Nabru Nominees Pty Ltd as Trustee of the Urban Family Trust No. 2 Trust v The Commissioner of Taxation of the Commonwealth of Australia
[1997] FCA 911
•21 July 1997
FEDERAL COURT OF AUSTRALIA
ADMINISTRATIVE LAW - appeal from the Administrative Appeals Tribunal - taxation assessment on the basis of sham - whether failure by Tribunal to make findings on material questions of fact
Administrative Appeals Tribunal Act 1975 (Cth) s 43 (2B)
Brackenreg v ComCare Australia (1995) 56 FCR 335
Copperart Pty Ltd v FC of T (1993) 93 ATC 4799
Repatriation Commission v O’Brien (1985) 155 CLR 422
Nabru Nominees Pty Ltd as Trustee of the Urban Family Trust No. 2 Trust v The Commissioner of Taxation of the Commonwealth of Australia
No. VG 538-543 of 1996
JUDGE: HEEREY J
PLACE: MELBOURNE
DATE: 21 JULY 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG 538-543 of 1996
)GENERAL DIVISION ) )
BETWEEN: NABRU NOMINEES PTY LTD AS TRUSTEE OF THE URBAN FAMILY TRUST NO. 2 TRUST
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE(S): HEEREY J PLACE: MELBOURNE DATED: 21 JULY 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
Appeals allowed.
Direct Commissioner amend the applicant’s assessment for the 1986 year of income by substituting as the net income for that year in place of $84,383 the amount of $61,737.
Otherwise matters be remitted for rehearing in accordance with these reasons before the Administrative Appeals Tribunal differently constituted.
Respondent pay the appellant’s costs, including reserved costs.
NOTE:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG 538-543 of 1996 ) GENERAL DIVISION )
BETWEEN: NABRU NOMINEES PTY LTD AS TRUSTEE OF THE URBAN FAMILY TRUST NO. 2 TRUST
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE(S): HEEREY J PLACE: MELBOURNE DATED: 21 JULY 1997
REASONS FOR JUDGMENT
These applications are appeals brought from a decision of the Administrative Appeals Tribunal (Taxation Appeals Division) delivered on 1 August 1996 concerning liability of the applicant under the Income Tax Assessment Act 1936 (Cth) (the Act).
The applicant is the trustee of the Urban Family No. 2 Trust (the trust). The Tribunal confirmed a decision of the respondent Commissioner of Taxation for each of the tax years 1985 to 1991 that there had been no bona fide distribution by the applicant of net income of the trust to non-resident beneficiaries. As a consequence there was no present entitlement within the meaning of s 128A(3) of the Act, Division 11A of Part III did not apply, and the net income of the trust was to be taxed as if the applicant was a resident taxpayer.
The Tribunal came to the conclusion that the distributions were never intended by the trustee to benefit the non-resident beneficiaries by giving them a present entitlement to the trust income. The Tribunal was satisfied that the transactions were a sham as that concept is expounded in the authorities, and in particular Sharrment Pty Ltd v The Official Trustee in Bankruptcy (1988) 82 ALR 530.
At a late stage in the hearing the applicant was given leave to amend its notice of appeal by adding as a ground:
The Tribunal erred in law by failing to make material findings of fact pursuant to s 43(2B) of the Administrative Appeals Tribunal Act 1975.
This ground of appeal has in my opinion been made out. It will be necessary therefore to refer in some detail to the form and structure of the Tribunal’s reasons.
Before doing so I shall briefly identify the principal parties. The directors of the applicant are Mr Peter Urban born in 1944 and his wife Shirley Helen Urban (nee Flamer) born 1946. In the years in question, there were three non-resident beneficiaries. The first,. Leopoldine Grossbart (Poldi) born 1944, was a cousin of Mr Urban, being the daughter of his maternal uncle Jakob Grossbart. The second was Mr Urban’s paternal aunt, Hilda Urban (Hilda), who died in 1990. The third was Effraim Flamer, a paternal uncle of Mrs Urban.
Paragraphs 5 to 19 of the Tribunal’s reasons appear under the sub-heading “The Evidence”.
