Trustee for the Estate of EV Dukes
[2002] AATA 574
•12 July 2002
DECISION AND REASONS FOR DECISION [2002] AATA 574
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2001/488
TAXATION APPEALS DIVISION )
Re TRUSTEE FOR THE ESTATE OF EV DUKES
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr BJ McCabe, Member
Date12 July 2002
PlaceBrisbane
Decision The Tribunal affirms the objection decision under review.
..................(Sgnd).....................
BJ McCabe
Member
CATCHWORDS
TAXATION – income arising from estate – whether tax payable by trustee/executor or beneficiaries – whether tax-free threshold applies to income earned during the administration of the estate – time in which to settle estate affairs – whether Commissioner has any discretion to relieve applicant from the operation of the legislative scheme
Income Tax Assessment Act 1936
IncomeTax Rates Act 1986
REASONS FOR DECISION
12 July 2002 Mr BJ McCabe, Member
Introduction
The applicant, Mr Darcy Dukes, is a trustee for the estate of his late wife, Mrs Estelle Dukes. Mrs Dukes died on 24 June 1997. She left the whole of her estate in equal shares to her husband and two children. During her life, she had traded cattle in partnership with her husband. Cattle in which she had a half interest through the partnership were sold in January 2000, and proceeds of the sale were distributed to the beneficiaries in May 2000. The Commissioner issued an assessment and Mr Dukes paid the tax in June 2000. Mr Dukes objects to the Commissioner's decision and has sought review by the Tribunal.
The FactsThe facts in this case were not in dispute. Mrs Dukes died on 24 June 1997. Mr Dukes became a trustee of the estate. He says his accountant told him there would be no tax implications provided he wound up the affairs of the estate within three years of Mrs Dukes' death.
Mr Dukes and his wife had been partners in a small-scale cattle-trading venture since 1968. The applicant said the partnership had thirty-seven head of cattle on agistment at the time of his wife's death. The cattle were sold by the partnership in January 2000. Mr Dukes said he was under the impression he had until 24 June 2000 to wind up the affairs of the estate following advice from his accountant before there would be any tax problems. He completed a tax return as trustee of the estate and declared $5,357 of assessable income, being the estate's share of the proceeds of the sale of the cattle.
Mr Dukes indicated in the return that he wished any tax to be payable by the trustee. He took the view that it was his role as a provider for his family to pay any tax. Even when his wife was alive and she derived income from the partnership, he assumed responsibility for paying the tax bill.
The applicant apparently expected to receive the benefit of the $6,000 tax-free threshold. He anticipated that he would not be liable to pay any tax because his income as trustee was only $5,357.
The Commissioner concluded the applicant was not entitled to the benefit of the tax-free threshold. An assessment notice was issued. Mr Dukes objected, but paid the tax of $1,071.60. He says the Commissioner has behaved unreasonably. Mr Dukes says the Commissioner should have exercised his discretion to permit the applicant to take advantage of the tax-free threshold.
Mr Dukes' sense of grievance increased when the Commissioner imposed an interest charge after claiming the tax had not been paid on time. After representations from his Member of Parliament, the Commissioner dropped the claim for interest. It appears the cheque had been lost within the Australian Taxation Office.
Mr Dukes referred to an offer of settlement that had been made by the Commissioner prior to the hearing. Mr Cullen for the Commissioner told the Tribunal the Commissioner had offered to withdraw the assessment and treat the income derived from the cattle sales as if it had been distributed amongst the beneficiaries. To do so, it was necessary for the Commissioner to revisit the assessments of Mr Dukes and his children. Mr Dukes was suspicious of the offer. He appeared to take it as an admission that the Commissioner was wrong, and an indication that the Commissioner would somehow make him and his children pay for forcing him to admit the mistake. He told his local Member of Parliament that he feared the Commissioner was persecuting him.
I am satisfied after hearing Mr Dukes and Mr Curran's explanations that the Commissioner has not been persecuting Mr Dukes. Indeed, the Commissioner exercised what little discretion he had in favour of the applicant. The problem in this case does not lie with the Commissioner (although the confusion over the late payment and interest charge did not help). If there is a problem, it is the legislative framework within which the Commissioner (and the Tribunal) is required to operate.
