Stephens and Commissioner of Taxation
[2008] AATA 176
•29 February 2008
ADMINISTRATIVE APPEALS TRIBUNAL № VT200600338
TAXATION APPEALS DIVISION
Re: VIVIENNE SUE STEPHENS
Applicant
And:COMMISSIONER OF TAXATION
Respondent
CORRIGENDUM [2008] AATA 176
Tribunal: Mr Egon Fice, Member
Date:5 March 2008
Place:Melbourne
Member Fice made an Decision under s 43 of the Administrative Appeals Tribunal Act1975 (the Act) on 29 February 2008.
The Tribunal was advised that there is an error in the decision dated 29 February 2008.
In accordance with s 43AA(1) of the Act, the Tribunal directs that the Registrar alter the text in paragraph 40 of the Reasons for Decision by deleting the words:
However, that of course is not evidence that NF Legal acted, or could reasonably have been expected to act, in accordance with the directions or wishes of NF Legal.
and replacing them with:
However, that of course is not evidence that NF Legal acted, or could reasonably have been expected to act, in accordance with the directions or wishes of Enizer.
(sgd) Egon Fice
Member
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 176
ADMINISTRATIVE APPEALS TRIBUNAL )
) No VT200600338
TAXATION APPEALS DIVISION ) Re VIVIENNE SUE STEPHENS Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Egon Fice, Member Date29 February 2008
PlaceMelbourne
Decision The Tribunal affirms the decision under review. (sgd) Egon Fice
Member
TAXATION ‑ capital gains tax – discretionary trust – beneficiary presently entitled – small business relief – active asset test – small business CGT affiliate – acting in accordance with directions or wishes – acting in concert
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Legal Practice Act 1996 (Vic)
Bank West Western Australia v Ocean Trawlers (1995) 13 WAR 407
Bateman and Ors v Newhaven Park Stud Limited and Ors [2004] ACSR 597
Papua New Guinea Dockyard Ltd v Adams and Ors (2005) 215 ALR 742
REASONS FOR DECISION
29 February 2008 Mr Egon Fice, Member 1. Ms Vivienne Sue Stephens is a beneficiary of the Stephens Family Trust. She and her husband are the directors and shareholders of the Corporate Trustee, Enizer Pty Ltd (Enizer). Mr Stephens, a solicitor, is a director of NF Legal Pty Ltd (NF Legal) which carries on a legal practice under the name Nevett Ford from premises at 40 Armstrong Street North, Ballarat (Armstrong Street). Ms Stephens is an employee solicitor with Nevett Ford.
2. The premises at Armstrong Street were purchased in 1988 by a partnership comprising the Stephens Family Trust and six other family trusts. On 1 April 2003 the premises were sold and the Stephens Family Trust realised a capital gain of $116,516. By the time of sale, one of the family trusts had sold its interest in Armstrong Street to the remaining six family trusts.
3. The Stephens Family Trust sought to take advantage of the small business relief provisions set out in Division 152 of the Income Tax Assessment Act 1997 (the Assessment Act). By applying the concessions available to small businesses under Division 152, the Trust returned a net capital gain of $29,130 for the income year ended 30 June 2003. The Trust distributed this capital gain to Ms Stephens and in her Income Tax Return for the 2003 tax year she included a capital gain of $29,130.
4. On 20 March 2006 the Commissioner of Taxation (the Commissioner) issued Ms Stephens with an amended assessment for the 2003 tax year which increased her capital gain by $29,130. Ms Stephens lodged an objection to the Commissioner’s amended assessment and on 22 August 2006, the Commissioner disallowed Ms Stephens’ objection. She seeks a review of that objection decision.
5. A capital gain made by a small business may qualify for relief from capital gains tax (CGT) where, amongst other things, the asset in question satisfies the active asset test described in s 152‑35 of the Assessment Act. The meaning of active asset is defined in s 152‑40(1) of the Assessment Act and it includes an asset which is owned and used or held ready for use in the course of carrying on business by the owners’ small business CGT affiliate. The only issue before me is whether the law firm, NF Legal, was a small business CGT affiliate of the Stephens Family Trust at the time of the sale of Armstrong Street.
