Stamp, K.A. v Commissioner of Taxation
[1988] FCA 563
•10 Jul 1988
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P,
C A T C H W O R D S
INCOXE TAX -
(i) tax avoidance scheme - circular movement of cheques - i ' I ,
purpose to effect tax-free distribution - held void - whether voidness affects taxpayer not party o scheme - no I- intention to benefit that party; I trust provisions - whether present entitlement - deed giving income at end of year in question;
amendment of assessment - whether full and true disclosure;
additional tax for omitted income - whether reasonably imposed;
reimbursement agreement - what constitutes.
Income Tax Assessment Act 1936, ss.97, ~ O O A , 260
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Kay Ann Stamp ,-.
v. The Commissioner of Taxation of the l ' Commonwealth of Australia Qld G2282 of 1987
7 OCTOBER 1988 i PINCUS J .
BRISBANE
C A T C H W O R D S
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INCOME TAX -
tax avoidance scheme - circular movement of cheques - purpose to effect tax-free distribution - held void -
whether voidness affects taxpayer not party to scheme - no intention to benefit that party:
trust provisions - whether present entitlement - deed giving income at end of year in question;
amendment of assessment - whether full and true disclosure;
additional tax for omitted income - whether reasonabiy imposed;
reimbursement agreement - what constitutes.
Income Tax Assessment Act 1936, S s . 9 7 , 100A, 2 6 0 : ; Kay Ann Stamp
v . The Commissloner of Taxatlon of the Commonwealth of Australia
Qld G2282 of 1 9 8 l
PINCUS J. BRISBANE
/ OCTOBER 1900i
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\I IN THE FEDERAL COURT OF AUSTRALIA 1
QUEENSLAND DISTRICT REGISTRY 1 QLD G2282 Of 1987 GENERAL DIVISION 1
BETWEEN: KAY ANN STAMP Applicant
AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
! MINUTES OF ORDER
JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 7 OCTOBER 1988 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed;
2 . The amended assessment dated 13 June 1984 be set aside;
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3 . The respondent pay the costs of and incidental to
the proceedings, to be taxed. ' . ,
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- NOTE : Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules. ..
! > \ IN THE FEDERAL COURT OF AUSTRALIA )
QUEENSLAND DISTRICT REGISTRY ) QLD G2282 of 1987
I GENERAL DIVISION )
:-
I .BETWEEN: KAY ANN STAHP
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Applicant
AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent .
PINCUS J. BRISBANE 1 OCTOBER 1728
REASONS FOR JUDGHENT
This is an income tax appeal direct to this Court In
which the prlncrpal question is one of construction of s.260 of the Income Tax Assessment Act 1936. The point arising under that
section is whether the vordness of arrangements caught by the section may be used by the Commissloner against taxpayers not involved in those arrangements. The case relates to an assessment
rn respect of the year ended 30 June 1981.
The tax-avoidance scheme, described below, was not one
for the appellant's benefit, nor did it in fact benefit her. The income which is the subject of the disputed assessment is purely
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notional; she did not receive rt, nor is she entitled to it.
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The facts in the matter are quite complex and are set
out below; they may be explained accurately enough, so far as
relevant to the main point, as follows. The appellant had the right, under a trust deed of 1976, to share in income of a trust
insofar as that income was not, under a discretionary power to do i ( so, distributed by the trustee. The trustee, in an elaborate way, i
.? . made a distribution of the income which was effective to deprive
the appellant of any right to share in it; the purpose of the
scheme was to make the distribution tax-free. The appellant
obtalned, and can obtain, none of it. Yet because the means
adnpteri t n ~ C ~ I ~ V P the distribution was, as is contended by the
Commissioner, void under s.260, the Commissioner claims to be
entitled to say that there never was a distribution, so the appellant is deemed to have received a share of the income. The appellant swore that she did not even know that she was named ln the deed and that was not challenged.
The legal point involved may be illustrated as follows.
Suppose that an arrangement struck down by s.260 includes as a first step a purchase by the participants of shares llsted on the
stock exchange and as a last step the sale by the participants of
those same shares, again on the exchange. If both of those steps are tainted by the tax avoidance purpose, they are good inter partes but may be treated by the Commissioner, as against the participants in the scheme, as never having occurred; for example, a loss on the participants’ sale would not be deductible.
