Stephen Moignard and Commissioner of Taxation
[2014] AATA 342
•30 May 2014
[2014] AATA 342
Division TAXATION APPEALS DIVISION File Number
2012/3591
Re
Stephen Moignard
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member R W Dunne
Date 30 May 2014 Place Adelaide The Tribunal sets aside the objection decision under review.
.....................[Sgd]...................................................
Senior Member R W Dunne
CATCHWORDS
TAXATION – income tax – failure to lodge taxation returns – default assessment – trustee discretion – assessment of trust income – present entitlement – burden of proof – administrative penalty – objection decision under review set aside.
LEGISLATION
Income Tax Assessment Act 1936 (Cth) ss 95, 95A, 97, 101 and 167.
Taxation Administration Act 1953 (Cth) s 14ZZK, Schedule 1 ss 284-75, 284-220 and 298-20
CASES
Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509
Colonial First State Investments Limited v Commissioner of Taxation (2011) 192 FCR 298
FC of T v Whiting (1943) 68 CLR 199
Taylor v FC of T (1970) 119 CLR 444
Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264Federal Commissioner of Taxation v Dalco (1989) 168 CLR 614
SECONDARY MATERIALS
Taxation Ruling IT 328
REASONS FOR DECISION
Senior Member R W Dunne
30 May 2014
INTRODUCTION
This is an application for review of a decision by the respondent to disallow a taxation objection lodged by the applicant against an amended assessment for the 2007/2008 year of income. The taxation objection related to the inclusion in the amended assessment of assessable income of $480,476 pursuant to s 97(1) of the Income Tax Assessment Act 1936 (“ITAA”) following an audit of the applicant’s taxation affairs.
At the hearing, the applicant was self-represented and the respondent was represented by Ms K Clark (of counsel). The Tribunal received into evidence the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975,[1] together with the following exhibits:
·summary of NAB Classic Banking Account for the applicant in the period 25 October 2007 to 30 June 2008;[2]
·copy of Business Management Account of Bay Terrace Holdings Pty Ltd in the period 1 November 2007 to 30 June 2008;[3]
·letter from the applicant to Mr J Peel at ASIC dated 28 April 2010;[4]
·letter from Keating and Company Pty Ltd to Mr J Peel at ASIC dated 22 July 2010, with accompanying documents;[5]
·copy of page 4 of signed Deed of Variation;[6] and
·copy of email from applicant to Mr Mark Keating dated 28 June 2010, together with additional information.[7]
[1] Exhibit R1, R2 and R3.
[2] Exhibit A1.
[3] Exhibit A2.
[4] Exhibit A3.
[5] Exhibit A4.
[6] Exhibit A5.
[7] Exhibit A6.
ISSUES BEFORE THE TRIBUNAL
The following issues are before the Tribunal:
a.Was the respondent correct to include the sum of $480,476 in the applicant’s assessable income for the 2007/2008 year of income pursuant to s 97 of the ITAA?
b.Was the respondent correct to impose an administrative penalty of 75 percent of the tax shortfall amount in the 2007/2008 year of income for intentional disregard of the law?
c.Was the respondent correct to increase the base penalty amount by 20 percent in the 2007/2008 year of income?
LEGISLATION
The legislation that is relevant in this matter is contained in the ITAA and the Taxation Administration Act 1953 (“TAA”).
The provisions of the ITAA relevantly read:
“95 Interpretation
(1) In this division:
…
net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus..
…
(2) For the purposes of this Division, a trust estate shall be taken to be a resident trust estate in relation to a year of income if:
(a)a trustee of the trust estate was a resident at any time during the year of income; or
(b)the central management and control of the trust estate was in Australia at any time during the year of income.
…”
“97 Beneficiary not under any legal disability
(1)Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:
(a)the assessable income of the beneficiary shall include:
(i)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
(b)the exempt income of the beneficiary shall include:
(i)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;
except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and
(c)the non-assessable non-exempt income of the beneficiary shall include:
(i)so much of the individual interest of the beneficiary in the non‑assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the non‑assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.”
…”
“101 Discretionary trusts
For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.”
“167 Default assessment
If:
(a) any person makes default in furnishing a return; or
(b)the Commissioner is not satisfied with the return furnished by any person; or
(c)the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;
the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.”
The provisions of Part IVC of the TAA relevantly read:
“14ZZK Grounds of objection and burden of proof
On an application for review of a reviewable objection decision:
(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; or
...”
The provisions of Sub-division 284-B of Schedule 1 to the TAA relevantly read:
“284-75 Liability to penalty
(1) You are liable to an administrative penalty if:
(a)you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c)you have a shortfall amount as a result of the statement.
…”
“284-90 Base penalty amount
(1) The base penalty amount under this Subdivision is worked out using this table:
Base penalty amount
Item
In this situation:
The base penalty amount is:
1
Your shortfall amount or part of it resulted from intentional disregard of a taxation law by your or your agent
75% of your shortfall amount or part
2
…
“284-220 Increase in base penalty amount
(1) The base penalty amount for your shortfall amount, or for part of it, for an accounting period is increased by 20% if:
…
(c) the base penalty amount was worked out using item 1, 2 or 3 of the table in subsection 284-90(1) and a base penalty amount for you was worked out under one of those items for a previous accounting period; or
…”
“298-20 Remission of penalty
(1)The Commissioner may remit all or a part of the penalty.
…”
BACKGROUND
General
The material facts in these proceedings are not in dispute and have been largely extracted from the statement of facts, issues and contentions of the respondent.
The applicant is currently, and has been in the past, a director of numerous Australian companies, including:
a.Rupert Street Pty Ltd from 13 June 2007 to the present;
b.Wine Logistics Pty Ltd (now deregistered) from 13 June 2007 to 29 October 2008;
c.Bay Terrace Holdings Pty Ltd (now deregistered) from 22 July 2002 to 29 January 2004 and from 13 June 2007 to 29 October 2008. The applicant was the sole director and secretary of Bay Terrace Holdings Pty Ltd from 13 June 2007 to 29 October 2008.
The applicant is also the trustee of a number of trusts including, but not limited to, the Hundred of Comaum Trust (formerly named the Rupert Street Trust) and the Wine Logistics Trust. The applicant has operated, and is a signatory to, numerous bank accounts including accounts held in both his own name or as trustee for various trusts, and accounts opened for corporate trustees of trusts associated to or with him.
The bank accounts to which the applicant is or has been a signatory include, but are not limited to, the following:
a.Account name: Stephen Lionel Moignard NAB Classic Banking
Account opened: 25 October 2007
Signatories: Mr Stephen Moignard
b.Account name: Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust)
Account opened: 27 February 2004
Signatories: Mr Stephen Moignard.
