TVKS and Commissioner of Taxation (Taxation)
[2016] AATA 1010
•9 December 2016
TVKS and Commissioner of Taxation (Taxation) [2016] AATA 1010 (9 December 2016)
Division: TAXATION AND COMMERCIAL DIVISION
File Numbers: 2015/4655 - 4656
Re: TVKS
APPLICANT
And:COMMISSIONER OF TAXATION
RESPONDENT
DECISION
Tribunal Deputy President S A Forgie
Date 9 December 2016
Place Melbourne
The Tribunal decides to:
affirm the Commissioner’s reviewable objection decision dated 9 July 2015.
……[sgd]…………………….
Deputy President
CATCHWORDS – TAXATION – applicant beneficiary of trusts during relevant income years – applicant seeking to disclaim entitlement to interest in income, capital or gifts from trusts – whether applicant can rely on disclaimer of entitlements under trust resolutions – whether trust resolution purporting to distribute trust income for 2006 year ineffective in accordance with terms of trust deed – whether trust resolutions effective in preventing applicant from being presently entitled to share of trusts in relevant income years – whether Commissioner out of time to issue amended assessments to applicant in relevant income years – whether carried forward losses available to company in capacity as trustee in 2006 income year – whether shortfall interest charge should be remitted – decision affirmed
LEGISLATION
A New Tax System (Goods and Services Tax Transition) Act 1999
A New Tax System (Goods and Services Tax) Act 1999
Administrative Appeals Tribunal Act 1975; ss 43, 43(2D)
Conveyancers Act 2006 (Vic); Item 6.6 of Schedule 2
Fringe Benefits Tax Assessment Act 1986
Income Tax Assessment Act 1936; ss 6(1), 51(1), 95, 95(1), 95(2), 95(3), 95A(2), 96, 97, 97(1), 97(2), 97A(1), 97A(1A), 98, 98(1), 98(2), 99, 99(1), 99A, 99A(2)(a)-(d), 99A(3), 99A(4)-(4C), 167, 170, 170(1), 170(7), 170(14), 190(a), 204(1)
Income Tax Assessment Act 1997; ss 4-1, 4-15, 4-15(1), 6-5 to 6-15, 8-1, 8-1(1), 10-5, 17-10, 17-30, 995-1(1)
Land Tax Assessment Act 1910
Real Property Act 1900 (NSW)
Taxation Administration Act 1953; ss 8 AAD(2)-(4), 14ZU, 14ZU(c), 14ZZE, 14ZZJ, 14ZZK, 14ZZK(a); ss 280-100, 280-105, 280-110, 280-160 of Schedule 1
Transfer of Land Act 1958 (Vic); s 128(2)CASES
Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375; 272-272
Automatic Fire Sprinklers v Watson [1946] HCA 25; (1946) 72 CLR 435;
BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164; (2001) 46 ATR 347; 2001 ATC 4111
Codelfa Construction Pty Ltd v State Railway Authority of New South Wales [1982] HCA 24; 149 CLR 337; 41 ALR 367; 56 ALJR 459
Coles Myer Finance Pty Ltd v Federal Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640; 67 ALJR 463; 25 ATR 95; 112 ALR 322; 93 ATC 4214
Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35; (2006) 228 CLR 1; 228 ALR 301; 80 ALJR 1282; 62 ATR 648; 2006 ATC 4404Commissioner of Taxation v Ramsden [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136
Confidential and Commissioner of Taxation [2012] AATA 178; (2012) 88 ATR 222; 2012 ATC ¶1-044
Craig v Federal Commissioner of Taxation [1945] HCA 1; (1945) 70 CLR 441
Federal Commissioner of Taxation v Bamford [2010] HCA 10; (2010) 240 CLR 481; 264 ALR 436; 75 ATR 1; 84 ALJR 266; 2010 ATC 20-170
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492Federal Commissioner of Taxation v Malouf [2009] FCAFC 44; (2009) 174 FCR 581; 75 ATR 335
Federal Commissioner of Taxation v Raymor (NSW) Pty Ltd [1990] FCA 193; (1990) 24 FCR 90; 94 ALR 255; 21 ATR 458; 90 ATC 4461Federal Commissioner of Taxation v Woolcombers (WA) Pty Ltd [1993] FCA 631; (1993) 47 FCR 561; 27 ATR 302; 93 ATC 5170
Gilder v Federal Commissioner of Taxation (1991) 22 ATR 872; 91 ATC 5062
Glenn v The Commissioner of Taxation (1915) 20 CLR 490