But may the Commissioner treat the transactions on the I -
open market as void when consldering the tax affairs of the
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, vendor, as to the first transaction, and the purchaser, as to the I- second? One would immediately be inclined to say, obviously not;
s.260 can hardly have been intended to achieve such an absurd result as to affect the Commissioner's position against perfectly
"innocent" parties havlng nothing to do with any scheme. >. ,, ' .. Another way of putting the Commissioner's point is that
the effect of 5.260 can be to avoid an arrangement "so far as it
has or purports to have the purpose or effect of" reducing or eliminating tax liabilitles, even as against persons who have
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nothing to do with either the purpose or the effect. If for example, a borrowing of money from a stranger to a scheme takes place as part of it, then the Commlssioner may if hls contention is right ignore that borrowing for the purposes of the tax affalrs of the innocent lender.
In my opinion, thls 1s not what the section is Intended
to achieve. If, of two partles to a contract caught by the section, one can say there is a tax-avolding "purpose or effect"
as to one but not the other, the section works only so far as the
contract has or purports to have that purpose or effect - i.e.
only so far as it relates to the party avoidance of whose tax is in question. That proposition appears to me to have the support
of the decision of the Full High Court in Rowdell Pty Ltd v. - The Commissioner of Taxation (1963) 111 C.L.R. 106.
That was a sequel to the Court's decision in Hancock v.
Federal Commissioner of Taxation (1961) 108 C.L.R. 258. The
earlier case concerned an arrangement held to be void under s.260
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.S under which shares in a company with accumulated profits were sold to Rowdell Pty Ltd, which caused the profits to be distributed to
! itself; the shares were then resold by Rowdell to some of the
original vendors, the Hancocks. The idea was to escape -
' I . . . the tax that must attach either to the company
the to or shareholders if the profits were undistributed and alternatively ... the tax which
as shareholders they would pay if the profits were
simply distributed asividends" (per Dixon C.J. p.278).
The "company" referred to in this passaage, whose shares were sold, was Mulga Downs Pty Ltd and at first instance it was held that -
' 8 . . . the transaction .. . the parties to which were
Rowdell. Hancocks the and Mulga and Dovns, constituted involved, or within the meaning of s.260 of the Assessment Act, a contract agreement
or arrangement which had the purpose or effect of
avoiding liability a y mposed George Mr. on Hancock by the Act" (p.270).
On appeal, Dixon C.J. defined the parties to the
arrangement so as to lnclude Rowdell (p.278) and Windeyer J.
agreed with his Honour's reasons (p.300). But when in the later
case the Commissioner sought to use s.260 against Rowdell, he was
unsuccessful. Kitto J. said:
"To grasp that s.260 defeats as against the
Commissloner tax-avoiding th efficacy of an
arrangement, and not any part of the arrangement
itself or anything done under it, is to see at once that it cannot support an assessment made against Rowdell on the footing that any of the transfers of
shares t o it were vold - unless, of course, the
arrangement was a means of tax-avoidance by Rowdell itself" (111 C.L.R. at p.125).
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Dixon C.J. agreed with the reasons of Kitto J. on this aspect (pp.116, 117) and Menzies J. adopted a slmilar approach:
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"The purpose and effect of the arrangement . .. was ; '
to avoid the tax obligations which the Act imposed
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upon the Hancocks and this alone: accordingly, it
is avoided by s.260 so far and no further. When,
therefore, the question is not as to the Hancocks'
obligations under the Act, nothing is avoided by s.260" (p.135).
It should be added that in Rowdell there were purchases . .
and sales In issue other than those which had been considered in
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the Hancock case, but they were part of similar schemes and Menzies J. In the passage I have quoted took the Hancock facts as
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an example. I .
The facts of this case are distinguishable from those of I
Rowdell, but in a way which helps the present appellant. There, ,- i' Rowdell was very much a party to the arrangement; if it matters, a MC watson, who controlled Rowdell, promoted the scheme. Here, the appellant was not a party to the scheme; no transaction in it
involved her.
It should be added that the readlng of s.260 adopted in
these reasons is notnecessarlly unfavourable to the Commissioner,
in every case. If a contract of sale forming part of a
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tax-avoidance scheme must be treated as void as between the
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Commissioner and a vendor who simply sells on the stock exchange I , and knows nothing of the scheme, that presumably would prevent the
,, commissioner from recovering tax on that vendor's sale, if profitable.