Ms Susan (Sue) Leydon has been a business associate and personal assistant to the applicant over many years.
Wine Logistics and Wine Logistics Trust
The applicant set up a wine merchandising business called “Wine Logistics” during the 2006 or 2007 year of income. The business commenced through the “Wine Logistics Trust”. The Wine Logistics Trust recorded net losses of $42,258 and $235,132 for the 2006 and 2007 years of income, respectively.
On 28 June 2010, the Wine Logistics Trust lodged a taxation return for the 2007/2008 year of income, with the applicant as trustee. The taxation return contained the following details:
a.the Wine Logistics Trust reported other business income of $820,194 and total business expenses of $618,718; and
b.the net income of $63,933 was distributed to the Hundred of Comaum Trust (“HoCT”).
From 23 April 2007, the Wine Logistics Trust was recorded on the Australian Business Register as a discretionary trading trust with a business location in VIC 3066, and a business trading name of “Wine Logistics”.
Two bank accounts were opened with the National Australia Bank Limited (“NAB”) for the Wine Logistics Trust, as follows:
a.Account name: Stephen Moignard (as trustee for the Wine Logistics Trust)
Account opened: 16 February 2007
Signatories: Mr Stephen Lionel Moignard and Mrs Susan Ann Leydon
b.Account name: Stephen Lionel Moignard (as trustee for the Wine Logistics Trust) – Client Account
Account opened: 27 February 2007
Signatories: Mr Stephen Moignard and Mrs Susan Ann Leydon.
The Rupert Street Trust
On 17 April 2007, the Rupert Street Trust (“RST”) was settled with the applicant as the trustee and Ms Leydon as the settlor. The settled sum was $50. The applicant is also the appointer and guardian of the RST. Clause 21 of the Deed establishing the RST provides the appointer with the power to appoint and remove the trustee, as well as the power to appoint a new appointer. From 23 April 2007, the RST was recorded on the Australian Business Register as a discretionary investment trust with a business location in VIC 3066 and a business trading name of “Rupert Street Trust”. No bank accounts were opened with the NAB for the RST.
The Hundred of Comaum Trust (formerly the Rupert Street Trust)
On 17 March 2010, the tax agent for the RST changed its name from the trustee for the RST to the trustee for the HoCT. On 8 March 2010 the tax agent for the RST lodged a form to register the RST for wine equalisation tax.
Two bank accounts were opened with the NAB for the HoCT, as follows:
a.Account name: Stephen Lionel Moignard as trustee for the “Hundred of Comaum Trust Business Cheque Account”
Account opened: 20 April 2009
Signatories: Mr Stephen Moignard
b.Account name: Stephen Lionel Moignard as trustee for the “Hundred of Comaum Trust Business Cash Maximiser”
Account opened: 20 April 2009
Signatories: Mr Stephen Moignard
Acquisition of 43-51 Rupert Street, Collingwood (“Rupert Street property”)
The Rupert Street property was leased by Wares Printing and Mailhouse Pty Ltd on 30 May 2005.
The lease agreement included an option for the tenant to purchase the property for $750,000, and the option could be exercised by providing the landlord with written notice of the tenant’s intention to exercise the option and a bank cheque for $75,000 (10% deposit of purchase price).
The lease agreement was signed and executed by Mr Raymond Ware and Ms Pamela Ware (lessor) and Ms Leydon, as director and secretary of Wares Printing and Mailhouse Pty Ltd (lessee).
On a date between 1 June 2005 and 15 October 2006, Ms Leydon assigned the option to purchase the Rupert Street property to the applicant for $730,000. On 31 July 2006, a licensed estate agent provided the applicant with a written opinion of the value of the Rupert Street property. The agent advised that the current selling range for the property would be $800,000 to $850,000 and it was recommended that the property be sold at auction.
On 29 June 2007, as trustee for the RST, the applicant purchased the Rupert Street property for $730,000. On 10 August 2007, a loan of $474,500 was established with IMMS Financial Services Limited to purchase the property. The loan details were as follows:
a.Borrower’s name: Stephen L Moignard (as trustee for the RST)
b.Guarantor: Stephen L Moignard
c.Amount: $474,500
d.Term of loan: 12 months
On 16 August 2007, a mortgage was registered over the Rupert Street property. A Notice of Trust Acquisition of an interest in land (dated 15 August 2007) was lodged with the State Revenue Office of Victoria on 27 August 2007, which declared the applicant as trustee for the RST as the transferee (buyer) of the Rupert Street property.
Sale of the Rupert Street property
On 29 June 2007, the applicant signed an Exclusive Auction Authority (in his capacity as trustee of the RST) to sell the Rupert Street property on the same date he acquired the property. On 29 August 2007, the Rupert Street property was sold at auction for $1,315,000 (exclusive of GST) to an unrelated party, SMTL Pty Ltd (“SMTL”). The contract of sale was signed by the applicant as the vendor. The deposit payable on signing the contract was $131,500 (10% of the purchase price).
On 25 October 2007, settlement of the sale of the Rupert Street property to SMTL occurred. On 25 October 2007, Conveyancing Melbourne Suburbs informed the applicant that settlement of the sale of the Rupert Street property had been effected and the applicant received the sum of $822,835.56 from the balance of the sale proceeds.
Net Proceeds from the Sale of the Rupert Street property
The net proceeds of $902,609.71 from the sale of the Rupert Street property were banked as follows:
a.on 26 October 2007, the sum of $822,835.56 was deposited into the applicant’s NAB Classic Banking account; and
b.on 2 November 2007, the sum of $79,774.15 was deposited into a NAB bank account in the name of Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust).
The funds deposited into the applicant’s NAB Classic Banking account were subsequently transferred to the Bay Terrace Holdings or the Wine Logistics Trust bank accounts, or used to pay a variety of expenses such as a mortgage, Phil Gartner (SA property), Origin Energy, Telstra, Foxtel, Trinity Grammar, cleaner and so on.
The funds transferred into the Bay Terrace Holdings bank account were subsequently transferred to other bank accounts, such as the Wine Logistics Trust, or used to pay a variety of expenses such as wages, Origin Energy, Telstra, VIC Roads Registration, Foxtel, Trinity Grammar, Methodist Ladies, Mills Oakley and so on.
Acquisition of Lot 1, Comaum School Road, Comaum
On 31 October 2007, a property was purchased at Lot 1, Comaum School Road, Comaum SA, for the sum of $500,000. The transferor was DGP Vineyards Pty Ltd and the transferee was Stephen Moignard.
