SBXB and Commissioner of Taxation (Taxation)
[2025] ARTA 999
•10 July 2025
SBXB and Commissioner of Taxation (Taxation) [2025] ARTA 999 (10 July 2025)
Applicant:SBXB
Respondent: Commissioner of Taxation
Tribunal Number: 2022/0821, 2022/0822, 2022/0823, 2022/0824, 2022/0825, 2022/0826
Applicant:YSPQ
Respondent: Commissioner of Taxation
Tribunal Number: 2022/0827, 2022/0828, 2022/0829
Tribunal:General Member J Dunne
Place:Melbourne
Date:10 July 2025
Decision:The Tribunal varies the decision under review so that:
the uplift of the base penalty amount pursuant to paragraph 284-220(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (Cth) is set aside;-
the uplift of the base penalty amount pursuant to paragraph 284-220(1)(c) of Schedule 1 to the Taxation Administration Act 1953 (Cth) is set aside in the 2011 year.-
Subject to the matters specified below which are remitted to the Respondent for determination, the decision under review is otherwise affirmed.
For the reasons set out in this decision, the Tribunal remits the decision on the remission of penalties, remission of the uplift of the base penalty amount and remission of the shortfall interest charge to the Respondent, with those decisions to be made in accordance with section 298-20 and section 280-160 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (as applicable) and the Tribunal’s recommendations in this decision.
.....................................[SGD].....................................
General Member J Dunne
Table of Contents
Definitions
Statement of Reasons
ISSUES
FACTUAL BACKGROUND
CONCLUSIONS ON PARTICULAR EVIDENTIAL ISSUES
The existence of bare trusts and/or bare sub-trusts
Deeds of Bare Trust
Apparent Purchaser Deeds, Declaration of Trust
Witness evidence – the Individual
Witness evidence – the Individual’s wife
Challenges to the Individual’s credibility as a witness
Case Law
Conclusions
Whether the Individual was engaged by A Ltd and S Ltd under the Consultancy Agreements
The nature of the Consultancy Agreements
Evidence suggesting the Individual was engaged by A Ltd and/or S Ltd
Evidence in favour of the Company being engaged by A Ltd and/or S Ltd
Inconsistencies in the evidence in favour of the Company being engaged by A Ltd and/or S Ltd
Payments received by the Individual from A Ltd and S Ltd and unknown sources
Challenges to the Commissioner’s bank account evidence
Reimbursement of expenses
Repayment of loans or advances
Other bank accounts
Distributions from Family Trust 2
Conclusions
The status of Family Trust 2’s tax returns and available losses
Advice from the parties as to whether the returns were lodged
Late issue from the Commissioner
Tribunal’s comments
The existence of the DE operation on the Farm
ISSUE 1: WHETHER THE INDIVIDUAL HAS SATISFIED HIS BURDEN OF PROOF
ISSUE 2: WHETHER PAYMENTS MADE BY S LTD AND A LTD WERE ORDINARY INCOME OF THE INDIVIDUAL UNDER SECTION 6-5 OF THE ITAA 1997 OR PERSONAL SERVICES INCOME OF THE INDIVIDUAL UNDER SECTION 84-5 OF THE ITAA 1997 AND TAXABLE UNDER SECTION 86-15 OF THE ITAA 1997
Ordinary income
Personal services income
ISSUE 3: WHETHER THE INDIVIDUAL SHOULD BE SUBJECT TO A PENALTY UNDER SECTION 284-75 OF SCHEDULE 1 TO THE TAA
ISSUE 4: WHETHER SECTION 284-220 OF SCHEDULE 1 TO THE TAA APPLIES SO THAT THE BASE PENALTY AMOUNT IS INCREASED
Legal principles
Case law
The parties’ positions
Conclusions
Reasonable care
Liability for an administrative penalty
Intentional disregard
Recklessness
Uplift to the penalty – section 284-220 of Schedule 1 to the TAA
ISSUE 5: WHETHER ANY PENALTY IMPOSED ON THE INDIVIDUAL SHOULD BE REMITTED IN WHOLE OR IN PART PURSUANT TO SECTION 298-20 OF SCHEDULE 1 TO THE TAA
Legal principles
Applicants limited to their grounds of Objection
Recommendations
ISSUE 6: WHETHER THE SHORTFALL INTEREST CHARGE IMPOSED ON THE INDIVIDUAL SHOULD BE REMITTED IN WHOLE OR IN PART PURSUANT TO SECTION 280-160 OF SCHEDULE 1 TO THE TAA
Legal principles
Applicants limited to their grounds of objection
Recommendations
ISSUE 7: WHETHER IN THE COMPANY’S RELEVANT YEARS, FAMILY TRUST 2 WAS A PERSONAL SERVICES BUSINESS PURSUANT TO SUBDIVISION 87-A OF THE ITAA 1997 AND A PERSONAL SERVICES BUSINESS DETERMINATION SHOULD HAVE BEEN ISSUED IN RESPECT OF FAMILY TRUST 2 PURSUANT TO SECTION 87-65 OF THE ITAA 1997
Considering the issue in principle
Parties’ positions
In principle analysis
ISSUE 8: WHETHER PART IVA OF THE ITAA 1936 IS APPLICABLE – PARTICULARLY WHETHER THE INDIVIDUAL AND/OR THE COMPANY ENTERED INTO OR CARRIED OUT A SCHEME FOR THE SOLE OR DOMINANT PURPOSE OF OBTAINING A TAX BENEFIT
OVERALL CONCLUSIONS
Catchwords
TAXATION – default assessments – whether Applicants met the burden of proof – held Applicants did not meet the burden of proof – detailed analysis of evidence
TAXATION – existence of bare trusts – powers of bare trustee – insufficient evidence of bare trusts
TAXATION – when a trust return is given, furnished or lodged – self assessment regime – Trust losses
TAXATION – ordinary income – personal services income – whether a personal services business determination should have been issued
TAXATION – Part IVA – decision not required – comment on late addition of Part IVA by Commissioner
TAXATION – penalties – intentional disregard penalty appropriately applied – uplift of base penalty amount – application of paragraph 284-220(1)(a) or paragraph 284-220(1)(c) of Schedule 1 to the TAA – Commissioner change of position from objection decision – paragraph 284-220(1)(a) improperly applied – paragraph 284-220(1)(c) improperly applied to the first of the years at issue
TAXATION – remission of penalties, remission of the uplift of the base penalty amount, and remission of the shortfall interest charge – no objection – no objection decision – Tribunal allows extension of grounds of objection and matters remitted to the Commissioner for determination subject to Tribunal recommendations
Legislation
Acts Interpretation Act 1901 (Cth) ss 13, 15AA
Administrative Review Tribunal Act 2024 (Cth) s 105
Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024
Corporations Act 2001 (Cth) ss 263, 286, 1305
Income Tax Assessment Act 1936 (Cth) ss 6, 161, 161A, 163, 166A, 167, Part IVA, 202BA, 262A, 318.
Income Tax Assessment Act 1997 (Cth) ss 6-5, 6-10, 6-15, 84-5, 86-1, 86-10, 86-15, 87-1, 87-5, 87-10, 87-15, 87-18, 87-20, 87-25, 87-30, 87-60, 87-65, 87-70, 87-75, 87-80, 87-85, Division 995.
Taxation Administration Act 1953 (Cth) s 14ZZK, Schedule 1 ss 280-100, 280-160, 280-165, 280-170, 284-75, 284-80, 284-90, 284-220, 298-20, 388-50, Division 388.
Cases
Abichandani and Commissioner of Taxation [2019] AATA 4296
Advanced Holdings Pty Ltd (as Trustee for Demian Trust) v Commissioner of Taxation [2020] FCA 1479
Allied Pastoral Holdings Ltd v Commissioner of Taxation (1983) 13 ATR 825
Ariss and Federal Commissioner of Taxation [2019] AATA 2958
Aurora Developments Pty Ltd v Commissioner of Taxation (No.2) [2011] FCA 1090
Bailey v Commissioner of Taxation (1977) 136 CLR 214
BHP Billiton Ltd v Federal Commissioner of Taxation (2020) 270 CLR 60
Bosanac and Commissioner of Taxation [2018] AATA 472
Bosanac v Commissioner of Taxation [2018] FCA 946
Bosanac v Commissioner of Taxation [2019] FCAFC 116
Bosanac v Commissioner of Taxation [2019] HCA 1
Broughamv Edwards [2024] SASC 59
Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2011] FCAFC 79
BSKF v Commissioner of Taxation [2024] AATA 3377
Cameron v Commissioner of Taxation [2012] FCAFC 76
Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677
CGU Insurance Limited v One-Tel Limited (in liq) [2010] HCA 26
Chief Commissioner of Stamp Duties v ISPT Pty Ltd 99 ATC 4066
Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Commissioner of Taxation v Fortunatow [2020] FCAFC 139
Commissioner of Taxation v Liang [2025] FCAFC 4
Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51
Commissioner of Taxation v Ross [2021] FCA 766
Commissioner of Taxation v White (No.2) [2010] FCA 942
Commissioner of Taxation v Yalos Engineering Pty Ltd [2009] FCA 1569
Condon v Commissioner of Taxation [2023] FCA 561
Confidential and Commissioner of Taxation [2011] AATA 682
Craddon and Commissioner of Taxation [2011] AATA 790
CVMW and Commissioner of Taxation [2023] AATA 4039
Danmark Pty Ltd v Federal Commissioner of Taxation; Forestwood Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) [1949] HCA 2
Diarra and Commissioner of Taxation [2019] AATA 5545
Dibarr Pty Ltd and Federal Commissioner of Taxation [2004] AATA 1030
Elcheikh and Commissioner of Taxation [2023] AATA 859
Ellison v Sandini Pty Ltd; Federal Commissioner of Taxation v Sandini Pty Ltd [2018] FCAFC 44
Federal Commissioner of Taxation v Bazzo; Bazzo v Federal Commissioner of Taxation [2024] FCA 452
Federal Commissioner of Taxation and Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540
Federal Commissioner of Taxation v Metaskills Pty Ltd [2003] FCA 766
George v Federal Commissioner of Taxation (1952) 86 CLR 183
Gashi v Federal Commissioner of Taxation (2013) 209 FCR 301
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Haritos v Federal Commissioner of Taxation [2015] FCAFC 92
Hart v Commissioner of Taxation [2003] FCAFC 105
Hawkins v Commissioner of Taxation [2019] FCA 627
Herdegen v Federal Commissioner of Taxation 88 ATC 4,995
Howard v Commissioner of Taxation (No.2) [2011] FCA 142
Howard v Commissioner of Taxation [2012] FCAFC 149
Howard v Commissioner of Taxation [2014] HCA 21
Hourigan and Commissioner of Taxation [2018] AATA 3369
Imperial Bottleshops Pty Ltd and Edgerton v Commissioner of Taxation [1991] FCA 276
IRG Technical Services Pty Ltd v Deputy Federal Commissioner of Taxation [2007] FCA 1867
Jones v Commissioner of Taxation [2003] AATA 84
Jones v Dunkel [1959] HCA 8
Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil and Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40
Kafataris v Deputy Federal Commissioner of Taxation [2015] FCA 874
Kocharyan v Commissioner of Taxation [2015] FCAFC 196
Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6
Le v Commissioner of Taxation [2021] FCA 303
Lewski v Commissioner of Taxation [2017] FCAFC 145
Mango Reef Pty Ltd and Commissioner of Taxation [2018] AATA 3091
Metaskills Pty Ltd v Commissioner of Taxation [2005] AATA 657
Mitri v Federal Commissioner of Taxation [2024] AATA 1268
Mulherin v Commissioner of Taxation [2013] FCAFC 115
MW McIntosh Pty Ltd v FC of T [2008] FCA 1949
MW McIntosh Pty Ltd v FC of T [2009] FCAFC 88
N&M Martin Holdings Pty Ltd v Federal Commissioner of Taxation [2020] FCA 1186
Phillip Hing Ma v Commissioner of Taxation [1992] FCA 359
Pleash, in the matter of Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355
Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345
Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCAFC 154
Princi v Federal Commissioner of Taxation [2008] FCA 441
Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 55
QTWG and Commissioner of Taxation [2019] AATA 2428
Queensland Maintenance Services Pty Ltd (in liq) and Commissioner of Taxation [2018] AATA 4525
Re Bosanac and Federal Commissioner of Taxation [2018] AATA 472
Re Confidential and Commissioner of Taxation [2012] AATA 178
Re Interwest Hotels Pty Ltd (in liq) [1993] VSC 477
RHDB and Federal Commissioner of Taxation [2017] AATA 3091
Rigoli v Federal Commissioner of Taxation [2014] FCAFC 29
Rizkallah v Federal Commissioner of Taxation [2022] AATA 3081
Russell v Federal Commissioner of Taxation [2009] FCA 1224
Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50
Scimitar Systems Pty Ltd v Deputy Commissioner of Taxation [2004] AATA 720
Sent v Federal Commissioner of Taxation [2012] FCA 382
Skiba and Commissioner of Taxation [2007] AATA 1705
Sole Luna Pty Ltd as Trustee for the PA Wade No.2 Settlement Trust v Commissioner of Taxation [2019] FCA 1195
STNK v Federal Commissioner of Taxation [2021] AATA 3339
Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Federal Commissioner of Taxation [2015] FCAFC 4
The Counsellor and Commissioner of Taxation [2024] AATA 220
The Taxpayers and Federal Commissioner of Taxation [2014] AATA 572
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
VBTL v Federal Commissioner of Taxation [2023] AATA 168
Vu v Federal Commissioner of Taxation [2006] FCA 889
Waddington v O’Callaghan (1931) 16 TC 187
Weyers v Commissioner of Taxation [2006] FCA 818
WYVW v Federal Commissioner of Taxation [2023] AATA 4242
Yalos Engineering Pty Ltd and Federal Commissioner of Taxation [2009] AATA 390
Yalos Engineering Pty Ltd and Federal Commissioner of Taxation [2010] AATA 408
Yazbek v Federal Commissioner of Taxation [2014] AATA 423
Zappia v Commissioner of Taxation [2017] FCA 390
ZFPR and Commissioner of Taxation [2025] ARTA 572
Secondary Materials
Australian Securities and Investments Commission “Help choosing a business structure”.