In par 5 it is said that Mr Urban is the only child of Mr Joseph Urban and Mrs Julie Urban, both now deceased. They came to Australia with their son from Vienna in 1950. During the Second World War Mr and Mrs Urban senior, who then lived in Vienna, experienced adversity. Mr Urban told the Tribunal that his father, because he had avoided conscription into the German army, and his mother, because she was Jewish, were initially hidden by Hilda in Vienna. Hilda was the only sibling of Mr Urban senior. Mrs Urban senior was one of eight children and had other relatives living in Vienna. Ultimately Mr Urban senior was interned in a concentration camp. Hilda also assisted the family of Mrs Urban senior during the war by arranging hiding places for them in Vienna and assisting them with food and information. Mr Urban told the Tribunal that Hilda had assisted his parents to resettle in Vienna after the conclusion of the war.
Paragraph 6 relates that after arriving in Australia Mr Urban senior was employed as a tailor. His wife worked initially as a seamstress before establishing her own drapery business in 1958. Their financial circumstances were constrained. They lived in cramped premises above the drapery shop which Mrs Urban senior leased. Nevertheless Mrs Urban senior was a generous person and from time to time she remitted money, the amounts of which were unknown to Mr Urban, to relatives remaining in Vienna, including Hilda. It was not until 1966 when Mr Urban acquired professional qualifications and the ability to borrow money that, with his assistance, his parents acquired a modest home.
In par 7 it is said that Mr and Mrs Urban married in 1972. Their professional and business interests prospered and their assets increased from $1.8 million in 1981 to in excess of $4.5 million by 1990. Mr Urban bought his parents a house and assisted both his and his wife’s parents with other purchases. I shall set out pars 8, 9 and 10 in full. They are as follows:
8. It was Mr and Mrs P.U.’s evidence that they maintained close contact with Mr P.U.’s parents during their lives and with Mrs P.U.’s parents (the latter being alive and living in the same suburb as Mr and Mrs P.U.). It was Mr P.U.’s evidence that after arriving in Australia his parents, his mother in particular, continued to stay in contact with relatives in Austria, including Hilda. Mr and Mrs P.U. and their then three children, with Mr P.U.'s parents, spent four months in Europe in 1980, during which time Hilda spent three months with them. Mr P.U. told the Tribunal that he was aware that his mother had given money to Hilda and to Mrs Ju.U.’s (Mrs Urban senior) niece (referred to in these Reasons as “Poldi”) over the years since their arrival in Australia, although he did not know the amounts given. Mr P.U. described the father of Poldi (and of Poldi’s only sibling, Hella) as Mrs Ju.U.’s favourite brother. Poldi and Hella’s father, who has since died, had also assisted Mr Ju.U. (Mr Urban senior) and Mrs Ju.U to resettle in Vienna after the war. It was Mr P.U.'s evidence that his mother had maintained contact with both Poldi and Hella and had sent each of them gifts of money in the period prior to the establishment of the No 2 Trust. It was also Mr P.U.'s evidence that Hilda had, prior to her retirement, worked in a government position in Austria and that at the time the No 2 Trust was established she was single (never having married), an aged pensioner and of limited means. Mr P.U. said that Poldi had separated from her husband and bore the responsibility of bringing up her child (Yvonne) and, in order to do this, had maintained a bookshop/cafe in Vienna but that her financial circumstances were not strong. He said that Hella was married and did not suffer (financial) hardship.
9. Mrs P.U. told the Tribunal that her parents kept in contact with Mr E.F.[Effraim Flamer], one of her uncles on her father’s side. She said that her family regarded Mr E.F. as the patriarch of the family in Israel and that she had not had direct contact with her uncle prior to 1981. She said that contact would be difficult because he spoke the Polish and Hebrew languages (in relation to which the Tribunal took it that Mrs P.U. is not fluent) and did not speak much English, but that contact was maintained through her parents.