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298;
JW Broomhead (Vic) Pty Ltd (In liquidation) v JW Broomhead Pty Ltd [1985] VR 891
Kordan v Pty Limited v Commissioner of Taxation [2000] FCA 1807; (2000) 46 ATR 191; 2000 ATC 4812
Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148; (1991) 103 ALR 156; 22 ATR 707; 25 ALD 257; 91 ATC 4942
Malouf v Federal Commissioner of Taxation [2008] FCA 497; (2008) 250 ALR 253; 68 ATR 470; [2008] ATC ¶20-023McLean and Dean v Commissioner of Taxation [1996] FCA 1459; (1996) 66 FCR 106; 32 ATR 647; 96 ATC 4443
Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24; 66 ALR 299; 60 ALJR 560Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104; 325 ALR 188; 89 ALJR 990
Nemesis Australia Pty Ltd v Federal Commissioner of Taxation [2005] FCA 1273; (2005) 150 FCR 152; 225 ALR 576; 61 ATR 119; 2005 ATC 4881
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179
NML Limited v Man Financial Australia Ltd [2006] VSCA 128; (2006) 15 VR 156
Phipps v Ackers (1842) 9 CL & Fin 583; 8 ER 539
Re Applicant and Federal Commissioner of Taxation [2008] AATA 927; (2008) 73 ATR 675
Re Kilpatrick’s Policies Trusts [1966] Ch 730
Sargent v ASL Developments Ltd (1974) 131 CLR 634; 48 ALJR 410; 4 ALR 257
Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121; 170 ALR 594; 74 ALJR 743
Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156; (2015) 89 NSWLR 431
Turner v Turner [1984] 1 Ch 100;Walsh Bay Developments Pty Ltd v Federal Commissioner of Land Tax (1995) 130 ALR 415; 31 ATR 15; 95 ATC 4378;
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70; 39 ATR 277; 98 ATC 4681
OTHER MATERIALS
Black’s Law Dictionary with pronunciations, 5th edition, 1989, West Publishing Company, St Paul
Chambers 21st Century Dictionary, 1999, reprinted 2004, Chambers
Macquarie Dictionary, revised 3rd edition, 2001, The Macquarie Library Pty Ltd
Practice Statement Law Administration, PS LA 2006/8, cl 2A, cl 7
Practice Statement Law Administration PS LA 2015/2
REASONS FOR DECISION
On 4 September 2015, TVKS[1] applied for review of an objection decision made by the Commissioner of Taxation (Commissioner) in relation to amended assessments he had issued to her in respect of the 2006 and 2007 income years. The issues centre around various transactions engaged in by the trustees of two trusts and the distributions made to TVKS by those trustees. I have affirmed the Commissioner’s reviewable objection decision dated 9 July 2015.
BACKGROUND
[1] Section 14ZZE of the TA Act provides that the hearing of a proceeding before the Tribunal is to be in private if the applicant requests that it be so. TVKS has made that request. Section 14ZZJ modifies s 43 of the Administrative Appeals Tribunal Act 1975 (AAT Act) so that it is read as including s 43(2D). The effect of s 43(2D) is that, when a proceeding in the Tribunal is not conducted in public “… the Tribunal must ensure, as far as practicable, that its reasons for the decision are framed so as not to be likely to enable the identification of the person who applied for review.” Consistently with that requirement, I have changed the names of all entities and persons.
The Trusts, their Trustees and their powers and the Beneficiaries
The facts that I set out in this part of my reasons are not in dispute between the parties. I make them in light of that and on the basis of the evidence. The Australian Taxation Office (ATO) audited the taxation affairs of TVKS’s husband, whom I will call Martin, and relevant entities for the years of income ending 30 June 2006 to 30 June 2008. Those entities are:
(1)Archer Property Pty Ltd (Archer Property), which was the trustee for the Woodchester No. 4 Trust.
