Peter Donkin; Krystiana Donkin, Nerida McKnight; Adeline Donkin; Joshua Donkin and Joshline Investments ATF Joshline Family Trust and Commissioner of Taxation (Taxation)
[2019] AATA 6746
•10 December 2019
Peter Donkin; Krystiana Donkin, Nerida McKnight; Adeline Donkin; Joshua Donkin and Joshline Investments ATF Joshline Family Trust and Commissioner of Taxation (Taxation) [2019] AATA 6746 (10 December 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2017/6538-2017/6558
Re:Peter Donkin; Krystiana Donkin, Nerida McKnight; Adeline Donkin; Joshua Donkin and Joshline Investments ATF Joshline Family Trust
APPLICANTS
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President I R Molloy
Member P RansonDate:10 December 2019
Place:Sydney
(1)The objection decisions dated 6 October 2017 so far as they assessed the First to Fifth Applicants (including, in the case of the Fourth and Fifth Applicants, the Sixth Applicant as trustee for the Joshline Family Trust) on the increase in the net income of the trust consequent upon inter alia the disallowance of claimed deductions for the income years ended 30 June 2010 to 30 June 2013 are affirmed.
(2)The objection decisions so far as they imposed administrative penalties in respect of the First to Fifth Applicants (including, in respect of the Fourth and Fifth Applicants, upon the Sixth Applicant as trustee for the Joshline Family Trust) for including false or misleading statements in their returns for the income years ended 30 June 2010 to 30 June 2013 are set aside.
(3)The parties have liberty to apply within fourteen (14) days from the date of publication of this decision in relation to any issues they may have as to the form of the above orders.
...................................[sgd].....................................
Deputy President I R Molloy
CATCHWORDS
TAXATION – AMENDED INCOME TAX ASSESSMENT – trust income – increase in net income of the trust – claimed deductions disallowed – whether the applicants were correctly assessed on the increase in net income of the trust – decision under review affirmed – PENALTIES – penalties for false and misleading statements – whether the applicants are liable for penalties – whether the penalties should be remitted – applicants not liable for penalties
LEGISLATION
Income Tax Assessment Act 1936 (Cth) sections 95, 97, 98, 99A and 170
Taxation Administration Act 1953 (Cth) sections 284-75, 298-20
CASES
Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) (2011) 196 FCR 457
Byrnes v Kendle [2011] HCA 26
Commissioner of Taxation v Bamford [2010] HCA 10
Commissioner of Taxation v Thomas [2017] HCA 57
Federal Commissioner of Taxation v Pearson [2006] FCAFC 111
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264
Lewski v Commissioner of Taxation [2017] FCAFC 145
Thomas v Commissioner of Taxation [2017] FCAFC 57Union Fidelity Trustee Co of Aust Ltd v Federal Commissioner of Taxation (1969) 119 CLR 177
Weyers v Commissioner of Taxation [2006] FCA 818
Zeta Force Pty Ltd v FCT (1998) 84 FCR 70
SECONDARY MATERIALS
Revised Explanatory Memorandum to the Bill which became A New Tax System (Tax Administration) Act (No. 2) 2000 (Cth) (Act 91 of 2000)
Woellner et al, Australian Taxation Law, Eighteenth Edition, 2018
REASONS FOR DECISION
Deputy President I R Molloy
Member P Ranson10 December 2019
INTRODUCTION
This is a review of the Respondent’s objection decisions dated 6 October 2017[1] in respect of the Applicants’ objections dated 22 March 2015 to amended income tax and penalty assessments for the income years ended 30 June 2010 to 30 June 2013 (“the relevant years”).
[1] Exhibit 1 (“T-Documents”), T2.
The Applicants are beneficiaries of the Joshline Family Trust (“JFT”), a discretionary trust established by a deed executed on 7 July 2009 (“the Deed”), [2] pursuant to which the Sixth Applicant (“Joshline”) is the trustee.
[2] T-Documents, T18.1825-1855.
The JFT is the sole beneficiary of the Strategic Accounting Advisers Trust (“SAA Trust”). The First Applicant, Peter Donkin, is the sole director and shareholder of the trustee of the SAA Trust. The SAA Trust carries on an accounting practice of which Mr Donkin is the principal.
Following an audit of the First Applicant and his associated entities the Respondent amended the assessments of the Applicants to include a greater quantum of the JFT net income assessable under ss 97 and 98 of the Income Tax Assessment Act1936 (Cth) (“the ITAA36”).
This was on the basis that the net income of the JFT and the net income of the SAA Trust were greater than returned because various claimed deductions were subsequently disallowed.