Commonwealth Bank website (at 15 June 2025) Memorandum to A New Tax System (Tax Administration) Bill (No.2) 2000 (Cth)
Explanatory Memorandum to the Taxation Laws Amendment Bill (No.3) 2011 (Cth)
Macquarie Dictionary (Online at 16 June 2025, Macquarie Dictionary Publishers, an imprint of Pan Macmillan Australia Pty Ltd)
Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard
Practice Statement Law Administration PS LA 2005/24 Application of the General Anti-Avoidance Rules
Practice Statement Law Administration PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount
Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill 1999 (Cth)
Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses
DEFINITIONS
Term used
Definition
2013 interview
Refers to the meeting between the Individual and officers of the Commissioner on 5 August 2013.
2015 interview
Refers to the meeting between the Individual and officers of the Commissioner on 6 August 2015.
A Ltd
The company:
(a) that was incorporated on 19 August 2008;[1]
(b) in which the Individual is one of the directors,[2] and Family Trust 2 is one of the shareholders[3]
(c) which is said during the Relevant Years (amongst other matters) to:
i. have use of some of the land comprising the Farm;[4]
ii. be involved in the work on a part of the land comprising the Farm to construct a plant to test, process, develop and potentially commercialise DE;[5]
iii. pay consultancy fees to the Company under the relevant Consultancy Agreements;[6] and
iv. reimburse expenditure incurred by the Individual.[7]
Amended Assessments
The Amended Assessments issued to the Individual for the Relevant Years on 12 June 2018.[8]
Applicants
The Individual and the Company.
Applicants’ Closing Submissions
Applicants’ Outline of Closing Written Submissions dated 10 March 2025.
Applicants’ Outline
Applicants’ Outline of Submissions dated 25 February 2025.
Applicants’ SFIC
Statement of Facts, Issues and Contentions dated 22 May 2022.
BN Ltd
The trustee of Family Trust 2,[9] and a company of which the Individual is the sole director and the Individual and his wife are the shareholders.[10]
Commissioner
The Respondent.
Commissioner’s Closing Submissions
Respondent’s Closing Submissions dated 10 March 2025.
Commissioner’s Outline
Respondent’s Outline of Submissions dated 25 February 2025.
Commissioner’s SFIC
Commissioner’s Statement of Facts, Issues and Contentions dated 4 July 2022
Company
The Applicant, YSPQ, in which the Individual is the sole director and shareholder,[11] and which is said during the Relevant Years to:
(a) be holding all assets as bare trustee for Family Trust 2;[12]
(b) provide consulting services, plant and equipment, personnel and resources to A Ltd and S Ltd in its capacity as bare trustee for Family Trust 2;[13]
(c) derive consultancy fees from A Ltd and S Ltd in its capacity as bare trustee for Family Trust 2;[14]
(d) be acting as bare trustee for Family Trust 2 at all times. [15]
Company’s Objection
The Company’s Objection dated 27 February 2018.
Company’s Relevant Years
The income years ended 30 June 2013, 30 June 2014, and 30 June 2015.
Consultancy Agreements
Agreements entitled “Service Agreement” or “Executive Services Agreement” and entered into with S Ltd dated 1 March 2011[16] and 21 April 2011,[17] and with A Ltd dated 1 December 2010[18] and 1 July 2013.[19]
DE
Diatomaceous earth, a siliceous sedimentary rock that can be used in an array of products.
DE operation
Refers to the processing and testing plant said to be constructed on some of the land comprising the Farm and associated work to test, process, develop and potentially commercialise DE.
Dr H
One of the Directors of S Ltd at relevant times.
Dr P
One of the Directors of A Ltd at relevant times.
Family Trust 1
A Family Trust established in the United Kingdom with the Individual, his wife and children as discretionary beneficiaries and a UK company as trustee which is said to subsequently have been wound up and properties and assets contributed to Family Trust 2.[20]
Family Trust 2
The discretionary Family Trust settled on 28 November 1996 in Australia,[21] of which BN Ltd is the trustee, the beneficiaries are the Individual, his wife and children,[22] and which is said to:
(a) be the ultimate owner the Farm and the other assets;[23]
(b) provide land, premises and resources to A Ltd so A Ltd could test, process, develop and potentially commercialise DE;[24]
(c) derive consultancy fees from A Ltd and S Ltd under the Consultancy Agreements by way of its bare trustee, the Company;[25]
(d) have incurred considerable losses and (mistakenly) understood that tax returns were not required to be lodged.[26]
Farm
The farm located in New South Wales said during the Relevant Years:
(a) to be held by TB Ltd as bare trustee for Family Trust 2;[27]
(b) to be used for cattle and sheep breeding, agistment,[28] and agricultural activities;[29]
(c) a part of which[30] was utilised by A Ltd to test, process, develop and potentially commercialise DE.
GST Act
A New Tax System (Goods and Services Tax) Act 1999 (Cth).
Individual
The Applicant, SBXB, said during the Relevant Years to:
(a) hold all assets (such as vehicles, land, houses) other than clothing acquired from around 2000 and registered in his name, on bare trust for Family Trust 2;[31]
(b) be involved in the provision of consultancy services by the Company to A Ltd and S Ltd in his capacity as bare trustee of Family Trust 2;[32] and
(c) have incurred costs on behalf of Family Trust 2 that were reimbursed by A Ltd and S Ltd.[33]
Individual’s First Witness Statement
The Individual’s witness statement dated 12 April 2023.
Individual’s Objection
The Individual’s Objection dated 11 July 2018.
Individual’s Relevant Years
The income years ended 30 June 2011, 30 June 2012, 30 June 2013, 30 June 2014, and 30 June 2015.
Individual’s Second Witness Statement
The Individual’s witness statement dated 13 March 2024.
Individual’s Son C’s Witness Statement
The Individual’s Son C’s witness statement dated 4 May 2023.
Individual’s Son M’s Witness Statement
The Individual’s Son M’s witness statement dated 4 May 2023.
Individual’s Third Witness Statement
The Individual’s witness statement dated 17 June 2024.
Individual’s wife
The Individual’s wife who is said during the Relevant Years to hold all assets (other than clothing) as bare trustee for Family Trust 2.[34]
Individual’s wife’s Witness Statement
The Individual’s wife’s witness statement dated 12 May 2023.
ITAA 1936
Income Tax Assessment Act 1936 (Cth).
ITAA 1997
Income Tax Assessment Act 1997 (Cth).
M Ltd
A group company in which the Individual was formerly a director.[35]
Mr P
A business associate of the Individual and director of A Ltd in the Relevant Years.
Mr P’s Witness Statement
The witness statement of Mr P dated 9 March 2023.
MT 2008/1
The Commissioner’s Miscellaneous Taxation Ruling MT 2008/1 Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard.
Other Companies
Refers to certain other companies in the Individual’s private group, as specified in correspondence with the Commissioner.[36]
Objections
Refers to the Individual’s Objection dated 11 July 2018 and the Company’s Objection dated 27 February 2018.
PS LA 2005/24
The Commissioner’s Practice Statement Law Administration PS LA 2005/24 Application of the General Anti-Avoidance Rules.
PS LA 2006/8
The Commissioner’s Practice Statement Law Administration PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods.
PS LA 2012/5
The Commissioner’s Practice Statement Law Administration PS LA 2012/5 Administration of the false or misleading statement penalty – where there is a shortfall amount.
Relevant Years
In aggregate, the Company’s Relevant Years and the Individual’s Relevant Years.
S Ltd
The company:
(a) that was incorporated on 31 March 2010;[37]
(b) that is a mining exploration company;[38]
(c) in which the Individual is one of the directors,[39] and BN Ltd is one of the shareholders;[40]
(d) which is said during the Relevant Years to:
i. pay consultancy fees to the Company;[41]
ii. reimburse expenditure incurred by the Individual for the Company.[42]
Stock Ltd
The company of which the Individual is a director[43] and that is said to have owned all stock for the Farm on bare trust for Family Trust 2.[44]
TAA
Taxation Administration Act 1953 (Cth).
TB Ltd
The company that is:
(a) the owner of the Farm, said to be in its capacity as bare trustee for Family Trust 2;[45] and
(b) a shareholder of companies in the structure including A Ltd.[46]
TR 2022/3
Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses
[1] ST18, ST19.
[2] Tribunal Book 214, 1384. First Witness Statement of the Individual [71].
[3] SBXB T Documents T26-1112.
[4] Individual’s Frist Witness Statement [76].
[5] SBXB T Documents T25-1083, T77-1936 to T77-1946. YSPQ T Documents T19-271 to T19-281.
[6] SBXB T Documents T20-1065. ST8-0219. The Commissioner suggested in its Position Paper dated 13 February 2017 that director fees were paid by A Ltd and S Ltd to the Individual as well (SBXB T Documents T58-1424, [1.1.5]) and the same point is made in its Reasons for Decision (YSPQ T Documents T17-167 [3], [7]). This is rejected by the Individual (e.g., SBXB T Documents T59-1484). See Tribunal Book 467, 491 which are Annual Reports for S Ltd and refer to director fees. This is considered further below.
[7] SBXB T Documents T20-1060.
[8] SBXB T Documents T70, T71, T72, T73, T74.
[9] SBXB T Documents T26-1091. Tribunal Book 2582.
[10] YSPQ T Documents, T22-318. Tribunal Book 138, 1072.
[11] Tribunal Book 159.
[12] Tribunal Book 202.
[13] Ibid. SBXB T Documents T23-1076, T23-1078 to T23-1080, T63-1572 to T62-1578.
[14] SBXB T Documents T25-1084.
[15] SBXB T Documents T45-1329 to T45-1330. Individual’s First Witness Statement [92]. Applicants’ Outline [42].
[16] SBXB T Documents T60-1538.
[17] SBXB T Documents T63-1572.
[18] SBXB T Documents T63-1604. T60-1541.
[19] SBXB T Documents T63-1577.
[20] Tribunal Book 62, Individual’s First Witness Statement, [14] to [19] and 67, [37].
[21] Tribunal Book 2582.
[22] YSPQ T documents, T22-318.
[23] Tribunal Book 67, Individual’s First Witness Statement [41].
[24] SBXB T Documents T25-1083, T25-1085.
[25] ST7-209 to ST7-215, ST8-0216 to ST8-0221.
[26] SBXB T Documents T77-1918 [3.2].
[27] Individual’s First Witness Statement, [41] and Tribunal Book 205. YSPQ T Documents T10-77. SBXB T Documents T25-1085, T79-1976.
[28] SBXB T Documents T77-1947, T77-1958.
[29] SBXB T Documents T77-1915 to T77-1916 [1.1] to [1.6], T79-1976.
[30] Tribunal Book 1381 to 1383. Applicants’ Outline [61]. Individual’s First Witness Statement [76].
[31] SBXB T Documents T26-1089; T77-1917 [2.1], said to be evidenced by Apparent Purchaser Deeds (for example) T48-1340 and T48-1350. YSPQ T Documents T19-254, T19-255, T19-259, T19-265. An instance of the Individual acting as bare trustee for A Ltd is also described: SBXB T Documents T77-1919; YSPQ T Documents T19-254.
[32] SBXB T Documents T60-1538, T60-1541, T63-1572, T63-1577, T77-1920, T77-1924, T77-1930. ST7-209 to ST7-215, ST8-0216 to ST8-0221.
[33] SBXB T Documents T45-1333 to T45-1335; T48-1338 to T48-1353, T51-1358.
[34] SBXB T Documents T26-1089.
[35] Transcript 74 [24], 76 [34].
[36] SBXB T Documents T26-1088 [1].
[37] ST20. Tribunal Book 1420.
[38] SBXB T Documents T77-1917 [1.8].
[39] Tribunal Book 441, 1420.
[40] SBXB T Documents T2-26 [125]. Tribunal Book 441.
[41] ST7-209 to ST7-215.YSPQ T Documents T5-49; T6-69
[42] SBXB T Documents T20-1061.
[43] Tribunal Book 122.
[44] Individual’s First Witness Statement [41] and Tribunal Book 208.
