WLT. If there had been a merger or a transfer of WLT's business including its liabilities, a distribution of income would not have been necessary because the losses of the WLT could then have been offset against the net income of the RS/HoCT.
(e)Mr Moignard acknowledged at [185]-[187] of his final submission that some $26,207.56 had been paid from the NAB Classic Banking Account to himself personally as “loans, distributions to and payments on behalf of Stephen Moignard in his personal capacity” and at [191]-[193] that there had been “loans” of other amounts to him in his personal capacity. On its face this seemed to be an admission that at least some of the net income of the RS/HoCT had been distributed to himself.
…
(j)The fact that some of the payments from the RS/HoCT were recorded (apparently contemporaneously) as “loans” to the WLT, a circumstance which is seemingly inconsistent with the net income of the RS/HoCT having been distributed to the WLT.[81]
[81] Federal Commissioner of Taxation v Moignard, [67].
I note that in the context of the rehearing, Mr Moignard has not sought to engage with the points noted by His Honour, or contend that the evidence referred to did not support a conclusion that no valid determination was in fact made during the 2007‑2008 year.
Having reviewed the evidence relevant to this issue, and having regard to the respondent’s submissions, the observations made by his Honour, and in the absence of any further submissions from Mr Moignard directed to these issues, I have ultimately concluded that there was no valid distribution of the trust income pursuant to s 3(1) of the deed during the 2007‑2008 financial year.
Mr Moignard has consistently relied on the certificate created in April 2011 in support of his assertion that the whole of the net profit from the sale was distributed to the WLT. The terms of that certificate were:
CERTIFICATE
Issued by the Trustee of the Rupert St Trust
This certificate evidences my intention to distribute the whole of the net proceeds of the sale of the property at … Collingwood to the Wine Logistics Trust as per clause 3(1)(a) and 3(1)(f) of the trust deed, effective for the 2007-2008 financial year.
Signed
Stephen Moignard
Date 4 April 2011
However, that certificate was created long after the year in question and much of the contemporaneous evidence is inconsistent with it. That evidence includes Mr Moignard’s evidence that some of the proceeds of the sale were applied for his personal benefit, and evidence that some of the proceeds were loaned to the WLT.
Mr Moignard has also relied on a trustee’s resolution signed by him resolving that the net income (said to be $384,242.00) of the RS/HoCT be applied for the benefit of the WLT. Mr Moignard has claimed that the funds were “allocated as per that resolution”. Again however, that resolution was not made until well after the end of the relevant accounting period (ending 30 June 2008), and therefore could not amount to a “determination” for the purposes of cl 3(4). The resolution was undated, but Mr Moignard has acknowledged that it was not made until 2011.
I am therefore not satisfied there was a valid distribution of the net income of the trust which was effective to avoid the operation of the default clause.
I have further concluded that the default clause, being cl 3(4) of the deed, was thereby enlivened such that Mr Moignard was entitled, subject to an effective disclaimer, to one‑third of the net income for that financial year.
Was there an effective disclaimer?
For a disclaimer to be effective, a beneficiary must have knowledge of the entitlement disclaimed. For instance, in the Full Federal Court decision of Federal Commissioner of Taxation v Ramsden (2005) 58 ATR 485 at 492, Lee, Merkel and Hely JJ held that a beneficiary may only disclaim an entitlement “on its coming to his or her knowledge”.[82] In fact, the requisite knowledge required is “full knowledge”, as the House of Lords said in Lady Naas v Westminster Bank Ltd [1940] AC 366, 400:
If [a disclaimer] is alleged, the Court must be satisfied that it is fully proved by the party alleging it, who must also establish that it was made with full knowledge and with full intention.
[82] Their Honours had essentially adopted the language of Davies, Sheppard and Hill JJ in Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347, 1349.