10. In the early 1980s, Mr P.U. said that he discussed with his parents how he could make financial provision for the support of their relatives in Austria and, in particular, he said he had in mind Hilda, Poldi and Hella. Mr and Mrs P.U. also discussed the proposition and decided that, since Mrs P.U. had herself contributed to the financial security of their family, one third of any sum set aside for the purposes of benefiting relatives should be set aside for Mrs P.U.’s relations living in Israel. In order to implement what was agreed, Mr P.U. discussed the proposal with his accountant, Mr S [Smart]. Mr and Mrs P.U. had already established a No 1 Trust to provide for their immediate family (which ultimately consisted of Mr and Mrs P.U. and their four children). It was decided to establish a No 2 Trust as the vehicle into which money would be channelled and invested for the benefit of distribution to the overseas relatives. Mr P.U. explained that the reason for the establishment of a second trust was that the No 1 Trust did not have the permission, as was then required under the Banking (Foreign Exchange) Regulations, from the Reserve Bank to distribute money overseas. He also felt it would be desirable for the sake of clarity to distinguish between the financial situation of his immediate family and the money set aside for distribution to overseas relatives. It was the evidence of Mr S., as confirmed in a letter from the Reserve Bank (exh LL), that approval was given for the No 2 Trust to distribute moneys overseas. Further, evidence about the purpose surrounding the establishment of the No 2 Trust was given by Mr S., who said that after he had received a notice pursuant to s.264 of the Act (“the s.264 notice”) in relation to the No 2 Trust distributions (T41) he had faxed it to Mr P.U. and had received a hand-written response (exh 3). The s.264 notice came under cover of letter dated 26 February 1991, but the hand-written note seems to bear the date “November 1990”. Despite the apparent disparity of dates, the Tribunal accepts that the hand-written note was prepared by Mr P.U. in response to Mr S. forwarding the s.264 notice to him. The following passage appears in the hand-written note:
“The moneys put aside for beneficiaries is (sic) mainly kept in Australia with beneficiaries verbal approval because
1) hope that they will one day settle in Aust
2) retained with structure to increase overall asset base
3) for capital growth
4)to remit funds in income generating form would mean growth could not be sustained.
Funds only requested by beneficiaries when urgently needed - Nov. 1990.”
In par 11 it is noted that the trust was established on 15 May 1991 as a discretionary trust. Clause 1.2 and the schedule to the trust deed defined “beneficiary” by reference to categories of relationship with Mr and Mrs Urban, their parents and children, and incorporated as additional beneficiaries members of the extended family, including uncles, aunts and cousins. The overseas beneficiaries already mentioned fall within the category of additional beneficiaries as defined. The powers of the trustee contained in cl 4 of the trust deed are set out and include powers to the trustee to determine with respect to all or any parts of the net income of the trust fund, amongst other things,
To pay apply or set aside the same to or for the benefit of any one or more of the beneficiaries.
Clause 4.2(c) provides that a determination to pay apply or set aside any sum may be satisfied by placing such amount to the credit of such beneficiary in the books of the trust or by applying the same or paying the same over to or for the benefit of such beneficiary in such manner as the trustee thinks fit.
Paragraph 12, 13 ,14 and 15 continue as follows:
12. Once the No 2 Trust was formed Mr and Mrs P.U. told their respective parents, so that the potential beneficiaries could be informed. At the time of its establishment no formal notification was sent to potential beneficiaries by the trustees. It was Mr P.U.’s evidence that his parents had visited Vienna and Israel in 1981 to discuss, inter alia, the establishment of the trust for the benefit of the relatives (exh H is a copy of the itinerary for that trip) and that he and his wife had also visited Israel during the same year.