(a)At all material times, TVKS was a General Beneficiary of the Woodchester No. 4 Trust.
(b)Woodchester No. 4 Trust invested in residential complexes as a member of a partnership.
(2)Shee Investments Pty Ltd (Shee Investments), which was the trustee of the Bristol Trading Trust.
(a)At all material times, TVKS was a General Beneficiary of the Bristol Trading Trust.
A. Bristol Trading Trust
The Bristol Trading Trust was established by a deed executed on 19 May 1986 (Bristol Trust Deed). On 29 March 1989, the initial Trustee retired and was replaced by Shee Investments.[2] The Bristol Trust Deed was varied by a further deed executed on 5 December 1995. TVKS was a General Beneficiary as defined in cl 1(3) when read with the Schedule to the deed and the definition of “Specified Beneficiary”.
[2] T documents; T3 at 104-106
A.1 Trustee’s power to distribute income
Clause 3 of the Bristol Trust Deed provided for the distribution of the income. Clause 3(1)(a) is relevant in this case:
“The Trustees may prior to the Vesting Day at any time and from time to time during any Accounting Period with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period determine –
(a)to pay apply or set aside the same for any one or more of the General Beneficiaries living or in existence at the time of the determination PROVIDED THAT any payment application or setting aside in favour of a General Beneficiary described in clause 1(3)(c) hereof shall on the first occasion on which a payment application or setting aside is made to or for that General Beneficiary be subject to clause 36 hereof;
(b)-(c)…”[3]
Clause 3(2) set out several provisions applying to the Trustee’s determination under cl 3(1). Those provisions included the following:
“a determination may be made by specifying a proportion of net income of the Trust Fund or by specifying an amount”.[4]
[3] T documents; T3 at 60-61
[4] Bristol Trust Deed at cl 3(2)(c); T documents; T3 at 61
Various terms were defined in cl 1 of the Bristol Trust Deed. They included:
“(27A) ‘Income’ includes but is not limited to assessable income and Capital Gain as defined in the Tax Law;
(27B)‘Net income of the Trust Fund’ includes the amount calculated as the net Income of the Trust Fund for an Accounting Period in accordance with section 95(1) of Tax Law including:
(a)Any Net Capital Gain to be included in the assessable Income of the Trust Fund by virtue of Tax Law; and
(b)To the extent allowable, any taxation credits available to the Trustee.”[5]
[5] T documents; T3 at 51-102 and T5 at 109-111
B. Woodchester No. 4 Trust
The Woodchester No. 4 Trust was established by a deed executed on 17 June 1997. By a deed executed on the following day, 18 June 1997, Archer Property was appointed as Trustee.[6] TVKS was a General Beneficiary of the trust.[7]
[6] T documents; T7 at 177-180
[7] Woodchester No. 4 Trust Deed of Settlement; cl 1.13 and Schedule 1; cl 2: T documents; T6 at 119 and 173
Archer Property, the Winslow Property Syndicate and its contractual arrangements
Archer Property was a member of a syndicate known as the Winslow Property Syndicate (WP Syndicate). The WP Syndicate was managed by Winslow Property Syndication Pty Ltd (WPS Pty Ltd). As manager of the WP Syndicate, WPS Pty Ltd entered two contracts on 30 June 1999. Both were with Osborne Properties Pty Ltd (Osborne Properties).
The first was a Contract of Sale of Real Estate (Contract of Sale). Under that contract, WPS Pty Ltd agreed to purchase a property for $16,240,000 in Victoria (Victorian property) while Osborne Properties agreed to carry out improvements on the buildings situated on it. WS Pty Ltd paid a deposit of $1,000,000 on signing the contract.[8] The remainder of the purchase price was to be paid in three instalments. The first instalment, amounting to $1,740,000, was payable on the Settlement Date, which was 31 October 1999, or such other date on which settlement occurred.[9] The second, described as the First Post Settlement Amount of $2,500,000, was payable on 1 July 2000 or the date of the issue of the Planning Permit, whichever was later.[10] The Final Post Settlement Amount, or third instalment, was an amount of $12,000,000 adjustable under cl 9.4. It was payable on the Date of Completion being 14 days after the issue of a Certificate of Completion.[11]
[8] T documents; T10 at 193-252
[9] Clause 8.1.1 read with the definition of “Settlement Date” in cl 1.46 and “Settlement Amount” in cl 1.45 of the Contract of Sale: T documents; T10 at 201-202 and 204.