In a copy of a Declaration of Trust the applicant, in his capacity as trustee for the HoCT, confirmed and declared that he had always held this property since the date of acquisition in his ‘fiduciary capacity as trustee of the Trust’. However, the Declaration of Trust did not include the date the property was acquired. Nor was it signed by the applicant, witnessed or dated.
In its balance sheet for the 2007/2008 year of income, the non-current assets of the RST included ‘Land & Buildings – Hundred of Comaum’ of $551,727.
Taxation Returns – Not Lodged
On 30 July 2009, a final notice to lodge income tax returns was issued to the applicant, as trustee for the RST, for the 2006/2007 and 2007/2008 years of income. On 1 September 2009, a final notice to lodge personal income tax returns was issued to the applicant for the 2006/2007 and 2007/2008 years of income.
On 11 September 2009, a notice of intention to commence prosecution action was issued by the respondent to the applicant (as trustee for the RST) as income tax returns for the 2006/2007 and 2007/2008 years of income had not been lodged.
On 9 October 2009, the applicant was also issued with a notice of intention to commence prosecution action as the applicant had not lodged his personal income tax returns for the 2006/2007 and 2007/2008 years of income.
The applicant did not subsequently lodge his personal income tax returns for the 2006/2007 or 2007/2008 years of income. Nor did the applicant lodge income tax returns in his capacity as trustee for the RST for the 2006/2007 or 2007/2008 years of income.
Audit of the Applicant’s Taxation Affairs – 2007 and 2008 Years of Income
On 23 April 2010, the respondent notified the applicant that a determination had been made of his tax-related liability, pursuant to s 167 of the ITAA, for the 2007/2008 year of income. The respondent also issued reasons for decision to the applicant.
On 4 May 2010, the applicant’s tax agent requested that the respondent defer issuing a notice of assessment for the 2007/2008 year of income until 31 May 2010 on the basis that the outstanding taxation returns for both the HoCT and the applicant for the 2006/2007 and 2007/2008 years of income would be lodged by that date. On 5 May 2010, the respondent agreed to grant the deferral. On 5 July 2010 the applicant lodged his personal taxation returns for the 2006/2007 and 2007/2008 years of income.
The applicant’s personal taxation return for the 2006/2007 year of income was a nil return, apart from reporting a net capital loss of $8,000,000. The applicant’s personal taxation return for the 2007/2008 year of income was also a nil return, with a carried forward net capital loss of $8,000,000.
On 13 July 2010, a notice of assessment for the 2007/2008 year of income was issued to the applicant. The applicant’s taxable income in the assessment was recorded as nil. On 2 August 2010, the applicant was requested to provide evidence to substantiate his purported unapplied net capital loss. On 4 August 2010, the applicant responded stating that the loss related to his failed investment in a United States Tech company, called Dot WAP, during the 2002 to 2006 years of income. The applicant did not provide any documentation to support the loss claimed.
HoCT Taxation Returns and Financial Statements
On 5 July 2010, a taxation return was lodged for the HoCT for the 2006/2007 year of income. The taxation return was a nil return. A taxation return was not lodged for the HoCT for the 2007/2008 year of income.
On 31 May 2010, a draft taxation return was submitted for the 2007/2008 year of income for the HoCT. This recorded a total net loss of $132,320 made up of:
a.net capital gain of $480,852, and
b.net business loss of $613,172 comprised of other business income of $470,642 and total expenses of $1,083,814.
On 31 May 2010, the Financial Report for the HoCT for the 2007/2008 year of income was submitted to the respondent. The HoCT reported:
a.A net loss of $132,320 made up of:
(i)gross loss from trading of $463,772, consisting of $467,077 in sales less cost of goods sold of $886,414 less manufacturing costs of $44,435;
(ii)other income of $484,417 consisting of recoveries of $3,565 and a capital gain on sale of non-current assets of $480,852; and
(iii)expenses totalling $152,965.
b.Net assets (liabilities) of ($132,270) made up of:
(i)total assets of $898,131 consisting of total current assets of $346,204 and total non-current assets of $551,927; and
(ii)total liabilities of $1,030,401 consisting of total current liabilities of $530,401 and total non-current liabilities of $500,000.
c.Beneficiaries’ funds totalling $172,981 recorded as:
Stephen L Moignard
Balance brought forward 295,110
Capital introduced 203,121
498,231
Drawings (822,836)
BTH Trust Capital Introduced 509,830
BTH Drawings (79,774)
SPM Trust Capital Introduced 67,530
172,981
On 14 July 2010, the applicant provided additional information in response to the respondent’s request dated 24 June 2010. In particular, he advised that:
a.No business transactions occurred in the HoCT prior to 1 January 2008. The business of Wine Logistics became the business of the HoCT from 1 January 2008. From the 1 July 2007 to 31 December 2007 the business of Wine Logistics was operated under the Wine Logistics Trust. The business was transferred to the HoCT when the property/winery was acquired by the HoCT. The same MYOB database was used for the full year, therefore, the transactions were required to be allocated appropriately between the entities.
b.The profit on the sale of the Rupert Street property was recorded in the draft financial statements for the year ended 30 June 2008 for the HoCT and sent to the respondent on 31 May 2010. The profit was shown as $480,852.
Informal Interview
On 23 August 2010, the applicant and his tax agent attended an informal interview at the offices of Keating & Co, Melbourne, with the respondent’s audit officers. On 2 September 2010, the applicant was requested to provide further information and documents to support his contention that the HoCT acquired the trading business (Wine Logistics) of the Wine Logistics Trust from 1 January 2008.
On 3 September 2010, the applicant provided a written submission in relation to his intention(s) to transfer the business of Wine Logistics Pty Ltd into the Wine Logistics Trust, with the applicant as trustee, and subsequently to the HoCT.
The applicant provided to the respondent a copy of an Asset Transfer Deed dated 1 July 2007 between Wine Logistics Pty Ltd (as trustee for the Wine Logistics Trust (as vendor)) and Stephen Lionel Moignard (as trustee for the Wine Logistics Trust (as purchaser)).
The applicant provided to the respondent a copy of an Asset Transfer Deed dated 1 July 2008 between Stephen Lionel Moignard (as trustee for the Wine Logistics Trust (as vendor)) and Stephen Lionel Moignard (as trustee for the HoCT (as purchaser)). The completion date was defined as “30 days from the date of this Deed or such further date as the parties agree”.
The applicant did not provide any other documentation to support his claim that the business of Wine Logistics was transferred from the Wine Logistics Trust to the HoCT on 1 January 2008.