In order to amend the 2010 and 2011 assessments the Respondent formed the view that there had been fraud or evasion so the time limit otherwise imposed under s 170 of the ITAA36 did not apply.
ISSUES
At the commencement of the hearing the Applicants were granted leave (which was not opposed) to amend their objections so as to ensure they encompassed the issues raised in the submissions.
The issues are:
(a)Whether the Respondent was correct in assessing the First to Fifth Applicants (including the trustee in the case of the Fourth and Fifth Applicants who are minors), rather than Joshline (sometimes described as the residuary or balance beneficiary), on the increase in the net income of the JFT.
(b)Whether the First and Sixth Applicants are liable to administrative penalties under s 284-75(1) of the Taxation Administration Act 1953 (Cth) (“the TAA”) in the relevant years.
(c)Whether the administrative penalties (if any) should be remitted under s 298-20 of the TAA.
In summary our conclusions in relation to these issues are as follows:
(a)The Respondent was correct in assessing the First to Fifth Applicants (including the trustee in the case of the Fourth and Fifth Applicants) on the increase in the net income of the JFT.
(b)The First and Sixth Applicants are excused from liability for administrative penalties.
(c)The question of remitting administrative penalties does not arise.
THE JOSHLINE FAMILY TRUST
By clause 2.1 of the Deed, the trustee, Joshline, holds the Trust Funds on the trusts of the Deed. The Trust Fund is defined in clause 1 to include the initial sum paid on settlement of the trust and all cash, investments and other property held by the trustee on the trusts of the Deed.
Clause 1 of the Deed defines “beneficiary” relevantly as follows:
‘Beneficiary’ means:
(a)each person specified in Part 5 of the Schedule;
(b)in relation to any person described in paragraph (a), his or her Spouse, former Spouse or widower,
(c)in relation to any person described in paragraphs (a) or (b):
(i) his or her Children and remoter issue;
(ii) his or her Spouse, former Spouse, widow or widower;
(iii) …
(d)in relation to any person described in paragraph (a), (b) or (c):
(i) any company in which that person is a director or member;
(ii) …
The First Applicant, Mr Donkin, and the Second Applicant, Krystiana Donkin, were named as both the Beneficiary and the Default Beneficiary in the Schedule to the Deed. The Third to Fifth Applicants were eligible beneficiaries.
The Sixth Applicant, Joshline, was also an eligible beneficiary by reason that the First Applicant, Mr Donkin, was its shareholder and director.
For convenience we will refer to the First to Fifth Applicants as the “individual beneficiaries” to distinguish them from Joshline.
Clause 1 of the Deed also includes the following definitions:
‘Tax Act’ means the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1999 (Cth) as amended from time to time and any replacement or additional legislation and any rulings or regulations or guidelines made or issued under it.
‘Income’ in respect of any Financial Year shall include so much of the receipt, profit or gain (or any part thereof) of the Trust Fund for the Financial Year which is assessable income for the purposes of the Tax Act that the Trustee in his discretion
Clause 3 of the Deed deals with income of the JFT. Clause 3.1 includes the following:
3.1 Allocation
(a)The Trustee may in each Financial Year determine in its absolute discretion the amount, proportion or percentage, if any, of the Income or, where clause 3.2(b) applies, any class of income for that Financial Year;
(i) which is to be applied to Beneficiaries (‘Applicable Income’);
(ii) which is to be transferred to a distribution reserve (‘Accumulated Income’); and
(iii) which is to be appropriated under clause 3.5.
(b)If, at the time that a determination is made by the Trustee under clause 3.1(a), the amount of Income is not known, the Trustee must ascertain the amount of Income as soon as practicable after such determination.
(c)If the Trustee does not make a determination under clause 3.1(b) in respect of all or any of the Income, that part of the Income must be dealt with in accordance with clause 3.6.
Clause 3.2(a) of the Deed provides that, subject to clause 3.2(b), the Trustee may apply Applicable Income for such one or more of the Beneficiaries as the Trustee in his absolute discretion determines. Clause 3.2 further provides:
(d) In the exercise of the Trustee’s powers pursuant to clause 3.2, any payment or investment of Applied Income by the Trustee, with or without the execution of a receipt, will constitute a full and final discharge to the Trustee in relation to the trusts of this Deed.
(e) The exercise of the Trustee’s discretion to apply Applicable Income for any Beneficiary will be final and nothing in this Deed is to be interpreted so as to authorise the Trustee to revoke its application to any Beneficiary.
(f) The Trustee may exercise the power conferred by clause 3.2 at any time and from time to time during the Financial Year.