[45] Individual’s First Witness Statement, [41] and Tribunal Book 205. YSPQ T Documents T10-77. Individual’s First Witness Statement [41]. Applicants’ Outline [47]. This is disputed: SBXB T Documents T2-15 [63].Tribunal Book 1506 [63].
[46] SBXB T Documents T45-1331.
Statement of Reasons
ISSUES
The issues are in this case are:
(a)Whether the Individual has satisfied his burden of proof under section 14ZZK of the TAA to demonstrate that assessments issued by the Commissioner for the Individual’s Relevant Years pursuant to section 167 of the ITAA 1936 were incorrect and what they should have been.
(b)Whether payments made by S Ltd and A Ltd were:
(i)ordinary income of the Individual under section 6-5 of the ITAA 1997; or
(ii)personal services income of the Individual under section 84-5 of the ITAA 1997 and taxable under section 86-15 of the ITAA 1997.
(c)Whether the Individual should be subject to a penalty under section 284-75 of Schedule 1 to the TAA;
(d)Whether section 284-220 of Schedule 1 to the TAA applies so that the base penalty amount is increased;
(e)Whether any penalty imposed on the Individual should be remitted in whole or in part pursuant to section 298-20 of Schedule 1 to the TAA;
(f)Whether the shortfall interest charge imposed on the Individual should be remitted in whole or in part pursuant to section 280-160 of Schedule 1 to the TAA;
(g)Whether in the Company’s Relevant Years:
(i)Family Trust 2 was a personal services business pursuant to Subdivision 87-A of the ITAA 1997; and
(ii)A Personal Services Business Determination should have been issued in respect of Family Trust 2 pursuant to section 87-65 of the ITAA 1997.
(h)Whether Part IVA of the ITAA 1936 is applicable – particularly whether the Individual and/or the Company entered into or carried out a scheme for the sole or dominant purpose of obtaining a tax benefit.[47]
[47] The inclusion of Part IVA as an issue is further discussed below. The non-inclusion of income for the Individual is said to be the tax benefit – Tribunal Book 38, 45, 53.
My conclusions are:
(a)The Individual has not met his burden of proof to demonstrate that the amended assessments issued pursuant to section 167 of the ITAA 1936 were wrong, and what his assessable income actually was.
(b)I am not satisfied that payments from A Ltd and S Ltd were not ordinary income nor personal services income of the Individual.
(c)The intentional disregard shortfall penalty was appropriately applied. The uplift of the base penalty amount is applicable in all but the first of the Individual’s Relevant Years.
(d)There is no objection nor objection decision on the issue of remission of penalties, the 20% uplift to the base penalty amount, nor the shortfall interest charge. The Tribunal allows an extension of the Applicants’ grounds of objection to cover those issues, and remits those matters to the Commissioner for determination subject to the relevant statutory provisions, the case law, and the Tribunal’s recommendations set out in this decision.
(e)Because of holdings on the evidential issues, particularly that I am not satisfied that the Company was acting as bare trustee for Family Trust 2, the personal services business determination issue cannot be found in favour of the Applicants. I make some in-principle comments only.
(f)Because of holdings above, Part IVA does not need to be considered.
FACTUAL BACKGROUND
The returns for the Individual’s Relevant Years showed $0, $1, $2 or $3 of income in those years.[48] The returns filed for the Individual’s Relevant Years were filed on 5 August 2016,[49] which followed the Commissioner commencing an investigation. The reason given by the Individual for that late filing of returns was that he was not required to do so as there was “no income.”[50]
[48] SBXB T Documents T34-1182, T35-1203, T36-1224, T37-1245, T38-1267.
[49] SBXB T Documents T34-1182, T35-1203, T36-1224, T37-1245, T38-1267.
[50] SBXB T Documents T3-46, T4-49. Individual’s First Witness Statement [156].
With the absence of the tax return for the year ended 30 June 2004, which was filed 3 January 2006,[51] the Individual also did not file tax returns for the years ended 30 June 2002 to 30 June 2009 until 16 May 2016.[52]
[51] ST5-37.
[52] ST5.
A comprehensive risk review by the Commissioner commenced on or around 22 May 2015.[53] The Commissioner considered that large deposits in the Individual’s bank accounts, and his lifestyle did not reflect a small amount of income. An income tax audit of the Individual commenced on 14 June 2016.[54]
[53] SBXB T Documents T3-46, T32-1174.
[54] SBXB T Documents T32-1174.
The Company and the Individual were investigated, and related entities including S Ltd, A Ltd, TB Ltd, Stock Ltd and Family Trust 2 were also subject to inquiries. The Commissioner’s investigation lasted for several years.
During the course of the investigation, the Applicants and the Commissioner met several times and engaged in voluminous correspondence. The result of all of this activity and the parties’ respective positions can be summarised briefly.
The Individual advised the Commissioner that the business structure was a result of advice he received, and was commonplace. Nothing was being done that was contrary to the taxation laws.[55] The Individual explained that:
[55] SBXB T Documents T62-1566 to T62-1570, T79-1980.
(a)The Individual’s tax returns were a result of the structure adopted to operate various businesses, including the Farm and including the DE operation.
(b)The structure involved the use of Family Trust 2, an Australian discretionary trust, as well as the Individual, the Company and other corporate entities acting as sub-trustees for Family Trust 2.[56] The reason for this structure related to asset protection,[57] as “it would be prudent and more efficient to establish a family trust in Australia to hold and accumulate the family’s wealth.”[58]
(c)The structure had a number of consequences. For example, the Individual said that advances by those entities to each other were (in broad terms) advances within Family Trust 2 itself.[59]
(d)Family Trust 2 supplied consultancy services under the Consultancy Agreements to A Ltd and S Ltd, via its bare trustee, the Company.[60]
(e)The Individual was not an employee of any of the entities in the structure[61] and there were no payments of fees or salary to the Individual.[62]
(f)Any tax on income from the Consultancy Agreements was payable by Family Trust 2, but there were tax losses in Family Trust 2 from the Farm that offset any tax liability. The Individual said that Family Trust 2 did not file any tax returns at the time on the basis it was in loss, and with the idea it did not need to. [63] Family Trust 2 has not applied for nor been provided[64] a tax file number.
(g)Returns for Family Trust 2 for the Relevant Years were sent to the Commissioner’s investigating team on 5 August 2016.[65] However these returns were not lodged on the Commissioner’s portal. The status of Family Trust 2’s tax returns and the availability of tax losses is the source of controversy between the parties and is considered further below. There is no dispute that Family Trust 2’s tax returns for the Relevant Years were late.[66]
(h)The source of the relevant deposits in the Individual’s bank accounts was Family Trust 2 via the Company in its capacity as bare trustee of Family Trust 2 and/or A Ltd and S Ltd.[67]
(i)Other than where the payments were for the reimbursement of expenses the Individual incurred for A Ltd or S Ltd or the repayment of advances made by the Individual, the Individual received any payments deposited in his accounts as bare trustee of Family Trust 2.[68]
(j)The Individual was not liable to pay tax in the Individual’s Relevant Years.[69]
[56] SBXB T Documents T26-1089.
[57] Individual’s First Witness Statement [40].
[58] Individual’s First Witness Statement [31].
[59] SBXB T Documents T45-1333.
[60] SBXB T Documents T45-1329 to T45-1330. Applicants’ SFIC [2], [5].
[61] SBXB T Documents T59-1505. Individual’s First Witness Statement, [92] to [100].
[62] ST7-209. SBXB T Documents T77-1916 [2]. Applicants’ SFIC [5]. The Commissioner pointed to contradictory evidence which is considered further below. For example, YSPQ T Documents T16-113, SBXB T Documents T2-22 [105b], T63-1572, T63-1577, T63-1582, T63-1590, T63-1591, T63-1595 to T63-1600, ST10-0265.
[63] SBXB T Documents T77-1918 [3.2]. This is a poor explanation. Tax losses arise when returns are filed. Without returns there are no tax losses.
[64] There is inconsistent evidence from the Commissioner on the issue of the tax file number as a “nominal” tax file number is said to have been issued - SBXB T Documents T58-1430 [2.3.17]. This is discussed further below at paragraph 138.
[65] ST4-0106 to ST4-0261, although they are signed and dated . Family Trust 2 filed returns for the years ended 30 June 2002 to 30 June 2009 on 20 May 2016 and draft financial statements on 11 December 2015, ST6, ST17. Email dated 14 March 2025 from Piper Alderman for the Applicants to the Tribunal annexing an unsigned letter dated 5 August 2016 to the Commissioner. That signed letter is at ST4-0106. Email dated 19 March 2025 from the Commissioner to the Tribunal annexing two phone notes dated 8 August 2016.
[66] There is no dispute that the Individual’s return for the Individual’s Relevant Years were late as well. This is described in paragraph 3.
[67] SBXB T Documents T45-1330.
[68] Applicants’ SFIC [6].
[69] Applicants’ SFIC [8].
The Commissioner disagreed with the Individual, and the following decisions were made, and opinions were formed by the Commissioner which are relevant to this case:
(a)The Commissioner reached the opinion that there was evasion in the Individual’s Relevant Years.[70] This decision enabled the Commissioner to issue the Amended Assessments for the Individual’s Relevant Years.[71]
(b)The Amended Assessments were issued on 12 June 2018[72] under section 167 of the ITAA 1936.
(c)The Amended Assessments were default assessments issued on the basis that the Individual derived ordinary income pursuant to section 6-5 of the ITAA 1997 or the personal services income rules in Division 84 and Subdivision 86-A of the ITAA 1997 were applicable.
(d)Penalty assessments were issued on 12 June 2018. Penalties were imposed for each of the Individual’s Relevant Years pursuant to item 1 of the table in section 284-90 of Schedule 1 to the TAA.[73] This was on the basis that the Individual’s tax shortfall resulted from an intentional disregard of taxation law. That penalty was then increased to 90% pursuant to section 284-220(1) of Schedule 1 to the TAA.[74]
(e)A determination was made on 12 December 2017, following an application being made by the Company,[75] that the Company was not a personal services business[76] under any of the tests in section 87-15 and associated provisions of the ITAA 1997. That decision applied to the Company’s Relevant Years.
(f)Another potential ground of assessment was raised by the Commissioner. The Commissioner added Part IVA of the ITAA 1936 as a ground in the Commissioner’s SFIC.[77] The Applicants complained this was without articulating a scheme or any analysis, and the Commissioner purported to reserve the right to do so at a later date. The Applicants also pointed out that there was no analysis of which version of Part IVA is applicable, given that the Relevant Years span amendments to Part IVA.[78] Further detail was provided by the Commissioner in response to the Applicants’ complaints.[79] There is no dispute that there is no determination under section 177F of the ITAA 1936, and this matter did not proceed through the GAAR Panel at the Australian Taxation Office.[80] This matter is considered further below.
[70] SBXB T Documents T2-7[4], T2-9 [20].
[71] Item 5 of the table in subsection 170(1) of the ITAA 1936 provides the Commissioner with the ability to amend an assessment at any time if it is of the opinion there has been fraud or evasion.
[72] SBXB T Documents T70, T71, T72, T73, T74.
[73] SBXB T Documents T2-22 to T2-23. ST1-1 to ST1-20.
[74] SBXB T Documents T2-23 [107] and following.
[75] YSPQ T Documents T12, T3.
[76] YSPQ T Documents T4-43 [2], T12-83.
[77] Tribunal Book 22, Commissioner’s SFIC [43].
[78] Applicants’ Outline [20] to [21].
[79] Commissioner’s SFIC footnote 33. Tribunal Book 33 to 57 (comprising correspondence between the Individual and the Commissioner about the application of Part IVA).
[80] The GAAR Panel is referred to in PS LA 2005/24 [18] to [41] and is stated as a “must” prior to a final decision being made by the Commissioner to apply Part IVA of the ITAA 1936. See Applicants’ Outline [20] to [21].
Following the Objections being filed by the Applicants on 11 July 2018 and 27 February 2018 respectively,[81] and disallowed on 9 December 2021,[82] the Individual and the Company each filed applications for review in this Tribunal[83] on 2 February 2022.
[81] SBXB T Documents T75-1843 to T75-1910. YSPQ T Documents T14-99. ST26.
[82] SBXB T Documents T81-1987. YSPQ T Documents T2-7.
[83] SBXB T documents T1 and YSPQ T documents T1. On 14 October 2024, the Administrative Appeals Tribunal became the Administrative Review Tribunal. Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 proceedings that were not finalised before 14 October 2024 are continued and finalised by the Administrative Review Tribunal. Anything done in relation to any such proceeding before 14 October 2024 is taken to have been done by the Administrative Review Tribunal.
CONCLUSIONS ON PARTICULAR EVIDENTIAL ISSUES
There is a lot of material before the Tribunal. There are two sets of T documents (one for SBXB and the other for YSPQ), four volumes of Supplementary T Documents, Further Supplementary T Documents, Second Further Supplementary T Documents, material handed up and further material in the Tribunal Book. The Individual, his wife, two of his sons, and a business colleague, Mr P, gave evidence. The Individual provided three witness statements. I have considered all of that material and evidence. Two expected witnesses for the Applicants did not give evidence. I have also considered that fact.
