Richardson v Commissioner of Taxation
[2001] FCA 1354
•21 SEPTEMBER 2001
Richardson v Commissioner of Taxation [2001] FCA 1354
Income Tax
Richardson v Commissioner of Taxation [2001] FCA 1354
INCOME TAX - trusts - trust income - trust in the business of deal making in land - whether proceeds of sale income or capital of the trust for trust purposes - whether trustee exercised power in trust deed to treat income as capital - whether beneficiary presently entitled to any income of the trust estate
Income Tax Assessment Act 1936 (Cth), s 97(1)(a)(i)
Administrative Appeals Tribunal Act 1975 (Cth), s 44(1)
Case 15/97 97 ATC 208 discussed
Richardson v Commissioner of Taxation (1997) 80 FCR 58 referred to
McBride v Hudson (1962) 107 CLR 604 discussed
Ritchie v Trustees Executors & Agency Co. Ltd (1951) 84 CLR 553 referred to
Federal Commissioner of Taxation v Raptis (1989) 20 ATR 1262 referred to
Hassel v Perpetual Executors Trustees & Agency Company (WA) Limited (1952) 86 CLR 513 referred to
Thornley v Boyd (1925) 36 CLR 526 referred to
Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 referred to
Commissioner of Taxation of the Commonwealth of Australia v Australia and New Zealand Savings Bank Limited (1998) 194 CLR 328 referred to
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 referred to
Zeta Force Pty Ltd v Commissioner of Taxation (1988) 84 FCR 70 referred to
IAN RICHARDSON v COMMISSIONER OF TAXATION
V 212 of 2001
BEAUMONT, LINDGREN & KENNY JJ
21 SEPTEMBER 2001
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 212 OF 2001
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: IAN RICHARDSON APPELLANT
AND: COMMISSIONER OF TAXATION RESPONDENT
JUDGES:
BEAUMONT, LINDGREN & KENNY JJ DATE OF ORDER: 21 SEPTEMBER 2001 WHERE MADE: MELBOURNE
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs of the appeal.
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 V 212 OF 2001
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: IAN RICHARDSON APPELLANT
AND: COMMISSIONER OF TAXATION RESPONDENT
JUDGES: BEAUMONT, LINDGREN & KENNY JJ DATE: 21 SEPTEMBER 2001 PLACE: MELBOURNE
REASONS FOR JUDGMENT
beaumont j:
1 I agree with Kenny J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont.
Associate:
Dated: 21 September 2001
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 212 OF 2001
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: IAN RICHARDSON APPELLANT
AND: COMMISSIONER OF TAXATION RESPONDENT
JUDGES: BEAUMONT, LINDGREN & KENNY JJ DATE: 21 SEPTEMBER 2001 PLACE: MELBOURNE
REASONS FOR JUDGMENT
lindgren j:
2 I agree with Kenny J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.
Associate:
Dated: 21 September 2001
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 212 OF 2001
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: IAN RICHARDSON APPELLANT
AND: COMMISSIONER OF TAXATION RESPONDENT
JUDGES: BEAUMONT, LINDGREN & KENNY JJ DATE: 21 SEPTEMBER 2001 PLACE: MELBOURNE
REASONS FOR JUDGMENT
KENNY J:
3 The appellant was assessed by an amended assessment to income tax under Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) ("the Act") in respect of income derived by him in the year ended 30 June 1988. The assessment was made pursuant to s 97(1)(a)(i) of the Act on the basis that the appellant was a beneficiary of a trust estate (the Richardson Family Trust, of which Ian R Richardson Pty Ltd was the trustee) and was presently entitled to a share ($707,122) of the income of the trust estate in that period. The amount of $707,122 constituted part of the gain made by the trustee on the sale of two properties which the respondent claimed were acquired and sold by the trustee in the course of its business as a builder and project manager.
procedural history
4 The respondent disallowed an objection by the appellant to the assessment and, on review, the Administrative Appeals Tribunal ("the Tribunal") affirmed the respondent's decision. Pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act"), the appellant appealed to this Court. The Court, constituted by Merkel J, held that the determination of the net income of the trust estate for trust purposes was a question of fact for the Tribunal, and that the Tribunal had erred because it had not determined that fact. His Honour allowed the appeal; set aside the decision of the Tribunal; and remitted the matter to the Tribunal "to be determined in accordance with law after the hearing of such further evidence as the parties may wish to lead in relation to the determination of the net income of the trust estate of the Richardson Family Trust for trust purposes for the year of income ended 30 June 1988".
5 On re-hearing the matter, the Tribunal again affirmed the respondent's decision and the appellant again appealed to this Court pursuant to s 44(1) of the AAT Act. In substance, the Court, this time constituted by Finkelstein J, dismissed the appeal, although it referred the assessment to the respondent to be amended by reducing the appellant's taxable income for the year ended 30 June 1988 from $725,452 to $697,452. This is an appeal from his Honour's decision.
the first decision of the tribunal
6 The following summary of the background facts derives from the first decision of the Tribunal. This decision is reported as Case 15/97 in 97 ATC 208.
7 In 1981, the appellant (on behalf of the trustee) was negotiating for a project for the construction of a head office for a prospective client.
There were several possible sites available in the environs of Melbourne. A property facing a main street in Box Hill was suggested ... . In order to construct a building in conformity with [the client's] requirements it was necessary to have the various lots constituting the property facing a main street in Box Hill rezoned, from light industrial, reserve light industrial/resident ("C") to office zone. (See 97 ATC 208 at 210.)