Clause 3.4 of the Deed provides:
Present Entitlement for Tax Purposes
It is a condition of entitlement of each Beneficiary to whom Applicable Income has been applied that the Beneficiary include [in] his or her assessable income the proportion of the net income of the Trust Fund for that Financial Year (as defined in section 95 of the Tax Act) that the Beneficiary’s share of Applied Income bears to total income.
Clause 3.5 of the Deed provides that the Trustee may appropriate an amount of the Income or Accumulated income of the Trust Fund for the purpose of discharging the liability of the Trustee for income tax or similar liabilities.
Clause 3.6 of the Deed provides:
Absence of Trustee’s determination
In the absence of a determination by the Trustee under clause 3.1, so much of the Income:
(a)which is neither Applicable Income nor Accumulated Income;
(b)which, being Applicable Income, is not applied to a Beneficiary; or
(c)which is not appropriated under clause 3.5,
must be treated as Applicable Income for the Default Beneficiary and if more than one then as Applicable Income for each Default Beneficiary as tenants in common in equal shares.
DISTRIBUTION OF TRUST INCOME OF THE JFT
During the relevant years Joshline, as trustee for the JFT, resolved to distribute the income of the JFT.[3] The only person recorded as present when the resolutions were made was the First Applicant, Mr Donkin.
[3] T-Documents, T24.1894, 1895, 1897, 1899.
The form of the resolutions varied slightly. The resolution made on 30 June 2010[4] (which was substantially in the same form as the resolution for the 2011 year[5]), relevantly provided:
[4] T-Documents, T24.1894.
[5] T-Documents, T24.1895.
DISTRIBUTION OF INCOME: The Chairman [First Applicant] advised the meeting that the trust estates [sic] financial period would end on 30 June 2010 and that the meeting should consider the distribution of the trust estates income.
IT WAS RESOLVED THAT: in accordance with the provisions of the deed of trust of The Joshline Family Trust that the income of the trust be distributed as follows:
The necessary proportion of income such that the following amount is distributed:
Adeline Krystiana Donkin [Fourth Applicant] – So much of the trust law income as is required to equate to $2,667 assessable income.
Joshua James Donkin [Fifth Applicant] – So much of any further trust law income as is required to equate to $2,667 assessable income.
Krystiana Rosemary Donkin [Second Applicant] – So much of any further trust law income as is required to equate to $80,000 assessable income.
Peter James Donkin [First Applicant] – So much of any further trust law income as is required to equate to $80,000 assessable income.
The balance (if any) is to be distributed as follows:
Joshline Investments Pty Ltd 100%
The resolution made on 29 June 2012[6] (which was in substantially the same form as the resolution for the 2013 income year[7]) provided relevantly:
[6] T-Documents, T24.1897.
[7] T-Documents, T24.1899.
DETERMINATION OF INCOME IT WAS RESOLVED THAT, in exercise of the power under clause 6.5 and the definition of income in Clause 1 of the Trust Deed, the trustee determines that the income of the Trust for the year ending 30 June 2012 comprises all those amounts being income for the purposes of the accounting records of the Trust (“Accounting Records”), less the expenses and outgoings of the Trust for the year ending 30 June 2012 attributed to those amounts for the purposes of the Accounting Records, in each case whether recorded in the Accounting Records by or after 30 June 2012.
DISTRIBUTION OF INCOME: IT WAS RESOLVED THAT: in accordance with clause 3.1 and 3.2 of the deed of trust of The Joshline Family Trust that the income of the trust be distributed as follows:
The necessary proportion of income such that the following amount is distributed:
Adeline Krystiana Donkin [Fourth Applicant] – So much of the trust law income as is required to equate to $416 assessable income.
Joshua James Donkin [Fifth Applicant] – So much of any further trust law income as is required to equate to $416 assessable income.
Krystiana Rosemary Donkin [Second Applicant] – So much of any further trust law income as is required to equate to $79,000 assessable income.
Peter James Donkin [First Applicant] – So much of any further trust law income as is required to equate to $350,000 assessable income.
The balance (if any) to be distributed as follows:
Joseline Investments Pty Ltd.
PRIOR PAYMENTS: RESOLVED THAT, for the avoidance of doubt, in respect of any amounts of income that have actually been paid by the Trustee to or for the benefit of any Beneficiaries specified above or any other Beneficiary of the Trust during the year ending 30 June 2012, the making of the payment did not constitute the making of a Distribution by the Trustee unless the payment was expressly recorded by a resolution of the Trustee as constituting a Distribution, and does not vary the terms of any Distribution made under these resolutions.