The disclaimer must also be made within a reasonable time of becoming aware of the entitlements as the Full Federal Court held in Ramsden:
A donee may indicate acceptance of a gift by positive conduct. In addition, if a donee knows of a gift, and does not disclaim it within a reasonable period of having regard to the circumstances of the particular case, the donee is ordinarily treated as tacitly accepting it: J W Broomhead (Vic) Pty Ltd (In Liq) v J W Broomhead Pty Ltd [1985] VR 891 at 930-931.[83]
[83] Federal Commissioner of Taxation v Ramsden (2005) 58 ATR 485 at 492, 496 at [53]..
In the Commissioner’s submissions on rehearing, it was submitted that there was no effective disclaimer as:
31.1First and foremost it is inconsistent with the operation of the default clause in the trust deed;
31.2 It was not made within a reasonable time;
31.3It was inconsistent with the Applicant’s knowledge of how the proceeds from the sale of the … property were in fact paid out during the 2007‑2008 year, and his acknowledgement that at least a portion of the funds were paid to him personally (Exhibits A1 and A2 and [185] and [187] of his final submissions).[84]
[84] Respondent’s submissions, [31].
Again, Mr Moignard did not engage with those issues in the context of the rehearing and did not seek to answer or rebut the arguments put by the respondent.
I have ultimately concluded that I accept the respondent’s submissions on this issue. On my findings, Mr Moignard was entitled to one‑third of the proceeds of the sale of the Rupert Street property and his two children were each also entitled to a third. His disclaimer purports to disclaim the “purported distribution of funds” from the sale of the property “to me in my personal capacity for the financial year ending 30 June 2008 of which I became aware on the 11th of February 2011”.[85]
[85] Exhibit R3, T66/599.
On analysis, that “disclaimer” does not relate to Mr Moignard’s actual share of the trust income and is clearly not made on the basis of an understanding of the operation of the deed or the share of the trust income to which he was entitled. As the purported “disclaimer” is not made on the basis of a correct understanding of the true position, in my view it is not effective to disclaim Mr Moignard’s entitlement to a third of the trust income for the 2007‑2008 year. In order to be effective, the disclaimer would have to indicate or be made on the basis of an understanding as to what Mr Moignard’s entitlement actually was.
Further, I note that “a beneficiary may disclaim an entitlement on its coming to his or her knowledge”. The difficulty in this situation is that Mr Moignard’s true entitlement did not come to his knowledge before making the disclaimer. It follows, in my view, that the disclaimer cannot be effective.
As I am satisfied that the disclaimer was not effective for these reasons in any event, it is unnecessary for me to specifically address the respondent’s submissions that it was not made within a reasonable time and was inconsistent with Mr Moignard’s knowledge as to how the proceeds of the sale of the property were in fact paid out.
What was the amount of Mr Moignard’s income from the RST during the 2007‑2008 year?
The respondent now contends that Mr Moignard’s taxable income for the 2008 income year was $160,158. That figure is based on a finding that the net profit arising from the sale of the Rupert Street property was $480,476.25.[86] One‑third of that amount is $160,158.75.
[86] The costs taken into account are reflected in the Respondent’s Statement of Facts, Issues and Contentions dated 4 July 2013, [99] and Exhibit R1, T2/72.
In the context of the rehearing, Mr Moignard did not dispute that figure. The respondent has calculated the tax payable on that amount (plus Medicare levy and Medicare surcharge) as $55,675.05,[87] and Mr Moignard also does not dispute the correctness of this assessment based on an income amount of $160,158.75.
[87] Respondent’s submissions, [9.2].
Accordingly, having regard to the material before me and the positions of both parties, I have concluded that Mr Moignard’s income for the 2008 income year was $160,158.75 with the tax payable on that amount being $55,675.05.
What is the appropriate administrative penalty?
The respondent has contended that the applicable administrative penalty should be $33,405.04, comprised of a penalty of 50% on the tax shortfall of $27,837.53, and a 20% uplift of $5,567.51. The 50% penalty is based on recklessness and the respondent says that “the applicant is liable to an increase in the penalty of 20% because he had a prior imposition of a Taxation Administration Act 1953 (TAA) s 284‑75(1) shortfall penalty (in respect of the 2001 income year)”.[88] Mr Moignard strongly resists the imposition of a penalty, contending that he was not reckless in declaring his income to be nil.