RELEVANT BACKGROUND
6. Enizer was registered in Victoria on 27 February 1986. Mr and Ms Stephens became directors of Enizer on 1 April 1986. Ms Stephens was also appointed company secretary on that date. By a Deed of Settlement made on 2 June 1986, Enizer became the trustee of the Stephens Family Trust.
7. Since 1988 Mr Stephens was a partner in the law firm which was then known as Nevett Coutts & Wilson. That firm merged with Ford & Co in 1989 to form the practice known as Nevett Ford. It initially conducted its legal practice as a tenant occupying 15 Armstrong Street South, Ballarat.
8. In about early 1988 the premises at Armstrong Street came onto the market. The partners of Nevett Ford agreed that they should purchase that property through their respective family trusts. This resulted in the trustees of the family trusts associated with the partners of Nevett Ford and, in one case, a senior employee of Nevett Ford, purchasing the Armstrong Street property as tenants in common in equal shares.
9. The building at Armstrong Street was substantially renovated before being occupied by the legal practice. There were three smaller areas capable of separate occupation, including two shops with frontage onto Armstrong Street and a separate office area on the first floor of the building.
10. After the law firm occupied the Armstrong Street premises, the owners, that is the various family trusts, did not cause the law firm (at that time a partnership) to enter into any formal lease. This remained the position for almost the entire period that Nevett Ford occupied the premises. For a short period in the early 1990s, when Nevett Ford was going through a difficult financial period, its bankers did require a formal lease to be executed. The rent payable by the partnership to the family trusts did not alter. The partners were also able to find tenants to occupy the two shops in the building. The area capable of separate occupation on the first floor was not let separately and the partnership utilised that area in the conduct of its legal practice.
11. After amendments were made to the Legal Practice Act 1996 (Vic) in January 1997, in or about 1998, the partners of Nevett Ford decided to incorporate the practice. NF Legal became the incorporated legal practitioner. The former partners of Nevett Ford became shareholders and directors of NF Legal. NF Legal also became the tenant of the Armstrong Street premises.
12. By late 2002 or early 2003, there were two principals of NF Legal who did not, directly or indirectly, have an interest in the Armstrong Street property. Further, one of the former principals of Nevett Ford, whose family trust retained an interest in the property, had retired from the firm.
13. In early 2003 the trustees of the family trusts, as proprietors of the Armstrong Street property, agreed that it should be sold subject to a lease to NF Legal of those parts of the premises which it then occupied. An intending purchaser was found who was prepared to proceed with the sale on the basis that NF Legal entered into a commercial lease in respect of the entire Armstrong Street premises. Negotiations for the sale were conducted by Mr Peter Wilson on behalf of NF Legal. Mr Wilson was a partner of the legal practice from 1988 and, subsequent to its incorporation, a shareholder and director of NF Legal.
14. Agreement was reached with the intending purchaser and the Armstrong Street property sold by its owners, the trustees of the various family trusts. The purchase price was $1,500,000. Of this sum, the Stephens Family Trust realised a capital gain of $116,516. This was one sixth of the total capital gain on the realisation of the property.
15. In the tax year ended 30 June 2003, Enizer distributed to Ms Stephens the whole of the capital gain.
LEGISLATIVE SCHEME
16. Liability to taxation of trust income is dealt with under Part III, Division 6 of the Income Tax Assessment Act 1936 (the 1936 Act). Where a beneficiary of a trust estate, who is not under any legal disability, is presently entitled to a share of income from a trust estate, the assessable income of the beneficiary includes that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident (s 97(1) of the 1936 Act).
17. The Stephens Family Trust is a discretionary trust and therefore s 101 of the 1936 Act applies to it. Under that section, a beneficiary in whose favour the trustee exercises his discretion is deemed to be presently entitled to the amount paid to him or her or applied for his or her benefit by the trustee in the exercise of that discretion.