The Commissioner's attempt to extend what has previously !
been understood to be the operation of s.260 therefore fails. It
appears to me desirable, however, to deal (albeit, as to some,
briefly) with the most substantial of the other points argued, as well as to explain the facts relating to the scheme in detail.
The other points will of course be discussed on the basis (which I
do not accept) that the Commissioner is correct in his fundamental submission, just dealt with. Deed of Settlement
The deed of settlement referred to above established the
"McCracken Family Trust" and was made on 24 June 1976, the settlor being Vivienne June Price and the trustee Kenmac Investments Pty
Ltd. It establlshed a trust fund consisting inltlally of a sum of
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$5, with provislon for feeding the trust. The principal
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provisions with respect to the income of the trust fund are to be
found in clauses 3.1 and 3 . 2 , which read as follows:
"3.1 The Trustee shall in each year determine the
income of the Trust Fund after allowing for all expenses of the Trust Fund.
3 . 2 The Trustee may at any time prior to the
expiration of any ear which ends before or
Perpetuity upon the Da e det rmine w th
respect to all or any parts of the Income of the Trust Fund of such year:
(i) to pay apply or set aside the same or
any part thereof for all or one or more
of the Primary, Secondary and Tertiary Beneficiaries living or in existence at
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the time of the determination;
(ii) accumulate To same he any or part thereof;
PROVIDED TAAT if the Trustee shall not by the
Thirtieth day of June have exercised its
discretion a ply pay side or o ..
accumulate he whole or any part of such ,
Income in the manner aforesald then the
Trustee shall hold the Income not so paid set
aside or accumulated for that year in trust
for such of the Primary Beneficiaries as are then living if more than one absolutely as tenants In common in equal shares."
The expression "the Trust Fund" is defined so as to include the initial $5 and other property held under the trust. The identity of the Secondary and Tertiary Beneficiaries is of no present consequence and it 1 s enough to say that they are defined,
in a schedule. The Primary Beneficiaries are three people one of
whom is the appellant.
The appellant was, at the time the settlement was
executed, the secretary of Kenmac Investments Pty Ltd, the trustee, and In that capacity she signed the deed on an imprint of the company's common seal. However, her role appears to have been
purely formal. She also signed, according to her recollection, some company returns, but did not attend directors' meetings (assuming that any in truth took place).
Mr Harrison Q.C., who appeared with MC D.R. Cooper for
the appellant, sought to undermine the Commissioner's relianceupon s.260 of the Act by setting up at the hearing a case that the
deed of settlement itself was void against the Commissioner under s.260. The raising of that point required leave, since no attack attempt to investigate the circumstances surrounding the execution
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i ,, on the deed was made in the notice of objection. I declined to
! allow the point to be raised, as it appeared to me impractical to
of the deed twelve years ago - a point on which very little lnformation seemed to be available.
It was argued f o r the Commissioner that if there were,
in fact, an exercise of discretion by the trustee under the
provisions of clause 3 . 2 quoted above, but that exercise were struck down under 5.260, then under the proviso to clause 3 . 2 the orimarqr beneficiarles would: fnr tax purpnseo, he re;=r.'& 2s taking the Income. The appellant contended that on its proper construction the proviso does not have that effect; it operates,
so it was argued, if the discretion is not exercised and the
question whether the exercise is effective for tax purposes has
nothlng to do with the matter.
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It appears to me that the dispute just mentioned
reflects a deeper one, namely whether the avolding effect of s.260 may be relied on by the Commissioner against people (like the
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appellant) who have in no sense participated in the Impugned t
I scheme, nor in any transaction forming part of it. But if s.260 ! .
had indeed such a universal effect, then it appears to me that the
Commissioner's argument on the construction of the proviso would
have to be accepted. Putting that point another way, the
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assumption on which the Commissioner's contention about the
proviso is based is that the avoiding effect of s.260 operates I l
against all taxpayers, whether or not taking part in the scheme; r I , r
if that is so, then it would appear to follow that, as against the I . !,
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,. appellant, the trustee must be deemed not to have exercised the
discretion referred to in the proviso (although it did so in
fact). As appears from what is written above, I do not accept the correctness of the assumption.