Mr Donkin lodged income tax returns for the relevant years on behalf of the JFT.[8] Those returns provided:
[8] T-Documents, T139.3933; T140.3948; T141.3964; T142.3980.
Label
2010 ($)
2011 ($)
2012 ($)
2013 ($)
Income;
‒ Non-primary production – Distribution from trusts less net capital
gain and foreign income
162,214
394,103
523,935
454,778
Deductions
Interest
80,256
106,725
101,707
80,287
Total deductions
80,256
106,725
101,707
80,287
Net income or loss
81,958
287,378
422,228
374,491
Distribution to beneficiaries
81,958
287,378
422,228
374,491
First Applicant
38,312
201,378
342,396
262,659
Second Applicant
38,312
80,000
79,000
79,000
Third Applicant
-
-
-
32,000
Fourth Applicant
2,667
3,000
416
416
Fifth Applicant
2,667
3,000
416
416
Actual distributions were made to the individual beneficiaries in accordance with the preceding table.[9]
[9] E.g. T-Documents, page 441.
The Respondent calculates the First to Fifth Applicants’ percentage shares in the income of the JFT as set out above were as follows:
Beneficiary
2010 (%)
2011 (%)
2012 (%)
2013 (%)
First Applicant
48.39
69.98
81.08
70.11
Second Applicant
48.39
27.93
18.72
21.11
Third Applicant
0
0
0
8.55
Fourth Applicant
1.61
1.05
0.10
0.11
Fifth Applicant
1.61
1.05
0.10
0.11
Total
100
100
100
100
As mentioned, the Respondent, in consequence of disallowing certain claimed deductions, adjusted the net income of the JFT for each of the relevant years. The Applicants now accept and no longer dispute those adjustments to the net income of the JFT.[10]
[10] Applicants’ Consolidated Statement of Facts, Issues and Contentions dated 2 August 2019, [2].
The Respondent has assessed the Applicants on the increased net income based on the proportions set out in paragraph 26 above:
Beneficiary
2010 ($)
2010 (%)
2011 ($)
2011 (%)
2012 ($)
2012 (%)
2013 ($)
2013 (%)
First Applicant
182,873
48.39
314,593
69.98
411,751
81.08
304,137
70.11
Second Applicant
182,873
48.39
125,558
27.93
95,047
18.72
91,586
21.11
Third Applicant
0
0
0
0
0
0
37,099
8.55
Sixth Applicant on behalf of Fourth Applicant
6,083
1.61
4,708
1.05
500
0.10
483
0.11
Sixth Applicant on behalf of Fifth Applicant
6,083
1.61
4,708
1.05
500
0.10
483
0.11
Total
377,912
100
449,567
100
507,798
100
433,788
100
In assessing the Applicants on the increased net income of the trust, the Respondent relied on the decision in Commissioner of Taxation v Bamford[11] (“Bamford”) where, in broad terms, the High Court held that where “tax law income” exceeds “trust law income”, beneficiaries will be taxed on the same proportion (percentage) of the tax law income as their “share” or percentage entitlements to the trust law income of the trust estate.[12]
[11] [2010] HCA 10.
[12] Woellner et al, Australian Taxation Law, Eighteenth Edition, 2018, [17-116].
PARTIES’ CONTENTIONS
The Applicants contend that the Respondent was not correct in assessing the individual beneficiaries of the JFT on the increase in the net income of the JFT.
They submit that on the proper construction of the resolutions of the trustee for each of the relevant years Joshline, in its capacity as the residuary beneficiary, not the individual beneficiaries, is properly assessable to the increase in income of the trust.
The Applicants contend that the effect of the resolutions is that the amount of each individual beneficiary’s share of “net income” or assessable income remains constant, but in the events that occurred a different part or portion, expressed as a percentage or fraction, of the trust law income is distributable to the individual beneficiaries.
Alternatively, the Applicants contend, still maintaining their submission as to the true construction the resolutions, that the individual beneficiaries were not presently entitled to a share of the trust law income, and consequently the resolutions were ineffective. They rely on the decision of the Full Court of the Federal Court in Lewski v Commissioner of Taxation[13] (“Lewski”).
[13] [2017] FCAFC 145.
On this basis all of the trust law income of the JFT in the relevant years, not only the increase, was properly assessable to the trustee[14]. For the purpose of this proceeding, however, the Applicants expressly confine themselves to the increase in income.
[14] ITAA36, s 99A(4).
The Respondent contends that the resolutions are effective. He contends that on their proper construction the resolutions work to fix the beneficiaries’ respective shares of net income as the proportion to which the specified amounts of “assessable income” bear to the trust’s net income as ascertained by the trustee.