Given the volume of material, it is not practicable to set out all of the evidence in this decision. I have instead set out the conclusions I have reached on the important evidential issues between the parties. The issues I have considered are:
(a)The existence of bare trusts and/or bare sub-trusts in the structure. This is important as the Applicants’ case is (amongst other matters) that all income the Individual derived (other than reimbursements or the repayment of advances) was as bare trustee for Family Trust 2.
(b)Whether the Individual was employed or otherwise engaged by A Ltd and S Ltd under the Consultancy Agreements. This is important as the Applicants’ case (amongst other matters) is that the Company was engaged by A Ltd and S Ltd, not the Individual, so the payments from A Ltd and S Ltd could not be ordinary income nor personal services income of the Individual. The Individual says payments made to him by A Ltd and/or S Ltd were the reimbursement of expenses or the repayment of advances/loans he made.
(c)Whether Family Trust 2’s tax returns have been lodged and the availability of losses. This is important when determining the weight to be given to Family Trust 2’s tax returns. Whether the Tribunal should even consider the availability of losses is also considered below.
(d)The existence and timing of the DE operation on the Farm. This is important as an explanation for the nature of the arrangements and structure before the Tribunal. It is also relevant in the context of considering the Company’s case in relation to the personal services income rules.
The existence of bare trusts and/or bare sub-trusts
The first evidential matter is whether the Tribunal is satisfied that the Company, the Individual, the Individual’s wife, Stock Ltd, TB Ltd, and the Other Companies were all bare trustees for Family Trust 2 as is asserted by the Applicants.[84] This is by virtue of being bare trustees or bare sub-trustees. Unless important for the facts, for the sake of succinctness sub-trusts will merely be referred to as bare trusts in these reasons.
[84] SBXB T Documents T26-1089 “these companies have acted solely as trustee/subtrustee (sic)”, “[The Individual] confirms that for each of [the Individual and the Individual’s wife] all assets are owned by [Family Trust 2] and that apart from some clothes no other assets are owned by either ‘[the Individual or the Individual’s wife]”.“The companies act as trustees/subtrustees (sic) for [Family Trust 2] but have no activity in their own right.” Also, SBXB T Documents T59-1487 “[TB Ltd, Stock Ltd, BN Ltd, the Company and the Other Companies] do not beneficially own anything in their own right”, T59-1488 “They are submanagers of the Trust.”
Deeds of Bare Trust
Evidence supporting the existence of bare trust arrangements includes the Deeds of Bare Trust.[85] Each of those deeds are dated 8 October 2008. One is between the Company and BN Ltd. The second is between TB Ltd and BN Ltd.[86] The third is between Stock Ltd and BN Ltd. The Deeds are said to have documented already existing arrangements.[87]
[85] Tribunal Book 202 to 210.
[86] Other material on the Tribunal Book might suggest TB Ltd was not a bare trustee. For instance, it is said that TB Ltd funded its acquisition of the Farm, not Family Trust 2: Tribunal Book 767. Presumably the response of the Applicants would be that this was done as bare trustee for Family Trust 2.
[87] For example, Individual’s First Witness Statement [41] refers to the trust arrangement for TB Ltd being in place since 2001. Transcript, 83 [34] the Individual confirmed he thought the sub trusts were established in the early 2000s.
In each of the Deeds of Bare Trust, BN Ltd is described as “Head Trustee” and is acting in its capacity as trustee of Family Trust 2, and the Company, Stock Ltd and TB Ltd (as applicable) are described as the “Sub-Trustee.” Each deed is widely expressed. Each Sub-Trustee “has at all times” “continues to” and “will in future” act, hold all assets, receive all income and incur liabilities “solely as bare sub-trustee for the Head Trustee.”
The Deeds of Bare Trust also provide that each Sub-Trustee will:
(a)deal with assets, and incur liabilities only as instructed by the Head Trustee;
(b)act promptly in relation to instructions from the Head Trustee; and
(c)be indemnified by the Head Trustee against all liabilities that are incurred from acting as Sub-Trustee.
There is a legal question as to whether the Deeds of Bare Trust are sufficiently certain, particularly in referring to future property. However, given that all income and all assets and liabilities are said to be in the relevant entity’s (Company, TB Ltd, Stock Ltd) capacity as a bare trustee for Family Trust 2, that meets the necessary certainty in the Tribunal’s view.
The Deeds of Bare Trust did not impress the Commissioner. Ms Bishop put to the Individual in cross-examination[88] that the Deeds of Bare Trust were created for these proceedings as the Commissioner had not been provided those documents throughout the years of investigation. The Individual rejected both points, but he then prevaricated, and said he was not sure whether the Deeds of Bare Trust had been provided to the Commissioner previously.[89] I agree with Ms Bishop that it is hard to understand why the Deeds of Bare Trust would not be provided to the Commissioner as part of the investigation.[90] However, the Individual said he thought this had been done, and it is apparent from the hearing transcript[91] that he prevaricated only because Ms Bishop was insistent that had not taken place.
[88] Transcript 85 [27], [39] to [47] and 72 [44].
[89] Transcript 85 [41] and following.
[90] The Commissioner certainly seems have been unaware of the Deeds of Bare Trust – for instance the Objection Decision SBXB T Documents T2-15 [63] and T2-25[116] states that no supporting documentation has been provided to demonstrate bare trustee status. The Apparent Purchaser Deeds were provided to the Commissioner (SBXB T Documents, T48-1338) but they did not impact the Company.
[91] Transcript 85 [31] to [37].
Ms Bishop challenged the drafting of the Deeds of Bare Trust pointing out they are retrospective, even on the Individual’s own case, as he said bare trusts had existed for about 8 years prior to the Deeds of Bare Trust.[92] The Individual said drafting the Deeds was to formalise arrangements but the relationships as bare trustee or sub-trustee for Family Trust 2 always existed. He said the formalisation was around the time that A Ltd was formed and everything was done at once, but he could not recall specifically. The Applicants’ Closing Submissions support this explanation.[93] In the Tribunal’s view, the purported retrospectivity of the Deeds of Bare Trust (“has at all times” “continues to” and “will in future” [be a bare trustee]) is a factor that impacts the weight to be given to those Deeds but does not of itself invalidate them entirely.[94]
[92] Individual’s First Witness Statement [41]. Transcript 83 [42] to [46], 84 [13] to [25].
[93] Applicants’ Closing Submissions [20] to [21].
[94] Edwards v Brougham [2024] SASC 59, [46] (upholding the lower Court judgment at [2022] SASC 8 [37]). Waddington v O’Callaghan (1931) 16 TC 187, 197. Advanced Holdings Pty Ltd (as Trustee for Demian Trust) v Commissioner of Taxation [2020] FCA 1479 [109] to [123].
Ms Bishop put to the Individual that there are documents before the Tribunal that do not support bare trust status as they do not clearly indicate that the entity at issue was acting as trustee. Examples include:
(a)Invoices said to have been issued by the Company to A Ltd and/or S Ltd without any evidence those invoices were issued by the Company as sub-trustee.[95] A further example are references in Annual Reports for A Ltd to consultancy fees charged to A Ltd by the Company, which do not reference the Company’s purported status as a bare trustee.[96] None of this material states that the Company was acting “as (bare) trustee for” Family Trust 2.
(b)A debenture filed pursuant to section 263 of the Corporations Act 2001 (Cth).[97] The registration document was amended to refer to BN Ltd otherwise than “as trustee.” The document as a whole is internally inconsistent. The front page clearly indicates that BN Ltd was acting as trustee for Family Trust 2. I do not accept the Commissioner’s Closing Submissions in relation to this document, as the reason for that amendment appears to have been the perception that ASIC does not register trust relationships.[98]
[95] Tribunal Book 1040 to 1071. Transcript 186-187. Transcript 82 [28] to [45].
[96] Transcript 160 [9].
[97] Tribunal Book 951; Transcript 201.
[98] Commissioner’s Closing Submissions [13c(iv)]. See Setting up a business structure for a small business | ASIC. “ASIC does not register trusts, partnerships or joint ventures, we only register companies and business names.”
In any event, the answer to Ms Bishop’s point is that stating “as trustee for” has evidential value to demonstrate trustee status, but it is not a requirement at law. Trustee status may be established by other evidence (such as that entity previously having acted in that capacity at all times), although the absence of the words “as trustee for” may impact trustee liability.[99] This is a factor I have taken into account below and I do not dismiss it entirely, but it is not of itself determinative.
[99] Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6, [3]; Re Interwest Hotels Pty Ltd (in liq) [1993] VSC 477, 12 to 90.
The Applicants’ Closing Submissions submit that the Commissioner’s cross-examination of the Applicants’ witnesses reflects that, in substance, the Commissioner is pleading a sham or otherwise challenging the veracity of the Deeds of Bare Trust too late, in circumstances where the Commissioner has had this material as part of the Tribunal documents for some time.[100] There is nothing set out in the Commissioner’s Closing Submissions arguing sham, and no such direct challenge in the Commissioner’s Outline either. I agree with the Applicants that were there to be a challenge to the Deeds of Bare Trust on the basis of sham, fairness dictates that it ought to have been clearly put for the Applicants to respond to before cross-examination. However, I do not think there is such a direct challenge. Instead, what the Commissioner is saying is that the purported retrospectivity of the Deeds of Bare Trust impacts their validity or weight, and that in some cases purported bare trustees contracted in their own capacity.
[100] Applicants’ Closing Submissions [19] to [20]. This is also set out in the Applicants’ Outline [17].
There are no resolutions from BN Ltd nor any written directions to any of the Sub-Trustees by BN Ltd before the Tribunal. There are no Deeds of Bare Trust relating to the Other Companies, the Individual (other than those specified immediately below), and the Individual’s wife. They too are said to be bare trustees for Family Trust 2.
Apparent Purchaser Deeds, Declaration of Trust
There are also Apparent Purchaser Deeds and a Declaration of Trust which suggest a bare trust relationship. The Apparent Purchaser Deeds relate to properties that are unrelated to the Farm.
That material comprises:
(a)a Declaration of Trust dated 26 September 2011 in which the Individual[101] is said to be the trustee of A Ltd in relation to a leasehold property;
(b)an Apparent Purchaser Deed dated 8 September 2011[102] in which the Individual is said to be the nominee of BN Ltd in the acquisition of a Sydney CBD property. This is dated around 3 months after that purchase;[103]
(c)an Apparent Purchaser Deed dated 13 August 2013[104] in which the Individual is said to be the nominee of BN Ltd in the acquisition of a Northbridge property;
(d)an Apparent Purchaser Deed that is undated[105] but which is said to be on or around 15 June 2012[106] and in which the Individual is said to be the nominee of both BN Ltd and another person (Ms C) on a 50/50 basis in the acquisition of a Mittagong property.
[101] YSPQ T Documents T19-254 – although the Individual’s first and middle names are in the wrong order.
[102] YSPQ T Documents T19-255.
[103] Individual’s First Witness Statement [131].
[104] YSPQ T Documents T19-259.
[105] YSPQ T Documents T19-265.
[106] Individual’s First Witness Statement [146].
The Individual also said in cross-examination that funding for the above purchases was provided to him from Family Trust 2.[107] However, when the banking material before the Tribunal is considered, financing was provided by banks to the Individual.[108] I have assumed that the Individual’s evidence was intended to be to the effect that the funding acquired by the Individual was as bare trustee for Family Trust 2.
[107] Transcript 128 [32] to [40].
[108] See paragraph 77 below which sets out that bank material.
Witness evidence – the Individual
Finally, the Individual’s and the Individual’s wife’s evidence before the Tribunal is relevant to the issue of whether there are bare trusts as asserted by the Applicants.
In terms of the Individual, particularly relevant to this point was the following evidence:
(a)The Individual said the sub-trust or bare trust arrangements were for asset protection[109] or succession planning.[110] In the Individual’s First Witness statement the Individual said that it was prudent to use a sub-trust structure for asset protection because “during the 1990s there had been a significant volume of litigation involving farmers.”[111] He referred to the DE operations as being carried on by Family Trust 2,[112] and the Consultancy Agreements being entered into by the Company as bare trustee for Family Trust 2.[113] He also described the Apparent Purchaser Deeds.[114]
(b)In cross-examination, the Individual referred to the Company as “a sort of sub-trustee” for BN Ltd.[115]
[109] Individual’s First Witness Statement [40].
[110] Transcript 72 [44] to [45].
[111] Individual’s First Witness Statement [40].
[112] Individual’s First Witness Statement [81].
[113] Individual’s First Witness Statement [92], [114].
[114] Individual’s First Witness Statement [139] to [154].
[115] Transcript 69 [39]to [40], [43].
There were also other aspects of the Individual’s evidence that are relevant. Where there are active duties of management on the part of the purported bare trustee, the relationship is not one of bare trust.[116]
[116] Chief Commissioner of Stamp Duties NSW v ISPT Pty Ltd 99 ATC 4066, 4074 to 4075.
The Individual said that BN Ltd the trustee of Family Trust 2 was not the entity that filed GST returns for Family Trust 2. Rather, the Company filed those GST returns.[117] It may be that the Company filed BAS as the representative member of a GST group as the handed-up GST returns are in the Company’s name.[118] If there was a GST group, the Company’s obligation under the GST Act is to file the BAS. I do not think that the filing of GST returns by the Company comprises any active duty that undermines bare trustee status.