An owner of a neighbouring property, No 20 Prospect Street, Box Hill, informed the appellant that she was not prepared to support his proposal. In order to overcome any opposition by her, the trustee purchased her property for a price of $60,000. The trustee then held No 20 Prospect Street as a tenanted residential property.
8 The appellant was successful in obtaining the requisite consents to the rezoning he sought. In a contract for the purchase of land for the redevelopment, the purchaser was identified as the trustee or its nominee. Under the same contract, the trustee or its nominee also purchased property at No 14 Prospect Street, Box Hill, which was contiguous to, and to the rear of, the principal properties purchased for the redevelopment. No 14 Prospect Street was acquired by the trustee with a view to providing future access to the property situated on the main road, but it did not ultimately form part of the redevelopment. The trustee held No 14 Prospect Street as a tenanted residential property. When the project was completed, the ultimate owner acquired the redeveloped land, and the trustee retained Nos 14 and 20 Prospect Street.
9 In August 1984, the owner of Nos 16 and 18 Prospect Street offered to exchange No 18 Prospect Street for No 14 at no cost to the trustee. The appellant, on behalf of the trustee, agreed to the exchange. The trustee sold No 14 Prospect Street for $155,000 and purchased No 18 Prospect Street for $155,000. In consequence of the exchange, the trustee and the former owner of Nos 16 and 18 Prospect Street each came to hold two contiguous blocks. This permitted them to take advantage of the proposed planning scheme to allow for office development .
10 Nos 18 and 20 Prospect Street were subsequently rezoned but the trustee continued to hold them as tenanted properties until May 1987 when an offer, "which was too good to refuse", was made by a third party to acquire the blocks for $950,000. The trustee accepted the offer and made a substantial profit on the sale of the two blocks.
11 The net profit of the trust was recorded in the trustee's profit and loss statement for the year ended 30 June 1988 as $901,265. The statement, which was prepared after 30 June 1988, recorded a net trading loss of $85,806 but, after accounting for interest, rental income and a "[c]apital gain on disposal of fixed assets" of $863,935, the net profit was disclosed. The sum of $863,935 was made up as follows:
Capital gains made on sale of No 18 and No 20
The balance sheet of the trust as at 30 June 1988 shows the "capital gain" of $863,935 transferred to the "capital profits reserve", and a distribution to beneficiaries of $37,330.
12 By a resolution of the directors of the trustee on 24 June 1988, it had been resolved that:
the net income of the Trust be distributed in the following manner:The Second Richardson Family Trust $47,000
and the remainder to Ian Richardson.
The resolution was found by the Tribunal to be effective and binding on the trustee. The Tribunal accepted that the minute of 24 June 1988 accurately reflected the trustee's decision. (The Tribunal did not accept a later unsigned resolution of the directors of the trust, dated 22 August 1988, as effective and binding on the trustee.)
13 In its 1988 income tax return, the trustee treated the capital profit of $863,935 as exempt income; recorded a taxable income of $37,330; and recorded the taxable income as being distributed to two beneficiaries, namely, the Second Richardson Family Trust as to $19,500, and the appellant as to $17,830.
14 In the Tribunal's first decision, the Tribunal held, at 97 ATC 214-215:
Having listened carefully to [the appellant's] evidence, the Tribunal is satisfied that [No 14 Prospect Street] was acquired as part of the purchase of the properties ... . It was incidentally acquired as part of the property needed by the trust for purposes of the development to be carried out ... . ... The commendable frankness with which [the appellant] gave evidence leaves the Tribunal satisfied that the business conducted by the trust is that of a `deal maker', and that the property at [No 14 Prospect Street] arose as part of that deal making.The trust acquired the property at [No 20 Prospect Street] to ensure that there was no opposition to the development of the ... complex. ... The purchase was perceived by [the appellant] as being necessary in order to achieve the major objective, vis, approval for the rezoning of the ... development site by the removal of a property owner who had a right to object and who would be likely to object to the rezoning. The Tribunal is satisfied the purchase arose as part of the trust's major business activity.
...
The Tribunal is satisfied that the [appellant] was approached ... to exchange [No 14 Prospect Street] for [No 18 Prospect Street], so that [the owner of No 18 Prospect Street] would have contiguous land ... required before there could be approval for redevelopment. ... The exchange carried out, at no cost to the [appellant], also gave the [appellant] a site which could, once rezoning occurred, be redeveloped. The exchange was subject to that rezoning occurring. The Tribunal is satisfied that the exchange should be viewed as part of the `deal making' aspect of the trust's business. ... It follows that the Tribunal is satisfied that the [appellant's] acquisition of both [No 20 and No 18 Prospect Street] arose as an incident to the trust's deal making business, and not as part of a strategy of the trust to acquire property for long term rental investment purposes. ... Accordingly, the profit from the sale of the properties is taxable as income under the provisions of s 25(1) of the Act.
15 The Tribunal concluded, at 97 ATC 215:
It follows from the conclusions reached by the Tribunal that, under the provisions of s 97 of the Act, the whole of the net income of the trust estate, in excess of $47,000, is assessable to [the appellant]. Since the Tribunal has found that the net income of the trust estate is the same as the trust income, and that it is assessable under the provisions of s 25(1), the issue of apportionment, addressed by the Federal Court in [Davis v Commissioner of Taxation (1989) 86 ALR 195] ... does not arise for consideration.