ITAA36 DIVISION 6 PART 3
Division 6 of Part 3 of the ITAA36 contains the primary provisions concerning the taxation of trusts and includes the following:
95Interpretation
(1)In this Division:
…
“net income”, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions…
…
97 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…
Under s 98 of ITAA36 where a beneficiary has such an entitlement, but is under a legal disability, the trustee is assessed for that share of the income.
It should be noted that ss 97 and 98 of ITAA36 are concerned with present entitlement to "a share of income of the trust estate" (i.e. trust law income), and not net income as defined in s 95 of ITAA36.[15]
[15] See Union Fidelity Trustee Co of Aust Ltd v Federal Commissioner of Taxation (1969) 119 CLR 177, 187-188; and Zeta Force Pty Ltd v FCT (1998) 84 FCR 70 (“Zeta Force”) at 74-75.
In Bamford the High Court said:
“[37]The opening words of s 97(1) speak of "a beneficiary of a trust estate" who is "presently entitled to a share of the income of the trust estate". The language of present entitlement is that of the general law of trusts, but adapted to the operation of the 1936 Act upon distinct years of income.
….
[38]The identification in s 97(1) of "a trust estate" of which there is "a beneficiary" also bespeaks the general law of trusts.
…
[39]Further, the phrase "presently entitled to a share of the income" directs attention to the processes in trust administration by which the share is identified and entitlement established.”
The Applicants place emphasis on the following passages quoted in Bamford[16]:
Having identified the share of the distributable income to which the beneficiary is presently entitled section 97 requires one to ascertain ‘that share of the net income of the trust estate’. That share is included in the beneficiary’s assessable income. The expression ‘net income of the trust estate’ in paragraph (a)(i) has the meaning given to it by s 95(1) - taxable income as opposed to distributable income. The words ‘that share’ in paragraph (a)(i) refer back to the word ‘share’ in the expression ‘a share of the income of the trust estate’, and indicate that the same share is to be applied to an income amount calculated according to a different formula (taxable income as opposed to distributable income). Since the income amount may differ according to which formula is applied the natural meaning to give to ‘share’ where it appears for the second time is ‘proportion’ rather than part of portion.
….
Once the share of distributable income to which the beneficiary is presently entitled is worked out the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate.
[16] Bamford, [45], quoting Sundberg J in Zeta Force.
In Bamford[17] the High Court also set out a passage from its earlier decision in Harmer v Federal Commissioner of Taxation[18] where it was accepted that a beneficiary would be “presently entitled” if, and only if:
(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.[19]
[17] Supra, [37].
[18] (1991) 173 CLR 264, 271.
[19] See also Lewski, [116] – [117]; and Federal Commissioner of Taxation v Pearson [2006] FCAFC 111, [14].
It seems to us that on the Applicants’ construction of the resolutions their alternative submission would be correct. That is to say, the resolutions would be ineffective to confer a present entitlement on the individual beneficiaries because they involved a contingency.
They would depend on the occurrence of an event which may or may not happen, in particular, the Respondent disallowing a deduction and including an additional amount in assessable income.[20] It follows that the individual beneficiaries would not be “presently entitled” under ss 97 or 98 of the ITAA36 to a share of the income of the JFT.
[20] Lewski, [46] and [121].
We do not, however, accept the Applicants’ construction of the resolutions.
CONSTRUCTION OF THE RESOLUTIONS
We accept the Respondent’s submission that, properly construed, the resolutions fix the beneficiaries’ respective shares of net income as the proportion to which the specified amounts of “assessable income” bear to the trust’s net income as ascertained by the trustee rather than as a proportion to which those specified amounts bear to the section 95 net income as subsequently amended by the Respondent.
The resolutions to distribute the trust income are expressed to be in made in accordance with the provisions of the Deed. We note the definition of “Income” in clause 1 of the Deed.
Clause 3.1(a) of the trust deed creates an obligation on the trustee to determine the income. Clause 3.1(b) provides that, if, at the time the determination is made, the amount of income is unknown, the trustee must ascertain the amount as soon as practicable thereafter.
These provisions, and clauses 3.2(d) and (e) of the trust deed, are directed to certainty and finality in relation to the trustee’s application of the income of the trust.
We agree with the Respondent’s submission that the Applicants’ construction would be contrary to the certainty and finality required under these provisions.
On the Applicants’ construction of the resolutions, Joshline as the balance beneficiary named in the resolutions, has gone from having no entitlement to the distributable income of the trust (and therefore assessed on no share of the s 95 net income of the trust) to some years later having an entitlement to a substantial amount of the distributable income of the trust (and assessable on a substantial share of the trust’s net income).