[117] Transcript 109 [35]. Transcript 148 [34] to [46] the Individual suggests the BAS were filed by the “trading entity” – being the Company.
[118] Applicants’ materials comprising GST returns in the Company’s name for GST periods from July 2010 to June 2013.
Witness evidence – the Individual’s wife
The Individual’s wife also gave evidence and was cross-examined at the hearing. The Individual’s wife’s Witness Statement mentioned that TB Ltd was bare trustee for Family Trust 2,[119] but there is no other mention of bare trusts in her witness statement. It is her signature[120] that appears on each of the Deeds of Bare Trust for BN Ltd as well as for Stock Ltd, TB Ltd and the Company (as applicable). She was a director of all of those entities as at the date of the Deeds of Bare Trust, but was no longer a director of any of those entities by January 2011.[121]
[119] Individual’s wife’s Witness Statement [4].
[120] The Individual’s wife’s signature on the Deeds of Bare Trust differs from her signature witnessing the Individual’s Third Witness Statement. I have drawn no particular conclusions as there is no suggestion before me that she did not sign both documents.
[121] Tribunal Book 1481 Individual’s wife’s Witness Statement [3].
In cross-examination, the Individual’s wife said she either did not know or could not remember what a bare trust was.[122] The Individual’s wife acknowledged she would sign documents when requested by the Individual because she trusted him.[123] She also acknowledged that she had spoken to the Individual about her witness statement, although she also noted she agreed with what he said.[124] The Applicants’ Closing Submissions take the view that the Individual’s wife’s evidence was uncertain on the bare trust issue as a product of the Commissioner’s questioning as to what a trust was in the first place, but her evidence demonstrated “key events.”[125]
[122] Transcript 200 [34] to [39], 201 [5] to [38].
[123] Transcript 202 [42] to [43].
[124] Transcript 202 [45], 203 [3].The Applicants’ Closing Submissions [27] suggested this did not diminish the independence of her evidence.
[125] Applicants’ Closing Submissions [26].
In terms of the Individual’s wife’s evidence that she did not understand what a bare trust was, the Deeds are dated 17 years ago and she also said at the hearing she could not remember what a bare trust was nor signing the Deeds.[126] This suggests it is a lack of memory now, and does not necessarily reflect anything about the position in 2008. I do not accept the Commissioner’s Closing Submissions on this point.[127] I draw no negative inferences from the Individual’s wife’s evidence in this respect, but it does impact the weight to be given to her evidence. My assessment is she answered all questions honestly but has a lack of memory. What I drew from her evidence is that it was the Individual that mainly ran business matters. That was not an unexpected revelation. While her honest answer was that she had spoken to her husband about her evidence, I did not assess that as the kind of collusion that ought to result in my dismissal of her evidence entirely.[128] It does impact the weight to be given to her evidence, and this, combined with her lack of memory means I have not given her evidence significant weight.
[126] Transcript 201 [30].
[127] Commissioner’s Closing Submissions [53].
[128] Ibid.
The Individual’s wife was also asked in cross-examination whether certain documents[129] were signed by her on behalf of BN Ltd in BN Ltd’s own capacity, and not in BN Ltd’s capacity as trustee.[130] The Individual’s wife said that was not what she understood.[131]
[129] Tribunal Book 948, 951 – relating to debentures where BN Ltd is either not referred to as trustee, or had that reference crossed out.
[130] Transcript 201 [40] to [47], 202 [1] to [14], [20] to [32].
[131] Transcript 202 [32].
This point does not of itself undermine the Deeds of Bare Trust as BN Ltd is clearly said in that context to be entering those deeds in its capacity as trustee of Family Trust 2. But it is relevant to the overall submissions made by the Individual to the Commissioner that all of the Company, BN Ltd, TB Ltd, Stock Ltd and the Other Companies, the Individual and the Individual’s wife are bare trustees for Family Trust 2 and had no assets of substance or business on their own right. This issue is dealt with above[132] and further below.
[132] See paragraphs 20 and 20(a) above.
Challenges to the Individual’s credibility as a witness
A lot of time was spent by the Commissioner challenging the Individual’s credibility. I consider some (but not all) of these challenges here as this could impact the credibility of the assertions relating to the existence of bare trusts. These challenges may impact other issues as well.
Ms Bishop focused in part on the 2013 interview. The Commissioner’s notes of the 2013 interview have been challenged by the Applicants.[133] I accept the notes are business records and can be relied upon as such. I also accept they were recorded shortly after that meeting and that this is the standard process at the Australian Taxation Office. I also accept that, like all meeting records, things may be missed or misunderstood by the note taker, and I have taken that into account when considering the Commissioner’s notes. I have come to the same view in relation to the notes of the 2015 interview. I record that some of the Applicants’ challenges to the Commissioner’s notes[134] have been taken into account when considering their weight.[135] I have also taken into account the Individual’s evidence before the Tribunal where he said the notes were inaccurate or mixed up and given the Individual the benefit of any doubt.[136] I have approached the 2013 interview notes and 2015 interview notes consistently in that manner.
[133] Applicants’ Closing Submissions [32] to [38].
[134] Ibid.
[135] The Tribunal does not accept that grammatical issues such as inaccurate use of pronouns affect the weight to be given to the notes. I also do not accept the notes are “laced with errors” Applicants’ Closing Submissions [35].
[136] For instance, Transcript 97 [30] to [34].
The first challenge to the Individual’s credibility related to the 2013 interview.[137] Ms Bishop referred to the Commissioner’s notes and asked the Individual to confirm that he had never mentioned sub-trusts at that time.[138] The Individual did not have complete recollection, accepted the sub-trusts may have been relevant, but he did not accept that the Commissioner’s notes were accurate, and noted that the interview was in relation to GST.[139] Ms Bishop‘s point, it seems, was both a challenge to the Individual’s credibility and also to support an inference that the Deeds of Bare Trust did not exist earlier than these proceedings.
[137] Transcript 95 to 102. ST22-0959.
[138] Transcript 101 [11] to [36].
[139] Transcript 101 [2], [36]; 102 [6] to [8].
I accept that the Individual did not mention the sub-trusts nor the DE operation at the 2013 interview, and I note that the Individual excused this omission before the Tribunal on the basis the interview was about GST.[140] It appears that he felt the focus of the 2013 interview was other than on those factual matters, and while he accepted the trust structure was relevant,[141] he was not volunteering anything to the Commissioner beyond the specific factual matters asked about. This is not ideal behaviour, and the Commissioner should be engaged with openly. The Individual explained the trust / sub-trust structure to the Commissioner at the 2015 interview.[142] On balance, I do not draw significant negative inferences against the Individual from this aspect of the 2013 interview.
[140] Ibid.
[141] Transcript 101 [35] to [36].
[142] ST22-0963 - ST22-0966.
The second challenge was whether the Individual had returned from overseas the day of the 2013 interview or not.[143] This was a dive into a rabbit hole of considerable depth. I took the Individual’s insistence that he had returned that day as perhaps being to suggest that he was tired or confused at that 2013 interview as well as to counter any suggestion he was misleading the Commissioner at that interview. The notes of that 2013 interview record that the Individual said that he had returned that day,[144] and the Commissioner raised this point to suggest that the Individual had misled the Commissioner in 2013.
[143] Transcript 101 [37] to [46]; 102 [9] to [46]; 103-107; 112 [4] to [40]; 116 [25] to [45]; 117 [1] to [47].
[144] ST21-0957.
The material on this point can only be reconciled by concluding that the Individual does not remember the timing of his arrival in Australia in 2013 accurately.[145] This is because the Government international movement records do not record the Individual’s arrival on that day.[146] The Individual said he arrived by air[147] and a movement record would have been recorded. I could not see much substance to a dispute on this point. The statement accorded to him in the Commissioner’s notes was that he had only arrived back in Australia on the day of the 2013 interview. This was either wrong or recorded wrongly. I could not understand why the Individual was insistent otherwise.[148] He did note it was 12 years ago and this was the best of his recollection.[149] This is hardly a point of any weight in the Commissioner’s favour, and I agree with the Applicants that it is not particularly relevant to any of the issues in dispute.[150] I also did not consider this to have been a major credibility challenge. The Individual’s insistence on this aspect was very puzzling.
[145] This is consistent with the Applicants’ Closing Submissions [14].
[146] FST7-0007.
[147] Transcript 102 [36] and following.
[148] I agree with the Commissioner’s Closing Submissions [86] that this would have been a sensible concession
[149] Transcript 117 [34] to [39].
[150] I agree with the Applicants’ Closing Submissions [14] on the point of relevance.
The Tribunal was bemused by the Individual’s assertion at the hearing that the 2013 interview was about the Company,[151] when it was about Family Trust 2 and BN Ltd, and (I accept) the questions related to that. The handed-up GST returns[152] are in the Company’s name and may reflect that the Company filed returns as the representative entity of a GST group.[153] Even if that is the case, the Commissioner can ask about the individual group members, and was clearly doing so. In saying all of that, I have not drawn negative inferences against the Individual from this matter as I put it down to the Individual potentially misunderstanding and taking a narrow focus on the (possible) representative entity for GST group purposes. It is not particularly relevant to the current proceedings.
[151] Transcript 101 [44] to [46].
[152] Applicants’ materials comprising GST returns in the Company’s name for GST periods from July 2010 to June 2013. I note these returns were not analysed by either party. The Commissioner said it did not have these returns. Whether they were lodged is unclear. The GST returns are not directly at issue in these proceedings.
[153] As the BAS are filed under the Company’s name.
The third challenge to the Individual’s credibility related to the 2013 interview and was about the properties held by Family Trust 2 at that time. The 2013 interview notes record that the Individual referred to the Farm, a property in Port Douglas and a property in the Sydney CBD.[154] Ms Bishop challenged him about properties in Mittagong.[155]The Individual accepted that BN Ltd/Family Trust 2 did hold a Mittagong property in 2013 but said he did not accept he was asked about that.[156] As Family Trust 2 did hold a property in Mittagong, it is strange that the Individual did not seek to explain that to the Commissioner when (I accept) he was asked about the properties held by Family Trust 2. I accept he was asked about the Mittagong property because the Commissioner was considering GST in the context of rental property income derived by Family Trust 2. I accept the Mittagong property acquired in 2012 should have been mentioned by the Individual. Similarly to the mention of the sub-trust structure, the Individual seems to take the view that he should only answer questions asked on the terms they were asked, and he did not correct matters even where it was clear the topic the Commissioner was asking about. The Individual’s approach is not recommended when dealing with the Commissioner as it can lead to negative inferences being drawn against him by the Commissioner as occurred here. It also impacted my assessment of him.
[154] ST21-958.
[155] Transcript 98 [44] to [47], 99-100.
[156] Transcript 99 [6], [14] to [16], 100 [2] to [4]. The Individual’s First Witness Statement refers to an acquisition in Mittagong in April 2012 (at [141] to [149]) which was said to be partly for Family Trust 2 and partly for Ms C, and the neighbouring property acquired by BN Ltd in 2015 (at [150]. The 2012 property was obviously relevant for the 2013 interview. I note that the evidence in the Tribunal Book reflects that the neighbouring Mittagong property was acquired by BN Ltd (not stated as “ATF Family Trust 2”) in 2015 on 2 March 2015 (Tribunal Book 1009) and then was transferred on 23 October 2015 (Tribunal Book 1010) by BN Ltd ATF Family Trust 2 to Ms C for exactly the same price. The transfer of the 2015 Mittagong property is not referred to in the Individual’s First Witness Statement (see [150]). Ms C’s involvement is as an established family friend (Individual’s First Witness Statement [147]) and an investor (SBXB T Documents T79-1979 under “Question 2.1(a)-(c)”).
There was also a challenge relating to whether the Individual was engaged directly by or was an employee of S Ltd or A Ltd. This was the most significant challenge to the Individual’s credibility. The Commissioner’s notes of the 2013 meeting suggest the Individual asserted he was an employee.[157] The Individual did not accept the Commissioner’s notes were accurate.[158] In a later meeting with the Commissioner, the Individual referred to himself as providing “services” to A Ltd and S Ltd at the 2015 interview, and does not on the face of the 2015 interview notes state he is an employee.[159] This issue is important and the Tribunal finds this matter does impact the Individual’s credibility adversely for the reasons noted in detail below but not due to the notes of the 2013 interview.[160] There were other connected challenges including to banking records which adversely impact the Individual’s credibility and are considered further below.[161]
[157] ST21-959; ST21-960.
[158] Transcript 98 [21], [34], [42], 101 [6].
[159] ST22-963, 966.
[160] See paragraph 9477 and following below.
[161] Transcript 108-111.
Ms Bishop put to the Individual that the Deeds of Bare Trust were “having these entities as sub trustees retrospectively” and about achieving “a tax saving.”[162] The Individual rejected that, but he was unable to recall the advice provided to him as to why the structure was in the form it was, other than that it was potentially related to succession planning.[163] The Individual accepted that Family Trust 2 could benefit himself and his family, could accumulate wealth in that trust, and income and capital could be distributed to family members when needed.[164]
[162] Transcript 84 [36], [40].
