The Beneficiary and Commissioner of Taxation (Taxation)
[2020] AATA 3136
•26 August 2020
The Beneficiary and Commissioner of Taxation (Taxation) [2020] AATA 3136 (26 August 2020)
Division:Taxation and Commercial Division
File Number(s): 2019/4865
Re:The Beneficiary
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member R Olding and Senior Member B Pola
Date:26 August 2020
Place:Brisbane
1.The Applicant’s application to extend her grounds of objection against the Amended Notice of Assessment dated 30 April 2018 is:
a)so far as it seeks to include a ground to the effect of the Second Disclaimer Ground as described in the Tribunal’s reasons for decision issued on the date of this order – granted; and
b)otherwise – refused.
2.The decision under review is affirmed.
..................[SGD].....................
Senior Member R Olding
...............[SGD]........................
Senior Member B Pola
CATCHWORDS
TAXATION – whether Applicant presently entitled to distribution of net income of trust - whether purported disclaimer of distribution effective – held distribution not disclaimed – decision affirmed
TAXATION – application for leave to extend grounds of objection – where application to extend grounds first made in closing reply submissions - application for leave partially refused
LEGISLATION
Income Tax Assessment Act 1997 (Cth), s 97
Taxation Administration Act 1953 (Cth), s14ZZK
CASES
Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175
Commissioner of Taxation v Ramsden [2005] FCAFC 39
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148
Lewski v Commissioner of Taxation [2017] FCAFC 145
Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148
Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146
The Trustee for The Dalby Family Trust and Commissioner of Taxation [2019] AATA 524The Trustee for the Whitby Trust and Commissioner of Taxation [2019] AATA 5637
REASONS FOR DECISION
Senior Member R Olding and Senior Member B Pola
26 August 2020
This case is about whether a trust distribution was effectively disclaimed so that it does not form part of the assessable income of the Applicant[1].
[1] Exhibit 1, T1, page 1. We have anonymised these reasons to avoid any risk of breaching s 121 of the Family Law Act 1975 (Cth).
It was also necessary to determine whether an application to extend grounds of objection against the relevant income tax assessment (the “Amended Assessment”) should be granted.
The written evidence before the Tribunal is outlined in the Exhibit Register in the Annexure to these reasons[2].
[2] For ease of reference, we have included in the Exhibit Register and numbered the written closing and reply submissions filed after the hearing as “Exhibits”.
SUMMARY OF ISSUES AND CONCLUSIONS
The Commissioner assessed the Applicant’s income tax liability for the year ended 30 June 2014 on the basis that the assessable income she derived included a distribution of $80,000 (“the Distribution”) from a trust (the “Trust”)[3].
[3] Exhibit 1, T1, pages 7 to 12; T2, pages 13 to 17; and T14.
The Trust is a discretionary trust created for the benefit of, amongst others, the Applicant and her former husband[4]. However, the Applicant and her former husband separated on 22 November 2014 and the Applicant says she subsequently disclaimed the Distribution.
[4] Exhibit 1, T12, pages 122 to 142.
The Commissioner does not accept that the Applicant disclaimed the Distribution and notes that she has retained the benefit of a refund of Pay-As-You-Go (“PAYG”) instalments of $31,248 paid by the trustee of the Trust on her behalf[5].
[5] Exhibit 1, T8, page 42.
The Applicant applied to the Tribunal for review of the Commissioner’s decision to disallow her objection against the Amended Assessment and also sought leave of the Tribunal to extend her grounds of objection to include three alternative bases on which she says she disclaimed the Distribution[6].
[6] Exhibit 1, T1, pages 1 to 12.
With the consent of the Commissioner, we accepted the application to extend the grounds of objection in respect of one proposed ground but, for the reasons which follow, have concluded that the application to extend the grounds to include the other proposed grounds of objection should be refused.
The Applicant has the burden of proving that she did not derive the Distribution. We have concluded that she has not discharged that burden.
SOME KEY FACTS
The following facts are either agreed or found on the basis of uncontested documents in evidence.
The Trust and the Distribution
The trustee of the Trust is a company (“the Trustee”)[7]. The Applicant‘s former husband was the sole director and secretary of the Trustee at all relevant times[8].
[7] Exhibit 1, T12, page 123.
[8] Exhibit 1, T15, pages 236 to 241.
The Applicant and her former husband were the primary beneficiaries of the Trust[9].
[9] Exhibit 1, T12, pages 141 and 142.
The Applicant’s former husband signed a ‘Resolution of Sole Director’ on behalf of the Trustee on 30 June 2014. The document included these resolutions[10]:
“RESOLVED THAT, in exercise of the power under clause 5 of the Trust Deed and every other power enabling it in that behalf, the income of the Trust for the year ending 30 June 2014 is hereby set aside for the beneficiaries as follows:
1. The first $80,000 to [the Applicant’s former husband]; and
2. The second $80,000 to [the Applicant]; and . . .
RESOLVED THAT, for the avoidance of doubt, in respect of any payments that have actually been made by the Trustee to or for the benefit of any Beneficiaries . . . during the year ended 30 June 2014, the making of the payment did not constitute the making of a Distribution by the Trustee unless the payment was expressly recorded by a resolution of the Trustee as constituting a Distribution . . .”
[10] Exhibit 1, T12, page 143.
The Trust’s financial statements for the 2013-2014 financial year record that the beneficiary account for the Applicant had an opening balance indicating her indebtedness to the Trust in the amount of $41,873.85[11]; advances to her or for her benefit during the year of $95,935.21[12]; and a distribution of $74,872[13], resulting in a closing balance of $62,937.06 owed by the Applicant to the Trust[14].
[11] Exhibit 1, T12, page 172.
[12] Ibid.
[13] Ibid.
[14] The difference between this amount and the Distribution of $80,000 was unexplained but neither party
submitted that it was germane to the issues to be decided by the Tribunal.