We agree that clause 3.4 of the deed further supports the Respondent’s construction of the resolutions.
We think the resolutions are quite different from the resolutions in Lewski. It was acknowledged that the resolutions there were “much more sophisticated”. They provided for the distribution of certain amounts of trust income[21], but then went on to provide:
Variation of Income: It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be distributed in the following manner: ….
[21] Although in one case providing for “The balance” to a particular beneficiary: Lewski, [54].
In those events there was expressed to be a deemed distribution of such amount or amounts to a different beneficiary or in a different proportion.[22] There is no such “Variation of Income” resolution in the present resolutions.
[22] Lewski, [113].
The Applicant adduced evidence that the resolutions were prepared on advice[23] and that the subjective intention was to ensure that the beneficiaries who were allocated income were taxed “on the amounts received”.[24]
[23] Exhibit 3, Statement of Bruce Elliott Rowntree, dated 2 August 2019.
[24] Exhibit 2, Statement of Peter James Donkin, dated 28 June 2019, paragraphs 3 and 4.
The Respondent submitted that in relation to trusts, as in relation to contracts, the subjective intention is irrelevant. The search for ‘intention’ is only a search for the intention revealed in the words used, construed in context.[25]
[25] Byrnes v Kendle [2011] HCA 26, [105]-[115].
That principle is clearly correct in determining whether a trust has been created and on what terms.[26] It does not appear to apply in the same way when construing trust resolutions.[27] Even so, it is still a matter of construing the words used to determine whether the resolutions were effective to produce the intended result.[28]
[26] Ibid, [113]-[114].
[27] Commissioner of Taxation v Thomas [2017] HCA 57, [64]; Thomas v Commissioner of Taxation [2017] FCAFC 57, [27] – [29].
[28] Commissioner of Taxation v Thomas (supra), [71] – [73]; Thomas v Commissioner of Taxation (supra), [19].
Having regard to the matters we have referred to we think more explicit language would be required to achieve what the Applicants contend was the purpose and meaning of these resolutions.
In our view the Respondent’s construction of the resolutions is correct. They were effective in our view in creating a present entitlement to a share of the trust law income in the individual beneficiaries as the Respondent contends.
They had the effect of fixing the individual beneficiaries’ respective shares of net income as the proportion to which the specified amounts of “assessable income” bore to the trust’s s 95 net income as ascertained by the trustee.
We consider the Respondent was correct in his application of the decision in Bamford, and assessing the individual beneficiaries to the increased net income in the same proportions as he calculated they shared in the trust law income according to the resolutions.
PENALTIES
As the first issue has been resolved in the Respondent’s favour it follows that in respect of the First to Fifth Applicants the returns in each of the relevant years were false or misleading in a material particular within the meaning of s 284-75(1) of Schedule 1 to the TAA and in each case there is a shortfall within s 284-80.
That is to say, in respect of the First, Second and Third Applicants, the shortfalls arose from returning their share of net income of the JFT in amounts which were less than the net income that was assessable under s 97 of ITAA36.
In respect of the Fourth and Fifth Applicants the shortfall arose in relation to the Sixth Applicant as trustee of the JFT returning the Fourth and Fifth Applicant’s share of the net income of the JFT in amounts which were less than the net income that was assessable under s 98 of ITAA36.
Section 284-75(1) of the TAA provides:
284-75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law (other than the * Excise Acts); and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.
The shortfalls stem from the disallowance of the underlying deductions at the JFT level and the SAA level. No evidence has been led and no submissions are made with respect to these underlying deductions which were ultimately disallowed or the penalties imposed. Irrespective of the manner in which the net income of the JFT was calculated, the issue is whether s 284-75(5) applies to excuse the Applicants from liability to a penalty under sub-section (1).
Section 284-75(5) provides relevantly:
(5)You are not liable to an administrative penalty under subsection (1) … for a statement that is false or misleading in a material particular if you, and your * agent (if relevant), took reasonable care in connection with the making of the statement.
The reasonable care test “calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer’s tax obligations”[29].
[29] Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) (2011) 196 FCR 457, 465 [38].
The Applicants have submitted that reasonable care has been exercised. They contend that the expression “presently entitled”[30] is not defined, and the individual beneficiaries (through their agent) have taken reasonable care in analysing Bamford.
[30] Appearing in ITAA36, s 95.
The Applicants submit that professional advice was taken as to the form of drafting of the resolutions. Reliance is placed on the statements of Dr Rowntree[31] and Mr Donkin.[32]
[31] Exhibit 3, statement of Peter James Donkin dated 28 June 2019.