[163] Transcript 83 [34].
[164] Transcript 71 [1] to [16].
The Tribunal accepts that some of the material the Individual was asked about was some time ago and there may be a lack of memory. However, there is one further aspect of the Individual’s evidence which has been taken into account when assessing the weight to give the Individual’s evidence before the Tribunal. The Individual was consistent in his blame for others for inconsistencies or issues that were raised with him in cross-examination.
Examples of this included blaming the following:
(a)Advisers for the management of trust entities – for example when questioned about the lack of trustee resolutions.[165]
(b)A mortgage broker for inconsistencies relating to his employment status or engagement by A Ltd and S Ltd or for incorrect facts being submitted to the bank (which are further discussed below).[166] The mortgage broker and accountants at A Ltd were blamed for creating what the Individual says are false pay slips and false Consultancy Agreements. In fairness, the Individual accepted that he told the accountants to do whatever the mortgage broker wanted.[167]
(c)An unnamed consultant at Commonwealth Bank for recording A Ltd as the Individual’s employer.[168]
(d)His tax agent for inconsistencies in tax returns or draft tax returns.[169]
(e)Auditors for company accounts.[170]
(f)The Commissioner for not asking the Individual about other bank accounts he maintained.[171]
[165] Transcript 71 [36] to [45], 174 [6], [30].
[166] Transcript 120 [20] to [45]; 121 [32] to [46]; 122 [12] to [15]; [29] to [35];128 [31}-[32]; 130 [8] to [10]
[167] Transcript 121 [38] to [46].
[168] Individual’s First Witness Statement [203(b)].
[169] Transcript 174 [2] to [4], 177 [27]; 187 [44] to [47].
[170] Transcript 159 [41] to [45], 186 [9] to [18].
[171] Transcript 134 [9] to [41], 135 [6] to [45], 136 [14] to [46].
The Tribunal accepts that advisers are relied upon by taxpayers and the Individual cannot be an expert in everything. However, the Individual’s tendency to excuse himself as innocently following what others said and to blame others was an aspect of this case which impacted the Tribunal’s assessment of his evidence overall. The Individual has responsibility, including (for instance) when acting as a director of various companies. He said he is an experienced director, [172] and as such he should know his duties. He has a responsibility to question advice he is given, particularly where he is told to provide false information and create false evidence (as his evidence before the Tribunal says is the factual position). That should be glaringly obvious to anybody in business or outside of business. The Individual is responsible for his tax affairs.
[172] Individual’s First Witness Statement [108].
In addition, it is concerning that the Individual failed to be open with the Commissioner and then blamed the Commissioner for not asking about material that was within the Individual’s knowledge. The subject areas that the Commissioner’s inquiries were about were clear. That approach lengthened the Commissioner’s inquiries and gave an impression of evasiveness.
Case Law
In Herdegen v Federal Commissioner of Taxation 88 ATC 4,995 the Federal Court confirmed that there was no bare trust in that case as there was insufficient evidence of certainty of property.[173]
[173] 88 ATC 4,995 at 5,005. This conclusion was about shares, and it was referred to in Ellison v Sandini Pty Ltd; Federal Commissioner of Taxation v Sandini Pty Ltd [2018] FCAFC 44 [21] which described this conclusion as “Dickensian” as it was related to time periods where there were physical share certificates and the like which enabled identification of specific shares.
At 5,003 Gummow J said:
Today the usually accepted meaning of "bare" trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform. except to convey it upon demand to the beneficiary or beneficiaries or as directed by them. …. The beneficiary may of course hold the equitable interest upon a sub-trust for others or himself and others: sec Halsbury's Laws of' England 4th ed .Vol. 48, "Trusts", para. 938. The term is usually used in relation to trusts created by express declaration. But it has been said that the assignor under an agreement for value for assignment of so-called "future" property becomes. on acquisition of the title to the property. trustee of that property for the assignee (Palette Shoes Pty. Ltd. v. Krohn (1937) 58 C.L.R. 1 at p.27) and this trust would answer the description of a bare trust. Also, the term "bare trust" may be used fairly to describe the position occupied by a person holding the title to property under a resulting trust flowing from the provision by the beneficiary of the purchase money for the property (Emphasis added).
The above comments from Herdegen are applied in other tax cases such as Kafataris v Deputy Federal Commissioner of Taxation [2015] FCA 874 and Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v Federal Commissioner of Taxation [2015] FCAFC 4. Those cases confirm that the beneficiary’s absolute entitlement to the trust property is a feature of a bare trust.
In Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2011] FCAFC 79 the issue before the Full Federal Court related to whether a bare trustee was entitled to indemnification out of the trust property. That came down to considering whether a bare trustee had obligations to oppose litigation as part of its duties to protect the trust assets or whether that was active management,[174] and contrary to the duties of a bare trustee which were merely passive in nature.[175] The Court held[176] that opposing litigation was part of the bare trustee’s duty of protecting the trust property. In Chief Commissioner of Stamp Duties v ISPT Pty Ltd 99 ATC 4,066 at 4,075 President Mason noted “[i]t is equally clear that some active duties, though not of management, are imposed on some, but not all, bare trustees” (emphasis added).[177]
[174] [2011] FCAFC 79, [21] “A bare trustee has a duty to maintain and protect the trust property and to refrain from active management that does not fall within this duty.”
[175] CGU Insurance Limited v One-Tel Limited (in liq) [2010] HCA 26 [36] to [37].
[176] [2011] FCAFC 79, [19] to [25].
[177] This is also cited in Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation [2011] FCAFC 79, [16].
While active duties to protect the trust property form part of the duties of a bare trustee, a bare trustee does not have the power to dispose of trust property.[178] In Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 Gordon J held at [26] and [28]:
26. The Company is and will remain a bare trustee. It may still hold the assets of the Trust. Its duties, powers and rights are limited to protecting the Trust assets: see, by way of example, Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2008] FCAFC 184 at [79]; Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2010] FCA 978 at [52] and Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281. …..
28. What then are the powers of a bare trustee? As noted, it has limited powers, and these do not include a power of sale: see [26] above.
[178] Federal Commissioner of Taxation and Bruton Holdings Pty Ltd (in liq) [2008] FCAFC 184 at [79]. Pleash, in the matter of Suncoast Restoration Pty Ltd (in liq) [2013] FCA 355 at [27], [32], [35].
In Kafataris v Deputy Federal Commissioner of Taxation [2015] FCA 874, at [34] Davies J held there was no bare trust noting:
The submission that the trust here is a ‘‘bare trust’’ is unsupportable having regard to the uncontroversial fact that the property was, at the time of the creation of the trust, subject to lease. There is some evidence to indicate that the property continues to be leased. At the least, the taxpayers, on whom the burden of proof falls, led no evidence to the contrary. In those circumstances it cannot be said that the taxpayers have no active duties to perform in relation to the property.
In Federal Commissioner of Taxation v Bazzo; Bazzo v Federal Commissioner of Taxation [2024] FCA 452 default assessments were issued to the taxpayer in relation to profits from the sale of properties. The taxpayer maintained that she held the properties in question on bare trust for her former de facto partner, and all deposits in her accounts were not for her benefit. In the same case before the Tribunal (as VTBL and Commissioner of Taxation [2023] AATA 168), it was accepted that Deeds of Bare Trust were valid, in circumstances of credibility challenge and where the Commissioner was raising inferences but not directly challenging the authenticity of the Trust Deeds. The Tribunal also found that to the extent the Deed of Trust had not been provided to the Commissioner that did not undermine its credibility as a Deed of Trust.[179] On appeal, in Bazzo, those holdings were not overturned.[180]
[179] [2023] AATA 168 [289] “The Applicant is not on trial in these proceedings for having failed to cooperate with the Respondent, or for having failed to produce documents.”
[180] [2024] FCA 452, [118].
Conclusions
I have concluded that the Deeds of Bare Trust are validly executed. The evidence before me does not satisfy me that the Deeds of Bare Trust were created after the event, for the purpose of these proceedings, nor is there evidence they were dated retrospectively and not when they were really entered into.
In terms of the Individual’s credibility, there are issues referred to below which impact his credibility adversely. While that is relevant to my findings below, I do not find his credibility adversely impacts the valid execution of the Deeds of Bare Trust. I follow the decision in Federal Commissioner of Taxation v Bazzo; Bazzo v Federal Commissioner of Taxation [2024] FCA 452 in this regard.
However, while the Deeds were validly executed, there is a question as to whether they are effective at law, and correctly describe a relationship as a bare trust. This is because there is a question as to whether the actions of the Company, TB Ltd, and Stock Ltd as evidenced before the Tribunal are consistent with being bare trustees. There is evidence before the Tribunal that active duties of management have been undertaken contrary to the relationships being a bare trust. The Individual noted that Stock Ltd sold its animal assets,[181] that TB Ltd entered into lease agreements/agistment agreements[182] in relation to the Farm,[183] a portion of the Farm was sold,[184] and there is evidence that the Company transferred vehicle assets to the Individual, and then the Individual transferred some of those vehicles to third parties.[185] It is also notable that the unknown source payments in the Individual’s account are said in the Applicants’ reconciliation to include funds from the sale of motorbikes without evidence of those funds then being transferred to Family Trust 2[186] The Company also (on the Applicants’ case) entered into contractual arrangements such as the Consultancy Agreements.[187] There is no evidence of BN Ltd/Family Trust 2 directing that any of those transactions occur.
[181] Transcript 80 [5] to [20].
[182] There was discussion in the Commissioner’s cross-examination of the Individual about the land on the Farm subject to agistment, due to some poor wording in the agreements at issue – Transcript 86-89.
[183] SBXB T Documents T77-1947; T77-1958.
[184] Individual’s First Witness Statement [63]. Tribunal Book 991. It is noted that these agreements alone import active duties of management inconsistent with TB Ltd being a bare trustee: Kafataris v Deputy Federal Commissioner of Taxation [2015] FCA 874 at [34].
[185] ST2-0041, ST2-0043; ST32-1148.
[186] ST32-1198.
[187] SBXB T Documents T63-1572; T63-1577.
It might be said that clause 2 of each of the Deeds of Bare Trust cures this by stating “The Sub-Trustee will deal with its assets and incur liabilities only as instructed by the Head Trustee.” It might be maintained that I should assume from that clause that such instructions arose. I do not accept that to be correct. Case law demonstrates that trustees operate beyond their powers on occasion.[188] Evidence should be produced to satisfy the Tribunal.
[188] For example, see the analysis at Lewski v Commissioner of Taxation [2017] FCAFC 145, [144] and following.
Subsection 298-20(1) of Schedule 1 to the TAA provides that the Commissioner may remit all or part of a penalty.[583] There are no explicit factors in the legislation that the Commissioner is required to consider.
[583] Subsection 298-20(3) provide that the Commissioner’s refusal to remit a penalty can be objected to in the manner set out in Part IVC of the TAA, and the Tribunal can review an objection decision that refuses to remit the penalty.
I agree with the Applicants’ Outline at [240] that the case law establishes that I am to consider the taxpayer’s particular circumstances, including whether there are circumstances that mitigate the taxpayer’s behaviour in some way. I also agree with the Applicants’ Outline that the purpose of the penalty provisions need to be considered. [584]
[584] Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50 [249], [274]; Diarra and Commissioner of Taxation [2019] AATA 5545 [34], [39].
Case law gives examples of factors that may be relevant to considering section 298-20. For example:
(a)In Yazbek v Federal Commissioner of Taxation [2014] AATA 423, the Tribunal noted at [106] to [107] the factors that could be relevant:
A number of factors could be relevant including some or all of the following:
(a) The taxpayer’s compliance history;
(b) The taxpayer’s personal circumstances;
(c) The fact that the correct interpretation is an issue which is controversial or novel;
(d) The ATO has caused significant delay; and
(e) The tax shortfall amounts to only a timing difference and not a permanent reduction in tax.
It is clear that it is for the taxpayers to spell out in detail the exact circumstances that would justify a full remission of the penalty pursuant to this section: Coppell v FCT 2000 ATC 2010.
(b)In Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50, at [240] and [249] the majority of the Full Federal Court held that when considering whether to remit a penalty, considering whether the taxpayer’s tax position is reasonably arguable is a relevant consideration as is determining whether the outcome for the taxpayer would be unreasonable or unjust.
Applicants limited to their grounds of Objection
Pursuant to section 14ZZK of the TAA, the Applicants are limited to their grounds of objection. I have considered the Individual’s Objection carefully. The material before the Tribunal contains objections dated 12 June 2018. [585] Accompanying them is a letter dated 11 July 2018 and it is this date the Commissioner refers to in the T Document index as the objection date.[586] In that 11 July 2018 letter there is the only reference to penalties[587] where it is stated:
As the ATO have only taken a portion of [Family Trust 2’s] income and applied that to the [Individual] without any deductions in the respect of earning that specific income, and further without any reasons being provided for the transfer of this income from the Trust to the [Individual], we therefore object to the Default Assessments and Penalties on the basis that they are neither valid nor on the basis of the facts presented, assuming the ATO are correct, the true net income position of the [Individual] and in fact are overtaxing the [Individual] without any justification. (sic)
[585] SBXB T Documents T75-1842 and following.