On 23 February 2011, the respondent notified the applicant that the audit of his taxation affairs for the 2006/2007 year of income had been completed. The applicant was advised that his claim for net capital losses of $8,000,000 had been disallowed and he was therefore not entitled to carry forward the claimed net capital losses to later income years. In this letter, the respondent also issued his reasons for decision to the applicant.
On 9 February 2011, the respondent notified the applicant that the audit of his taxation affairs for the 2007/2008 year of income had been completed. The applicant was advised that the view of the respondent remained unchanged in respect of his tax related liability for the 2007/2008 year of income determined on 23 April 2010.
On 4 April 2011, the respondent issued an amended assessment to the applicant for the 2007/2008 year of income. The amended assessment was issued on the basis that the HoCT did not conduct the business of the Wine Logistics Trust. There was no distribution from the HoCT to the Wine Logistics Trust and the profit on sale of the Rupert Street property was on revenue account.
On 4 April 2011, the respondent also issued a penalty assessment to the applicant for the 2007/2008 year of income.
On 4 April 2011, the applicant executed a Deed of Disclaimer to disclaim any entitlement to a distribution of funds from the sale of the Rupert Street property for the 2007/2008 year of income.
The following table summarises the adjustments made as a result of the applicant’s audit:
Year of income
Increase in taxable income ($)
Tax shortfall ($)
Tax shortfall penalty ($)
Shortfall interest charge ($)
2007/2008
480,476.00
207,826.10
187,043.45
36,133.74
Objection
On 5 April 2011, the applicant lodged an objection against the amended assessment for the 2007/2008 year of income which issued on 4 April 2011. Following further requests for information in relation to the objection, on 27 April 2012 the respondent issued a notice of objection decision to the applicant disallowing the objection in full.
EVIDENCE OF APPLICANT
In giving his evidence, the applicant described himself as a vigneron and restaurateur. He said the RST had changed its name to the HoCT. He said that, when the Rupert Street property was sold, the respondent regarded the profit as income. The respondent would not have done this if the applicant had filed, or been able to file, taxation returns in a timely fashion. However, he said he could not file taxation returns because the original accounting documents, which would enable the returns to be lodged, had been withheld by ASIC. As a result, the respondent proposed that a default assessment would issue. The applicant applied for deferral, which was granted, and the applicant filed the best taxation returns he could. Subsequently, more documents were received from ASIC to enable the applicant to file financial documents which were submitted at objection. As a result, there were discrepancies between the documents filed at audit and those filed at objection.
The applicant said that the HoCT was part of a group of trusts and there were costs involved in improving the Rupert Street property for sale. He said the respondent continued to maintain the argument that had been applied when the default assessment issued. The respondent did not know or understand what had actually happened subsequently. In relation to the option, he said it was acquired with the purchase of the business which was operating in a factory on the Rupert Street property. The tenancy in relation to the Rupert Street property had occurred two or three years earlier than the sale of the property.
The applicant said he decided to sell the building on the Rupert Street property because it was no longer needed in the business. He had to acquire the property through bridging finance in order to exercise the option, then to sell the building in order to pay back the bridging financier. The bridging finance had been obtained for three months to allow the exercise of the option, together with $300,000 that the applicant held in cash. A new trust was established to hold the building and to exercise the option. The option was exercised and the building sold on the same day (29 June 2007). Wares Printing and Mailhouse Pty Ltd was lessee of the Rupert Street property. As lessee, it had the option to purchase the property, but assigned the option to the applicant as trustee of the RST. The applicant exercised the option in that capacity. When the property was sold, the profit/gain on sale ($902,609.71) was assessed to the applicant entirely in his personal capacity. The applicant said that the profit on sale of the Rupert Street property was only $380,000 (approximately) and this was included in the taxation return of the HoCT/RST for the 2007/2008 year of income. The difference between that amount and the amount arrived at by the respondent represented improvements made to the building on the property, prior to sale, during the tenancy. These improvements were included in the accounts of the HoCT/RST at the time of the objection. He said the improvement costs were the costs of a “group of trusts” and the applicant was the trustee of the group. The group was comprised of two head trusts – the Bay Terrace Holdings Trust and the Secure Portfolio Management Trust. The Bay Terrace Holdings Trust loaned monies through the Secure Portfolio Management Trust in the name of Portfolio Ventures. There was a wine business in the Wine Logistics Trust and a mail house business through Wares Printing and Mailhouse. There was also a graphic design business called Finger Graphics. These subsidiary trusts were financed by the head trusts. The grouping meant that the Bay Terrace Holdings Trust had made loans to the subsidiary trusts.
The applicant said that, when the amended assessment for the 2007/2008 year of income issued to the HoCT/RST, he objected and an interview was held with the respondent’s audit officers. At the objection stage, he could have disclaimed the distribution that the respondent alleged had been made to him. However, he said the respondent believed it had been too long before the applicant sought to disclaim the distribution.
In cross-examination by Ms Clark, the applicant confirmed that the HoCT/RST had been set up to acquire the building on the Rupert Street property. Prior to that, the business had been operated by Australian Mail Solutions Pty Ltd. Ownership of the property was not in the same trust and the lessee was Wares Printing and Mailhouse which had a lease agreement with Mr and Ms Wares. Wares Printing and Mailhouse assigned the lease and the option to the applicant as trustee of the HoCT/RST.
The applicant said that valuations of the Rupert Street property had been made before the option was exercised, and he knew that a profit would be made on sale. This was required by the financier to cover the risk. He said he had to exercise the option before it expired and he would sell the building to enable the bridging finance to be repaid out of the profit. He wanted to purchase a new building to focus on wine making and to purchase wine making assets in the countryside. The new property was acquired at Lot 1, Comaum School Road, Comaum. The property there was purchased on 31 October 2007, subject to an existing mortgage. The applicant took on responsibility to pay the mortgage on behalf of the vendor (DGP Vineyards Pty Ltd) and the mortgage ($500,000) was paid off in 2009. The mortgage was paid off from funds coming from a head trust of the group. The capital of the mortgage was financed, but not out of the money from the Rupert Street property, which went to the Wine Logistics business to cover its losses. The applicant said there were two sets of financial statements for the HoCT/RST – one at audit, one at the objection stage. There were inconsistencies in these statements because there was another set of documents prepared before the final set was provided at objection.
Ms Clark referred the applicant to the financial report of the HoCT for the 2007/2008 year of income.[8] The applicant was not sure of the financials that appeared in the report[9]. When referred to the second version of the financial report of the HoCT,[10] the applicant said that the other income of $397,304[11] was the corrected profit figure from the Rupert Street property sale. When asked about the difference between the $397,304 and the amount of $480,452 calculated by the respondent, the applicant said that further improvements had been made to the property before the HoCT owned it. The amount of $79,774[12] was the amount payable to Bay Terrace Holdings to repay the loan made for improvements to the Rupert Street property.