[32] Exhibit 2, statement of Bruce Elliott Rowntree dated 2 August 2019.
Dr Rowntree has practised as a solicitor since October 2005.[33] The Respondent acknowledged that he was “very well qualified”. Dr Rowntree says he recognises the form and substance of the resolutions by Joshline as trustee of the JFT in each of the relevant years “as my standard form of wording for a trustee resolution following on from the decision of the High Court in Bamford.”[34]
[33] Exhibit 3, [2].
[34] Exhibit 3, [10].
Dr Rowntree says:[35]
I recall that I advised Mr Donkin, in the preparation of the trustee’s resolutions for each year, that the resolutions were effective to ensure the present entitlement to a particular and defined amount of distributable trust law income with the consequence that the percentage share of the net income was always the amount the beneficiary returned in his or her tax return. I recall I used words to Mr Donkin each year to the effect that:
“the entitlement to an amount of distributable income is variable so that the share of the net income remains the same”.
[35] Exhibit 3, [11].
Mr Donkin says that around 30 June in each of the relevant years, as sole director of Joshline, he considered the needs of his family and prepared resolutions to distribute the income of the trust received that financial year.[36]
[36] Exhibit 2, [2].
Mr Donkin says[37]:
3. I was concerned to ensure that the beneficiaries who were allocated income were subject to tax on the amounts received and I sought advice from Dr. Rowntree of Bonnell Rowntree and later Rubicon Lawyers Pty Limited.
4. The form of resolutions prepared in each of the years was based upon the advice of Dr. Rowntree to ensure that the beneficiaries were taxed on the amounts received.
[37] Exhibit 2, [3] & [4].
The Respondent referred to Aurora Developments Pty Ltd v Commissioner of Taxation (No 2)[38] where the Federal Court set out part of an Explanatory Memorandum[39] which, it was submitted, reflects the proper approach to a reasonable care test. The Memorandum includes the following[40]:
[38] (2011) 196 FCR 457.
[39] Revised Explanatory Memorandum to the Bill which became A New Tax System (Tax Administration) Act (No. 2) 2000 (Cth) (Act 91 of 2000).
[40] (2011) 196 FCR 457 at 464 [37].
1.67The reasonable care test requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer’s tax obligations. …
1.68The test looks to whether a person, in all the circumstances of the taxpayer, would have foreseen as a reasonable probability or likelihood the prospect that the act or failure to act would result in a shortfall amount. It is not a question of whether the taxpayer actually foresaw the probable impact of the act or failure to act, but whether a person in the same circumstances of the taxpayer would have foreseen it. The test does not depend on the actual intentions of the taxpayer.
1.69Reasonable care requires a taxpayer to make a reasonable attempt to comply with the provisions of a taxation law. The effort required is one commensurate with all the taxpayer’s circumstances, including the taxpayer’s knowledge, education, experience and skill.
…
What is reasonable care?
1.73On questions of interpretation, reasonable care requires a taxpayer to come to conclusions that would be reasonable for an ordinary person to come to in the circumstances of the taxpayer. If the taxpayer is uncertain about the correct treatment of a tax-related matter, reasonable care requires that taxpayer to make reasonable enquiries to resolve the issue. Reasonable enquiry would include the taxpayer consulting someone or some text like an ATO publication or other reference in an effort to satisfy the taxpayer about the proper tax treatment of the matter. The taxpayer would need to have reasonable grounds for believing the source consulted reflected the true tax position in respect of the matter…
1.74The taking of a position with respect to a tax matter that is frivolous, or which lacks a reasonable basis, would be a strong indication of a lack of reasonable care.
1.75A taxpayer who prepares his or her own return or BAS would usually be taken to have exercised reasonable care if in doing so the taxpayer relies upon the advice of a registered tax agent, accountant or lawyer or other person whom the taxpayer could reasonably expect to provide competent advice on the relevant matter. On the other hand, where such advice is not followed this would usually mean that the taxpayer did not exercise reasonable care.
1.76If a taxpayer seeks to rely upon the wrong advice, and the taxpayer’s skill and education was such that the taxpayer could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. A taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the adviser and this had materially affected the advice on which the taxpayer sought to rely.
…
1.78A taxpayer who relies upon the advice from a third party of a fact that is material to the preparation of the taxpayer’s return (e.g. a bank providing a statement of the amount of interest earned by the taxpayer) will not usually be liable for penalty if the advice is wrong, as taxpayers are ordinarily entitled to rely on such advice. However, if the taxpayer knew, or could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty…
The Respondent also referred to the decision of Federal Court in Weyers v Commissioner of Taxation[41] which recognises that a taxpayer may be entitled to rely upon the advice of his or her accountant or solicitor, save where the taxpayer would be expected to know that the advice was not worthy of reliance.