The objection decision under review
The Applicant’s 2014 income tax return which she lodged on 17 July 2016 returned an amount of $7,804 as income but did not disclose the Distribution[15].
[15] Exhibit 1, T5, pages 26 to 31.
The Trustee had paid PAYG instalments of $31,248 relating to the Applicant during the 2013-14 financial year[16]. These instalments were included in the Applicant’s return as lodged[17]. Consequently, when the return was processed it generated a refund of $31,328 which was paid to the Applicant on 27 July 2016[18].
[16] Exhibit 2, pages 242 to 247.
[17] Exhibit 1, T3, page 23.
[18] Exhibit 1, T4, page 24.
Following reviews of the return, the Commissioner issued an amended notice of assessment dated 13 October 2017[19] relating to a franked dividend; and a further amended notice of assessment dated 30 April 2018[20] which included in her taxable income the amount of $80,000 as a share of net trust income of the Trust derived by the Applicant.
[19] Exhibit 1, T6, pages 32 to 35.
[20] Exhibit 1, T8, pages 42 to 45.
A notice of objection lodged on behalf of the Applicant on 4 June 2018[21] (the “Objection”) was disallowed by the Respondent on 12 June 2019[22].
[21] Exhibit 1, T10, pages 100 to 114.
[22] Exhibit 1, T14, page 235.
The Applicant applied to the Tribunal for review of that objection decision on 9 August 2019[23].
SHOULD THE APPLICANT’S GROUNDS OF OBJECTION BE EXTENDED?
[23] Although the Objection referred to the 13 October 2017 amended notice of assessment, both the Objection
and the objection decision dealt only with the Distribution issue (Refer to Exhibit 1, T10, page 102).
Statutory context
Under s14ZZK of the Taxation Administration Act 1953 (Cth), on an application for review of a reviewable objection decision (which includes a decision of the Commissioner on an objection against an income tax assessment):
“the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates . . .”
Background to the Applicant’s request to extend grounds of objection
The grounds of objection stated in the Applicant’s objection
The Objection stated that the Applicant became aware of the Distribution when she received the amended notice of assessment dated 13 October 2017 and that she disclaimed the Distribution on 6 April 2018[24]. On the latter date, the Applicant executed a document entitled “Disclaimer of Trust Income”[25] (the “6 April 2018 Disclaimer”) which purported to disclaim the Distribution, along with a statutory declaration which also included a paragraph purporting to disclaim the Distribution[26]. The Objection and statutory declaration also asserted that she did not receive any part of the Distribution[27].
[24] Exhibit 1, T10, page 100 to 111.
[25] Exhibit 1, T10, page 114.
[26] Exhibit 1, T10, page 112, paragraph 9.
[27] Exhibit 1, T10, page 109, paragraphs 26 and 27; and page 112, paragraph 7.
The proposed grounds of objection
In reply submissions filed after the hearing, the Applicant sought to rely upon additional grounds of objection. The various original and proposed grounds of objection are referred to in the submissions as:
(a)The “First Disclaimer Ground” – being the 6 April 2018 Disclaimer[28];
(b)The “Second Disclaimer Ground” – which related to the Applicant’s counsel, Mr Fisher, on 23 March 2015 striking through the Distribution in a draft income tax return sent to the Applicant by the accountants engaged by her former husband to prepare the Trust and their individual income tax returns (the “Accountants”) as discussed further below[29];
(c)The “Third Disclaimer Ground” – which sought to rely upon clause 6.4 of consent orders made on 20 April 2015 by the Family Court of Australia in property settlement proceedings between the Applicant and her former husband (the “Consent Orders”) and which gave effect to an agreement signed on 23 March 2015[30]; and
(d)The “Fourth Disclaimer Ground” – which sought to rely upon the basis on which the Applicant prepared and lodged her 2014 income tax return; that is, without including the Distribution as part of her assessable income[31].
[28] Exhibit 1, T10, pages 112 to 114.
[29] Exhibit 3, pages 4 and 5, paragraphs 26 and 27; and Exhibit 5, pages 3 and 4, paragraphs 9 to 16.
[30] Exhibit 8.
[31] Exhibit 1, T3, pages 18 to 23.
The First Disclaimer Ground is covered by the grounds stated in the Objection.
The Second Disclaimer Ground, although not stated in the Objection, was raised in the Applicant’s Statement of Facts Issues and Contentions[32]. The Commissioner does not object to the grounds of objection being extended to include this ground[33]. We agree that the grounds of objection should be extended to include the Second Disclaimer Ground.
[32] Exhibit 3, pages 4 and 5, paragraphs 26 and 27.
[33] Exhibit 10, page 11, paragraph 35.
The Commissioner objects to the grounds of objection being extended to include the Third Disclaimer Ground and the Fourth Disclaimer Ground[34].
[34] Exhibit 10, page 16, paragraph 55; and page 14, paragraph 46.
Relevant procedural history
The hearing of the Application for review took place on 17 June 2020, commencing at
10-00am. At 8-02 am, the Tribunal registry received an email from the Applicant’s counsel, Mr Fisher, copied to the Commissioner’s officers and the Commissioner’s counsel, Mr Brennan. The email foreshadowed that Mr Fisher would be seeking leave to rely upon the Consent Orders.A copy of the Consent Orders was admitted into evidence by consent[35]. Mr Brennan cross-examined the Applicant at some length, but not in relation to the Consent Orders. Mr Fisher submits that was a forensic choice by Mr Brennan and the Commissioner is bound by the decisions of Counsel made on his behalf.
[35] Exhibit 8; and with reference to Transcript of 17 June 2020, page 4, lines 39 to 46; page 5, lines 1 to 47; and page 6, lines 1 to 17.