[88] Respondent’s submissions, [10.2].
With respect to the base penalty amount, I note that a penalty of 25% will apply where the tax shortfall was a result of failure by a taxpayer or their agent to take reasonable care to comply with a tax law.[89] A 50% penalty applies where the tax shortfall was a result of recklessness by a taxpayer or their agent as to the operation of a tax law.[90]
[89] Item 3, s 284‑90(1) of Schedule 1 to the Taxation Administration Act 1953.
[90] Item 2, s 284‑90(1) of Schedule 1.
There is no doubt that Mr Moignard’s taxation affairs at the relevant time were complex. The respondent has now acknowledged that the Commissioner’s own analysis and assessment with respect to those affairs were flawed, resulting in a substantial over‑assessment of Mr Moignard’s tax liability. Determining the correct tax liability depended in part on correctly construing the provisions of the trust deed. As canvassed above, an issue also arose as to the correct characterisation of the proceeds of the sale, and whether the net profit was income or a capital gain.
The fact that Mr Moignard did not declare any income was based on a number of factors, including that he does not appear to have correctly understood the effect of the deed or that any distribution of income needed to be made within the relevant financial year. Part of Mr Moignard’s approach also seems to have been an assumption that after the end of any given financial year, profits and losses between different trusts could be offset and income attributed to different trusts in a way which was advantageous for tax purposes. His approach seems to have overlooked the fact that the income of the RST was required to be determined and distributed during the course of each financial year, in order to avoid the operation of the default clause.
Notwithstanding the complexity of his affairs, and the difficulty of accurately interpreting the trust deed, I am satisfied on balance that the shortfall arising on my findings can fairly and properly be said to arise from a failure to take reasonable care to comply with the tax law. The nil amount declared by Mr Moignard appears to have been based on a belief on Mr Moignard’s part that he had effectively distributed all of the net trust income to the WLT, notwithstanding the absence of any determination during the relevant year, and the matters referred to by White J, including that some of the proceeds were received by him in his personal capacity. In my opinion, that view of Mr Moignard’s affairs was not soundly based and it follows that the shortfall I have determined has arisen by reason of a failure by Mr Moignard and those advising him to take reasonable care. That leaves the issue, however, of whether his conduct amounted to recklessness.
I note that Miscellaneous Taxation Ruling MT 2008/1 sets out what the Commissioner considers to be reasonable care, recklessness and intentional disregard for the purposes of applying the applicable penalties. Paragraph 99 provides that recklessness is something more than “mere carelessness or inadvertence”, and paragraph 102 provides that recklessness “assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person”. Paragraph 101 indicates that recklessness will be where the “behaviour … falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the entity”.[91]
[91] Miscellaneous Taxation Ruling MT 2008/1.
I note that at audit, the Commissioner took into account facts and evidence, including the following:
You hold tertiary qualifications and have extensive corporate and commercial experience.
You hold a Bachelor of Laws with Honours (Deakin); a Bachelor of Arts Degree (Literature & Philosophy) (Swinburne); a Post Graduate Diploma (Business Information Technology) (Swinburne); and a Post Graduate Diploma (Legal Practice & Ethics) (Monash).
Your academic achievements also include the Coulter Burke Prize for Taxation, the Harwood & Andrews Prize for Commercial Law, and holding the position of President of Deakin Law Students Society 1996 & 1997.
Your corporate and commercial experience includes holding the position of Managing Director of Consolidated Publishing Solutions 1991‑1995; Founder and Managing Director of Davnet Limited 1998‑2001; and Executive Director of CBD Energy 2001‑2003.
Your published personal profile describes your substantial experience in IPO, reverse takeovers, mergers and acquisitions, ASIC/ASX operations, Corporate and Personal Tax law, Australian and off‑shore financing – debt and equity markets.
You used a tax agent … to lodge your individual return. At the time the return was lodged you and your tax agent were aware of the Commissioner’s views relating to the profit from the sale of the Rupert Street property.