THE DECISION OF JUSTICE MERKEL
16 The challenge to the Tribunal's finding that the profit from the sale of the properties was assessable income under s 25(1) of the Act failed before Merkel J. His Honour's judgment is reported: see Richardson v Commissioner of Taxation (1997) 80 FCR 58. His Honour observed at 65 that the Tribunal:
... concluded that the acquisition of No 14 and No 20 and the later exchange of No 14 for No 18 arose as an incident of the Trust's `deal making business' and not as part of a strategy of the Trust to acquire property for long term rental investment purposes. A fair reading of the AAT's reasons for decision discloses that it:• carefully scrutinised the Trust's business
• decided that the two additional blocks were acquired as part or as an incident of the ordinary business activities of the Trust
• concluded that the requisite profit-making purpose can be derived from the association between the acquisition and the sale of the land and the ordinary business activities of the Trust.
There was ample evidence to support the conclusions of the AAT which were consistent with the principle stated in [Westfield Ltd v Commissioner of Taxation (Cth) (1991) 28 FCR 333]. In my view no error of law on the part of the AAT has been demonstrated. Accordingly, the appeal on the first issue, which relates to the assessibility of the profit derived from the sale of No 18 and No 20, must fail.
17 The error in the first Tribunal decision arose, so Merkel J held, from the Tribunal's failure to determine the net income of the trust estate for trust purposes. In relation to the Tribunal's conclusion that "the net income of the trust estate is the same as the trust income", Merkel J observed at 68:
It is not possible to determine from the decision of the AAT, or the evidence before it, how it arrived at that conclusion. Counsel for the Commissioner relied upon it as a finding of fact but could not point to anything in the decision or the evidence that supported or justified the statement or the finding said to have been made. Indeed all of the material before the AAT pointed to a significant discrepancy between the trust income and the assessable income. In order to arrive at the conclusion that the trust and assessable income were identical a number of issues were required to be addressed and findings were required. In my view it is clear that the AAT must have erred in law in arriving at its conclusion.
18 After considering provisions of the trust deed (referred to below), his Honour held at 72:
The resolution of 24 June 1988 was passed prior to the completion of the accounting period. As at 24 June 1988 the quantum of the net income, as opposed to the distribution of and therefore entitlement to the net income, remained to be determined in accordance with the Trust Deed. The quantum of the net income which was to be distributed by reason of the resolution was a question of fact to be determined by the AAT having regard to the material placed before it, including material relating to whether the Trustee has made a determination in respect of that income under cl 1(9) [of the Trust Deed]. As this particular issue was not the subject of detailed argument before me and the matter is to be remitted to the AAT, inter alia on this question, it is undesirable for me to say any more than that:• the determination of the net income of the Trust estate for trust purposes is a question of fact for the AAT
• the income is to be determined in accordance with the Trust Deed and any applicable determinations of the Trustee under cl 1(9)
• subject to the above matters, proper trust accounting principles are likely to be relevant to the determination of the net income.
As already noted, his Honour remitted the matter to the Tribunal "to determine the net income of the Trust estate for trust purposes".
the second decision of the tribunal
19 When the matter returned to the Tribunal, "the parties agreed that there was no dispute as to the facts of the matter as found and stated" in the first decision of the Tribunal. At the second hearing, the Tribunal understood that its task was to make "a finding as to the net income of the Trust".
20 Amongst other things, the Tribunal received evidence from Mr Bruce Porter, who was a chartered accountant, and Mr Keith James, who was a solicitor and accountant. The appellant relied on the evidence of Mr James, the respondent on the evidence of Mr Porter.
21 Before making relevant findings, the Tribunal observed that "the [trust's] minutes and accounts were deficient". Accordingly, it rejected the appellant's contention, supported by Mr James, that "a reconstruction of the accounts can be easily effected to clarify the capital and revenue details of the Trust". The Tribunal observed:
These details, which were not before the Tribunal, can only be obtained from the general ledger. While the balance sheet is assumed to accurately reflect the general ledger, it is also noted by Mr James that certain details are omitted from the balance sheet, such as the value of Nos. 14 and 18. This leads me to the conclusion that the transposing of amounts from the balance sheet to capital and revenue accounts may not fully represent the Trust account. The onus being on the taxpayer, this has not been discharged.
22 The Tribunal continued:
There is no dispute that the sale profit was treated in the balance sheet as part of the net profit of the Trust prior to transfer to the capital reserve account. There is no evidence as to when this transfer occurred ... . Therefore I can only refer to the statement as provided, which is to include the sale profit as part of the net profits by considering the accounts on an entity basis. The Trust definition of `income' in cl 1(9) [of the Trust Deed] is broad enough to include the sale profits as income of the Trust when received. At some later time the funds were transferred to the reserve account.It would therefore seem that the present entitlement of the beneficiaries to the net profits arises when the sale profits are received as income of the Trust where the net income of the Trust includes the profits as a separate income source to `sales'. ...
In any event, the important factor is the inclusion ... of the sale profits with the income in the balance sheet to give an amount for net profits, being the net income as accepted from Mr Porter's evidence. This being the assessable income less allowable deductions as prescribed in s 95. The assessable income is the amount of $1,052,400 inclusive of profit, interest and rental income, less the deductions as specified in the balance sheet of $151,135, to yield net income of $901,265.
While Mr James essentially considered that the profits always remained as capital from the sale of fixed assets and could be isolated from the income, this cannot be evidenced in their treatment in the first page of the balance sheet - the profits are brought into account as part of the net income of the Trust together with interest and net rental income.
Therefore [the appellant] prima facie has a present entitlement to this net income as an income beneficiary prior to the trustee's distribution of funds by resolution. After transfer of the profits at an unknown time to the capital reserve, this present entitlement dissipated, not through distribution of the income, but through transfer to the capital reserve thus to be held for the benefit of the corpus beneficiaries. The [appellant] was not a corpus beneficiary. ...