Mr Fisher also points out that the Consent Orders were stated in his email to be “material”; must have been relevant to the issues before the Tribunal to be admitted into evidence; were referred to in a witness statement filed on behalf of the Applicant before the hearing (although not exhibited to the statement); and had been provided to an internal legal representative of the Commissioner on 20 December 2019[36]. Additionally, that the Commissioner was put on notice of the existence of the Consent Orders through his exercise of information-gathering powers as early as 31 January 2019. Further, for reasons that were not explained, a copy of the Consent Orders, although held by the Commissioner, was not produced as part of the “T documents” in accordance with the obligation under s37 of the Administrative Appeals Tribunal Act 1975 (Cth). Finally, that Mr Brennan could have, but did not, seek an adjournment of the hearing to enable the Commissioner to consider the Consent Orders[37].
[36] Transcript, 17 June 2020, page 2, lines 17 to 27.
[37] Exhibit 11, pages 4 to 6, paragraphs 20 to 26.
All of that may be true but, with respect, takes on a different complexion when considered in its proper context. It is not surprising that Mr Brennan chose not to cross-examine the Applicant in relation to the Consent Orders. At the time that choice fell to Mr Brennan to make, reliance upon the Consent Orders as an effective disclaimer of the Distribution had never been raised on behalf of the Applicant . It was not raised as an issue in her Statement of Facts, Issues and Contentions[38]; with the Tribunal in Mr Fisher’s email[39]; or when Mr Fisher sought leave to produce the Consent Orders[40]; or in any opening statement at the hearing[41].
[38] Exhibit 3.
[39] Exhibit 8.
[40] Transcript, 17 June 2020, page 2, lines 14 to 35.
[41] Transcript, 17 June 2020, page 4, lines 19 to 23; and page 5, lines 1 to 9.
More significantly, reliance upon the Consent Orders as evidencing a disclaimer of the Distribution did not form part of the Applicant’s grounds of objection. Nor had an application to extend the grounds of objection to include the Consent Orders been made or even foreshadowed at the hearing. The seeking of an order extending the grounds of objection was first raised by Mr Fisher in written reply submissions filed on 15 July 2020 in response to the Commissioner’s written closing submissions[42].
[42] Exhibit 11, page 4, paragraphs 18 and 19.
In those circumstances, Mr Brennan could only have concluded that the significance, if any, of the Consent Orders must have been confined to providing context for and/or being said to be consistent with what the Applicant had at that point maintained was the disclaimer of the Distribution by the striking through of the Distribution in the draft tax return prepared by the Accountants, and the 6 April 2018 Disclaimer. It could not have been relevant to an argument that the Consent Orders effected a disclaimer when that issue was neither before the Tribunal as a ground of objection nor even the subject of a foreshadowed application for leave to amend the grounds of objection.
The legal principles
It appears to be common ground that in determining whether to make an order extending grounds of objection relevant considerations include:
(a)the nature and importance of the proposed additional grounds;
(b)the reason for not raising the issue earlier and the adequacy of the explanation given;
(c)the effect a grant of leave to extend the grounds would have on the hearing; and
(d)any prejudice to the Commissioner.[43]
[43] Lewski v Commissioner of Taxation [2017] FCAFC 145, [125].
The Tribunal elaborated upon the approach to an application to extend grounds of objection in The Trustee for The Dalby Family Trust and Commissioner of Taxation, as follows[44]:
[44] [2019] AATA 5241.
“12. Until an amendment to a predecessor provision in 1986,[45] taxpayers were confined to their grounds of objection. That amendment introduced the exception ‘unless the Tribunal otherwise orders’. Before the amendment, there was no power vested in the Commissioner, the Tribunal or the Court to allow a taxpayer to argue matters outside the grounds included in the taxpayer’s objection. As a Full Court of the Federal Court observed in Lighthouse Philatelics Pty Ltd v Commissioner of Taxation,[46] this gave rise to injustice. The Court went on to note that:
[45] Income Tax Assessment Act 1936 (Cth), s 190, amended by Act No. 48 of 1986.
[46] (1991) 32 FCR 148, [12].
37. The decision whether to allow an amendment [to grounds of objection] ought to be made on the same considerations of justice upon which such decisions are regularly made in litigation. It was in the past a reproach to the law that the real issues in taxation appeals could be refused a hearing for a defective objection, and Parliament has legislated to remove that reproach; an amendment under [the predecessor provision, the amended section 190(a) of the Income Tax Assessment Act 1936] should not be considered with reluctance, but on its merits.[47]
[47] (1991) 32 FCR 148, [37].
13. It is clear that the Tribunal has the power to permit, as sought in this case, an entirely new ground of objection. Further, I take the comment that an amendment ‘should not be considered with reluctance’ to mean that one does not start from a default position or rebuttable presumption that the limitation in section 14ZZK should be upheld. Such an approach could perpetuate the vice intended to be addressed by the 1986 amendment – taxation controversies not being decided on their substantial merits due to shortcomings in objections.
14. Conversely, though, nor is there a presumption that an amendment to grounds of objection a review should be allowed where declining to do so would prevent the review addressing on its merits a substantive issue arising under the relevant taxation law. An application to amend grounds commonly will be attended by that feature.
15. In accordance with the Full Court’s judgement in Lighthouse Philatelics, and as recently reiterated by another Full Court in Lewski v Commissioner of Taxation,[48] the discretion to permit amendment of grounds of objection must be exercised by reference to considerations of justice on which such decisions are regularly made in litigation.