13. It was Mr P.U.'s evidence that his family had hoped that Hilda may, after her retirement, come to Australia to live. Father B. [Borde], who also corresponded with Hilda, mentioned as a possibility that Hilda may visit Australia in a letter he wrote to her dated December 1981 (exh Y). There is no suggestion from Father B.’s letter that Hilda was contemplating living permanently in Australia. However, Mr J.S., who lived in Vienna and a friend of Hilda’s attested in a letter (exh Z) apparently prepared with these proceedings in mind that Hilda had discussed with him the possibility of her coming to live in Australia. While it was Mr P.U.'s evidence that it was his parents who had kept in contact with the Austrian relatives, there was evidence that Mr P.U. wrote to his aunt (Hilda) during the time he was at school and while undertaking his professional studies (exh J). It was Mr P.U.'s evidence that he and his family visited Hilda when they went to Europe and that Hilda had appointed Mr P.U. as the executor of her estate (exh X). All of these things confirm that, although the main contact was maintained with Hilda during her life through Mr P.U.'s parents, Hilda and Mr P.U. remained close. He said that he had discussed the possibility of Hilda coming to live in Australia with his parents and told the Tribunal that his family had offered to look after Hilda should she come to live here. It was Mrs P.U.'s evidence that her family hoped that Mr E.F. and his family would also come to Australia. It was thought that this was more likely during the 1970s and the 1980s, when life in Israel was described as being difficult. In particular, Mrs P.U. said that Mr E.F. was concerned about his two sons having to undergo conscription into the armed forces at a time when Israel was at war and experiencing internal security problems.
14. It was the evidence of Mr and Mrs P.U., confirmed by their accountant Mr S., that a decision was made by Mr and Mrs P.U. in their capacity as directors of the No 2 Trust during the last three months of each financial year about the amounts of trust money to be allocated, and the beneficiaries to whom the amounts would be given, and that Mr S. was notified of the decision. The meetings were held in the informal setting of Mr and Mrs P.U.’s house (which, in any event, is the registered office of the trustee company). Mr S. would implement the decision and minutes would be documented at the time that the annual financial returns for the No 2 Trust were prepared during August/September (see, for example, exhs DD and FF, being minutes of meetings). The minutes list the beneficiaries by name, record the proportion of income to be distributed to each beneficiary sand [sic] note the implementation of the decision by the crediting of the sum to each beneficiary’s loan account in the books of the trust. The minutes are in unexceptional form and, perhaps with the reservation that the informal meetings held at Mr and Mrs P.U.’s house may not in reality have included confirmation of the minutes of the previous meeting, there is nothing exceptional in the way in which either the decision of the trustee was reached or the way in which it was recorded. It was Mr S.’s evidence that income which came by way of interest to the No 1 Trust was paid into the No 2 Trust and that this was done because the source was readily distinguishable from other income sources. Mr S. also said that interest was paid by the No 1 Trust for money lent by the No 2 Trust to the No 1 Trust and that the No 1 Trust claimed the interest as being tax deductible.
15. Mr P.U. said, and this was confirmed by Mrs P.U.’s evidence, that when distribution was made he would tell his parents and his wife would tell her parents and that the respective parents would pass the information on to the beneficiaries and obtain their consent for the sums to be reinvested in Australia. The information concerning the benefits was conveyed by telephone to the relatives abroad. There is no evidence that the arrangements were ever confirmed in correspondence at or about the time they were put into place. Mr P.U. said that in 1987 his accountant told him that the Australian Taxation office wanted acknowledgements signed by the beneficiaries. He said that his mother visited Vienna and Israel in 1987 and acknowledgements as to distributions were obtained from Hilda for the years 1982 to 1986 (exh L - with her original signature covering the years 1985 and 1986 and a photocopy of an acknowledgement covering the years 1982-1984 (inclusive)), Mr E.F. for the years 1985 and 1986 (exh M) and Poldi for the years 1985 and 1986 (exh N).
Paragraph 16 deals with the issue of a notice by the Commissioner under s 264 of the Act on 26 February 1991 requesting documentary evidence of specified documents relating to the distribution of funds to the overseas beneficiaries, correspondence and the like.