Thus I must now return to the question: what is the character of the moneys in the hands of the Trustee prior to distribution? As discussed above, there has been no distribution of the moneys to the beneficiaries, but I consider that this is not fatal. While the present entitlement of the beneficiaries may be dictated by the account records and accounting standards, these same considerations cannot apply to the characterisation of the moneys in the hands of the trustee. Whilst not determinative, both witnesses considered that the moneys were of a revenue nature as arising from the sale of fixed assets.
On the facts as found, the proceeds of sale are realised on the sale of capital assets of the trust acquired for the purpose of sale at a profit. As determined by the Tribunal at first instance and accepted by the Court, these amounts arise as part of the Trust's business in acquiring property for resale at a profit, and on ordinary concepts therefore constitute income in the hands of the Trustee. It follows that the s 97 calculation must apply in including the sale profit as income of the Trust for taxation purposes and the applicant must be assessed on the balance after payment of $47,000 in accordance with the resolution of 24 June 1988.
the decision of justice finkelstein
23 In relation to the Tribunal's reasons for its decision, Finkelstein J remarked at [33]:
To determine whether the tribunal has committed an error of law such that its decision ought to be set aside is a task usually undertaken by an examination of the tribunal's reasons to identify the error. In this case, however, that approach is made difficult, if not impossible, by the lack of clarity in the reasons which are supposed to demonstrate error. It is convenient for me to approach the case in the same way as the parties, namely to consider whether, on the facts as found by the tribunal (at the first hearing and on the remittal) it follows, as a matter of law, that the decision under review should have been affirmed or set aside. If the decision was correct, then no relevant error of law will be established. On the other hand, if the objection should have been allowed on the facts as found, then legal error will have been demonstrated, although the precise error may not be identifiable.
24 Finkelstein J ultimately found that the Tribunal had made no error of law save in its determination of the part of the profit on the sale of the properties that was to be included in the appellant's assessable income for the relevant income year. There was, so his Honour held, no error in the Tribunal's finding that the income of the trust estate included the gain ($707,122) made on the sale of the properties at Nos 18 and 20 Prospect Street, Box Hill.
25 In supplementary reasons for judgment, his Honour continued:
To this figure must be added the difference between the net profit of the trust disclosed by the trust's accounts, which is $901,265, and the `capital gain on disposal of fixed assets' stated in the accounts, namely $863,935. The sum, $744,452, is the net income of the trust estate for the year ended 30 June 1988. The [appellant] is entitled to $697,452, being the whole of the net income of the trust apart from $47,000. On the proportionate basis of calculating the [appellant's] `share of the net income of the trust estate', the [appellant] is entitled to 93.687% of the income of the trust, so his taxable income, should be calculated by applying 93.687% to the net income of the trust estate, which yields $697,452. This is the amount on which the [appellant] should be assessed to income tax.
The appellant did not challenge his Honour's reasoning as set out in the passage above. On appeal, the appellant contested his Honour's holding that no error was shown in the Tribunal's finding that the income of the trust estate included the gain made on the sale of the properties, as well as his Honour's determination that, on the facts as found by the Tribunal, the appellant was presently entitled to a share of the income of the trust estate.
the trust deed
26 In order to understand the parties' respective submissions, it is necessary to refer to the terms of the trust deed. For this reason, the relevant parts of the deed are set out below.
27 By cl 2 of the trust deed, the trustee is to "stand possessed of the Trust Fund and of the income thereof upon the Trusts and with and subject to the powers and provisions ... expressed concerning the same".
28 There is a definition of "the Trust Fund" in cl 1(3). It provides:
`the Trust Fund' means the said settled sum being a sum paid or to be paid by the Settlor to the Trustee upon the execution hereof all moneys investments and property paid or transferred to and accepted by the Trustee as additions to the Trust Fund the accumulations of income hereinafter directed or empowered to be made all accretions to the Trust Fund and the investments and property from time to time representing the said money investments property accumulations and accretions or any part or parts thereof respectively.
29 "Income" is defined in cl 1(9) as follows:
`income' shall include any amounts which the Trustee shall in its absolute discretion determine to form income of the Trust Fund whether or not:-(a) such amounts constitute income for the purposes of the Income Tax Assessment Act (or any other legislation relating to taxation of any form) or not;
(b) such amounts arise from investments or personal exertion;
(c) such amounts constitute gains of a capital nature (which have accrued actually or notionally) for the purposes of any legislation relating to taxation of any form.
30 As Finkelstein J noted, the definition of "income" is an inclusive one. Thus, his Honour observed as follows:
Accordingly, subject to certain qualifications ... , the income of the trust includes that which is regarded as income according to ordinary principles. In addition, the trustee can decide that any other receipt shall form part of the income of the trust, whether or not that amount is income according to ordinary principles.
31 Under the deed, the trustee has power to make a determination to the effect that a receipt that is income according to ordinary principles is not income for the purposes of the trust. This is the qualification to which his Honour was referring. Under cl 6(h), the trustee may, "at its absolute discretion notwithstanding anything to the contrary herein contained or otherwise provided", "determine whether or not any income constitutes a gain of a capital nature ...", although only for a limited purpose, namely, for the purpose of "any legislation relating to taxation". Of course, as his Honour noted, a determination made under cl 6(h) could not bind the revenue authorities.
32 Clause 7(m) also gives the trustee a further power to determine for the purposes of the Trust whether a gain or receipt is capital or income. It provides that the trustee shall have power:
to determine whether any real or personal property or any increase or decrease in amount number or value of any property or holdings of property or any receipts or payments from for or in connection with any real or personal property shall be treated as and credited or debited to capital or to income and generally to determine all matters as to which any doubt difficulty or question may arise under or in relation to the execution of the trusts and powers of this Settlement; and every determination of the Trustee in relation to any of the matters aforesaid whether made upon a question formally or actually raised or implied in any of the acts or proceedings of the Trustee in relation to the Trust Fund shall bind all parties interested therein and shall not be objected to or questioned on any ground whatsoever.