The exercise of discretion to which I have referred was
effected by a resolution of the trustee on 21 May 1981, providing for distribution of $370,100 to A. & B. Management (No.
72) Pty Ltd and $29,900 to A. & B. Management (No. 83) Pty Ltd.
Although the Commissioner formally submitted that the resolution,
like all other steps taken in the scheme, was a sham, there is
nothing to support that, nor any other reason to doubt the
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effectiveness of the distribution as against the appellant. It
follows that she in fact obtained no entitlement to income in the
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relevant year. I The Arrangement
The arrangement attacked by the Commissioner was rather
a complex one. All the principal steps occurred within a few mlnutes of 5.25 p.m. on 21 May 1981.
In outline, the idea was that $400,000 of trust income
would be dealt with through an accountant's trust account, the
promoters of the scheme taking a commission of about 7.5%. The rest would go down to an exempt beneficiary which, after deduction
of a small sum, would return the bulk. The crux was the presenceof the exempt beneficiary, which, if the scheme worked, would make
the distribution a tax free one without (except to a small extent)
,, incurring the disadvantage of actually benefiting the exempt
beneficiary. It is clear that the scheme's purpose was not to
save the appellant tax; she was not intended to receive or become
entitled to any income on which she might be taxed. The sequence in which the transactions forming part of
the scheme took place was not fully proved, and to some extent the
order of transactions set out below is arbitrary. Nor did the evidence contain much detail as to the precise means whereby the scheme was put into effect, for example, as to how cheques drawn 2s ~ z r t of the scheme were physically paid over to their jntended
recipients. The parties seemed to have argued the case on the assumption that such details were not of any present importance,
subject to one reservation. This is that the argument for the Commissioner included, as I have sald, a suggestion that the whole round-about of cheques was a sham. That pornt was not, however, elaborated upon, nor pursued by putting approprlate suggestions to
the deponents who gave evldence about the way the scheme was effected.
The essential steps were:
1. Kenmac Investments Pty Ltd as trustee of the McCracken Family
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Trust (referred to above) resolved to distribute $29,900 to
A. & B. Management (No. 83) Pty Ltd as trustee of the Conduit
Discretionary Trust, and $370,100 to A. & B. Management (No.
7 2 ) Pty Ltd as trustee of the McCracken Subscribable Unit Trust.
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i 2. Cheques numbers 218533, and 218534 drawn on the trust account 1
of Ahern Betar and Dunn (the accountant who promoted the
I scheme) were paid to make the distributions just mentioned.
3 . Josby Pty Ltd a s trustee of the Centaur Memorial Fund for
Nurses resolved to apply $368,000 (i.e. the $370,100 referred to in step one, less $2,100 which was intended to remain with the Fund) for the benefit of the Fund by purchasing "B" class I
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units in the McCracken Subscribable Unit Trust in the name of Intercontintental Shelf No. 104 Pty Ltd as trustee of the
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C I I C . . , . - m-..- . l..- 7 \ I -
. . b & . C U U L &.."=L ,',V. L , .
4 . A. & B. Management (No. 72) Pty Ltd as trustee of the
McCracken Subscribable Unit Trust resolved to issue 368,000
one dollar "B" class units in the trust to Intercontinental . I
Shelf No. 104 Pty Ltd as trustee of the Centaur Trust (No. ! '. 2).
5. The units just mentloned were paid for by a cheque, number
218536 drawn on the same trust account in the sum of $368,000.
6. A. & B. Management (No. 7 2 ) Pty Ltd as trustee of the
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McCracken Subscribable Unit Trust resolved to distribute
income of $370,100 to the holder of the "B" class units, that is, to Intercontinental Shelf No. 104 Pty Ltd as trustee of
the Centaur Trust (No. 2). 7. That distribution was effected by cheque number 218535 drawn
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12,
. on the same trust account.
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8. A. & B. Management (No. 83) Pty Ltd as trustee of the Conduit
Discretionary Trust resolved to distribute the $29,900
mentioned above to Tarbet Investments Pty Limited as trustee
of the Betar and Ahern Trust trading as Rocklea Industries.