Paragraphs 17, 18 and 19 are as follows:
17. Mr P.U. said Poldi was a very determined woman and would not draw upon the money set aside for her in the No 2 Trust on the basis that she wanted to prove she could make good by her own efforts. Mr P.U. said that he could recall on one occasion in the 1970s his mother sending Poldi a cheque which she did not cash. Mr P.U. said that prior to his mother’s death she had expressed a strong wish that some money be sent to Poldi. In order to arrange this, Mr P.U. contacted the First Austrian Bank seeking information as to the opinion of an account in Austria which Poldi could access (exh Q). Exhibit Q contains a letter from the First Austrian Bank and it refers to the account being for Mr P.U.'s “niece”. The Tribunal accepts Mr P.U.'s evidence that this was an error and that the account was with respect to his cousin Poldi. An account was opened at the First Austrian Bank at the branch nearest Poldi’s residence (exhs R and R1). It was Mr P.U.'s evidence that his mother had contacted Poldi by telephone to inform her of the existence of the account and that she could access it. Mr P.U. said that he had also informed her as to how she might access the money (see exh KK, p.11). In order to draw on the account, Poldi needed to produce identification to the Bank. This did not occur and it was Mr P.U.'s. evidence that after 12 to 18 months he arranged for the return of the money deposited in the First Austrian Bank account to Australia, where he considered he could achieve a better return on investment. Following this Mr P.U. said that it was decided that Poldi’s share should be set aside for her daughter, Yvonne. It is anticipated that Yvonne, who is currently undertaking tertiary studies in Austria, may continue those studies in Melbourne (see letter from Poldi to Mr P.U. dated July 1991 (exh U)). Mr P.U. said that the money previously standing to the account of Poldi had been transferred to Yvonne, in trust, and a separate tax file number applied for. The income from the trust had been returned as assessable income for Yvonne and a separate tax return lodged, and tax paid, with respect to the income earned by that trust. With respect to the last sentence of the first page of Mr P.U.'s notes to Mr S. (Exh 3), viz “funds only requested by beneficiaries when urgently needed”, Mr P.U. said that the “urgency”, in as far as sending funds to Poldi was concerned, arose as the result of his mother’s anxiety to ensure Poldi received funds and not from any urgency expressed on the part of Poldi. There is no mention in the notes (exh 3) prepared by Mr P.U. and sent to his accountant in response to the issuance of the s.264 notice of any amount deposited in the First Austrian Bank on behalf of Poldi. Mr P.U. also said that there had been an offer made to assist Poldi’s sister, Hella. That offer had resulted in Hella letting his parents know, during 1986, that she did not require any financial assistance and that her share should be added to Poldi’s share.
18. Mrs P.U.'s parents are now elderly and suffer ill-health. Neither were able to give oral evidence. Both, however, signed a statement dated 23 November 1995 (exh CC) confirming, inter alia, that since they arrived in Australia in 1937 they have maintained constant communication with Mr E.F. and his family. They attest that since the early 1980s they have been advising Mr E.F. of the existence of the trust for his benefit and of the amounts owing to him from time to time. They say that, until 1990, Mr E.F. always asked for the money to be invested for him in Australia. In 1991, however, he requested it be sent to him. Mr P.U. said that he arranged for the money standing to Mr E.F.’s credit to be given to him. Exhibit BB shows a telegraphic transfer of $150,000 to Mr E.F.’s bank in Israel on 19 November 1991 and a further and final payment of $58,641 to him by cheque on 7 December 1992. Exhibit AA is a letter from Mr E.F. thanking Mr and Mrs P.U., inter alia, for their monetary gift.
19. Hilda died on 7 July 1990 (exh X) and Mr P.U., as well as being the executor, was the beneficiary of her estate. Prior to her death she apparently suffered some delusions, as illustrated in the comments made in her letters to Mr P.U.'s parents at about that time (exh V1 to 3). However, even given her mental state, there appears to be some reference to her signing an acknowledgement to Mr P.U. concerning payments to her. Mr J.S., Hilda’s friend who visited her in her nursing home and whilst she was in hospital and who is no relation to the family, attested in a document prepared for the purposes of these proceedings (exh Z) as follows:
“During the period that I have known [Hilda], she mentioned to me several times that she had received money from her nephew [Mr .P.U.] However, she had asked for these amounts to be invested on her behalf in Australia, as she had contemplated living in Australia.”
An asset of the estate would include the amount set aside for her in the No 2 Trust. However the Tribunal notes that there is no mention in the inventory of Hilda’s estate prepared for Austrian probate purposes (exh X) of any amount held on her behalf in the No 2 Trust.