16. In Aon Risk Services Australia Limited v Australian National University,[49] the High Court restated the considerations in respect of when late amendments to pleadings should be permitted. The Court reiterated that a ‘just resolution’ of proceedings remains paramount, but speed and efficiency, in the sense of minimum delay and expense, are essential to just resolution of disputes.[50]
17. This does not mean that an application for amendment of pleadings must be refused because it involves some delay and waste of costs, as it inevitably will. As Gummow, Hayne, Crennan, Kiefel and Bell JJ stated in Aon:
102. . . . Factors such as the nature and importance of the amendment to the party applying cannot be overlooked. . . It is the extent of the delay and costs associated with it, together with the prejudice which might reasonably be assumed to follow and that which is shown, which are to be weighed against the grant of permission to a party to alter its case. Much may depend upon the point the litigation has reached relative to a trial when the application to amend is made. There may be cases where it may properly be concluded that a party has had sufficient opportunity to plead their case and that it is too late for a further amendment, having regard to the other party and other litigants awaiting trial dates . . . Invariably the exercise of that discretion will require an explanation to be given where there is delay in applying for amendment.[51]
18. In relation to the explanation for the delay, their Honours went on to note that ‘[G]enerally speaking, where a discretion is sought to be exercised in favour of one party, and to the disadvantage of another, an explanation will be called for.’[52]
19. While these considerations were discussed in the context of particular court rules, the principles stated in Aon have been taken to generally guide the exercise of the discretion under court rules to allow amendment of pleadings. This may be contrasted with what has been described as the ‘more permissive approach’[53] reflected in the earlier High Court decision in Queensland v JL Holdings Pty Ltd.[54]
20. The Full Federal Court in Lewski opined that, subject to adjustments to reflect the particular context of an application for review, the considerations outlined in Aon are relevant in determining an application for an order under section 14ZZK(a).[55]”
Application of the legal principles
[48] [2017] FCAFC 145, [125].
[49] (2009) 239 CLR 175.
[50] (2009) 239 CLR 175; see, for example, Gummow, Hayne, Crennan, Kiefel and Bell JJ at [93].
[51] (2009) 239 CLR 175, [102].
[52] (2009) 239 CLR 175, [103].
[53] Lewski v Commissioner of Taxation [2017] FCAFC 145, [126].
[54] (1997) 189 CLR 146.
[55] [2017] FCAFC 145, [131].
(a) nature and importance of the proposed additional grounds
Third Disclaimer Ground
Order 6.4 of the Consent Orders, upon which the Applicant seeks to place reliance as a disclaimer of the Distribution, relevantly states[56]:
“Retention by (sic) Property by the Husband
6. That the Husband forthwith retain as his absolute property and the Wife forthwith relinquish and/or transfer to the Husband all right, title and claim (if any) in and to the following:-
…
6.4 The [Trust]; … ”
[56] Exhibit 8, page 3, paragraph 6.
The Commissioner acknowledges that this order may be a complete answer to the amended assessment and that this consideration weighs in favour of granting leave to extend the grounds of objection to include the Third Disclaimer Ground. The Commissioner says that it would be necessary to cross-examine the Applicant as to her subjective intent in agreeing to the Consent Orders. However, against the possibility that the Tribunal might grant leave to add the Third Disclaimer Ground without that occurring, the Commissioner also submitted that for various reasons Order 6.4 of the Consent Orders did not have the effect of disclaiming the Distribution.
We agree that if we were to accept that Order 6.4 of the Consent Orders effected a disclaimer of the Distribution that would be a complete answer to the assessment so far as it included the Distribution in the Applicant’s assessable income. On this basis, this factor would weigh heavily in favour of granting leave in respect of the Third Disclaimer Ground.
The Applicant’s submissions say that Order 6.4 speaks for itself and that its words are of general import and have the effect of disclaiming any interest the Applicant had in the Trust[57]. The Applicant’s reply submissions indicate that she is content for the issue of whether Order 6.4 effected a disclaimer to be decided on the material currently before the Tribunal[58]. We are therefore in a position to consider, if leave were to be granted, the strength of the argument that Order 6.4 had the effect for which the Applicant contends. On the material before us, we are not persuaded that the case is as strong as Mr Fisher submits.
[57] Exhibit 9, page 4, paragraph 9; and page 11, paragraph 27.
[58] Exhibit 11, page 13, paragraph 59.
In its terms, Order 6.4 does not itself effect any relinquishment of the Distribution or indeed anything else. Rather, it orders the Applicant to relinquish and/or transfer to her former husband any right title or claim in and to the Trust. There is no evidence that the Applicant did so in response to the order.
Thus, Order 6.4 of the Consent Orders might well provide relevant context consistent with a submission that a disclaimer was in fact effected by some other act. We are not satisfied in the absence of further relevant evidence that the Applicant would necessarily discharge the burden of proving that, properly construed, Order 6.4 of the Consent Orders had the effect of disclaiming the Distribution.
Fourth Disclaimer Ground
We are not persuaded that this ground has merit. There is in our view nothing in the act of lodging a tax return prepared in a particular way that could be construed as a disclaimer. Again, the basis on which the return was prepared may provide some context consistent with disclaimer by some other act, but in our view the case that in itself it constitutes a disclaimer is not strong.
If it were necessary to decide whether the Applicant had discharged the burden of proving on the basis of this ground that she had disclaimed the Distribution, we would not be satisfied that she had. Accordingly, we conclude that the Fourth Disclaimer Ground would have little importance as a further ground of objection.
(b) reason for not raising the issues earlier and adequacy of the explanation
The Applicant’s submissions offer only the following by way of explanation for the delay in seeking to amend her grounds of objection:
“The reason for not raising the Third and Fourth Disclaimer Grounds earlier is that the Third Disclaimer Ground (in particular) did not become apparent to the Applicant until the morning of the hearing.”
In respect of the adequacy of this explanation, the submissions point to a copy of the Consent Orders being in the possession of the Commissioner since at least January 2019. However, that fact really says nothing about why the application to amend grounds of objection to rely upon the Third or Fourth Disclaimer Grounds was not made until the Applicant’s reply submissions were filed.
Additionally, the Applicant’s submissions appear to try to sheet home some blame for the late raising of Order 6.4 of the Consent Orders to the Commissioner for not including the Consent Orders in the T documents, stating if that had occurred the relevance of the orders “may have come into sharper relief for the parties much earlier than it did”[59]. We do not accept that this should be given significant weight. The Applicant has the burden of proving the amended assessment is excessive. If she wished to rely upon additional grounds of objection it was for the Applicant to identify those grounds and make a timely application to the Tribunal for leave to amend her grounds of objection.