18. Section 102-5(1) of the Assessment Act provides that a person’s assessable income includes that person’s net capital gain (if any) for the income year. It also sets out a five-step process to be followed in working out the net capital gain of a taxpayer. The first two steps are not relevant to Ms Stephens. Step three allows the taxpayer to reduce by the discount percentage each amount of a discount capital gain remaining after step two. Discount percentage is defined in s 995-1(1) of the Assessment Act as the meaning given to that expression by subdivision 115-B; and discount capital gain is defined as the meaning given to that expression by subdivision 115-A. The discount percentage for an amount of a discount capital gain is 50 percent if the gain is made by a trust (s 115-100(a)(ii)).
19. The fourth step under s 102.5 is to apply the small business concessions set out in subdivisions 152-C, 152-D and 152-E. The amount remaining after step four has been taken is, in this case, the Stephens Family Trust’s net capital gain for the tax year ended 30 June 2003 (step five).
20. Subdivision 115-C of the Assessment Act sets out the rules that apply to trusts which have net capital gains. Section 115-215 deals with assessing presently entitled beneficiaries. Section 115‑215(1) provides that:
The purpose of this section is to ensure that appropriate amounts of the trust estate’s net income attributable to the trust estate’s capital gains are treated as a beneficiary’s capital gains when assessing the beneficiary, so:
…
(b)the beneficiary can apply the appropriate discount percentage (if any) to gains.
Section 115-215(2) of the Assessment Act provides that:
This section treats [the beneficiary] as having certain extra capital gains [and allows the beneficiary] a deduction [where the person is]
(a) a beneficiary of a trust estate; and
(b) [the] assessable income for the year includes an amount (the trust amount):
(i) under paragraph 97(1)(a) of the Income Tax Assessment Act 1936…
Section 115-215(3) of the Assessment Act provides that:
For each capital gain (the trust gain) of a trust estate, Division 102 applies [insofar as it is relevant to Ms Stephens]:
…
(c)if the trust gain was reduced under both step 3 of the method statement and subdivision 152-C … a capital gain equal to 4 times the part (if any) of the trust amount that is attributable to the trust gain.
Section 115-215(4) of the Assessment Act provides that:
For each *capital gain of yours mentioned in paragraph (3)(b) or (c):
(a)if the relevant trust gain was reduced under step 3 of the method statement in subsection 102-5(1)—Division 102 also applies … as if [the] capital gain were a *discount capital gain, if you are the kind of entity that can have a discount capital gain; and
(b)if the relevant trust gain was reduced under Subdivision 152-C—the capital gain remaining after you apply step 3 of the method statement is reduced by 50%.
21. Subdivision 152-C of the Assessment Act explains how the small business CGT concessions referred to in step 4 of the method statement in s 102-5(1) are to be applied. Section 152‑200 explains that even though the capital gain may have been reduced by the discount percentage, a reduction under subdivision 152-C applies to the reduced gain. Where a trust gain is reduced under subdivision 152-C, the capital gain remaining to a beneficiary, after applying step three of the method statement, is further reduced by 50 percent.
22. Applying the above provisions of the Assessment Act, the issue to be resolved in this application is whether the Stephens Family Trust was entitled to the small business 50 percent reduction provided for in s 152-205 of the Assessment Act. For s 152‑205 to apply to the Stephens Family Trust’s net capital gain, the basic conditions in subdivision 152-A must be satisfied. The Commissioner accepted that the Stephens Family Trust satisfied condition s 152-5(a) of the Assessment Act. The only condition in question is set out in s 152-5(b) which requires the CGT asset to be an active asset (s152-5(c) not being relevant to this matter).
23. A CGT asset satisfies the active asset test if the asset was an active asset just before the earlier of: the CGT event (the sale of the Armstrong Street premises); and at least for half of the period between 1 March 1988 and 1 April 2003 (s 152-35 of the Assessment Act).
24. The meaning of active asset is set out in s 152-40(1) of the Assessment Act which provides:
(1)A *CGT asset is an active asset at a given time if, at that time, you own it and:
(a)use it, or hold it ready for use, in the course of carrying on a *business; or
(b)it is an intangible asset that is inherently connected with a business that you carry on (for example, goodwill or the benefit of a restrictive covenant); or
(c)it is used, or held ready for use, in the course of carrying on a business by:
(i)your *small business CGT affiliate; or
(ii)another entity that is *connected with you.