9. That distribution was effected by cheque number 218539 drawn on the same trust account.
11. That distribution was effected by cheque number 218537 drawn
i I on the same trust account.
i 12. A. & B. Management (No. 72) Pty Ltd as trustee of the
McCracken Subscrrbable Unit TmSt resolved to declare that that trust vest on 22 May 1981 (i.e. the following day) and resolved pending that vesting to distribute $368,000 being the capital of the Fund to the holder of the "A" class units, Ronald Graham Mccracken a5 trustee
of the McCracken Final Discretionary Trust by way of advance distribution upon the vesting.
13. That advance distribution of $368,000 was made by cheque number 218540 drawn on the same trust account.
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I . 14. Ronald Graham McCracken as trustee of the McCracken Final
! Discretionary Trust resolved to lend $368,000 to Kenmac
Investments Pty Ltd as trustee of the McCracken Family Trust. 15. That loan was made by cheque number 218532 drawn on the same trust account.
It should be added that it is not entirely clear, as to
step number 12, how it came about that R.G. McCracken was entitled to the capital in question. The relevant trust deed does not appear to create that entitlement; however, it does not seem to be
necessary to pursue that point.
The way in which the original $400,000 flowed was
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therefore:
I . r 1. $29,900 went to A. & B. Management (No. 83) Pty Ltd and
then to Tarbet Investments Pty Ltd; that was in
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substance the promoter's fee. , ,
2. $370,100 was distributed by Kenmac Investments Pty Ltd to A. & B. Management (No. 72) Pty Ltd and then to
Intercontinental Shelf No. 104 Pty Ltd and then to Josby
Pty Ltd from which point that sum was divided into twostreams:
(a) $368,000 was paid by Josby Pty Ltd to A. h B.
Management (No. 72) Pty Ltd for "B" class units and the same sum was distributed by A. .S B. Management (No. 7 2 ) Pty Ltd to R. G. McCracken as the holder of ten "A" class units and then paid by
way of loan to Kenmac Investments Pty Ltd (the originator of the flow);
(b) $2,100 remained with Josby Pty Ltd as trustee of the Centaur Memorial Fund for Nurses.
The money went around in a circle from Kenmac
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Investments ~ t y Ltd to Kenmac Investments Pty Ltd. $29,900 being syphoned off on the way to the promoters and $2,100 to the Centaur
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Memorial Fund for Nurses.
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Doe5 s .260 catch the arrangement? I. ; ,
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I There some was discussion at the hearing about Lord I
Denning's test in Newton v. Federal Commrssioner of Taxation
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(1958) 98 C.L.R. 1 at p.8 and it was said that the transactlons
are capable of explanation by reference to "ordinary business o r
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1 family dealing". In my opinion, they cannot be so characterised. I - I
I It has to be admitted that inter vivos trusts are very common in i our community, as are dealings relating thereto. The reasons for !
the existence of such trusts, since the abolition of death duty,
are primarily concerned with lncome tax. It must further be said in favour of the appellant on this point that the trust dealings
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which were upheld in Cridland v. The Commissioner of Taxation r .
(1977) 140 C.L.R. 330 were no less artificial than those with
which I am concerned: making a stranger a $1 unit holder (that l
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R sum not even being paid) could hardly pass the Newton test.
It does not appear, however, that it is necessary for
the purposes of resolutlon of this point to attempt to frame a
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test by which one can determine which uses of trust mechanisms do, and which do not, collide with s.260. Where one has a basically circular movement of money, making no commercial sense, prima facie 5.260 applies, in my opinion, subject to the possibility of
application of the choice principle. It is true that, as was argued at the hearing, it is now established by decisions of the
Full Court that s.260 cannot affect deductions otherwise allowable
under S. 51: Australian National Hotels Limited v. Federal
Commissioner of Taxation (1988) 88 A.T.C. 4627 at 4635, but even
that general proposltlon may be sub~ect to a qualification
covering arrangements which are wholly artificial and circular and
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lack any commerclal foundation; Federal Commissioner of Taxation
v. Lau (1984) 84 A.T.C. 4929 at 4947 per Beaumont J., with whom - Jenklnson J. agreed. Further, rt is not clear whether the general
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exemption of s.51 deductions from the operation of 5.260 rests on the choice principle or some other basis: if on the former, that must be regarded as depending on speclal reasons. There is
nothing in the cases on 5.51, In my respectful opinion, which
assists the appellant here, for the most important recent
authority on the scope of the choice principle is The Commissioner
of Taxation v. Gulland (1985) 160 C.L.R. 55; there the test was so stated as to make it impossrble for the scheme outlined above to 1 pass. Gibbs C.J. used the expression:
"... if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is
free to choose, or offers certain tax benefits t o
taxpayers who adopt a particular course of conduct
. . . l t (p.66). Dawson J. spoke of provisions of the Act other than 5.260, which -
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organize his affairs so as t o incur a greater or
lesser tax liability according to the decision
which he makes." (p.105, 106)
Wilson J. agreed in substance with the reasons of both Glbbs C.J. and Dawson J. t I
I cannot identify provisions of the Act relevant to the
present case which answer either of these descrlptions; in particular, there appears to be nothlng in the trust provlsions of the Act, such as 5.91, suggesting an intention to offer a choice of "alternatlve tax consequences" or an intention to offer
"certain tax benefits". I am of opinion, then, that s.260 captures the circular flow of money.