[59] Exhibit 11, page 8, paragraph 36 D.
The limited explanation for the delay in our view weighs against the granting of leave to amend. The Applicant has known of the Consent Orders since they were made in April 2015. In fact, the Applicant accepts that she knew of them when she provided her consent on 23 March 2015. The agreement to and making of the orders was not an insignificant event. If the Consent Orders truly “dealt with a live matter lying at the heart of the application for review” as she submits, it was for the Applicant to raise the matter and seek to amend her grounds of objection[60].
[60] Exhibit 11, page 9, paragraph 41 D.
The Applicant offers no substantive explanation for the delay in seeking to raise the Fourth Disclaimer Ground.
(c) effect a grant of leave to extend the grounds would have on the hearing
The effect that granting leave would have on the hearing would depend upon whether we considered it necessary to give the Commissioner an opportunity to cross-examine the Applicant in relation to the Consent Orders. Mr Fisher submits that would not be necessary as the Consent Orders speak for themselves and accordingly may be construed by the Tribunal without further elucidation, but that the Applicant would submit to a direction for her to be recalled to be cross-examined[61].
[61] Exhibit 11, page 10, paragraph 44.
It is not immediately clear to us why additional evidence is necessary to construe the Consent Orders, although it may be that contextual evidence could be relevant. However, Mr Brennan having called for that opportunity we would, if it were necessary to decide, conclude that he should be given it.
Thus the effect of the granting leave to amend the grounds would be that a further hearing would be required, at some expense to the Commissioner and Tribunal, which could have been avoided by a timely application to amend grounds, or perhaps even if such an application had been foreshadowed when the request for leave to admit the Consent Orders was made.
This factor weighs heavily against granting leave to add the Third Disclaimer Ground.
There would be no need for a further hearing to be convened in respect of the Fourth Disclaimer Ground. However, for the reasons already indicated we consider this ground has little merit.
(d) prejudice to the Commissioner
The Commissioner does not suggest that he would suffer prejudice by a late grant of leave. It is not a case where, for example, relevant evidence may be no longer available.
However, the Commissioner points out that he will suffer additional cost if leave to add the Third Disclaimer Ground is granted as a further hearing would be required[62]. The Tribunal being a “no costs jurisdiction”, such costs incurred would be irrecoverable.
[62] Exhibit 10, page 16, paragraph 55.
It is not clear to us whether “prejudice” of this kind is a relevant factor for the Tribunal to take into account. However, we do not need to resolve this issue, as we would reach the same conclusion, whether or not we had regard to the potential for the Commissioner to incur additional costs.
Conclusion - leave to add the Third Disclaimer Ground and Fourth Disclaimer Ground as grounds of objection refused
Weighing up all of these factors, we consider that granting leave to add the Third Disclaimer Ground should be refused. Granting leave in response to such a late application, not made until the filing of closing submissions in reply, is not appropriate in the particular circumstances of this matter.
A circumstance to which we give particular weight is the absence of an explanation for the delay that amounts to anything more than that the issue did not occur to the Applicant until the morning of the hearing, when she has been represented throughout by the same counsel in both the family law and taxation issues. Further, that statement does not explain why the application to amend grounds of objection was not made or at least foreshadowed at the hearing. Another is the need for a further hearing to be convened.
Although our preliminary view is that it is doubtful, we would reach the same conclusion whether or not the Applicant would discharge the burden of proving the Consent Orders had the effect of disclaiming the Distribution. This case is analogous to the category of cases identified by the High Court’s judgement in AON Risk Services, extracted earlier, where it may properly be concluded that a party has had sufficient opportunity to plead their case and that it is too late for a further amendment, having regard to the interests of the other party and other applicants awaiting hearings.
We have already indicated that we consider the Fourth Disclaimer Ground to have little merit. In any case, no explanation for the delay in seeking leave to add this ground is offered on behalf of the Applicant. For those reasons, we also refuse leave to add the Fourth Disclaimer Ground.
HAS THE APPLICANT DISCHARGED THE BURDEN OF PROVING THAT THE DISTRIBUTION WAS DISCLAIMED?
The legal principles and issues to be decided
Burden of proof
The Applicant has the burden of proving on the balance of probabilities that the Amended Assessment is excessive[63].
[63] Taxation Administration Act 1953 (Cth), s14ZZK.
We approach consideration of whether the Applicant discharged this burden with the following principles in mind:
(a)Facts may be found on the basis of oral evidence alone.
(b)There is no barrier to a fact being found on the uncorroborated evidence of a witness. There is no requirement that direct evidence by oral testimony may only be accepted if corroborated, for example, by documentary evidence.
(c)However, self-serving statements should be given close scrutiny.
(d)Nevertheless, evidence of a taxpayer is not to be regarded as prima facie unacceptable[64].
(e)If the taxpayer succeeds in “weighing down [the] scales ever so slightly in [her] favour then [she] has discharged the burden [she] carries” [65].
[64] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation(1991) 22 ATR 148, 155; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
[65] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88].
Disclaimer of trust income
The parties approached this matter on the basis that, in accordance with s97 of the Income Tax Assessment Act 1997 (Cth), the Distribution forms part of the assessable income the Applicant derived in the 2014 income year, being a share of trust income to which she was presently entitled, unless she disclaimed the Distribution.
In considering this matter, we adopt the following principles:
(a)Until disclaimed, a beneficiary’s entitlement to income under a trust attracts the operation of s97 of the Income Tax Assessment Act 1997 (Cth) the moment it arises.
(b)This is so even if the beneficiary is unaware of the entitlement.
(c)A beneficiary may disclaim an entitlement on becoming aware of it.
(d)An effective disclaimer operates retrospectively as if the entitlement never arose.
(e)An annual distribution of income is a stand-alone gift. As such, a beneficiary may accept or disclaim the distribution whether or not the beneficiary accepts or disclaims other gifts under the trust[66].