Paragraphs 20 to 27 appear under the sub-heading “Consideration”. Paragraph 20 summarises the relevant provisions of the Act. Paragraph 21 notes that s 101 of the Act and the decision in Commissioner of Inland Revenue (New Zealand) v Ward (1969) 69 ATC 6050 have the effect that a resolution of a trustee which has the effect of determining the sums allotted to beneficiaries to whom the payments will be made amounts to the vesting of a specific portion of the trust income. The Tribunal points out that the share can arise without the beneficiary knowing of its existence, although a beneficiary upon participation in the distribution may disclaim.
Paragraph 22 discusses the concept of sham and the decision in Sharrment. The Tribunal formulates the issue to be decided in these terms:
For the purpose of the instant case, the Tribunal is to decide whether it was ever intended that the beneficiaries would benefit from distributions made by the No. 2 Trust.
Paragraph 23 records a number of comments made by counsel for the Commissioner. Paragraphs 24 and 25 record the Tribunal’s conclusion:
24. The Tribunal finds that the circumstances of this case are most unusual. For example:
(i)the lengths to which Mr P.U. went to try and persuade Poldi to accept what amounts to a substantial sum of money which had been set aside for her benefit in the No 2 Trust and importantly that, while this occurred prior to the issuance by the respondent of the s.264 notice, there was no formal, or indeed informal, written communication from either Mr P.U. or his accountant to Poldi, nor any written acknowledgement from Poldi to Mr P.U. concerning the arrangement. Ordinary human experience would suggest that for one cousin to offer another cousin living in another country and experiencing financial hardship $100,000 would prompt some written acknowledgement, even if the sum was not accepted. There was no suggestion of any such acknowledgement in this case. Further, in his notes to his accountant (exh 3) at the end of 1990 or early 1991, curiously, Mr P.U. did not mention the amount deposited in the First Austrian Bank on behalf of Poldi. These events strike the Tribunal as being curious, given the size of the sum deposited and the “urgency” that Mr P.U.'s mother was expressing in her requests for Poldi to be given assistance;
(ii)the way in which information concerning the distributions to the beneficiaries was conveyed, that is, through Mr P.U.'s parents (when they were alive) to Hilda and Poldi and through Mr and Mrs P.U.'s parents to Mr E.F., is again, given the sum of money involved and given the formality of records otherwise kept, curious in that there appears to be no written acknowledgement except that prepared at the request of the Taxation Department in the mid-1980s, and the rather oblique reference in Mr E.F.’s letter of Mr P.U. after he accepted his distribution;
(iii)the request for a distribution to be effected to Mr E.F. and the fact that it was effected provides, given again the substantial sum involved, evidence of the parties intentions being put into effect. However, as Mr Murphy [counsel for the Commissioner] points out, the fact that this did not occur until after the issuance of the s.264 notice by the respondent may tend to diminish the impact and significance of this evidence;
(iv)despite Hilda’s financial and health circumstances being insecure, no distribution actually occurred to make her life more enjoyable. Further, there is no mention of any of the sum set aside for her benefit in the No 2 Trust in the inventory prepared for Austrian probate purposes. This indicates to the Tribunal a lack of any real intention to see that the purpose for which the No 2 Trust was established was actually implemented. The Tribunal is not influenced in this conclusion by the fact that Mr P.U. is the beneficiary of Hilda’s estate;
(v)the expressed intentions of Mr P.U. with respect to the beneficiaries of the trust in this minute to the accountant of November 1990 (exh 3), lacks credit. By that time, despite circumstances indicating needs, not any of the Austrian beneficiaries had been sent money. Further, it would seem unlikely that any of the beneficiaries were then evincing an intention to come to Australia. Certainly in the case of Hilda there would seem no point in achieving capital growth in her share, given her age and circumstances.
The Tribunal is rather less influenced by the fact that the beneficiaries’ allotments were calculated by reference to a mathematical formula. There is nothing in the evidence to suggest that any one of the beneficiaries was better or worse off than the others and in those circumstances, if there was a genuine intention to distribute, the Tribunal finds nothing peculiar in the application of a formula which seeks to benefit each of the beneficiaries equally. The Tribunal is also not influenced in reaching its conclusion by the fact that there was a large disparity between the amount of tax payable if the sum had been distributed under the No 1 Trust and that payable under the No 2 Trust.