Mr Harrison pointed out that, even if that were so, then
the effect of s.260 is annihilatlng only. He contended that there is a degree of reconstruction in postulating of the taxpayer that
she obtained a right to trust income, when in truth she obtained
no such right.
In my opinion, the effect one gives to the principle on which Mr Harrison relies depends very largely on how one chooses
to describe the transactions in question. It must be admitted < .
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,S that one could contend that there is more than annihilation
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involved, for if the Commissioner is right, there notionally comes
into existence ( s o far as the appellant's tax affairs are
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concerned) a right havlng no previous or other existence. I /
Alternatively, one could say that there is no reconstruction, for i' one simply strips away the distribution which in fact occurred, leaving exposed a set of facts having adverse tax consequences for
the appellant. Similarly, in Federal Commissioner of Taxation v.
Rareena Hospital Pty Ltd (1979) 79 A.T.C. 4667, on which MC Harrison relied, it could perhaps have been said that once the
i n t r cduc t inn nf the loss company was annihilated, the Commissioner
was entitled to treat its income as having been received by the
entlty previously running the business, as in Peate v. - The
Cornmissloner of Taxation (1966) 116 C.L.R. 38 at 44 (Privy Council). Conceding that these difficulties exist, I am of the
view that the "annihllation only" principle cannot save the
appellant here. That is so because one does not have to postulate the occurrence of any additional event or transaction to achieve
the result for which the Commissioner contends. It is true that one treats as existlng a right to income which would not otherwise
I exist, but hat does not appear to me to require any
reconstruction. Full and True Disclosure
The assessment in respect of the year I have mentioned,
viz. that ended 30 June 1981, as originally issued on 8 March 1982
did not seek to tax the income in question. The appeal relates to
an amended assessment issued on 13 June 1984, less than three
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0 years after the relevant date. Section 170(3) reads:
"Where a taxpayer has made to the Commissioner a
full and true disclosure of all the material facts
necessary for his assessment, and an assessment is
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made after that disclosure, no amendment of the
assessment increasing the liability of the taxpayer
in any particular shall be made except to correct
an error in calculation or a mistake of fact; and
such amendment no shall m de be fter he
expiration of 3 years from the date upon vhich the tax became due and payable under that assessment."
Mr Harrison said that there was a "full and true
disclosure of all the material facts necessary" for the
appellant's assessment. Therefore, he said, an assessment
increasing her liability would be permisslble only "to correct an error in calculation or a mistake of fact". The point taken was
that at the time when the first assessment was made, the
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Commlssloner had in hls possesslon enough of the details of the :. ! L - scheme to apply s.260 against the appellant. They were contained, ! ! - so it was said, in varlous of the returns lodged by the trusts
involved in the scheme. It is true that some details (but by no means the full picture), could have been dug out of those returns.
It was not suggested that the taxpayer had herself made
a full and true disclosure of any facts relating to the scheme;
she made no such disclosure, as she knew nothing of it. Mr Harrison contended that there was no need for disclosure of
matters of which the Commissioner was already aware.