Small Business CGT Affiliate
25. Section 152-25 of the Assessment Act sets out the meaning of small business CGT affiliate. It provides:
152-25(1) A person is a small business CGT affiliate of yours if:
(a)you are an individual and the person is your *spouse or *child under 18 years; or
(b)the person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you.
152-25(2) Another partner in a partnership in which you are a partner is not your small business CGT affiliate only because the partner acts, or could reasonably be expected to act, in concert with you in relation to the affairs of the partnership.
26. The contentions of both parties focused on whether NF Legal acts, or could be reasonably expected to act, in accordance with the directions or wishes of Enizer or in concert with Enizer. Ms Stephens contended that between July 1998 and 1 April 2003, NF Legal:
(a)acted in accordance with Enizer’s directions or wishes in respect of the asset;
(b)could reasonably be expected to act in accordance with Enizer’s directions or wishes in respect of the asset;
(c)acted in concert with Enizer in respect of the asset; and
(d)could reasonably be expected to act in concert with Enizer in respect of the asset.
27. On the other hand, the Commissioner contended that Enizer was merely one of six owners of the Armstrong Street premises. Although Mr Stephens was a director of Enizer, he was merely one of seven directors of NF Legal. Of the seven directors of NF Legal, only four, including Mr Stephens, had any connection with a co-owner. Ms Stephens, the second director of Enizer, was an employee of NF Legal. Therefore, according to the Commissioner, it could not be said that NF Legal acted in accordance with the directions or wishes of Enizer nor could it reasonably be expected to have so acted.
28. Section 152-1 of the Assessment Act sets out a guide to Division 152. It provides that if the basic conditions for relief are satisfied, capital gains can be reduced by the various concessions set out in Division 152. The basic conditions are set out in Subdivision 152-A. The small business concession with which we are concerned in this case is the 50 percent reduction referred to in Subdivision 152-C.
29. Section 152-200, which is the guide to Subdivision 152-C, explains that:
…
A capital gain is reduced by 50% if the basic conditions in Subdivision 152-A are satisfied.
Furthermore, it explains that:
If the capital gain has already been reduced by the discount percentage, the 50% reduction under this Subdivision [152C] applies to that reduced gain.
30. The basic conditions for relief under Subdivision 152A are set out in s 152 ‑ 10 of the Assessment Act which, relevantly, provides:
(1)A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
(a)a *CGT event happens in relation to a *CGT asset of yours in an income year;
Note:This condition does not apply in the case of CGT event D1: see section 152-12.
(b)the event would (apart from this Division) have resulted in the gain;
(c)at least one of the following applies:
(i)you are a *small business entity for the income year;
(ii)you satisfy the maximum net asset value test (see section 152-15);
(iii)you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership;
Note:For the meaning of small business entity, see Subdivision 328-C.
(d)the CGT asset satisfies the active asset test (see section 152-35).
Note:This condition does not apply in the case of CGT event D1: see section 152-12.
31. There is no doubt in this case that the sale of the Armstrong Street premises was a CGT event, which happened in relation to a CGT asset. Further, the CGT event has resulted in the capital gain of the entity in an income year. Although initially I considered it possible that in this case a small business entity might in fact include all of the six family trusts which were owners of the Armstrong Street property, I accept the submissions of the Commissioner that a small business entity for the purposes of Division 152 of the Assessment Act must be capable of making a capital gain. Therefore, the small business entity referred to in Division 152 of the Assessment Act cannot comprise a partnership of persons each owning part share of the asset for the reason that any capital gain made by a partnership is deemed to have been made by the partners individually (see s 106 – 5 (1)). However, there is no restriction on a trust or individual having a capital gain. It follows that the small business entity which is able to take advantage of the 50 per cent reduction in capital gain must be a person or a trust. Accordingly, for the purposes of this matter, the small business entity is necessarily the Stephens Family Trust. I am therefore required, as a matter of fact, to determine whether NF Legal acted, or could reasonably be expected to act, in accordance with the trust's directions or wishes, or in concert with the trust.