[66] Commissioner of Taxation v Ramsden [2005] FCAFC 39; Lewski v Commissioner of Taxation [2017] FCAFC 145; The Trustee for the Whitby Trust and Commissioner of Taxation [2019] AATA 5637, [128].
It is sometimes said that, to be effective, a disclaimer of a gift must be made within a reasonable time of becoming aware of it. However, the position is more nuanced. As the Full Court of the Federal Court stated in Commissioner of Taxation v Ramsden[67]:
“. . . the question is not answered by measurement of the period of time that has elapsed simpliciter, but by whether in all the circumstances acceptance of the gift should be inferred from absence of dissent from the donee, and the passage time.”
[67] [2005] FCAFC 39, [55].
The grounds of objection, as extended to include the Second Disclaimer Ground, and the way the Applicant’s case was conducted, confined the case to whether, by striking through the Distribution in the draft tax return or through the 6 April 2018 Disclaimer, the Applicant effectively disclaimed the Distribution.
We therefore consider the following questions relevant:
(a)First Disclaimer Ground - was the act of the Applicant executing the 6 April 2018 Disclaimer and providing it to the Trustee effective to disclaim the Distribution?
(b)Second Disclaimer Ground - was the act of Mr Fisher striking through the reference to the Distribution in the draft income tax return on 23 March 2015 and the Applicant initialling this change effective to disclaim the Distribution?
To answer those questions, we need to determine whether it should be inferred that the Applicant had already accepted the Distribution. And to answer that question, we first need to determine when the Applicant became aware of the Distribution.
For completeness, we note that the Applicant’s grounds of objection, witness statement, and objection also maintain that she did not receive the Distribution. However, it seems to be accepted by both parties that whether the Applicant actually received the Distribution does not in itself answer the question whether she derived the relevant trust income, which depends upon whether she was presently entitled to the income. It is common ground that the answer to that question depends upon whether the Distribution was effectively disclaimed, not whether it was received.
However, whether the Applicant received amounts in advance of the trust resolution being made on 30 June 2014 may be relevant context to whether it should be inferred that she accepted the Distribution. We discuss this in the reasons which follow.
Since it is relevant to whether the Distribution had already been accepted by the Applicant when it was purportedly disclaimed, it is convenient to start with consideration of when the Applicant became aware of the Distribution.
When did the Applicant become aware of the Distribution?
Statements submitted in this regard on behalf of the Applicant have not been consistent, as the following extracts demonstrate:
(a)Statement of Facts, Issues and Contentions dated 20 January 2020[68]:
[68] Exhibit 3, page 4, paragraph 25.
“The Applicant became aware of the trust distribution from the [Trust] by means of the Amended Assessment issued on 16 October 2017.”
(b)Closing submissions dated 17 June 2020[69]:
“The Tribunal should find that the Applicant disclaimed the $80,000 distribution from the [Trust] within a reasonable time of her becoming aware of the distribution on 13 February 2015 . . .”
(c)Reply submissions dated 14 July 2020[70]:
“The Applicant’s knowledge or awareness of the Distribution was no earlier than late March 2015.”
[69] Exhibit 9, page 12 and 13, paragraph 31.
[70] Exhibit 11, page 11, paragraph 49.
The initial assertion that the Applicant became aware of the Distribution in October 2017 would be inconsistent with her submission that she disclaimed the Distribution when the amount of the Distribution was struck through in the draft tax return in March 2015. The Applicant seemed to concede as much during cross-examination[71].
[71] Transcript, 17 June 2020, page 22, lines 10 to 16.
Accordingly, adopting her second and third submissions, we conclude that the Applicant was aware of the Distribution by late March 2015.
First Disclaimer Ground - was the 6 April 2018 Disclaimer effective to disclaim the Distribution?
There is no question, and the Commissioner accepts[72], that the 6 April 2018 Disclaimer evidences an unequivocal intention to disclaim the Distribution. It was provided to the Trustee[73]. If the Applicant had not previously accepted the Distribution, this would have been effective to disclaim the Distribution.
[72] Exhibit 10, page 9 and 10, paragraph 27.
[73] Exhibit 1, T10, page 114.
Should it be inferred that the Applicant had accepted the Distribution?
While there are competing considerations, we are not persuaded that the Applicant has discharged the burden of proving that she had not accepted the Distribution or, put another way, that an inference should not be drawn that she had done so, before she signed the 6 April 2018 Disclaimer.
Indications that could be said to be in support of, or consistent with, the conclusion that the Applicant had not accepted the Distribution include:
(a)The Applicant’s actions in taking advice from Mr Fisher and accepting his advice by initialling the striking through of the Distribution in the draft tax return.
(b)That the Applicant had not received the Distribution, as discussed further below, coupled with:
(i)an inference that might be drawn from the signing of the agreement that led to the Consent Orders that the Applicant considered she had, consistent with the philosophy behind such orders, made a “clean break” and therefore had no further interest in or entitlements in relation to the Trust;
(ii)there being no evidence that the Applicant ever sought to recover the amount of the Distribution from the Trustee (but see further reasons below).
(c)The lodgement of her 2014 income tax return without including the Distribution.
Against these considerations, the passage of more than three years after the Applicant became aware of the Distribution without taking any action to explicitly disclaim the Distribution is a strong foundation upon which to draw an inference that she had accepted the Distribution.
It is true that Mr Fisher took various steps on the Applicant’s behalf in that time, including making inquiries with the Accountants who prepared the draft return and discussions with the Australian Taxation Office. On the other hand, we note that correspondence from the Accountants dated 17 December 2014 and annotated as having been provided to Mr Fisher, advised[74]:
“To further complicate matters, trust law dictates the distribution of trust income must be decided by 30 June each year and to that effect [the Trustee] made the attached resolution on 30 June 2014.
The trust must therefore distribute $80,000 each to [the Applicant and her former husband] and after a small distribution to the children, the balance of trust income for 2014 will be distributed to [a nominated corporate beneficiary]”.