The problem of construction of s.170(3) so raised has no
obvious solution. It is difficult to say, with any pretence to
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%\ accuracy, that a taxpayer has made a full and true disclosure of
.. facts when she has disclosed nothing. But it would seem an odd
result that such a taxpayer should fail on the ground of non-disclosure, if the Commissioner needs to know no more than he
has already been told by others. What night be described as a
compromlse interpretatron is that the taxpayer is excused from . _I
disclosure of facts in the Commissioner’s possession if he or she !. ,
knows that he Commissioner has them: Foster v. Federal
Commissioner of Taxation (1951) 82 C.L.R. 606 at p.619 per Dixon J.
That view is of no consequence for present purposes, for , i
the appellant did not have any reason to think the Commissioner
knew anything about he scheme. In my opinion a broad
construction should be glven to the words “made ... a full and
true disclosure”, so as to encompass inter alia any reasonable,
express or impllclt, indication by the taxpayer as to where the
material facts may be found; but subject to the doctrine of
Foster’s case (above) no construction faithful to the language can
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be advanced which saves a taxpayer who has simply told tSe Commissioner nothing about the facts necessary for assessment.
It was argued, also, that the amendment was beyond power
because the appellant did not know the necessary facts, nor could she have found them out. I am not satisfied of her inability to do so. For reasons which do not require detailed explanation, the relationship between the parties was such that in my opinion the facts could have been ascertained by the appellant, had she had
any interest in them at the relevant time. The real reason for
,, non-disclosure was that no-one thought the scheme had anything to
do with the appellant's tax position; nor, in my opinion, did it.
In my opinion, then, the appellant's point under s.170
fails.
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section 97 !
Mr Harrison raised a question of construction of s.97 of
the Act, which he asserted led to the conclusion that the
! appellant was not, during the relevant year, deemed to be
presently entitled to a share of the income of the trust estate, within the meaning of that section. Section 97(1) reads, so far as relevant, as follows:
"Where a beneficiary of a trust estate who is not
under any legal disability is presently entitled to
a share of the income of the trust estate -
(a) the assessable income of the beneficiary shall include -
(i) so much of that share of the net income
af the trust estate as is attributable
to a period when the beneficiary was a resident; and
(ii) so much of that share of the net 'income
of the trust estate as is attributable
to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
... "
The appellant's argument amounted to this, that the
beneficiary's assessable income could not include a share of the trust estate's net income unless there were a present entitlement
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i , in the sense of entitlement to the income as and when earned. It
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would follow that if, under the de c 3, the entitlement were made to arise at some time after the earning of the income, It would not
be a present entitlement.
The other view is that a beneficiary is presently
entitled at a particular time if he then has a right to be paid a share of the income, even if that right arises after the earning
of the income, e.g., in a subsequent year.
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Here,
the appellant beneficiary could not have had
a
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vested Interest in any of the income during the year in question. i , That interest would have arisen, had there been no distribution,
at the very conclusion of the year. Williams J. put his
understanding of the section in thls way:
"The section would require a life tenant presently
entitled to income of a trust estate i; lspe;:e t: include in his assessable income the W o e
net income of the trust estate . .. less any sums vhich the trustees were ntitled to retain out of
this income under the trust instrument" (Tindal v .
The F deral Commissioner of Taxation (1946) 72
C.L.R. 608 at p.632) . Although some may cavil at the use of the expression "in
specie" as describing the nature of the beneficiary's right, the notion conveyed is clear enough. It was contended on behalf of the Commissioner that
inability to include the sum in question within the scope of s.97
would not be fatal to his case, because it could still be included t
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(as I understood the argument) under s .25 . In my opinion, that is
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incorrect; the income in question is, if not caught by s.97, then
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brought to tax under s.99 or s.99A - i.e. taxed in the hands of the trustee. There is no question of application of s.101, in the circumstances of this case. I have not found it necessary to express a conclusion to the correctness of Mr Harrison's
as
submission concerning s.97,
but have thought it right to explain the point made. The Commissioner's essentially technical argument based
on s.260 was sought to be met by an equally technical rejoinder,
based on s.lOOA(1). The general effect of s.1OOA is to exclude
certain entitlements to income from the category of present ! I '
entitlement. Section lOOA(1) and (7) respectively read as follows: "(1) Where -
(a) apart from this section, a beneficiary i
of a trust estate who is not under any
legal disability is presently entitled
to a share of the income of the trust estate: and
(b) the present en itlement th of
beneficiary to that share or to a part
of that share of the income of the
trust estate (vhich share or part, as
the case may be, is in this sub-section
referred the ' levant as to trust income') arose out of a reimbursement
agreement or arose by reason any f act, transaction or circumstance that
occurred in connection with, or as a
! result of, a reimbursement agreement,
the b neficiary shall, for the purposes of . /
this Act, be deemed not o be, and never to have been, presently entitled to the relevant trust income."