33 Clause 3 governs the way in which the trustee is to deal with the income of the trust. As Finkelstein J observed:
For that purpose income will comprise income according to ordinary principles, except to the extent that a determination under cl 7(m) changes that position, plus any amount determined to be income under cl 1(9), minus any sum that the trustee has determined to be capital gain under cl 6(h).
34 Clause 3 relevantly provides:
(i) The Trustee shall in each accounting period until the Vesting Day pay apply or set aside the whole or such part (if any) as it shall think fit of the net income of the Trust Fund of that accounting period to or for the benefit of or for all or such one or more exclusive of the others or other of the Income Beneficiaries living from time to time in such proportions and in such manner as the Trustee in its absolute discretion and without being bound to assign any reason therefor shall think fit; any amounts set aside for any Income Beneficiary as aforesaid shall not form part of the Trust Fund as defined in Clause 1(3) hereof but shall upon setting aside be thenceforth held by the Trustee as a separate trust fund on trust for such beneficiary absolutely with power to the Trustee pending payment over thereof to such beneficiary to invest or apply to deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in Clause 6(d) hereof. The application or setting aside of any part of the income of the Trust Fund to or for the benefit of any beneficiary may be effectually made by a resolution of the Trustee that a sum out of or a portion of the net income of the Trust Fund for the accounting period be allocated to such beneficiary or that a sum out of or portion of the net income as defined in Section 95 of the Income Tax Assessment Act of the Trust Fund for the accounting period be allocated to such beneficiary And any resolution of the Trustee allocating income as hereinbefore provided shall be irrevocable and the income of the Trust Fund shall be dealt with as required by such resolution.(ii) Any income not paid or applied pursuant to the preceding sub-clause in each year of income shall be held by the Trustee in trust for such of the Corpus Beneficiaries as shall be living at the 30th day of June in each year of income and if more than one such beneficiary shall be living at the aforesaid date then equally between them as tenants in common and for the purposes of this sub-clause each date of accrual of each such portion of income shall be deemed to be the date of vesting.
(iii) Notwithstanding anything to the contrary contained in the preceding sub-clauses the Trustee may by resolution in each year of income and at its own discretion determine to accumulate for the benefit of any adult Income Beneficiary to the extent permitted by law and for the benefit of any infant Income Beneficiary during the minority of such infant or infants any income derived in such year of income which the Trustee shall have appropriated for such infant or infants and the Trustee may postpone the payment of such accumulations to any such infant or infants until the date of vesting and until the aforesaid date any such accumulations shall be treated as an accretion to the Trust Fund. ...
The appellant is an income beneficiary. This is relevant for the purposes of the trust deed, including cl 3.
the parties' submissions on appeal
35 The appellant submitted that his Honour had misconstrued and misapplied the trust deed in accepting that, for the purposes of the trust, the gain on sale of the two properties was income as defined in cl 1(9), and income for the purposes of cl 3 of the deed, unless the trustee exercised power under the deed to determine that the income was to be regarded as capital for the purposes of the trust. The appellant contended that, notwithstanding that the properties had been acquired as part of the deal-making business carried on by the trust, they formed part of the capital of the trust fund in the years subsequent to their acquisition and retained this character when they were sold.
36 The appellant submitted in writing that:
As at 30 June 1982, the trustee remained the owner of [No 20 Prospect Street]. It could have distributed the property in specie to the beneficiaries but did not. In its accounts for the year ended 30 June 1982 the trustee treated the purchase price of $60,000 as a capital cost and treated the corresponding asset as a non-current asset. ... The property formed part of the `Trust Fund' being `property paid or transferred to and accepted by the trustee as additions to the Trust Fund'....
The vendor [of the land for redevelopment] was obliged to sell No 14 to the Trustee or its nominee pursuant to the contract of sale ... . However, No 14 Prospect Street was not required to provide rear access to the ... property and was therefore not assigned to the financier of the ... development. The allotment was transferred to the trustee for no consideration. No 14 formed part of the `Trust Fund' being `property ... transferred to and accepted by the trustee as additions to the Trust Fund'. Alternatively, it was an `accumulation of income' and therefore formed part of the Trust Fund under clauses 1(3) and 3(ii).
37 In the course of his submissions, the appellant sought to meet the criticism levelled by Finkelstein J at the evidence of Mr James. The appellant maintained that, as Mr James said in evidence before the Tribunal, it was open to the trustee to treat the value of Nos 14 and 18 Prospect Street as income in the year of receipt. Since the income was not distributed to any beneficiary in the accounting period of receipt, then, so the argument ran, it was held in trust by the trustee for the corpus beneficiaries, not the appellant, pursuant to cl 3(ii), and was an "accumulation of income" which was an addition to the trust fund under cl 1(3). The appellant submitted that, on the exchange of No 14 for No 18 in August 1984, No 18 became an addition to the trust fund.
38 With respect to No 20 Prospect Street, the appellant submitted that, although he might have done so, the trustee did not at any time resolve to treat the property as trading stock and its acquisition as in the nature of income. Further, arguing by analogy with the decision in McBride v Hudson (1962) 107 CLR 604, the appellant submitted that, if No 20 Prospect Street was in fact in the nature of trading stock, then it formed part of the trust fund for the benefit of the corpus beneficiaries or remaindermen, in contradistinction to the income of the trust fund which derived from the trading stock and was the property of the life tenants. The property was, therefore, part of the trust fund when it was sold in August 1987.