[74] Exhibit 1, T12, pages 182, to 184.
No doubt the Applicant hoped she could persuade the Commissioner’s officers that she should not be assessed for income tax on the Distribution. But despite being legally represented in relation to the issue, she did not until April 2018 take the one, straightforward and conventional step that would have unequivocally disclaimed the Distribution - signing a written disclaimer.
Additionally, the Applicant lodging her tax return on the basis that she was entitled to the benefit of a credit for the amount of the PAYG instalments paid to the Commissioner by the Trustee and retaining the refund of that amount generated upon lodgement of her return is inconsistent with the Applicant not accepting the Distribution. If the Applicant considered she was not entitled to any distribution from the Trust for the 2014 income year, why would she claim and retain the benefit of the substantial instalment payments relating to income from the Trust? Her evidence was that the PAYG instalments were explained to her by the accountant who prepared the return that was lodged on her behalf[75]. The Applicant’s submissions do not engage with this issue at all despite it being raised in the Commissioner’s written submissions[76].
[75] Transcript, 17 June 2020, page 11, lines 40 to 47; page 12, lines 1 to 21.
[76] Exhibit 10, page 3 and 4, paragraph 8.
The Applicant’s relative inaction over the period between becoming aware of the Distribution by late March 2015 and finally disclaiming it on 6 April 2018 around the time her Objection was lodged, and claiming and retaining the PAYG instalments, indicate she was reluctant to disclaim the Distribution and indeed that it should be inferred that she accepted the Distribution.
On balance, we are not persuaded the contrary indicators mentioned, or other matters raised in the Applicant’s submissions, are sufficient to discharge the burden that falls upon her to prove that such an inference should not be drawn.
Second Disclaimer Ground - was the striking through of the Distribution in the draft tax return and associated actions effective to disclaim the Distribution?
The uncontested evidence of the Applicant establishes that:
(a)In March 2015, the Applicant consulted Mr Fisher, who was acting for her in relation to family law matters arising out of separation from her husband, when she received a draft income tax return for the 2014 income year from the Accountants which included the Distribution.
(b)the Applicant advised Mr Fisher that she had not received the Distribution.
(c)Mr Fisher advised the Applicant that if she had not received the Distribution she should not lodge a tax return indicating that she had and proceeded to strike through the reference to the Distribution.
(d)The Applicant initialled that amendment to the return and “zero-ed” the amount previously included as the Distribution.
(e)There was no discussion at the conference with Mr Fisher about disclaiming the Distribution.
There is no reliable evidence that Mr Fisher or the Applicant returned the amended draft return to the Accountants or communicated the change to the draft return to the Trustee[77].
[77] Witness statements by the Applicant and her mother contained speculation about whether Mr Fisher may have done so, but Mr Fisher did not give evidence, nor is there evidence that the Accountants received the amended draft return.
We accept that Mr Fisher striking through the Distribution and the Applicant signing that change occurred in such proximity to the Applicant becoming aware of the Distribution that it could not be inferred from the passage of time that she had already accepted the Distribution.
However, we are unable to accept that these actions were sufficient to disclaim the Distribution. On her own evidence, the Applicant had no concept of disclaimer in mind when this occurred. Nor is there any evidence that the Applicant communicated the alleged disclaimer to the Trustee either directly or through the Accountants.
It is true that the Applicant subsequently, on 17 July 2016, lodged her income tax return on a basis that is consistent with disclaimer of the Distribution[78]. However, this is insufficient, in our view, to found an inference that the striking through and initialling of the amended return, without more, constituted a disclaimer of the Distribution.
[78] Exhibit 1, T3, pages 18 to 23.
These considerations are sufficient to conclude that we are not satisfied that the Distribution was disclaimed on the Second Disclaimer Ground. We also observe that the 6 April 2018 Disclaimer document did not record any earlier disclaimer or that it was executed for the avoidance of doubt or the like. Although we would reach the same conclusion without regard to this factor, it is consistent with 6 April 2018 being the first occasion on which the Applicant attempted to disclaim the Distribution.
In deference to Mr Fisher, we discuss below some additional issues canvassed in his submissions but note that we would reach the conclusions already set out regardless of the discussion that follows.
Other matters
Relevance of whether the Applicant received the Distribution
Whether the Applicant actually received advances during the 2014 income year that were set off in the Trust’s financial statements against her entitlement to the Distribution was initially in issue between the parties. The Commissioner’s Statement of Facts, Issues and Contentions took issue with this contention and did not accept the Applicant’s denial that she received amounts from the Trust. However, at a directions hearing on 10 June 2020, Mr Brennan advised that the Commissioner was abandoning his contention that the Applicant had received all or part of the Distribution from the Trustee.
At our request, the Commissioner provided written confirmation of this concession before the hearing[79]. In this document, the Commissioner confirmed his abandonment of any contention that the Applicant had not received payments from the Trustee, stating[80]:
1. For the purpose of the Review, the Commissioner no longer relies on the contention that the Applicant received the Distribution or any part thereof by virtue of her receipt of payments from [her former husband’s] bank account throughout the financial year ending 30 June 2014.
2. Having regard to that contention being abandoned, the Commissioner no longer relies upon [nominated paragraphs in the Commissioner’s Statement of Facts, Issues and Contentions asserting that the payments were not received].
[79] Exhibit 7.
[80] Ibid.
Mr Fisher claimed that this meant it must be accepted that the Applicant did not receive the payments from the Trustee. However, the Commissioner’s closing submissions state that the reason for abandoning the contention is that there is no record of a resolution of the Trustee relating to payments made during the 2014 income year[81]. As such, under the terms of the trust deed for the Trust, and the resolution extracted earlier in these reasons, the payments could not be a distribution of part of the Trust’s income. Any such payments could only be advances to the Applicant or of some other nature.
[81] Exhibit 10, page 3 to 5; paragraphs 8 to 13.