"(7)
Subject to sub-section ( 8 ) , a reference I n this ection, in relation to a beneficiary of
a trust estate, to a reimbursement agreement
shall be read as a reference to an agreement,
whether entered into before after the
commencement of this section, that provides
for the payment of money or the transfer of
property to, or the provision of services or I '
other benefits for, a person or persons other
than the b neficiary or the b neficiary and another person or other persons." To take sub-section (7) first, Mr Harrison argued that
here there was an agreement w i ' c h i i i 'chat subsection and t h a t appears to me to be so, if for no other reason than that under the arrangements which were implemented, no doubt pursuant to prior
agreement, the promoters obtain some money. The next step in the
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argument is that the alleged present entitlement grows out of that
agreement or "by reason of any ... circumstance that occurred in
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connection with ..." that agreement. Mr Harrison said that there
was a close enough connection because the present entitlement
arose from the failure of the reimbursement agreement o achieve what was intended.
In my opinion the argument should not succeed. Assuming
all else in favour of the Commissioner, as one must for the
purpose of considering the point, s.260 operates to avoid the reimbursement agreement entirely, as against the Commissioner.
His rights are to be determined as if there had never been such an agreement. The present entitlement of which s.lOOA(l)(b) speaks cannot, as against the Commissioner, be taken to arise by reason
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of anything connected with the reimbursement agreement. I I
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The appellant's point under s.100A therefore fails. l.,
Additional Tax
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It was contended on behalf of the appellant hat he ;: t .
Commissioner had no right to charge additional tax or, to put the l
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point another way, that it was unlawful not to remit such tax. I
Tks fiqures are as follows. The orrginal assessment to
whlch I have referred related to tax of $6958.52. The amendment
increased that to $85,377.30. under s . 2 2 6 ( 2 ) , the appellant was prima facie liable to pay double the difference between the tax
properly payable and the tax that would have been payable if she
were assessed upon the basis of the return furnished. The maximum
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additional tax possible was $156,837.56.
In fact, the Cornmissloner emitted all but about
two-thirds of that, leaving due for additional tax the sum of
$53,561.09.
As Mr Muir Q.C. (with whom MC Hack appeared) pointed out
on behalf of the Commissioner, there was very little information
placed before the Court on this issue. Mr Muir argued that the appeal relating to additional tax should fail because there was
not sufficlent in the evrdence to discharge the appellant's onus
of proof. He said, in effect, that the Commissioner might have relied upon circumstances other than those in the evidence the r- parties placed before the Court, which circumstances might have
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justified the Commissioner's action. , !
Section 226(2) applies, inter alia, to: "Any taxpayer
who omits from his return any assessable income . . . ' I It appears to me to be correct that, assuming all else in favour of the
Commissioner, assessable income was omitted. The operation of the section is not conditioned upon the taxpayer's knowing of the income omitted.
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Nevertheless, the failure to remit seems to have been a
mistake. If (contrary to the view I have expressed above)
assessable income was omitted, that was o only in the sense that
on a certain rnterpretation of 5.260 there was deemed to be
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assessable Income. In fact, there was no such income. Acceptlng,
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f o r the purpose of disposition of this point, that having received , I I.
not a cent of the income in question ( $ 1 3 3 , 3 3 3 ) and having no right to receive any of it, the appellant must be treated for tax
purposes as having had the money, still it appears extraordrnary
to seek to exact additional tax. In defence of the course taken, it may be said that the Commissioner did not perhaps then fully 1.
appreciate that the appellant had no connection with the scheme, I '.
but that is mere speculation. There is nothing, so far as the
I material before me shows, to support it. Since the so-called
omitted income had no real existence, it was prima facie an
indefensible course to seek to exact additional tax. If I may be
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i permitted to say so, it was a little surprising that while not
disputing the evidence that the appellant was entirely unconnected with the scheme, the Commissioner sought before me to defend the
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