39 In written submissions, the appellant summarised this aspect of his case in the following terms:
It follows that at all material times from 1982 until August 1987 when the properties were sold, the properties formed part of the Trust Fund to which the corpus beneficiaries were entitled. The Appellant is not a corpus beneficiary. ... The rental income derived from those properties was `income' of the trust to which the income beneficiaries could become entitled at the discretion of the trustee. Absent a specific determination by the trustee, the general law concerning trust income applies - the fruit of the tree being the rental income is available for distribution to the income beneficiaries; and the Trust Fund (including the properties in Prospect Street) are retained for the benefit of the corpus beneficiaries. Hassell v Ball (1952) 86 CLR 513, 522-523.The sale of the Prospect Street properties in August 1987 was a change in investment. As a general principle, any augmentation of the Trust Fund as originally constituted or change in investment accrues to the capital of the Fund and belongs to the corpus beneficiaries.
Jacobs, Law of Trust in Australia, 4th Ed., 396, first paragraph [1932]; 409 [1950].
The appellant submitted that, by keeping the general ledger from which the profit and loss accounts and balance sheet were extracted, the trustee met its accounting obligations as required by trust law. He referred to McBride v Hudson at 623-624 and Ritchie v Trustees Executors & Agency Co. Ltd (1951) 84 CLR 553 ("Ritchie") at 583. The appellant claimed:
The only reason annual profit and loss accounts and balance sheets were produced was to satisfy the requirements of the Commissioner of Taxation to lodge trust tax returns.
There was, the appellant said, no evidence that the trustee had made any determination under the trust deed to include any amount in the nature of capital in the income of the fund. The appellant submitted that:
To the contrary, the trustee's accounts clearly disclose an intention on the part of the trustee that the proceeds of the disposal remain part of the Trust Fund. In the annual accounts prepared for tax purposes the trustee transferred the net capital profit to the capital profits reserve.
40 As the trustee had ascertained that the income of the trust estate in the accounting period ended 30 June 1988 was $37,330 and $47,000 had been distributed, by resolution, to the Second Richardson Family Trust, it followed, so the appellant said, that he was not entitled to any income of the trust estate for trust purposes, and the amount of his assessable income was nil. The appellant contended that the trustee "did not pay, apply or set aside the gain for the benefit of the Appellant", but "the trustee transferred the capital gain of $863,935 to" the capital profits reserve account as trust corpus after receipt.
41 The respondent maintained that the judgment delivered by Finkelstein J was correct, for the reasons given by his Honour.
consideration of the matters in issue
42 As already noted, Merkel J held, in a decision that was not subject to appeal, that the Tribunal committed no error of law in holding that the profit on the sale of the Box Hill properties was assessable income under s 25 of the Act, and formed part of the net income of the trust in accordance with s 95 of the Act. On this appeal, there were essentially two matters in issue: first, whether, in its second decision, the Tribunal had erred in identifying the income of the trust estate for trust purposes, and, secondly, whether, in its second decision, the Tribunal had erred in holding that the appellant was "presently entitled" to a share of the income of the trust estate.
43 Section 97(1) of the Act provided:
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; and
(b) the exempt income of the beneficiary shall include:
(i) so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii) so much of the individual interest of the beneficiary in the exempt 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,
except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate.
The appellant was at all times resident in Australia.
44 Section 95(1) defined "net income" as follows :
`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, except the concessional deductions and deductions under Division 16C and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under section 80, 80AAA or 80AA in respect of such of the losses of previous years as are required to be met out of corpus.
45 On the second occasion that this matter came before the Tribunal, the Tribunal referred to the fact, as "determined by the Tribunal at first instance and accepted by the Court", that the profit on the sale of the Prospect Street properties arose "as part of the Trust's business in acquiring property for resale at a profit, and on ordinary concepts therefore constitute[d] income in the hands of the Trustee". As already noted, the Tribunal had earlier found that the properties were acquired "as an incident to the trust's deal-making business". The finding that the amount of $707,122 was a profit realised as part of the trust's business was a finding of fact. Even if the finding were wrong, it would not follow that there was an error of law for the purposes of s 44(1) of the AAT Act. As Gummow J said in Federal Commissioner of Taxation v Raptis (1989) 20 ATR 1262 at 1263:
The `appeal' from the tribunal to this court must be solely `on a question of law'; AAT Act, s 44(1). There is no error of law simply in making a wrong finding of fact: Waterford v Commonwealth (1987) 163 CLR 54 at 77 per Brennan J. But the tribunal will have made an error of law if there was no evidence to support a conclusion of fact, if the only true conclusion which the tribunal, properly instructed as to law, could have reached is contrary to that it did reach, or if its decision otherwise was perverse: Lombardo v FCT (1979) 9 ATR 550; 40 FLR 208 at 210; Ditchfield v Sharp [1983] 3 All ER 681 at 685; FCT v Dunn (1989) 20 ATR 356; 89 ATC 4141 at 4144.
In this case, no error of law is shown in the critical finding that the profit arose as part of the business of the trust. For present purposes, therefore, the finding must be accepted.