Does NF Legal Act or Could Reasonably be Expected to Act In Accordance with the Directions or Wishes of the Stephens Family Trust?
32. Mr Stephens’ evidence was that he was a partner of Nevett Ford prior to its incorporation and a director and shareholder of NF Legal after the practice was incorporated in 1998. He also gave evidence about the operation of the legal practice at the Armstrong Street premises. The premises was originally purchased by the partners of Nevett Ford prior to its incorporation. It was purchased by the trustees of the partners’ family trusts and, in one case, by the family trust of a law clerk employed by Nevett Ford. Altogether, there were seven original owners of the premises. At some point, one of the partners, Mr Brewin, sold his interest in the premises to the remaining partners. That resulted in there being six interests in the premises as tenants in common in equal shares.
33. After the Nevett Ford partnership was incorporated, all of the partners became directors of NF Legal. By this time, two further lawyers, Mr Andrew Lumb and Mr Peter Lumb, had become partners of the firm and subsequently directors of NF Legal. Those two persons have never held an interest in the premises. There was also one partner, Mr Burns, who left the partnership to go to the Victorian Bar in about 1990; but his family trust retained its interest in the premises.
34. In his evidence, Mr Stephens focussed on the use of the Armstrong Street premises by NF Legal to demonstrate that the legal practice acted in accordance with the wishes and directions of Enizer. According to Mr Stephens, for almost the entire period that the Armstrong Street property was occupied by Nevett Ford and NF Legal, there was no formal lease in place as all of the partners agreed that it was unnecessary. Mr Stephens pointed out that for a short period in the early 1990s, when Nevett Ford was experiencing some financial difficulties, its bankers required a formal lease. The rent paid by the legal practice to the owners of the premises was calculated at fair market rent for the portion of the premises which it occupied. After the premises had been refurbished, there were three smaller areas capable of separate occupation. They comprised two shops which had frontages onto Armstrong Street and a separate area on the first floor. However, NF Legal was never able to find a tenant for the first floor area and it was used by the legal practice. Although capable of separate occupation, and although the legal practice used the area, the owners did not charge the legal practice rent for the occupation of that area.
35. Mr Stephens’ evidence was that initially the two shops on the ground level were separately leased. However, in structuring the leases for those tenancies, the future needs of the legal practice remained paramount and the leases were drawn in a fashion which would have enabled the legal practice to expand into those areas if that was required.
36. In early 2003, the owners of the Armstrong Street premises agreed that it should be sold. The intending purchasers were known to the legal firm and were, in fact, clients of the firm. The intending purchasers were prepared to purchase the Armstrong Street property only if NF Legal entered into a commercial lease in respect of the entire premises, not only the parts which it then occupied. To facilitate the sale, the legal practices’ Service Trust, which was in fact the tenant, entered into a commercial lease in respect of the entire premises at Armstrong Street, not just the parts which it then occupied. At the time of the sale, one of the shopfronts was occupied and the other was vacant. The discrete area on the first floor together with the remainder of the premises was used by NF Legal.
37. Therefore, immediately prior to the sale of the Armstrong Street premises on 1 April 2003, the entire premises at Armstrong Street, except for the two small shopfront areas, was being used by NF Legal in the conduct of its legal practice. The lessee of the entire premises was the Service Trust of NF Legal. NF Legal had seven directors, four of whom were also directors of the trustees of the family trusts which owned the premises. Of the two remaining trusts which had an interest in the Armstrong Street premises, one trustee was the company of a former partner of the legal firm and the other was the company of a law clerk employed by NF Legal. Two directors of NF Legal did not have any ownership interest in the premises.