You lodged a return for the 2008 year despite being instructed to submit a draft return and not to lodge. [92]
[92] Exhibit R1, T2/34, [181].
Having had regard to the complexity of his affairs and the other difficulties I have referred to, but also to Mr Moignard’s qualifications and experience, and the nature of the particular conduct which led to him not correctly declaring his income, I have ultimately concluded that I agree with the Commissioner’s assessment that Mr Moignard’s conduct is properly characterised as reckless. I have reached that view notwithstanding the change in the Commissioner’s position, as I consider that change reflects an improved understanding in light of evidence provided during the Tribunal hearing, rather than an acceptance or partial acceptance of the correctness of Mr Moignard’s position. Of course, the information which has led to the Commissioner’s changed position was always known or available to Mr Moignard and those advising him.
In my view, Mr Moignard had capacity and resources which should have enabled him to arrive at a better and more accurate understanding of what his true taxation liability was. Instead, he made assumptions which were not correct, including that the income from one trust could be offset against losses by another such that “the various profits would all flow between the trusts to produce the appropriate tax outcome for the group” without the need for the income of the RST to be properly accounted for, recorded and allocated during a particular financial year. Given his level of understanding and the fact that he was in receipt of professional advice, I agree with the Commissioner that for Mr Moignard to submit a nil return on the basis that all of the profits from the sale of the Rupert Street property had been properly distributed to the WTL for the purposes of the 2007‑2008 financial year represented reckless conduct on his part, and it is therefore appropriate to impose a 50% penalty on the shortfall of $27,837.53.
Should the base penalty amount be increased?
I note that in the objection decision, the delegate observed that:
As a result of a prior audit of your taxation affairs, the Commissioner assessed you on a base penalty of 75% for intentional disregard of the law in respect of income totalling $2,237,540 omitted from your tax return for the 2001 year of income [Notice of penalty assessment for the 2001 year of income issued to Mr Stephen Moignard on 18 December 2002]. In particular, the Commissioner determined that amounts you received were assessable to you under section 6‑5 or section 6‑10 of the ITAA 1997 in the 2001 year of income [Letter dated 26 July 2002 from the Commissioner to Mr Stephen Moignard including position paper].[93]
[93] Exhibit R1, T2/36, [193].
Mr Moignard does not dispute those facts. Accordingly, having regard to the provisions of s 284‑220, in particular subsection (1)(c), as he has previously had a base penalty of 75% imposed, I note that Mr Moignard’s base penalty amount for the 2008 income year must be increased by 20% in accordance with s 284‑220(1) of Schedule 1 to the TAA.
Accordingly, I am satisfied that a 20% uplift of $5,567.51 should also be applied.
CONCLUSION
I have therefore concluded that Mr Moignard’s income for the 2007‑2008 financial year consisted of one‑third of the proceeds of the sale of the Rupert Street property, being $160,158.75, and the tax payable on that income is $55,675.05. I have further concluded that a base penalty amount of 50% or $27,837.53 should be imposed, together with an uplift of 20% or $5,567.51, resulting in a total penalty amount of $33,405.04 and an overall liability of $89,080.09. I will accordingly set aside the decision under review and substitute a decision reflecting those conclusions.
DECISION
The decision under review is set aside and in substitution for that decision it is decided that:
(a)Mr Moignard’s taxable income for the 2008 income year was $160,158.75;
(b)The tax payable on that income, plus Medicare levy and Medicare surcharge, is $55,675.05; and
(c)A 50% base penalty and 20% uplift should also be applied, resulting in a penalty amount of $33,405.04.
I certify that the preceding 113 (one hundred and thirteen) paragraphs are a true copy of the reasons for the decision herein of Deputy President K Bean.
........... [Sgd] .........................................
Associate
Dated: 6 October 2017
Date of hearing: 29 February 2016 Date final submissions received: 20 February 2017 Applicant: In person Counsel for the Respondent: Ms K Clarke Solicitors for the Respondent: Mr A Goss
ATO Legal Practice
0
14
0