46 Where a profit such as this arises from the sale of a trust asset in the course of the carrying on of business by the trustee pursuant to the trust instrument, then the profit realised on the sale is income, in the ordinary sense of the word, in the hands of the trustee: compare Hassell v Perpetual Executors Trustees & Agency Company (WA) Limited (1952) 86 CLR 513 ("Hassell") at 523 and contrast Thornley v Boyd (1925) 36 CLR 526 at 536. It is immaterial that, before sale, the assets formed part of the corpus of the trust, since all trust assets will form part of that corpus. The critical question is not whether, before sale, the property was part of the trust corpus, but whether the proceeds received on sale had the character of income or capital in the hands of the trustee. Cf Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 at 608, referred to by Gleeson CJ in Commissioner of Taxation of the Commonwealth of Australia v Australia and New Zealand Savings Bank Limited (1998) 194 CLR 328 at 337. I agree with Finkelstein J that the amount of $707,122 constituted income in the hands of the trustee and, therefore, income of the trust estate for trust purposes.
47 Given its income nature in the hands of the trustee, was the amount of $707,122 governed by cl 3 of the trust deed as Finkelstein J found? Since the amount of $707,122 was income according to ordinary principles, it was income for the purposes of the trust, unless the trustee had made a determination under either cl 6(h) or cl 7(m) that it was not income.
48 Neither party suggested that cl 6(h) of the deed had any present application. It may be recalled that a determination under that clause (whatever its operation) can be made only for the purpose of "legislation relating to taxation". Did the trustee exercise its power under cl 7(m)? The Tribunal found that the trustee did not exercise this power. After noting that Mr James (who, as already noted, gave evidence for the appellant) "considered that the Trustee exercised its discretion to treat the profit from the property sale as capital by transferring those funds to the capital reserve fund in accordance with cl 7(m) ...", together with the other relevant evidence, the Tribunal concluded that "the transposing of amounts from the balance sheet to capital and revenue accounts may not fully represent the Trust account. The onus being on the taxpayer, this has not been discharged". That is, having considered the possibility that, as Mr James said, the trustee exercised its power under cl 7(m) of the deed by transferring what was described in the balance sheet as a "capital gain" to the "capital profits reserve", the Tribunal held that no such exercise of power had been established. If no error of law is shown in the finding, then the finding must stand.
49 On appeal, the appellant challenged the Tribunal's finding that the entries in the balance sheet and profit and loss statement were unreliable, and the relevant information was obtainable only from the general ledger to which the Tribunal did not have access. Counsel for the appellant maintained that the trustee met his accounting obligations under trust law, and that the Tribunal should have accepted the entries as disclosing an intention, on the trustee's part, that the sale proceeds were part of the trust fund on capital account. I return to this contention below.
50 Before concluding this discussion of cl 7(m), it suffices to note Finkelstein J's observation that the entries are "entirely consistent with the view that was taken by the trustee, and presumably by its accountant, that the two parcels of land were acquired as a capital asset and were not part of the trading stock of the trust's business". As stated above, the appellant adopted this very position on the hearing of the appeal. As his Honour observed, on this view, there was simply no need for a determination under cl 7(m) since the character of the moneys in the hands of the trustee was of a capital nature on receipt. Further, I accept, as his Honour did, that if the trustee had exercised its powers under cl 7(m), the appellant would have said so when he gave evidence before the Tribunal. The appellant did not claim that any such determination had been made. Nothing he said indicated that the trustee gave any consideration to using its power under cl 7(m) of the trust deed.
51 Since the amount of $707,122 was income in the ordinary sense and there was no determination under cl 7(m) to alter its character for trust purposes, the amount was capable of constituting part of the net income of the trust fund to be dealt with under cl 3 of the trust deed. It may be noted that, although there was an inclusive definition of "income" in cl 1(9), there was no definition of "net income" in the trust deed. Neither party contended, however, that if the amount of $707,122 was income, it was not capable of forming part of the net income of the trust fund for the purposes of cl 3(i) of the trust deed.
52 It was open to the Tribunal to find that the entries in the balance sheet and the profit and loss statement did not establish an exercise of the trustee's discretion under cl 7(m) of the trust deed, notwithstanding that the latter part of cl 7(m) makes it clear that a determination under the clause need not be "made upon a question formally or actually raised" and may be "implied in any of the acts or proceedings of the Trustee in relation to the Trust Fund". A determination by the trustee was not required to be in, or evidenced by, any particular form. The Tribunal did not suggest otherwise, but found, and was entitled to find, that the documents before it did not establish a determination. As Finkelstein J suggested, the entries in the balance sheet and the profit and loss statement are consistent with a view that a determination under cl 7(m) was unnecessary.
53 Is any error shown in Finkelstein J's holding that the appellant was "presently entitled" to a share of the income of the trust estate"? I do not think that there is.
54 At [8] of his reasons for decision, Finkelstein J stated:
A beneficiary will be `presently entitled' to a share of income of the trust if the beneficiary can demand payment of the income from the trustee; that is, if the beneficiary has an indefeasible or vested interest in possession in the trust income: Commissioner of Taxation v Whiting (1943) 68 CLR 199; Union Fidelity Trust Co of Australia Ltd & Mayfield v Federal Commissioner of Taxation (1969) 119 CLR 177; Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444.
The parties accepted that this statement of principle was correct. The parties were at issue about the application of the principle, having regard to the trust deed.
55 By the operation of cl 3(i), the appellant would acquire a present entitlement to so much of the net income of the trust fund as the trustee set aside in the relevant accounting period "to or for" his benefit as an income beneficiary. If the trustee set aside part of the net income, that part would no longer form part of the trust fund as defined in cl 1(3). Pursuant to cl 3(i), the trustee might set aside any part of the trust fund by a resolution allocating that part to an income beneficiary, and any such resolution was irrevocable.