[8] Exhibit R2, T51.
[9] Exhibit R2, pages 365-368.
[10] Exhibit R3, T67.
[11] Exhibit R3, page 602.
[12] Exhibit R3, page 606.
When referred to the trustee’s resolution of the HoCT [13], the applicant said it had been prepared by Keating and Co. He acknowledged that the resolution had been signed by him as part of lodging the financials of the trust with the respondent, which was what the applicant intended would happen. However, he acknowledged that the resolution had not been dated, but would be dated by his accountants, Keating and Co. When questioned about this, the applicant said that, as controller of the various trusts, he would have an indication of how the businesses were going and how the profits/losses would arise. When one trust was making a profit, and another was making a loss, he knew there would be no tax liability within the group. His accountants would document the applicant’s intentions and the trusts were “synergistic”. He acknowledged the trusts had other trustees and other beneficiaries, but they had no tax to pay. In relation to the trustee’s certificate dated 4 April 2011,[14] the applicant said that it had been dated the same date as the objection. He said he had been involved in a Part X Arrangement and could not be involved in signing the accounts for the trusts. The HoCT would own the vineyard property and operate the wine business.
[13] Exhibit R3, T105.
[14] Exhibit R3, T65.
Ms Clark referred the applicant to clause 8 of the Trust Deed for the RST[15], which required that the trust fund of the RST had to be kept separate and distinct from other trust funds. In response, the applicant said that he had opened a new account for the RST and the trust fund was kept separate and distinct from the monies paid to Bay Terrace Holdings.
[15] Exhibit R1, page 165-166.
Applicant’s Submissions
In brief terms, the applicant’s submissions may be summarised as follows:
(a)The respondent has incorrectly interpreted the application of s 101 of the ITAA in the applicant’s case. The respondent is incorrect in asserting that the applicant is deemed to be presently entitled to the trust income of the HoCT/RST in the 2007/2008 year of income under s 101 of the ITAA because it was paid to him in his personal capacity. The case law supports the existence of only one basis for the application of s 101, and that is “allocation”.
(b)There is direct evidence relating to the non-distributive nature of the deposits into the NAB bank accounts arising from the sale of the Rupert Street property in the 2007/2008 year of income. Given the discrepancy between the trust law income of the HoCT/RST and the cheque for $79,774.15, the respondent is not able to reasonably determine that this deposit was part of the trust law income of the HoCT/RST ($480,476) for the 2007/2008 year of income. In relation to the settlement funds of $822,835.56 deposited into the applicant’s “NAB Classic Banking Account”, there is no evidence to suggest that the proceeds from the settlement of the Rupert Street property were received by the applicant in his personal capacity. The fact that a bank account controlled by a trustee bears the name of a particular beneficiary of trust funds does not establish that the beneficiary is “presently entitled” to the trust funds. When loaned to other group entities, the funds were recorded in the books and records of those entities as trust funds of the HoCT/RST. They bore no relation in quantum to the trust law income of the HoCT/RST and thus could not be distributions.
(e)In relation to the applicant’s use of the settlement funds in the Classic Banking Account, 82% of all funds deposited into the Account (which the respondent claims were for the applicant’s personal use) were disbursed on vineyard and wine-related business expenses of the HoCT/RST in the 2007/2008 year of income. In relation to the funds transferred into the Bay Terrace Holdings bank account, 78% of all funds were disbursed on vineyard and wine related expenses in the 2007/2008 year of income. These funds are all trust-related and are not personal.
(f)In relation to the retrospective effect of the applicant’s entitlement to disclaim the distribution of trust income of the HoCT/RST in the 2007/2008 year of income, the right to disclaim within a reasonable time is well established. The applicant’s disclaimer was dated 4 April 2011. The applicant believed that his own characterisation of the trust distribution between the RST and the Wine Logistics Trust was effective, and he had no knowledge of the personal distribution allegation until he received the respondent’s letter and reasons for decision relating to the default assessment, both dated 23 April 2010. The 2007/2008 amended assessment relating to the personal distribution then issued to the applicant on 4 April 2011. Even if time began to run for the effectiveness of the applicant’s disclaimer from 23 April 2010, less than one year would have passed by the time the applicant issued the disclaimer and this is reasonable in the circumstances.
(g)In the event that the respondent advances an argument based on the decision in Australian Securities and Investments Commission v Carey (No 6),[16] the applicant does not agree that there is a possible alternative view that the high level of control exercised by the applicant over the RST and its assets and funds could be sufficient by itself to indicate effective ownership of the trust property by the applicant as controller.
[16] (2006) 153 FCR 509.
Respondent’s Submissions
In brief terms, the respondent’s submissions may be summarised as follows:
(a)The respondent determined that the net income of the RST as calculated under s 95 of the ITAA for the 2007/2008 year of income consisted of the profit of $480,476 derived on the sale of the Rupert Street property. As all the net proceeds from the sale of the property were transferred to the applicant’s NAB Classic Banking account and to the bank account in the name of Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust), a company controlled by the applicant, these transactions were an exercise of the trustee’s discretion to pay or apply trust income to or for the applicant’s benefit as a specified beneficiary of the RST for the purposes of s 101 of the ITAA. The respondent was correct to assess the applicant on a total of $480,476 for the 2007/2008 year of income, being the applicant’s share of the net income of the RST, under s 97 of the ITAA. Section 101 of the ITAA will still apply to deem the applicant to be presently entitled to an amount even if the trustee of the RST has not made a declaration, resolution, or other act to distribute an amount to him, providing that an amount has been paid to the applicant’s benefit.
(b)In the event that the applicant says that he did not make a valid distribution of the net trust income to himself in the 2007/2008 year of income and the amount involved reverts to the trust fund of the RST, the respondent argues that clauses 3(4) and 3(5) of the trust deed of the RST apply. Clause 3(5) then provides that the net trust income ceases to be part of the trust fund and, pursuant to clauses 4(1) and 4(2) of the trust deed, the net trust income is assessed to the applicant as a specified beneficiary of the RST, in respect of his one-third share of the net trust income, and to the applicant in respect of the remainder of the net trust income for his two minor children also as specified beneficiaries under s 98 of the ITAA.
(c)Although the applicant has disclaimed entitlement the net income of the RST, the disclaimer dated 4 April 2011 was not made within a reasonable time of the applicant becoming aware of his entitlement to the trust income, and it is therefore ineffective.