38. Mr Stephens’ evidence was that he, along with Peter Wilson and David Stratton, were the directors of NF Legal more involved in the running of the business of the legal practice than the other partners/directors. Although that evidence was not contradicted, there was no independent evidence of that fact. In addition, Mr Stephens’ evidence was that at the time that the premises was first purchased by the Nevett Ford partnership, Mr Peter Wilson was the Managing Partner and he negotiated its purchase. The purpose of its purchase was to provide the legal firm with suitable premises, after extensive refurbishment, from which it could conduct its legal practice. All of the partners authorised Mr Wilson to proceed with the design requirements and to engage a builder to carry out the refurbishment. At the time of purchase, Mr Stephens said that the partners discussed whether, for the purposes of protecting the partners’ assets, it was advisable to have the partners’ family trusts become the owners of the premises. They agreed that should be the case. In addition to the partners, a senior employee of the Nevett Ford partnership, a law clerk, also agreed to purchase an interest in the property through his family trust. The refurbishment and fitout of the premises was paid for by the trustees of the family trusts. The partners of Nevett Ford at that time ensured that the design specifications of the refurbishment met the needs of the legal practice. Although, following the passage of time, the partners of Nevett Ford and subsequently the directors of NF Legal changed, immediately prior to the sale, four directors and one senior employee of NF Legal all had an ownership interest in the premises through their respective family trusts. Only two of the NF Legal directors had no direct or indirect ownership interest.
39. It is a question of fact as to whether, at the relevant time, NF Legal, in the conduct of its legal practice, acted or could be reasonably expect to act, in accordance with the directions or wishes of the Stephens Family Trust. It is also important to observe that s 152-25 (1) of the Assessment Act is not limited to the conduct of the small business CGT affiliate in the use of the CGT asset. Rather, it is couched in broad terms and must include the relationship between the parties in the conduct of the affiliate’s business generally. The question is whether Mr and Mrs Stephens were in a position to direct the activities of NF Legal in the course of that firm conducting its business at the Armstrong Street premises. That must involve more than merely directing NF Legal’s use of the Armstrong Street premises.
40. Mr Stephens said in evidence, and it was not contradicted, that the six family trusts, the owners of the Armstrong Street premises, did not require NF Legal to enter into a formal lease for the premises. In his written statement, Mr Stephens said that even following the refurbishment work carried out on the Armstrong Street premises, NF Legal did not cause the partnership of the trustees of the respective family trust to seek to enter into any formal lease. However, that of course is not evidence that NF Legal acted, or could reasonably have been expected to act, in accordance with the directions or wishes of NF Legal. If that were the case, it would have been a fairly simple matter for Mr Stephens to obtain evidence from all of the directors of NF Legal to that effect. There was no such evidence before me. Mr Peter O'Donnell provided a statement to the Tribunal in which he merely acknowledged the accuracy of a number of paragraphs in Mr Stephens' statement. Mrs Stephens did likewise. Mr Peter Russell, who is also a director of NF Legal, concurred with the statements made by Mr Stephens in his written statement. There was no evidence from any of the other persons who were Directors of NF Legal at the time of the sale of the Armstrong Street premises.
41. Mr Stephens said in his written statement that when offers were being considered for the rental of the two shops which form part of the Armstrong Street premises, the directors of NF Legal considered the proposed tenants and that the needs of NF Legal were paramount. In fact, one application for a lease of one of the shops was refused because the prospective tenant was another lawyer. This fact, as I understood it, was put as an example of NF Legal acting in accordance with the directions or wishes of Enizer. However, in my view that is, at best, equivocal. It could just as easily be said that the wishes of both parties in this instance merely coincided. There was no evidence of a direction or wish expressed by Enizer which was acted on by NF Legal.