56 By its first decision, the Tribunal found that the resolution of 24 June 1988, which was made in the accounting period ended 30 June 1988 for the income of that period, was valid and binding on the trustee. The parties accepted this finding on the second occasion that they came before the Tribunal. The resolution "distributed" (or allocated) $47,000 to the Second Richardson Family Trust and the remainder of "the net income of the Trust" to the appellant. That is, in consequence of the 24 June 1988 resolution made under cl 3(i), the appellant became entitled to the whole of the net income of the trust save for $47,000. For present purposes, it is immaterial whether or not the appellant received all or any part of the fund representing his entitlement. Further, bearing in mind that a resolution under cl 3(i) is irrevocable, any post-30 June 1988 transfer of that fund by the trust's accountant (even with the trustee's approval) to a capital profits reserve account would not diminish the appellant's right to demand and receive payment. The fact that the precise quantum of his entitlement was not ascertainable until after 30 June 1988 would not prevent the right from arising, or render his interest contingent. It follows from this that the appellant was, as Finkelstein J found, presently entitled (within the meaning of s 97(1)) to the whole of the income of the trust estate less the amount of $47,000 that the trustee allocated to the Second Richardson Family Trust.
57 At first instance and on appeal, counsel for the appellant said, in argument, that the 24 June 1988 resolution ought not to be given its literal meaning. He did not state what other meaning, apart from its literal meaning, the resolution might bear. There was no evidence adduced before the Tribunal to show that the trustee did not intend the resolution to mean what it literally said. Nor was there evidence of events prior to, or at the time of, the making of the resolution to indicate that another meaning should be attributed to the resolution. The Tribunal apparently found that the resolution meant what it said. I accept that the 24 June 1988 resolution took effect according to its terms.
58 The appellant did not challenge that part of the reasoning of Finkelstein J in which his Honour concluded that the net income of the trust estate for the year ended 30 June 1988 was $744,452; and that, since the appellant was entitled to 93.68% of the income of the trust, his taxable income was $697,452.
59 As already noted, the appellant placed great store on the fact that, on acquisition, the Prospect Street properties became assets of the trust forming part of the corpus of the trust fund. For the reasons already given, this consideration is not determinative of the matters in issue. The critical consideration in this regard was that the trust acquired the properties as part of its deal-making business.
60 Further, on appeal, the appellant invited the Court to accept the evidence of Mr James, notwithstanding that the Tribunal had rejected his evidence for the reasons already mentioned. This course is not open to the Court in a proceeding instituted under s 44(1) of the AAT Act (unless an error of law is shown that would permit it); and it is not open in an appeal from a decision in such a proceeding. For example, it was open to the Tribunal to find (as it did) that the transposing of amounts from the balance sheet to capital and revenue accounts might not fully represent the trust account. Since no relevant error of law is shown, the Court cannot interfere with the finding.
61 The appellant also relied on McBride v Hudson, Ritchie, Hassell, and Thornley v Boyd.These cases concerned the business of a pastoral property committed to the management of a trustee under a testamentary trust. The appellant contended that these cases, together with passages in Jacobs' Law of Trusts in Australia (4th ed.), supported the proposition that the realisation of the Prospect Street properties constituted an augmentation of the trust fund which accrued to capital and belonged to the corpus beneficiaries (who were in the nature of remaindermen) and not to the income beneficiaries (who were in the nature of life tenants).
62 This is not a case about competing equitable rights of life tenants and remaindermen to the enjoyment of the assets of a testamentary trust. The pastoral cases turn very much on their facts. In connection with these cases, Meagher and Gummow, Jacobs' Law of Trusts in Australia (6th ed.) ("Jacobs"), states at [1947], that "[s]uch businesses involve special considerations, with profits arising not only from buying and selling but also from natural increment and trustees having to cope with unexpected privations of drought, fire and flood". None of the cases to which the appellant referred lays down any "hard and fast rule capable of solving in all cases the problem of what is and what is not comprehended by the word `profits'. Consideration must be given to the nature of the relevant business activity and to the manner in which it is customarily carried on ... .": see McBride v Hudson at 623. Nothing said in these cases would lead me to differ from Finkelstein J. As Jacobs notes at [1941] "[w]here trustees carry on a business, under a power to do so in the trust instrument for the benefit of life tenant and remainderman ... the rights of life tenant and remainderman to income and capital respectively will depend primarily upon the terms of the trust instrument". This is plainly correct. For the reasons given, the terms of the trust instrument in this case together with the resolution of 24 June 1988, support the conclusion that the appellant was presently entitled to a share of the income of the trust estate.
63 Bearing in mind that no challenge was made to the reasoning in Finkelstein J's supplementary judgment, it is unnecessary to consider the issue that concerned Sundberg J in Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 and, to a lesser extent, Merkel J in an earlier part of this proceeding, namely, whether under s 97(1) of the Act the assessable income of a beneficiary of a trust estate is to be computed by the proportionate method or otherwise.
64 As already noted, the primary judge was of the view that in some respects the reasons for the second decision of the Tribunal were unclear. In written submissions, the appellant contended that:
The Tribunal's task requires clear and full findings on material questions of fact, referring to the evidence or other material on which those findings are based. It is an error of law to have failed to do so.
It will be apparent from the foregoing discussion, however, that I have not formed the view that any deficiencies in the Tribunal's reasons give rise to an error of law that requires the Court to remit the matter to the Tribunal. The findings of fact on which the outcome of this case depends appear sufficiently clearly in the reasons of the Tribunal.
65 For the reasons stated, I would dismiss the appeal with costs.
I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.
Associate:
Dated: 21 September 2001
#DATE 21:09:2001
Counsel for the Applicant: Mr P Searle Solicitor for the Applicant: T J Mulvany & Co Counsel for the Respondent: Mr T Murphy Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 13 August 2001 Date of Judgment: 21 September 2001
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