CONSIDERATION
Was the respondent correct to include the sum of $480,476 in the applicant’s assessable income for the 2007/2008 year of income pursuant to s 97 of the ITAA?
It is clear from much of the material in these proceedings that the applicant has been involved in a dispute (or disputes) with the respondent for a number of years. The disputes have related to his personal taxation affairs and the taxation affairs of related companies and trusts.
Analysing certain of the background facts, the applicant set up a wine merchandising business called Wine Logistics during the 2007/2008 year of income and the business commenced through the Wine Logistics Trust. He was trustee of both the Wine Logistics Trust and the RST. In October 2007, he began the process of consolidating his wine-related business interests in the name of the vineyard, the Hundred of Comaum. His plan was that the HoCT would hold the vineyard property at Comaum in the Coonawarra, would own and operate the winery business and would take over the wine merchandising business.
The central issue presently is whether the respondent was correct to include the sum of $480,476 in the applicant’s assessable income for the 2007/2008 year of income. In answering this question, the respondent in his reasons for decision dated 27 April 2012[17] (issued in disallowing the applicant’s objection against his 2007/2008 amended assessment) sought to explain that s 97 of the ITAA applies to include in the assessable income of a beneficiary of a trust estate, who is not under a legal disability and is presently entitled to a share of the income of the trust estate, their share of the net income of the trust estate.
[17] Exhibit R1, T2.
The respondent has argued that the sum of $480,476, which was derived on the sale of the Rupert Street property, comprised the net income of the RST for the 2007/2008 year of income. The net income (or net proceeds) from the sale of the property were transferred to the applicant’s NAB Classic Banking account and to a bank account in the name of Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust).
I note that the sum of $480,476 that has been included in the applicant’s assessable income in the 2007/2008 year of income has been calculated as follows:
Proceeds of sale (GST exclusive) $1,315,000.00
Total costs:
Acquisition cost $730,000.00
Remuneration to Agent (GST exclusive) $47,023.50
Cost of Transfer fees $20.00
Stamp Duty (deemed) $39,460.00
Interest on Mortgage $11,595.93
(IMMS Financial Services Ltd)Rates (City of Yarra) $2,190.86
Service Charges (City of West Water) $390.46
Land Tax $1,355.00
Insurance (Wesfarmers) $2,488.00 $834,523.75
ASSESSABLE PROFIT $480,476.25
In arguing that the sum of $480,476 is assessable income, the respondent does not accept that there is evidence available to support the applicant’s claim that he made a determination to distribute the net income of the RST to the Wine Logistics Trust. The respondent asserts that the applicant exercised his discretion as trustee of the RST by directing or causing the net proceeds derived upon the settlement of the Rupert Street property to be deposited into his personal bank account and the bank account of a company controlled by him during the 2007/2008 year of income. Therefore, the applicant is deemed to be presently entitled to the sum of $480,476, being the income/profit derived on the sale of the property, pursuant to s 101 of the ITAA. The respondent argues that the applicant may be deemed to be presently entitled to the sum if the trustee of the RST pays or applies an amount to the applicant’s benefit, even if the trustee has not made a declaration, resolution or other act to distribute an amount to the applicant, provided that an amount has been paid to the applicant or for his benefit.
The respondent has written to the applicant and has issued reasons for decision at various stages during the course of this matter. When the applicant failed to lodge his outstanding 2007/2008 taxation return, the respondent wrote to him on 23 April 2010[18] relating to various matters and attached reasons for decision explaining the determination of his tax-related liability pursuant to s 167 of the ITAA. When the respondent’s audit for the 2007/2008 year of income was completed, further reasons for decision were forwarded to the applicant on 9 February 2011.[19] The respondent’s view of the applicant’s tax-related liability remained unchanged from that expressed in the reasons for decision dated 23 April 2010. When the respondent’s audit for the year ended 30 June 2007 was completed, further reasons for decision were issued to the applicant by the respondent on 23 February 2011.[20] When the respondent received the applicant’s objection against his 2007/2008 amended assessment on 13 April 2011, the respondent disallowed the objection and issued further reasons for decision on 27 April 2012. In his objection, the applicant denied receiving the proceeds from the sale of the Rupert Street property in his personal capacity. He contended that the distributable income of the RST for the 2007/2008 year of income was distributed to him in his capacity at trustee of the Wine Logistics Trust. In the reason for decision, the respondent required that the applicant not only demonstrate that the Wine Logistics Trust (rather than the applicant) was beneficially entitled to the distributable income of the RST for the 2007/2008 year of income, but that the beneficial entitlement was created by 30 June 2008.
[18] Exhibit R2, T42-T43.
[19] Exhibit R3, T59-T60.
[20] Exhibit R3, T61-T62.
As already mentioned, the respondent contends that the applicant as the trustee of the HoCT/RST exercised a discretion to pay all of the income of the HoCT/RST for the 2007/2008 year of income to the applicant (a specified beneficiary of the trust) in his personal capacity. In my view, the respondent is unable to properly assert that the applicant was presently entitled to the income of the HoCT/RST for the 2007/2008 year of income on the basis that the income was paid to him in his personal capacity and because he was deemed to be presently entitled to that income under s 101 of the ITAA. The respondent has incorrectly interpreted the operation of s 101. There must be evidence of the exercise of the trustee’s discretion for s 101 to operate, and the mere receipt of funds by a discretionary beneficiary may activate s 101, but only if that receipt is “allocated”. As the applicant has correctly submitted, in my view, the only basis for the application of s 101 is allocation and taxation of beneficiary income on a receipts-basis must be rejected. In this regard and although it has been withdrawn, what was said by the respondent in Taxation Ruling IT 328 is still relevant. The Ruling read:
“22. Caution will also be needed in advising persons who are seeking to bring about present entitlement by paying trust income into bank accounts in the names of beneficiaries. Trust income is always paid into some bank account and the fact that a bank account controlled by a trustee bears the name of a particular beneficiary does not establish that the beneficiary is presently entitled. This question would have to be determined by considering the terms of the provision in the trust deed which authorised the trustee to pay the money into the bank account, the manner in which the application of income was made and the arrangements that were made with the bank.”
In paragraph 70 of the respondent’s reasons for decision dated 27 April 2012 (directed to the applicant), the respondent asserted the following:
“(a) On signing the contract to purchase the Rupert Street property, SMTL paid a deposit totalling $131,500 to your agent, Ryder Commercial, on 29 August 2007 and 31 August 2007.
(b) Settlement of the Rupert Street property occurred on 25 October 2007. As per the settlement instructions, $822,835.56 of the sale proceeds was to be distributed to you. In a letter informing you that settlement had been affected, you were advised that $822,835.56 of the sale proceeds were distributed ‘To yourself cheque herewith’.