42. In his oral evidence Mr Stephens said that some partners were more involved in the day-to-day running of the NF Legal business while others were more concerned with practising law. Mr Stephens mentioned himself and two other partners as being more interested in the operations of the business of NF Legal. Mr Stephens was asked whether there was any occasion between 1988 and 2003 when either the partners of Nevett Ford prior to incorporation, or the Directors of NF Legal after incorporation, disagreed with Mr Stephens and prevailed regarding the manner in which the premises was dealt with. Mr Stephens answered no. While that answer might indicate that the directors of NF Legal generally acted in accordance with the wishes of Mr Stephens, it did not address the day-to-day business affairs of NF Legal. There was no evidence about the way in which the legal practice conducted its business affairs. Commonly, where there is a partnership, there are regular partnership meetings to discuss the affairs of the partnership. I have no doubt there are similar meetings of directors, where a legal practice is incorporated. Unfortunately, there was no evidence before me of the way in which the directors of NF Legal made decisions regarding the day-to-day business practices and the future directions which the practice might explore. It would be surprising if there were not some disagreement between the directors, particularly given that two of the directors were not owners of the property and some of the owners of the property were not directors of NF Legal at the relevant time. Even if there was no disagreement, there was no evidence about how the legal practice made its business decisions.
43. Although Mr Young, who appeared for Ms Stephens, submitted there was a high degree of co-operation between Mr Stephens, as the directing mind and will of the trustee Enizer, and the practice of NF Legal, at least as far as the use of the CGT asset is concerned, that seems to fall short of establishing the requirements as set out in s 152 – 25 (1) (b).
Acting in Concert
44. The meaning of phrase to act in concert with has been subject to substantial judicial scrutiny. However, as Mr Nicholas, who appeared for the Commissioner, submitted, while there are many cases in which that phrase or variations of it have been analysed by the Courts, they deal with it in different statutory context to that before me. Often, they are called for in relation to the Corporations Act 2001 and the Trade Practices Act. Frequently, there is a pejorative element attached in the context of that legislation which is, of course, quite different to the context in which appears in the Assessment Act. According to Mr Nicholas, the phrase has not previously been considered in an income tax context. Nevertheless, there is some benefit in examining what has been said about the phrase in other contexts which may be of assistance. In the context of the Corporations Act, Barrett J in Bateman and Ors v Newhaven Park Stud Limited and Ors [2004] ACSR 597 canvassed a number of authorities dealing with the phrase acting in concert. Included among those cases was the decision of Owen J in Bank West Western Australia v Ocean Trawlers (1995) 13 WAR 407 which was referred to by Mr Nicholas. His Honour said, at 431 – 432:
The meaning to be ascribed to the words used must be gleaned from the context to which they relate and from the scope and purpose of the instrument in which they appear. The phrase acting in concert connotes knowing conduct the result of communication between parties and not simultaneous actions occurring contemporaneously. . . . Acting in concert involves at least an understanding between the parties as to a common purpose or object: . . .
45. Finkelstein J in Papua New Guinea Dockyard Ltd v Adams and Ors (2005) 215 ALR 742 summarised the cases discussing the meaning of acting in concert as collected by Barrett J in Bateman's case. He said, at 746:
These cases show that a person, A, will be acting in concert with another person, B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement . . .
46. Mr Young submitted that the evidence in this matter disclosed a single objective or purpose, which was to secure for the legal practice appropriate business premises and to protect those business premises by placing them in the structure of trustees. He said there was undoubtedly an understanding between the Stephens Family Trust and NF Legal as the directing minds and wills of both of those entities were the same. In my opinion, that submission cannot be accepted. Quite clearly, only one of the directors of NF Legal was also a director of Enizer. Mrs Stephens was employed by NF Legal and in that capacity, it is unlikely, and there is no evidence, that she could influence any of the business decisions of the legal practice. In fact, there are two directors of NF Legal who have no ownership interest at all. No evidence was taken from them as to whether they understood themselves to be acting in concert with Mr and Mrs Stephens. Perhaps even more significantly, one of the former principals of Nevett Ford, when it was a partnership, continued to hold an interest in the property but had retired from the firm. As a mere part-owner of the property through his family trust, it is entirely conceivable that Mr Burns may have had a different view about the use of the Armstrong Street premises and the business affairs of NF Legal, particularly as far as the two shops which were available for external lease is concerned. There may also have been differences of opinion regarding the separate area on the first floor which was also available for rent. However, there was no evidence before me as to the views of Mr Burns. In fact there was no evidence from any of the directors of NF Legal about the interaction between Enizer and NF Legal.