[586] SBXB T Documents T75-1843.
[587] Other than minor references such as “Further we raised an objection to the validity of the Default Assessments and the Shortfall Penalty Notices” and “As the audit of the [Individual] and the Controlled Entities is not complete, it makes it difficult to lodge a complete Objection to the Default Assessments and Penalties”.
The Individual’s Objection does not refer to requests for remission. Subsection 298-20(3) and section 280-160 of Schedule 1 to the TAA are not referred to. Remission also does not feature in either of the objection decisions.[588] Failure to remit first came up in the Application for Review for the Individual.[589] There is other material from the Commissioner on its position that remission is not warranted but it is not in an objection decision.[590] I have also considered the other correspondence (including the Company’s Objection) and have not found an extension of the grounds of objection accepted by the Commissioner as in time on the issue of remission.
[588] SBXB T Documents T2-7 and following. YSPQ T Documents T2-7 and following.
[589] SBXB T Documents T1-5.
[590] The Position Paper at [3.1.4] and [3.1.18] to [3.1.24] considers remission is not available (SBXB T Documents T58-1481 to T58-1482). The Statement of Audit Position at [289] to [293] and [301] also determines remission is not available (SBXB T Documents T68-1796 to T68-1797). Also see the Commissioner’s SFIC [46] to [48]. Commissioner’s Outline [196] to [198]. Commissioner’s Closing Submissions [91] to [95]. There is an open question as to whether the analysis in these documents is sufficient to meet the requirements of written notice of reasons in subsection 298-20(2) of Schedule 1 to the TAA.
Under section 14ZZK of the TAA on an application for review before the Tribunal, the Applicants are limited to their grounds of objection unless the Tribunal orders otherwise. I have argument before me from both parties about penalty remission. I have determined that the Tribunal will allow the Applicants to extend their grounds of objection to cover penalty remission, including the remission of the uplift to the base penalty amount.[591] For the avoidance of doubt, the Tribunal also intends that the Individual is given the opportunity to supplement the Individual’s Objection to the failure to remit the penalty and base penalty amount uplift with submissions to the Commissioner if the Individual wishes to do so, and the Commissioner must take those submissions into account.
[591] Objection is provided for in subsection 298-20(3) of Schedule 1 of the TAA.
In the circumstances, in accordance with section 105 of the Administrative Review Tribunal Act 2024 (Cth) I remit the question of whether the penalty / the penalty uplift should be remitted in whole or in part to the Commissioner for determination in accordance with the recommendations below.
Recommendations
The Commissioner should consider the Individual’s Objection as to the remission of penalty and the uplift to the base penalty amount in whole or in part taking into account the statutory provision, the factual circumstances as a whole and the following:
(a)Section 298-20 of Schedule 1 to the TAA provides a simple discretion that the Commissioner may remit all or a part of the penalty.
(b)The statutory provision provides that part of a penalty can be considered for remission.
(c)The case law provides that the Commissioner should consider the taxpayer’s circumstances and whether it would be reasonable, fair and just to remit the penalty in whole or in part.
(d)The statutory provision does not limit the Commissioner from considering remission of a penalty or the remission of the uplift of the base penalty amount merely because an intentional disregard penalty has been imposed. That is not a reason to refuse to remit.
(e)There has been very significant engagement by the Applicants with the Commissioner lasting more than a decade.
(f)There were very significant delays from the Commissioner, including 3 and a half years to determine the Individual’s Objection.
(g)In relation to the 20% uplift of the base penalty amount:
(i)The Commissioner’s objection decision took the view that a lack of a voluntary disclosure was a relevant factor when applying paragraph 284-220(1)(a) which is incorrect. This means that the objection decision did not engage with the statutory provision appropriately.
(ii)The Commissioner has chopped and changed its position about which paragraph in section 284-220 was being applied. In particular it changed its position in the Commissioner’s Outline before the Tribunal from the objection decision, and making it impossible for the Individual to answer the case.
(iii)Issues of justice and fairness are relevant when considering remission.
For completeness I record my disagreement with example 12 of PS LA 2012/5 . An inference might be drawn by the Commissioner’s officials from that example that remission of the base penalty uplift cannot be considered in a case where the intentional disregard penalty has been applied. Example 12 considers a circumstance where, like here, the Commissioner applies paragraph 284-220(1)(c) to uplift the base penalty amount where an administrative penalty has been applied in a group of years following an ATO review. That example states that as long as the penalty is not for intentional disregard, a tax officer can consider remitting the uplift on the basis that the taxpayer was not aware of the first imposition of the administrative penalty. While policies such as PS LA 2012/5 issued by the Commissioner are not law, they are applied by the Commissioner’s officials for the worthy objective of consistency in administrative decision-making. In the case of example 12, I do not think it is correct to suggest that remission of the base penalty uplift is only applicable to some penalties and not others in the circumstances described. The legislative provisions contain no such constraint, and the case law advises the Commissioner to take into account all circumstances in each individual case.
ISSUE 6: WHETHER THE SHORTFALL INTEREST CHARGE IMPOSED ON THE INDIVIDUAL SHOULD BE REMITTED IN WHOLE OR IN PART PURSUANT TO SECTION 280-160 OF SCHEDULE 1 TO THE TAA
Legal principles
The shortfall interest charge is applied for periods on the day the tax became due and payable or would have been, and finishes on the day the Commissioner gives notice of the amended assessment.[592] I note that the Commissioner appears to have applied the shortfall interest charge up to the date of the Position Paper (February 2017) on the basis that this is when the Individual was advised of the Commissioner’s position, and not up to the amended assessment date.[593]
[592] Section 280-100 of Schedule 1 to the TAA.
[593] SBXB T Documents T68-1723 [11], T68-1724 table 1.See [3A] of PS LA 2006/8.
Subsection 280-160(1) of Schedule 1 to the TAA provides that the Commissioner may remit all or a part of an amount of the shortfall interest charge if it is fair and reasonable to do so. Without limiting the factors that can be considered, subsection 280-160(2) sets out two principles:
(a)that remission should not occur just because the benefit received by the Individual from the temporary use of the tax shortfall amount is less than the shortfall interest charge; and
(b)that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.
The Commissioner’s policy on the remission of the shortfall interest charge is PS LA 2006/8. The Commissioner refers to an array of factors that it takes into account when considering remission. These include the following comments:
(a)Where there are findings of evasion the Commissioner says it will not normally remit the shortfall interest charge, but regard should be had to the circumstances surrounding the shortfall.[594]
(b)Remission to at least the base rate should be considered in circumstances of delay by the Commissioner or where there is a delay in obtaining information from third parties.[595]
(c)Circumstances where the taxpayer has delayed the provision of information are said to not generally substantiate remission.[596]
[594] PS LA 2006/8 [16].
[595] PS LA 2006/8 [11], [12], [13], [14].
[596] PS LA 2006/8 [18].
Case law establishes that:
(a)There is no special circumstances test when considering remission of the shortfall interest charge;[597]
(b)It is relevant to consider that the shortfall interest charge is not merely imposed in terms of tax shortfalls, but the time between the time the relevant tax was due to when the relevant amended assessment issued.[598] This means any delay on the Commissioner’s part is a particularly relevant factor.
[597] N&M Martin Holdings Pty Ltd v Federal Commissioner of Taxation [2020] FCA 1186 [95] to [100]
[598] Mitri v Federal Commissioner of Taxation [2024] AATA 1268 [62]. WYVW v Federal Commissioner of Taxation [2023] AATA 4242 [713].
Applicants limited to their grounds of objection
Once again, the Tribunal finds itself considering a matter that is not in the Individual’s Objection nor the objection decision.
From the Tribunal Book:
(a)In the Position Paper, the Commissioner refers to its policy at PS LA 2006/8 and states at [3.1.4]: “In this case there are no relevant grounds for remission and so no remission is considered appropriate.”[599]
(b)In the Statement of Audit Position Paper, the Commissioner again refers to its policy and says at [301] “In this case, it has been determined that tax shortfalls were due to the Taxpayer’s intentional disregard of a taxation law. Therefore, there are no relevant grounds for remission and so no remission is considered appropriate.“[600] The Tribunal comments that there is an issue whether the analysis outlined in the Position Paper and Statement of Audit Position meets the requirements of section 280-165 of Schedule 1 to the TAA given little reasoning is given.
(c)The Individual’s Objection does not include a ground relating to the remission of the shortfall interest charge. I have also considered the other correspondence (including the Company’s Objection) and I have not found an extension of the grounds of objection accepted by the Commissioner as in time which considers remission of the shortfall interest charge.
(d)The objection decision does not consider the issue of remission of the shortfall interest charge.[601]
(e)In the Application for Review[602] at [3] the Individual submits that the shortfall interest charge should be remitted in whole or in part.
(f)In the Applicants’ SFIC[603] there is reference to the considerable delays on the Commissioner’s part as being the reason for remission of the shortfall interest charge. Those delays were not just taking such considerable time to determine the Objections, but more than 2 and a half years passing while under review without contact from the Commissioner before information was sought.
(g)The Commissioner’s Outline says at [198] “There are no circumstances raised by [the Individual] that would result in any remission of SIC.”
(h)The Applicant’s Outline states [243] that the shortfall interest charge should be remitted in full or in part and then says the issue would be dealt with in detail in closing submissions. The Applicants’ Closing Submissions deal with other matters.
(i)The Commissioner’s Closing Submissions say at [95] that the Individual has “failed to discharge his burden showing the Penalty Assessments are excessive and that the decision [not] to remit SIC was in error.”
[599] SBXB T Documents T58-1478
[600] SBXB T Documents T68-1797.
[601] SBXB T Documents T2.
[602] SBXB T Documents T1-5.
[603] Applicants’ SFIC [64].
There has been engagement by the parties, but not in an objection process on this issue. I have determined that the Tribunal will allow the Applicants to extend the grounds of objection to cover the failure of the Commissioner to remit of the shortfall interest charge.[604] For the avoidance of doubt, the Tribunal also intends that the Individual is given the opportunity to supplement the Individual’s Objection to the failure to remit the shortfall interest charge with submissions to the Commissioner if the Individual wishes to do so, and the Commissioner must take those submissions into account.
[604] This can be objected to pursuant to section 280-170 of Schedule 1 to the TAA.
In accordance with section 105 of the Administrative Review Tribunal Act 2024 (Cth), I remit the matter to the Commissioner for determination in accordance with the recommendations below.
Recommendations
The Commissioner should consider the objection as to the remission of the shortfall interest charge in whole or in part taking into account the statutory provision (section 280-160 of Schedule 1 to the TAA), the case law, the factual circumstances as a whole and the following:
(a)Section 280-160 of Schedule 1 to the TAA provides a discretion that the Commissioner may remit all or a part of the shortfall interest charge if it is fair and reasonable to do so.
(b)Subsection 280-160(2) provides some factors to consider, but the considerations or not limited to those factors. The Commissioner must consider all of the circumstances.
(c)The statutory provision provides that part of the shortfall interest charge can be considered for remission.
(d)The case law provides that the Commissioner should consider the taxpayer’s circumstances and whether it would be fair and reasonable to remit the shortfall interest charge in whole or in part.
(e)The statutory provision does not limit the Commissioner from considering remission of the shortfall interest charge merely because an intentional disregard penalty has been imposed. That is not a reason to refuse to remit. All of the circumstances must be considered.
(f)There has been very significant engagement by the Applicants with the Commissioner lasting more than a decade.
(g)There were very significant delays from the Commissioner, including 3 and a half years to determine the Individual’s Objection.
(h)The Commissioner must determine the relevant shortfall period.
ISSUE 7: WHETHER IN THE COMPANY’S RELEVANT YEARS, FAMILY TRUST 2 WAS A PERSONAL SERVICES BUSINESS PURSUANT TO SUBDIVISION 87-A OF THE ITAA 1997 AND A PERSONAL SERVICES BUSINESS DETERMINATION SHOULD HAVE BEEN ISSUED IN RESPECT OF FAMILY TRUST 2 PURSUANT TO SECTION 87-65 OF THE ITAA 1997
Considering the issue in principle
As I have noted above, section 84-5 and section 86-15 of the ITAA 1997 apply to the payments made by S Ltd and A Ltd whether made to the Individual or Family Trust 2 as those payments are mainly a reward for the Individual’s personal efforts or skills, and are personal services income.
Subsection 86-15(3) provides that if I was to take the view that the payments from S Ltd and A Ltd are derived by Family Trust 2, if Family Trust 2 is conducting a personal services business, then the payments are not personal services income of the Individual.
There are a number of reasons that the Applicants cannot succeed on this issue.
I am not satisfied on the evidence that the Company (as bare trustee) rather than the Individual was engaged by S Ltd and/or A Ltd under the Consultancy Agreements. I am also not satisfied on the evidence that the Company acts as bare trustee for Family Trust 2. Those holdings alone mean that I cannot find this issue in favour of the Applicants.
Putting those issues aside for present purposes, I have considered the question whether on the evidence before me in principle Family Trust 2 could meet any of the tests set out in section 87-15(2) of the ITAA 1997 and whether a personal services business determination should have been issued. I make high level comments only below.