The dispute turns on the application of a series of technical rules contained in ss 97-99A of the Income Tax Assessment Act 1936 and s 12 and Schedules 7 and 10 of the Income Tax Rates Act 1986. The rules are complex and rigid. They cry out for simplification.
The Law
I start from the proposition that $5,357 was derived from the sale of Mrs Dukes's interest in the cattle in January 2000. In whose income should that amount be included? Ordinarily, the amount would be included in the assessable income of the person or entity that earned the money, and the taxpayer would be assessed at the conclusion of that financial year. But in this case the money was earned by Mrs Dukes's estate. Special rules apply where assessable income is derived by a trust.
Where a beneficiary is presently entitled to a distribution of money from the trust, in the sense that an amount is imminently available for distribution, s 97 says the amount is counted as part of the beneficiary's assessable income. If there are no beneficiaries presently entitled to the money, the money will be included in the assessable income of the trustee, subject to ss 99 and 99A.
In this case, the applicant had specified in his tax return that tax was payable by the trustee. There was no suggestion the beneficiaries were presently entitled to a distribution. Accordingly s 97 does not apply.
Section 99A provides the trustee shall be assessed and be liable to pay tax at the rate prescribed in the Income Tax Rates Act 1986. Section 12(9) of that Act says the rate applicable in an assessment under s 99A is 47%. But the Commissioner does not have to apply s 99A. Section 99A(2) says the Commissioner has the discretion to assess the income under s 99 instead if he is satisfied that it would be unreasonable to apply s 99A.
The Commissioner exercised the discretion provided for in s 99A(2) to assess the income under s 99 instead of s 99A. Section 12(6) of the Income Tax Rate Act 1986 says the rates of tax applicable to assessments under ss 98 and 99 are set out in Schedule 10. It is therefore necessary to examine the terms of Schedule 10 in some detail to determine how the income in this case ought to be treated.
Clause 1(b) of Schedule 10 says that where a deceased person dies less than three years before the end of the year of income (ie, at any time during the three years prior to 30 June of the year in which the income was derived), the appropriate tax rates are set out in Part 1 of Schedule 7 or Part 1 of Schedule 9. Mr Curran for the Commissioner explained that the applicable rates would be found in Part 1 of Schedule 7. The provision says, in effect, that the first $6,000 of income is exempt from tax. Amounts in excess of $6,000 up to $20,000 are taxed at 17%.
If clause 1(b) of Schedule 10 applied to the applicant, he would not be required to pay any tax. But this provision does not apply because Mrs Dukes died more than three years before the end of the relevant year of income. She died on 24 June 1997; the end of the relevant year of income is 30 June 2000. Clause 2 of Part 1 of Schedule 10 says that the rate of tax in those circumstances is as set out in Part 1 of Schedule 7, subject to one important modification: clause 2(b) says, in effect, that the tax-free threshold of $6,000 is not available. It follows that the whole of the income (up to $20,000) derived during that year of income will be liable to a 17% rate of tax.
Mr Dukes says that result is harsh. Mrs Dukes died only 6 days before the end of the 1997 financial year. He says that six days is treated as if it were a whole tax year. He noted advice from the Australian Tax Office that the position would be the same if his wife died immediately prior to midnight on 29 June 1997. He says that is absurd, particularly given the income was derived within three calendar years of the death of his wife.
Whether or not it is an absurd result, the Commissioner has no discretion to deal with the income any other way – at least, not once the discretion under s 99A has been exercised. The rules may be complex and inelegant, but their effect is clear enough. I am satisfied the Commissioner has correctly calculated the applicant's tax liability.
Conclusion
I have sympathy for Mr Dukes. He appeared to be a decent and honest individual. He is genuinely mystified by the treatment he has received. He said he feels betrayed. The fact the dispute arises out of the administration of his wife's estate makes it even harder for him to bear. He blames the Commissioner for what has occurred, but I am satisfied the Commissioner has acted appropriately in his assessment of the applicant's tax. If blame is to be apportioned, a large part of it must rest with the legislative provisions that dictate the result in this case. At the very least, they are inherently difficult to explain.
I affirm the decision under review.
I certify that the 21 preceding paragraphs are a true copy of the reasons for the decision herein of Mr BJ McCabe, Member
Signed: Sarah Oliver
AssociateDate of Hearing 12 June 2002
Date of Decision 12 July 2002The Applicant represented himself
Solicitor for the Respondent Mr M Curran, ATO Legal Practice
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