47. In his written statement, Mr Stephens said that by late 2002 or early 2003, there were three principals of NF Legal who did not have a proprietary interest in the Armstrong Street premises and that one of the former principals of a family trust had an interest but had retired from the firm. Mr Stephens then said:
Accordingly, in late 2002 or early 2003 representatives of each of the Trustees of the Family Trust referred to above and the principals of Nevett Ford discussed, and agreed to pursue, the sale of 40 Armstrong Street.
It seems to me not unreasonable to infer, from what Mr Stephens said in his statement, that the departure of one of the directors of NF Legal, whose family trust part-owned the premises, and the fact that there were other Directors of NF Legal who had no ownership interests in the premises, precipitated its sale. However, there was no independent evidence of that, particularly from those persons who were directors of NF Legal at the time of sale or those persons who held a proprietary interest through their family trust but were not directors of NF Legal. The only other director of NF Legal to provide a written statement was Mr Peter Wilson who simply agreed with the statements contained in paragraphs 8 – 53 of Mr Stephens' statement.
48. While there were a number of submissions regarding the context in which the phrase act in concert appears in the Assessment Act, and in particular the connection between the taxpayer and relevant entity which is said to be the small business CGT affiliate of the taxpayer, there seems to be no purpose in examining those in any detail. This is because there is insufficient evidence for me to determine whether there was in fact an understanding or arrangement between the Stephens Family Trust and NF Legal as to a common purpose or object. That seems to me to be fundamental to the outcome of this matter, although the evidence pointing to it was absent.
CONCLUSION
49. On an application for review of a reviewable objection decision made to this Tribunal, the applicant has the burden of proving that if the taxation decision concerned is an assessment, the assessment is excessive (s14ZZK of the Administration Act). In my view, the applicant has failed to discharge the onus of proof. In particular, Mr Stephens has failed to prove that NF Legal is a small business CGT affiliate of the Stephens Family Trust. Although there was ample evidence of Mr Stephens' role in NF Legal, particularly as far as use of the Armstrong Street premises is concerned, there was no direct evidence that NF Legal acted or could be reasonably expected to act in accordance with the directions or wishes, or in concert with, Enizer in respect of the conduct of its business. Although Mr and Mrs Stephens are the directors of Enizer, there was no evidence from any of the other directors of NF Legal, save for Mr Wilson, who simply agreed with paragraphs 8 – 53 of Mr Stephens' statement. There is nothing in those paragraphs of the evidence, or the oral evidence given by Mr Stephens, which establishes that the firm of lawyers, comprising some seven directors, acted or could be reasonably expected to act in the course of conducting the business of the legal practice in accordance with Mr and Mrs Stephens' directions. While Mr Stephens gave evidence that there were only three directors of NF Legal who were concerned with the management and business of the practice, the other two directors did not given any evidence about the conduct of the practice. There was nothing obvious from the evidence before me that Mr Stephens was the controlling partner of the practice. Furthermore, the legal practice had undergone substantial changes since it was first formed, including the departure of partners, the sale of one property interest and the appointment of new directors of NF Legal who did not hold a property interest. The views of those persons were not in evidence.
50. There was also no evidence before me which disclosed that Enizer and NF Legal acted in concert in respect of the business of NF Legal in the context in which that expression appears in s 152 – 25 of the Assessment Act.
51. I have therefore formed the view that NF Legal was not a small business CGT affiliate of the Stephens Family Trust as that expression is defined in s 152 – 25 of the Assessment Act. It cannot be said that the Armstrong Street premises was an active asset of Enizer as that expression is defined in s 152 – 40 (1) of the Assessment Act. Therefore, the amended assessment issued by the Commissioner for the 2003 tax year was correct and must be affirmed.
I certify that the fifty‑one [51] preceding paragraphs are a true copy of the reasons for the decision herein of Mr Egon Fice, Member
Signed: Lauren Spragg
AssociateDate of Hearing 18 September 2007
Date of Decision 29 February 2008
Counsel for the Applicant Mr A. P. Young
Solicitor for the Applicant Paul Stephens
Counsel for the Respondent Mr P. D. Nicholas
Solicitor for the Respondent Vanessa Bruton
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