[41] [2006] FCA 818 at [155].
In the same case the Court said[42]:
A client is not obliged or entitled to accept bland assurances by his or her professional advisers. Bland assurance is not the same thing as professional advice. A taxpayer may simply accept advice that he or she will achieve a tax benefit if he or she acquires a particular entity, but such acceptance is at the taxpayer’s own risk. If the advice is wrong, there will be consequences….
[42] Ibid, at [156].
The Respondent makes three principal submissions with respect to whether Mr Donkin took reasonable care. First, the standard of care that would be expected of Mr Donkin is high. Mr Donkin has significant experience as an accountant and is a registered tax agent for a number of taxpayers.
We accept that the test of reasonable care requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer.
Secondly, it was pointed out that Mr Donkin deducted amounts at the JFT level and the SAA level in a manner that was reckless and in intentional disregard of the tax law. In those circumstances, it was submitted, reasonable care in preparing the Applicants’ tax returns required a very high level of certainty that the relevant share of net income would not be affected.
We accept that what is reasonable must be considered in context, so that the conduct in a question ought reasonably reflect, for example, the seriousness of the consequences to the taxpayers and the revenue.[43] In consequence we generally accept the Respondent’s first and second principal submissions.
[43] Ibid.
Thirdly, it was submitted on behalf of the Respondent, that the statements of Mr Donkin and his lawyer, Dr Bruce Rowntree, are insufficient to discharge the Applicants’ onus of establishing that reasonable care was taken in seeking advice.
It was submitted that the Tribunal is in no position to evaluate the basis on which the legal conclusions recorded in the statements were reached. It was also pointed out that a taxpayer would be at risk of a penalty if the taxpayer was careless in presenting all of the relevant facts to an adviser and such a failure materially affected the advice upon which the taxpayer sought to rely.
It was pointed out that there is absent any explanation as why Dr Rowntree reached his conclusion. It is not apparent whether Dr Rowntree was provided with a copy of the trust deed. Dr Rowntree’s reasoning is not exposed. The advice, it is submitted, is of a general nature. No written advice has been produced. Mr Donkin was not put in a position to analyse Dr Rowntree’s conclusion for himself.
The Respondent submitted that Dr Rowntree’s advice, in the circumstances in which it was given and received, is properly characterised as “bland assurances” rather than professional advice. It was further submitted that Mr Donkin would be expected to know that the “advice”, in the circumstances that it was given and received, was not worthy of reliance.
We do not think this characterisation does justice to Dr Rowntree’s advice. Nor do we consider that Mr Donkin should have considered it unreliable. It is not clear what were the circumstances in which the advice was received, but it is not without significance that the same advice was given in each of the relevant years.
The matters raised by the Respondent all carry some weight. In the end, however, we have concluded that Mr Donkin, and through him the other Applicants, took reasonable care in relying on Dr Rowntree’s advice in preparation of the returns in the relevant years.
It follows that it is unnecessary to consider remission of penalties.
CONCLUSIONS
The following orders should be made:
(a)The objection decisions dated 6 October 2017 so far as they assessed the First to Fifth Applicants (including, in the case of the Fourth and Fifth Applicants, the Sixth Applicant as trustee for the Joshline Family Trust) on the increase in the net income of the trust consequent upon inter alia the disallowance of claimed deductions for the income years ended 30 June 2010 to 30 June 2013 are affirmed.
(b)The objection decisions so far as they imposed administrative penalties in respect of the First to Fifth Applicants (including, in respect of the Fourth and Fifth Applicants, upon the Sixth Applicant as trustee for the Joshline Family Trust) for including false or misleading statements in their returns for the income years ended 30 June 2010 to 30 June 2013 are set aside.
(c)The parties have liberty to apply within fourteen (14) days from the date of publication of this decision in relation to any issues they may have as to the form of the above orders.
89. I certify that the preceding 88 (eighty-eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy and Member P Ranson
....................................[sgd]....................................
Associate
Dated: 10 December 2019
Date(s) of hearing: 12 and 13 September 2019 Date final submissions received: 16 September 2019 Counsel for the Applicant: Mr I Young Solicitors for the Applicant: Rubicon Lawyers Pty Ltd Counsel for the Respondent: Ms K Deards SC and Mr R May Solicitors for the Respondent: Australian Government Solicitor
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