Thus it seems that the Commissioner’s intention in making the concession was not to accept that no payments had been made to the Applicant during the year, but rather to concede that any such payments could not be characterised as all or part of the Distribution.
Nevertheless, it is the case that the Applicant’s evidence was that[82]:
“7. I have not received an amount of $80,000 (or any other sum) from the [Trustee] for the FY 2014.
8. To the best of my knowledge, information and belief no amount of $80,000 (or any other sum) has been paid at my direction or request by the [Trustee] for the FY 2014 to any third party.”
[82] Exhibit 5, Attachment D (Statutory declaration of the Applicant dated 6 April 2018).
It may be that if the receipt of the amount of $80,000 were in contention, entries in the Applicant’s bank account would invite explanation. However, ultimately the Applicant’s evidence as set out above was not challenged. But even accepting that the Applicant did not receive the amount of $80,000 by way of a loan or advances or otherwise from the Trustee, nor direct it to any third party, that fact could provide at best no more than, arguably, some contextual support for the submission that the Applicant had not accepted the Distribution.
Further, even if it is accepted that the Applicant did not receive $80,000 or any part of it for the 2013-14 financial year, it does not follow that the Applicant has not used any part of the Distribution. As mentioned above, the Trust’s financial statements indicate that the Applicant had an opening balance of indebtedness to the Trustee of $41,873.85 at 1 July 2013[83]. That opening balance is not challenged. There is no reason to suspect that it is inaccurate[84].
[83] Exhibit 1, T12, page 172.
[84] There is also correspondence from the Accountants to the effect that the Applicant was advised of the Trust’s beneficiary account balances as part of the basis on which the property settlement was negotiated, and no evidence that the Applicant challenged the calculation of the balance (Exhibit 1, T12, pages 182 to 184).
Thus, even assuming there were no advances to the Applicant during the year ended 30 June 2014, the Applicant would have had a closing indebtedness to the Trust of $41,873.85. Setting off the Distribution against that indebtedness would constitute use of part of the Distribution by the Applicant.
However, it is not necessary to pursue this issue further since, even without a conclusion that this set-off involved at least partial use of the Distribution, we would not be persuaded that an inference that the Applicant had accepted the Distribution should not be drawn for the reasons already mentioned.
Alleged “domestic violence” considerations
There were submissions to the effect that the evidence indicated that during their marriage the Applicant’s former husband controlled the couple’s finances and the Trust structure was not understood by the Applicant.
In that regard, the Applicant’s Statement of Facts Issues and Contentions, which in this respect was adopted in her written submissions, asserts that her former husband “engaged in creating trust structures that have ultimately visited a tax liability upon the Applicant through no fault or contribution of her own”[85].
[85] Exhibit 3, page 5, paragraph 28.
The Statement goes on to assert[86]:
“This is a type of domestic violence taking the form of economic abuse within section 8(1)(c) of the Domestic and Family Violence Protection Act 2012 (Queensland). By analogy, and as a matter of comity, the Tribunal ought to give effect to now well-established and well-entrenched legal principles relating to protecting women against domestic violence by allowing the Application for Review in so far as it seeks to overturn and impugn the Amended Assessment . . .”
[86] Ibid.
The Applicant’s written closing submissions, after noting that there is no documentary evidence regarding whether the Applicant granted her former husband authority to manage her financial affairs, assert[87]:
“This Tribunal should take account of the approach of the law, which is to recognise and protect the interests of spouses who, by reason of a relationship of trust, and in particular marriage, or emotional dependence, leave financial decisions to the other spouse: see Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at [21], [73].”
[87] Exhibit 9, pages 7 and 8, paragraph 20.
We make no finding regarding whether the conduct of the Applicant’s former husband, who was not called to give evidence, constituted domestic violence as a form of “economic abuse”. Even if we were to do so, we are unable to understand, and the Applicant’s submissions did not explain, the legal foundation upon which the considerations referred to in these submissions would assist our task of determining whether the Applicant has discharged the burden of proving that the Amended Assessment is excessive. The Tribunal has no general power to make orders for the purpose of protecting vulnerable spouses.
Conclusion – the Applicant has not discharged the burden of proving that the Amended Assessment was excessive
We are not satisfied that the Applicant effectively disclaimed the Distribution.
It follows that the Applicant has not discharged the burden of proving that the Amended Assessment is excessive and we must affirm the objection decision.
I certify that the preceding 104 (one hundred and four) paragraphs are a true copy of the reasons for the decision herein of Senior Member Olding and Senior Member Pola
...................................[SGD].....................................
Associate
Dated: 26 August 2020
Date(s) of hearing: 17 June 2020 Date final submissions received: 15 July 2020 Counsel for the Applicant: S. Fisher Counsel for the Respondent: V. Brennan Solicitors for the Respondent: ATO Review and Dispute Resolution Annexure – Exhibit Register
Exhibit Number
Description
1
Section 37 Tribunal Documents, paged 1 to 241, received 12 September 2019.
2
Supplementary section 37 Tribunal Documents, paged 242 to 247, received 20 February 2020.
3
Applicant’s Statement of Issues, Facts and Contentions, paged 1 to 6, received 20 January 2020.
4
Respondent’s Statement of Issues, Facts and Contentions, paged 1 to 7, received 20 February 2020.
5
Witness Statement of the Applicant, paged 1 to 5, with attachments A – E, received 20 January 2020.
6
Witness Statement of the Applicant’s mother, paged 1 to 3, received 20 January 2020.
7
Respondent’s Objections to Evidence and Concessions/Clarifications, paged 1 to 3, received 15 June 2020.
8
Email with Attachment containing Family Court of Australia Consent Orders of 20 April 2015, paged 1 to 13, received 17 June 2020.
9
Closing submissions from the Applicant, paged 1 to 13, received 17 June 2020.
10
Closing submissions from the Respondent, paged 1 to 27, received 9 July 2020.
11
Closing submissions in reply from the Applicant, paged 1 to 14, received 15 July 2020.
0
9
0