(c) On 29 October 2007, Ryder Commercial issued a tax invoice totalling $51,725.85 to you for the professional fees and marketing expenses incurred in relation to the sale of the Rupert Street property.
(d) The net proceeds on the sale of the Rupert Street property (after taking into account expenses) was $902,609.71, which was banked as follows:
(i)On 26 October 2007 and 29 October 2007, a total of $822,835.56 was deposited by cheque into a NAB Classic Banking account opened in your name on 25 October 2007.
(ii)On 2 November 2007, $79,774.15 (the difference between the deposit paid by SMTL of $135,000 and the fees charged by Ryder Commercial of $51,725.85) was deposited by cheque into a NAB bank account in the name of Bay Terrace Holdings Pty Ltd as trustee for the BTH Trust.
(e) As the amount of $822,835.56 was deposited into a bank account opened in your own name, this is evidence that the sale proceeds were received by you in your personal capacity.
(f) You were the sole director and secretary of Bay Terrace Holdings at the time of these transactions. You were also the sole signatory for the bank account held in the name of Bay Terrace Holdings as trustee for the BTH Trust.
(g) Given your capacity to control Bay Terrace Holdings as the sole director and secretary, and in the absence of any other plausible reason as to why the funds were transferred to the bank account of Bay Terrace Holdings, it is concluded that the funds were transferred to Bay Terrace Holdings to hold on your behalf or for your benefit.”
In my view, on the evidence the assertions by the respondent in subparagraph 70(e) and subparagraph 70(g) cannot be maintained.
At objection, the applicant denies receiving the proceeds from the settlement of the Rupert Street property in his personal capacity. He contends that the evidence demonstrates that the distributable income of the RST for the 2007/2008 year of income was distributed to the applicant in his capacity as trustee of the Wine Logistics Trust.
As was confirmed by Stone J in Colonial First State Investments Limited v Commissioner of Taxation,[21] a beneficiary’s present entitlement to trust income must arise during the relevant tax year. That is, the resolution, whether written or otherwise, to appoint income to beneficiaries must be made by the trustee by the end of the year of income. While a determination may be made after 30 June for trust purposes, for a beneficiary to be presently entitled to a share of income within the meaning of s 97 of the ITAA, the beneficiary must have (or be deemed to have) a vested and indefeasible interest in that share as at the end of the year of income. In my view, the applicant did not have a vested and indefeasible interest in that share of the net income of the HoCT/RST in the 2007/2008 year of income. On the evidence, I am satisfied that the applicant has sufficiently demonstrated that the Wine Logistics Trust, rather than the applicant in his personal capacity, was beneficially entitled to the distributable income of the HoCT/RST for the 2007/2008 year of income.
[21] (2011) 192 FCR 298.
Section 101 does not disturb the key principle established by the decisions in FC of T v Whiting[22]and Taylor v FC of T[23]that a beneficiary will be regarded as “presently entitled to a share of the income” of a trust estate if they have an absolute and indefeasible vested interest in possession in that share and have an immediate right to obtain payment. As was outlined by the High Court in Harmer v Federal Commissioner of Taxation[24], a beneficiary is “presently entitled” to a share of the income of a trust estate if, but only if:
“…
(a)the beneficiary has an interest in the income which is both vested in interest and vested in possession; and
(b)the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.”
[22] (1943) 68 CLR 199.
[23] (1970) 119 CLR 444.
[24] (1991) 173 CLR 264.
In closely analysing the receipt of the proceeds from the sale of the Rupert Street property, I note they were received in two settlement cheques totalling $902,609.71. The sum of $822,835.56 was banked into a new NAB account opened in the name of the applicant. The sum of $79,774.15 was banked into an existing bank account named Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust). The funds from both the accounts were subsequently paid to a variety of suppliers, other trusts and beneficiaries.
Looking at the smaller amount of $79,774.15, the respondent argued as follows:[25]
“In addition, a cheque for $79,774.15 issued by Ryder Commercial was subsequently deposited into the NAB bank account of Bay Terrace Holdings Pty Ltd (Bay Terrace) … ATF the BTH Trust on 2 November 2007. These proceeds represented the difference between the deposit of $131,500 paid by SMTL Pty Ltd to Ryder Commercial less the professional fees charged by the latter to you in respect of the Rupert Street property sale.
Bay Terrace is not a specified beneficiary of the Rupert Street Trust. However, you were the director and secretary of Bay Terrace on the 2 November 2007 given that you were the sole director and secretary of this company from 13 June 2007 to 29 October 2008.
Given your capacity to control Bay Terrace as sole director and secretary, and the absence of any other plausible reason as to why the funds were transferred to Bay Terrace, the Commissioner concludes that these funds were transferred to Bay Terrace to hold on your behalf, or to hold for your benefit.
These proceeds would have included a portion of the profit of $480,476 (refer paragraph 31) from the sale of the property. Accordingly, the receipt by Bay Terrace Holdings of $79,774.15 is considered to be the exercise of the trustee’s discretion to apply trust income to or for your benefit as a specified beneficiary for the purposes of section 101.”
[25] Exhibit R2, T43 paragraphs 89-92.
Given the discrepancy between the trust law income and the cheque for the sum of $79,774.15, it is difficult to understand the basis upon which the respondent was able to determine whether that amount was part of the trust law income of the HoCT/RST Trust.
In relation to the cheque for $822,835.56 paid into the applicant’s NAB Classic Bank account, the respondent argued:[26]
“You opened a new account in your own name – Stephen Moignard – and deposited $822,435.56 as the balance of proceeds (excluding initial deposit paid by the purchasers) from the property settlement of 43-51 Rupert Street Collingwood on 25 October 2007. The proceeds were deposited into Account Number …………………. It is therefore evident that proceeds from the property settlement of 43-51 Rupert Street Collingwood were received by you in your personal capacity.”
[26]Exhibit R2, T43 paragraph 87.
It seems to me that the payment of trust income into a bank account which might be controlled by a trustee where the account bears the same name as a particular beneficiary does not establish that the beneficiary is presently entitled. In this regard, the payment into the applicant’s NAB Classic Bank account was made at a time when the HoCT/RST had no bank account in its name and it appears to have been opened in the same name as the settlement cheque, for simplicity. The conveyancers had not properly included the trust details on the cheque because the mortgage taken out over the Rupert Street property clearly shows the applicant was acting as trustee for the RST,[27] and it appears the conveyancing company (Conveyancing Melbourne Suburbs) had a copy of this document. It seems clear to me that, even though the applicant’s NAB Classic Banking account was missing the suffix “as trustee for the RST”, in reality this is how it was treated in the various settlement documents. Moreover, it seems clear that the funds in the NAB Classic Banking account were treated as trust funds, with transactions into and out of the account recorded as such.