25. The Tribunal listened very carefully to the evidence given, in particular to that of Mr and Mrs P.U. in their capacity as directors of the trust company. Because of the matters set out in paragraph 24(i)-(v) herein, the Tribunal is satisfied that there is substantial and justifiable evidence open to it, taking into account the seriousness of the allegation made, to satisfy it that the transactions were never intended by the trustee to benefit the named non-residents by giving them a present entitlement to the income of the second trust. The Tribunal is satisfied that the transactions are a sham within the meaning of that term set out earlier in this Decision. The transactions being a sham, the Tribunal is also of the view that the trustee of the No 2 Trust is the correct taxpayer (see s.99A of the Act). Given that finding, the Tribunal does not believe it is appropriate for it to interfere with the culpability penalty imposed. The Tribunal, as in the case of VT 94/24-29 and Commissioner of Taxation (unreported: Decision No 10,796, Senior Member B. Pascoe, dated 13 March 1996), is concerned that the withholding tax already paid on behalf of different taxpayers may not be credited to the tax which the Tribunal has found is payable by the trustees of the No 2 Trust (being different taxpayers from those who paid the withholding tax). However, as pointed out by Senior Member Pascoe, the Tribunal is restricted to dealing with the applicant the subject of this application. That may be a matter which the respondent can consider when assessing the time over which additional tax should be payable.
Findings on Material Questions of Fact
Section 43 of the Administrative Appeals Tribunal 1975 (Cth) relevantly provides as follows:
(2)Subject to this section and to sections 35 and 36D, the Tribunal shall give reasons either orally or in writing for its decision.
(2A)Where the Tribunal does not give reasons in writing for its decision, a party to the proceeding may, within 28 days after the day on which a copy of the decision of the Tribunal is served on that party, request the Tribunal to furnish to that party a statement in writing of the reasons of the Tribunal for its decision, and the Tribunal shall, within 28 days after receiving the request, furnish to that party such a statement.
(2B)Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based.
There is a substantial body of law on the obligation of courts and tribunals to give reasons for their decisions. The authorities are comprehensively reviewed by Sheppard J in Brackenreg v ComCare Australia (1995) 56 FCR 335 at 343-352. For present purposes however it is not necessary to canvass these authorities because s 43(2B) provides a specific statutory mandate which the Tribunal was obliged in law to follow.
Unfortunately, the Tribunal did not comply with the requirements of s 43(2B). Its reasons consist of a long narrative, not of facts as found, but of evidence given, mainly by Mr Urban. The decision is replete with expressions such as “It was Mr Urban’s evidence”, “Mr Urban told the Tribunal”, “Mr Urban said that”. There follows, in par 24, some critical comment on “the circumstances of this case” which take the form largely of comments on what is said to be the inherent improbability of some of the events of which Mr Urban spoke. The reasoning then concludes in para 25 with a statement that because of the “matters set out in par 24” the Tribunal
is satisfied that there is substantial and justifiable evidence open to it, taking into account the seriousness of the allegations made, to satisfy it that the transactions were never intended by the trustee to benefit the names of non residents by giving them a present entitlement to the income of the second trust. The Tribunal is satisfied that the transactions are a sham.
But the Tribunal fails to make any findings of fact, particularly concerning the critical evidence as to the arrangements of which Mr Urban spoke with the overseas beneficiaries. A reader of the reasons is left with a lengthy recital of Mr Urban’s evidence and a suspicion that the Tribunal did not accept a large part of it. On the other hand, it would seem likely that the Tribunal accepted some of his evidence, such as that relating to the family history and background, but the reasons are silent as to just which evidence the Tribunal accepted and which it did not. As result, the conduct of the appeal became quite unworkable. Counsel for the applicant, understandably enough, urged that where the Tribunal referred to Mr Urban’s evidence it must be taken to have accepted that evidence and made a finding of fact that the events, the subject of the evidence, in fact took place. However, if one accepted Mr Urban’s evidence in toto, the ultimate finding of sham would not be open.
In a case like the present one where the real issue is the intention to be inferred from facts and circumstances, it is a critical step in the reasoning process to find what those facts and circumstances in truth were. This the Tribunal failed to do.