Parties’ positions
In the Applicants’ Outline at [115] and following, the Applicants say they should succeed in the Company’s Relevant Years as:
(a)The results test in section 87-18 is met – this is further analysed in the Applicants’ Outline at [123] to [133];
(b)For 2013 when less than 80% of the personal services income came from a single source, the unrelated clients test in section 87-20 is met – this is further analysed in the Applicants’ Outline at [141] to [164]. In addition, or in the alternative, the business premises test in section 87-30 is met – this is further analysed in the Applicants’ Outline at [138] to [140];
(c)A personal services business determination should have been issued pursuant to section 87-65 because:
(i)In the Company’s Relevant Years, the Company (as trustee for Family Trust 2) could reasonably be expected to meet the results test, the employment test or the business premises test and the Individual’s personal services income included in the Company’s assessable income was or could be reasonably expected to be from the Company conducting activities meeting those tests - this is further analysed in the Applicants’ Outline at [167] to [179];
(ii)In the 2014 and 2015 years, the Company (as trustee for Family Trust 2) could reasonably be expected to meet the unrelated clients test, because of unusual circumstances 80% or more of the Individual’s personal services income came from A Ltd, and the Individual’s personal services income included in the Company’s assessable income was or could be reasonably expected to be from the Company conducting activities meeting the unrelated clients test - this is further analysed in the Applicants’ Outline at [180].
The Applicants accept that 80% or more of the personal services income is from A Ltd in all but the 2013 year.[605] As this is the position, Family Trust 2 and/or the Company as trustee cannot self-assess as a personal services business and unless a personal services business determination is issued by the Commissioner.[606]
[605] Applicants’ Outline [135].
[606] TR 2022/3 [73].
The Commissioner’s Outline sets out its position at [136] and following. In short, the Commissioner says:
(a)The results test is not satisfied as income was not paid by A Ltd nor S Ltd to produce a result.
(b)Family Trust 2, A Ltd and S Ltd are associated, so more than 80% of the personal services income came from one entity and its associates. Family Trust 2 cannot satisfy the 80% rule.
(c)Any work by the Individual’s wife, the Individual’s Son M, and the Individual’s Son C were not remunerated and should be ignored, had no connection to S Ltd or A Ltd, was not pursuant to any agreement or was ancillary to the Individual’s services. Any other services by farm hands and the like are not evidenced.
In principle analysis
In terms of the results test I conclude as follows:
(a)The personal services income (be that derived by the Individual or the Company as trustee for Family Trust 2) must be for producing a result. Case law suggests the payment must be for more than merely personal skills and all of the evidence as to what occurred not just the relevant contract must be considered.[607] The Individual or the Company must be required to supply plant, equipment or tools of trade needed to perform the work to produce the result. The Individual or the Company must also be liable for the cost of rectifying any work defect.
(b)I have found above that the DE operation was carried out on the Farm using the plant but only prior to the Relevant Years, with limited work after that.[608] The weight of the witness evidence is to that effect. I have found above that what is supplied to A Ltd and S Ltd under the Consultancy Agreements is executive services. The evidence in favour of the arrangement with A Ltd being for results is found in the Individual’s First Witness Statement.[609] That evidence is not corroborated on the Tribunal Book other than by Mr P’s Witness Statement (in circumstances where Mr P clearly was not aware of a number of matters which contradicted his evidence), and Dr P’s letter (which is not compelling).
(c)There is no arrangement demonstrating that Family Trust 2, TB Ltd (the Farm owner), the Company nor the Individual was required to supply plant, no evidence that payments made under the Consultancy Agreements were linked to results, and the wording of the Consultancy Agreements bely those submissions. In addition, in the Relevant Years paddock trials were carried out on a limited basis on the Farm, and the evidence of the Individual’s wife and the Individual’s Son C was that this was unpaid. There is no evidence of a requirement to remedy defects. The Applicants[610] say that the Company (presumably as trustee) “was required to change the test products and protocols in order to improve results and conduct a successful trial”. The Tribunal has no evidence of products and protocol, no evidence of results, and no evidence of changes to trials. There is also no evidence of payments made for these trials.
(d)I record I have considered the invoices[611] issued by the Company to A Ltd, as they set out services said to have been performed in return for consulting fees, and refer to “soils and field trials” on occasion.[612] However as is noted in detail above,[613] those invoices are not accurate in terms of their figures, broadly mirror one another, refer to soil trials at various venues not the Farm in any event, and they are inconsistent with other evidence.
(e)From the evidence, I also do not accept that any DE plant on the Farm was used to produce results in the Relevant Years. I conclude that I would not be satisfied that the results test applied.
[607] Commissioner of Taxation v Metaskills Pty Ltd [2003 FCA 766 [28]; Skiba and Commissioner of Taxation [2007] AATA 1705 [61]; Dibarr and Commissioner of Taxation [2004] AATA 1705 [46].
[608] See paragraph 155 above.
[609] Individual’s First Witness Statement [76], [78], [85], [88].
[610] Applicants’ Outline [132].
[611] ST40-3121 and following.
[612] For instance, ST40-3168.
[613] For example, paragraphs 84 to 86, 93(g) and 94 above.
In terms of the unrelated clients test the Applicants raise issues only in respect of the 2013 year. I have concluded:
(a)I have little evidence upon which I can assess whether A Ltd and S Ltd, BN Ltd and A Ltd or S Ltd, S Ltd or A Ltd and the Individual are associated in accordance with section 318 of the ITAA 1936. For instance, I cannot discern if sufficient influence[614] arises from the Individual, as I do not have evidence of director meetings, resolutions and decision making. I have evidence only from Mr P and the Individual, and from no other directors. As another director was due to give evidence, and did not do so without explanation, for the reasons specified above,[615] I assume that missing evidence would not be favourable to the Applicants.
(b)I accept from the evidence on the Tribunal Book that in the Relevant Years the Individual was only one of a number of directors for each of A Ltd and S Ltd, and that the shareholding suggests the Individual did not hold a majority of shares in A Ltd or S Ltd and nor did BN Ltd.
(c)While I accept the evidence that the DE operation itself is a narrow industry, I am not sure why fertilizer would not be relevant for a wide swathe of agricultural businesses. The only evidence as to the Company’s “offers to a small niche segment of the public” (per the Applicants’ Outline at [162] to [164]) is the Individual’s First Witness Statement at [129] to [130]. I have also considered the Invoices which refer to work in places such as Indonesia, India and Turkey but there is little substantive detail (no marketing materials, for example). Because I have made the findings I have about the Individual’s credibility, more evidence would be needed to satisfy me on the unrelated clients test.
[614] Considering ,for instance, the decision in BHP Billiton Ltd v Federal Commissioner of Taxation (2020) 270 CLR 60
[615] See paragraph 153(a) above.
In terms of the business premises test I conclude as follows:
(a)The Applicants make a number of assertions. In the Relevant Years it is said that the Company (as trustee) had exclusive use of parts of the Farm which were physically separate from other areas. It could be said this must be so because of the description of the plant referred to above[616] which suggests some land on the Farm must have been set aside. In saying that, if the plant was mobile as is also suggested, that may not be the position. In any event, taking the evidence overall, during the Relevant Years the evidence does not establish that the plant was utilised.
(b)However, I have accepted some paddock trials occurred in the Relevant Years. Paddocks must have been set aside for that. However, the payments made by A Ltd have not been demonstrated to be linked to any such business premises. The evidence is that the payments are made for “executive services”. Those services are not linked to trials on the Farm. As is noted above, the invoices which might suggest a linkage have a number of errors and are inconsistent with other evidence. There are no directions from A Ltd that might expand the concept of executive services in the Consultancy Agreement.
(c)I conclude that I would not be satisfied that the business premises test applied.
[616] See subparagraph 153(c) above.
Finally, submissions are made in relation to subsections 87-65(3), and 87-65(3A), 87-65(3B), 87-65(5) of the ITAA 1997 and the personal services business determination. These are to the effect that the Company (as trustee) could reasonably be expected to meet the results, employment or business premises test or unusual circumstances prevented that.
In terms of the employment test, I note that section 87-25 provides that an individual or a personal services entity meets the employment test if they engage entities (that are not associates) or individuals (that may be associates) to perform at least 20% (by market value) of the individual’s or personal entity’s principal work in a year.[617] I have no evidence about this test in the context of this case.
[617] TR 2022/3 [109] and following.
The unusual circumstance relied upon is S Ltd’s inability to pay consultancy fees in the 2014 and 2015 years. This relies upon a conclusion that S Ltd and A Ltd are not associated, and the 80% test would be passed. More evidence would be needed to satisfy me as to that. There is also a question as to whether S Ltd’s inability to pay is an unusual circumstance and but for that circumstance one of the specified tests could reasonably be expected to be passed. When considering whether an unusual circumstance arose, the question to consider is whether entities in the same industry as S Ltd faced the same economic situation as S Ltd in the Relevant Years. In other words, whether this was a prevailing economic circumstance for the mining industry, or whether it was something merely impacting S Ltd.[618] The evidence of the Individual is insufficient on its own to assist me on those issues.
ISSUE 8: WHETHER PART IVA OF THE ITAA 1936 IS APPLICABLE – PARTICULARLY WHETHER THE INDIVIDUAL AND/OR THE COMPANY ENTERED INTO OR CARRIED OUT A SCHEME FOR THE SOLE OR DOMINANT PURPOSE OF OBTAINING A TAX BENEFIT
[618] Scimitar Systems Pty Ltd v Deputy Commissioner of Taxation [2004] AATA 720 [29]. Commissioner of Taxation v Yalos Engineering Pty Ltd [2009] FCA 1569 [28]; Yalos Engineering Pty Ltd and Federal Commissioner of Taxation [2010] AATA 408.
I do not need to determine the application of Part IVA in the light of my holdings above and, given the already considerable volume of this decision, it shows some mercy to the parties that it is not necessary for me to do so.
I comment that it is difficult to understand why the inclusion of such a significant ground was made so late by the Commissioner and in circumstances where the normal administrative processes could not be undertaken (such as the GAAR panel). While I am not reaching a view of the application of Part IVA, I can certainly see why Part IVA was a relevant matter to consider in this case and I do not understand why it was not raised by the Commissioner with the Applicants at the same time as the other issues. Given its significance and complexity, and to ensure fairness to the taxpayer, the Commissioner should only rarely put Part IVA in play at the last minute. The obvious nature of its potential relevance in this case and the review process being over ten years in duration in this case gave the Tribunal pause. This should not have been one of those rare cases.
Of course, there is nothing at law preventing the Commissioner from doing exactly what it has done in this case as the Tribunal can exercise powers to issue a Part IVA determination.[619] However, taking into account fairness to the Applicants, it was a very unhelpful state of affairs in this case for Part IVA to be added when it was.
[619] Princi v Federal Commissioner of Taxation [2008] FCA 441 [103].
OVERALL CONCLUSIONS
In summary, I have concluded:
(a)On specific evidential issues:
(i)There is insufficient evidence before the Tribunal to establish that the Individual (other than is specified in the Declaration of Trust and the Apparent Purchaser Deeds), the Company, TB Ltd, Stock Ltd and the Other Companies acted as bare trustees for Family Trust 2.
(ii)I am not satisfied that the Individual was not engaged by A Ltd and/or S Ltd under the Consultancy Agreements whether as an employee or otherwise.
(iii)I am not satisfied on the evidence before the Tribunal that payments derived by the Individual from A Ltd and S Ltd were for the reimbursements of expenses and the repayment of advances.
(iv)I make no findings on the availability of losses in Family Trust 2. I comment on issues relating to the filing of and status of Family Trust 2’s tax returns but make no findings in that regard.
(v)I find that the DE operation on the Farm using the plant ceased prior to the Relevant Years and in the Relevant Years only limited work was undertaken on the Farm involving testing on paddocks.
(b)The Individual has not met his burden of proof to demonstrate that the amended assessments issued pursuant to section 167 of the ITAA 1936 were wrong, and what his assessable income actually was.
(c)I am not satisfied that payments from A Ltd and S Ltd were not ordinary income nor personal services income of the Individual.
(d)The intentional disregard shortfall penalty was appropriately applied. The uplift of the base penalty amount is applicable in all but the first of the Individual’s Relevant Years.
(e)There is no objection nor objection decision on the issue of remission of penalties, the 20% uplift to the base penalty amount, nor the shortfall interest charge. The Tribunal allows an extension of the Applicants’ grounds of objection to cover those issues, and remits those matters to the Commissioner for determination subject to the relevant statutory provisions, the case law, and the Tribunal’s recommendations set out in this decision.
(f)Because of holdings on the evidential issues, particularly that I am not satisfied that the Company was acting as bare trustee for Family Trust 2, the personal services business determination issue cannot be found in favour of the Applicants. I make some in-principle comments only.
(g)Because of holdings above, Part IVA does not need to be considered.
Date of hearing: 3 to 6, 10 and 11 March 2025 Counsel for the Applicant: Mr C Peadon
Mr E ChanSolicitors for the Applicant Piper Alderman Lawyers Counsel for the Respondent: Ms E Bishop SC
Mr K JosifoskiSolicitors for the Respondent: Australian Taxation Office, Litigation and Legal Services
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