[27] Exhibit R1, T22.
In the present case, the quantum of funds deposited into the NAB Classic Banking account does not accord with a trust distribution under the RST trust deed. Nor does the amount which is alleged to be trust income accord with the surplus in the trust. The amount deposited by the applicant on 25 October 2007, supposedly in his personal capacity, was $822,835.56. This would have been the amount of the settlement cheque from Ms Joanne Ibrahim from the sale of the Rupert Street property received by the applicant from the conveyancing company, Conveyancing Melbourne Suburbs. However, the respondent admits that the assessable profit from sale of the property was at most $480,476 after the deduction of incidental and other costs. The applicant calculated the trust law income as $384,242, as contained in the actual resolution of the trustee[28], to be distributed 100% to the Wine Logistics Trust. Moreover, as the cheque deposited was not calculated or drawn by the trustee, it cannot be evidence of his intention to distribute funds.
[28] Exhibit R3, T105.
In my opinion, given the circumstances surrounding the deposit of the sum of $822,835.56 into the applicant’s NAB Classic Banking account and having regard to the submissions that I have canvassed, the respondent was not correct to include the sum of $480,476 in the applicant’s assessable income for the 2007/2008 year of income pursuant to s 97 of the ITAA. Apart from the analysis of the circumstances surrounding the deposit into the applicant’s NAB Classic Banking account, which is sufficient to answer the question whether the sum of $480,476 should be included in the applicant’s 2007/2008 assessable income, there is evidence which shows that 82% of the funds deposited were disbursed, not for the applicant’s personal use, but for vineyard and wine-related expenses in the 2007/2008 year of income.[29] In relation to the deposit of the smaller sum of $79,774.15 into the Bay Terrace Holdings account, there is also evidence which shows that 78% of the funds deposited were disbursed on vineyard and wine-related business expenses in the 2007/2008 year of income.[30]
[29] Exhibit A1.
[30] Exhibit A2.
The respondent has submitted that the applicant has not discharged his burden of proving that the amended assessment for the 2007/2008 is excessive (s 14ZZK(b) of the Taxation Administration Act 1953). On the material before me, this submission cannot be maintained. In my view, there is evidence (which I have outlined above) to show that the amended assessment is excessive. As was said by Brennan J in Federal Commissioner of Taxation v Dalco:[31]
“The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. …”
[31] (168) CLR 614 at 624.
Having reviewed it further, the evidence before me shows that the sum of $480,476, which was derived on the sale of the Rupert Street property and transferred to the applicant’s NAB Classic Banking account and to the bank account in the name of Bay Terrace Holdings, was not assessable income of the applicant under s 97 of the ITAA for the 2007/2008 year of income. I am satisfied that there is sufficient evidence to show that the sum (or some portion of the sum) was properly assessable to the applicant for the 2007/2008 year of income, as trustee of the Wine Logistics Trust.
In the event that my finding in relation to the operation of s 101 and s 97 of the ITAA is wrong, the applicant has sought to disclaim the purported distribution from the HoCT/RST for the 2007/2008 year of income. The right of a beneficiary to disclaim entitlement to a distribution within a reasonable time of becoming aware of it is well established: see Federal Commissioner of Taxation v Ramsden & Ors .[32] As the Full Federal Court said in Ramsden:
“Until disclaimer, a beneficiary’s entitlement to income under a trust is operative for the purposes of s 97 of the ITAA from the moment it arises notwithstanding that the beneficiary has no knowledge it (Federal Commissioner of Taxation v Vegners (1989) 89 ATC 5274). A beneficiary may disclaim and entitlement on its coming to his or her knowledge. At law an effective disclaimer operates retrospectively, and not merely from the time of disclaimer.”
[32][2005] FCAFC 39
For a disclaimer to be effective, it must be made within a reasonable period after the beneficiary becomes aware of the deemed distribution. I note that the applicant made the disclaimer on 4 April 2011. This followed receipt of the respondent’s reasons for decision dated 23 April 2010 or upon the date of the respondent’s decision upon determination of the applicants objection (27 April 2012). In either case, the disclaimer was lodged within a period of less than one year after the applicant became aware of the deemed distribution which would not be an unreasonable period.
In the respondent’s written submissions for hearing, it has been suggested that the applicant sought to characterise (or re-characterise) certain transactions retrospectively. The respondent submitted as follows:
“44. It is clear that the applicant takes the view that he (and his tax agent) are entitled to look back at various transactions some years after they occurred and characterise (or re-characterise) them in a manner which best suits the applicant and the entities he controls. The applicant considers that he is entitled to retrospectively characterise transactions in a manner which minimises his taxation obligations.
45. The respondent obviously takes a different view, and contends the transaction must be assessed for what they were in actual fact, and in some instances by operation of law, at the time the transactions were made. The respondent has made an assessment which reflects the continued separate legal personalities of the entities controlled by the application in the 2008 income year.”
The applicant has denied that characterisation or re-characterisation of transactions occurred retrospectively. In my view, there is no evidence to suggest that the applicant engaged in retrospective transactional activities some years after they occurred. He admitted that he met with his accountant/tax agent as was required, but that it was necessary for him to look back at some transactions when documents or records became available from ASIC or the respondent so that he was able to lodge outstanding taxation returns.
CONCLUSION
For the reasons I have outlined and as already mentioned in paragraphs 88 and 90 above, I find that the respondent was not correct to include the sum of $480,476 in the applicant’s assessable income for the 2007/2008 year of income pursuant to s 97 of the ITAA.
Was the respondent correct to impose an administrative penalty of 75 percent of the tax shortfall amount for intentional disregard of the law, and to increase the base penalty amount by 20 percent, in the 2007/2008 year of income?
As I have found that the sum of $480,476, derived on the sale of the Rupert Street property, was not assessable income of the applicant for the 2007/2008 year of income, it follows that the respondent was not correct to impose an administrative penalty of 75 percent of the shortfall amount or to increase the base penalty amount by 20 percent in the 2007/2008 year of income.
DECISION
The Tribunal sets aside the objection decision under review.
I certify that the preceding 97 (ninety-seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne ....................[Sgd]....................................................
Administrative Assistant
Dated 30 May 2014
Date of hearing 26 November 2013 Applicant In person Counsel for the Respondent Ms K Clark Advocate for the Respondent Ms M Mckie Solicitors for the Respondent ATO Review and Dispute Resolution
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