What occurred in this case is aptly described in language used by Hill J in Copperart Pty Ltd v FC of T (1993) 93 ATC 4779 at 4781. His Honour said:
At the heart of the criticism made by senior counsel for the applicant of the Tribunal’s reasons is the failure of the Tribunal to find the facts from which the ultimate questions of law for decision by this court might emerge. The reasons consist of a long recitation of the evidence given by the three witnesses called for the applicant, followed by conclusions of fact which can only proceed on the basis that the Tribunal has rejected some, at least, of the evidence which it has recited. The reasons fail, also, to comment on the credit of the witnesses, though it must be assumed, as some at least of their evidence cannot have been accepted, that the Tribunal did not accept the credit of the witnesses.
After referring to some authorities on s 43(2B) his Honour continued:
The obligation under s 43(2B) is not satisfied by a statement of the Tribunal’s conclusion of fact. The parties are entitled to know what evidence the Tribunal accepted and what evidence it took into account. Likewise the parties are entitled to know what evidence the Tribunal rejected. Without this knowledge the parties will have but an incomplete idea of the Tribunal’s process of reasoning and a lessened respect for the Tribunal’s decision-making process.
Although an appeal was allowed ((1994) 50 FCR 345) the Full Court made no criticism of the passages in Hill J’s judgment which I have just quoted.
The Appropriate Order
In his dissenting judgment in Repatriation Commission v O’Brien (1985) 155 CLR 422 at 446 Brennan J said:
An obligation to give oral or written reasons for a decision is cast on the AAT by s 43(2) of the AAT Act but the remedy for a failure to fulfil that obligation adequately is a mandatory order by the Court to do so. An AAT decision, if it is made in accordance with the statutory provisions that govern the exercise of its power, is not invalidated by a mere failure to expose fully the reasons for making it. In my opinion the reasons given by the AAT in this case do not warrant an inference that it failed to review the Commission’s decisions according to law.
In Brackenreg Sheppard J (at 352) said:
It was submitted by counsel for the respondent that I should do as Brennan J said should be done in O’Brien and make a mandatory order requiring the Tribunal to give the reasons it should have given. I have concluded that I should not take that course. I think it would be quite wrong to send a matter back to a Tribunal such as the Tribunal here after a lengthy criticism of the way in which its decision has been arrived at and ask it to give additional reasons for its conclusions. I am not suggesting for a moment that the Tribunal did not or would not act in good faith. But in the administration of justice, appearances are as important as actualities. It would be very difficult to persuade a reasonable person observing what had happened that justice had necessarily been done if it turned out that the decision remained as it is. In my opinion, the matter should be remitted to the Tribunal for rehearing before a different member.
Brackenreg was a case where the breach of s 43(2B) was a failure to refer to the evidence on which the findings were based, rather than a failure to state the findings. However that is not a material distinction. I would respectfully adopt the comments of Sheppard J. In the present case, while I share Sheppard J’s confidence in the good faith of the Tribunal, it would be an unseemly exercise for it to patch up its reasons by inserting findings of fact to accord with the decision already announced. This is particularly so in a case where the ultimate finding that the transactions in question were a sham involves a serious imputation against the persons concerned.
An ancillary issue concerns the 1986 year of income. In this year the Commissioner assessed the applicant on the footing that the net income from the trust estate for that year of income was $84,383. The net income for the trust estate was in fact $61,737. This was conceded by the Commissioner at the hearing but the concession appears to have been overlooked by the Tribunal.
There will be orders that the appeal will be allowed, the appropriate amendments be made to the assessment for the 1986 year of income and the matter otherwise remitted for hearing before a differently constituted Tribunal. There will be an order that the respondent pay the appellant’s costs, including reserved costs.
I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey
Associate:
Dated: 21 July 1997
Counsel for the Applicant: Mr J W DeWijn Solicitor for the Applicant: Herbert Geer & Rundle Counsel for the Respondent: Mr T Murphy Solicitor for the Respondent: Australian Government
SolicitorDate of Hearing: 15, 16 and 28 May 1997 Date of Judgment: 21 July 1997
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