[10] Clause 8.1.2 read with the definition of “First Post Settlement Amount” in cl 1.21 of the Contract of Sale: T documents; T10 at 200 and 204.
[11] Clause 8.1.3 read with the definition of “Final Post Settlement Amount” in cl 1.20 and of “Date of Completion” in cl 1.15 of the Contract of Sale: T documents; T10 at 200 and 204-205.
The second contract entered by WPS Pty Ltd and Osborne Properties on 30 June 1999 was an agreement to purchase a business that was operated from the Victorian property (Purchase of Business Agreement). The purchase price was $7,260,000 and the deposit was $1,750,000.[12] The balance of the purchase price was, subject to any adjustments, payable on the Completion Date, which was 31 October 1999 or such other date as the parties agreed.[13]
[12] Clauses 1.23 and 2.2.1: T documents; T11 at 256 and 257.
[13] Clause 2.2.2 when read with definition of “Completion Date” in cl 1.11: T documents T11 at 255 and 257.
Clause 11.1 of the Purchase of Business Agreement provided that it was interdependent with the Contract of Sale in respect of the Victorian property between WPS Pty Ltd and Osborne Properties. Without limiting the generality of that agreement, cll 11.2.1 to 11.2.8 provided for certain consequences flowing from certain situations as a result of that interdependence. They included that completion of the agreements would be contemporaneous and a breach of one agreement by one or other of the parties would be regarded as a breach of the other agreement. In the event that one or the other was entitled to terminate or rescind the Contract of Sale, then that party was entitled to terminate or rescind the Purchase of Business Agreement.
Also on 30 June 1999, WPS Pty Ltd paid a syndication fee of $3,000,000. That meant that, on 30 June 1999, WPS Pty Ltd paid a total of $5,750,000 on behalf of the WP Syndicate.
B.Deductions allowed Archer Property in respect of its interest in the WP Syndicate
In its Profit and Loss Statement for the year of income ended 30 June 1999 (1999 Year), Archer Property disclosed income totalling $1,266,466.85 of which $1,263,795.45 was described as Syndication Fees. Of the expenses totalling $749,938.68, a sum of $562,970.00 was disclosed as Syndication Costs. In all, Archer Property had a net profit of $516,508.17, all of which was distributed to the beneficiaries.[14]
[14] T documents; T9 at 189
Archer Property reported the sum of $516,508 as the total business income of the Woodchester No. 4 Trust when it completed the Tax Return for the 1999 Year.[15] No amounts were shown as deductions in that return. In setting out its position to the Commissioner in December 2003, Archer Property as trustee for the Woodchester No. 4 Trust, claimed an amount of $550,000 as a deduction in respect of its investment in the WP Syndicate in the 1999 Year. It claimed that amount as the amount of its loss as a result of its investment in the WP Syndicate. That amount represented 2% of the total deductions of $27,500,000 claimed by the investors in the WP Syndicate.[16]
[15] T documents; T8 at 181-187
[16] T documents; T19 at 424-425
On 22 December 2003, Archer Property, as trustee of the Woodchester Trust No. 4, and the Commissioner entered a Deed of Settlement in relation to its taxation liability in respect of the WP Syndicate.[17] The Commissioner accepts that, as at 30 June 1999, Archer Property had a 40% interest in the WP Syndicate. In the following years up until the year ending 30 June 2006, it had a 2% interest in that syndicate. In his objection decision dated 9 July 2015, the Commissioner found the following facts and allowed the following deductions:
[17] T documents; T19 at 419-425
Year of Income
Date of payment according to contract
Amount paid
Archer Property’s interest in WP Syndicate
Amount allowed as a deduction
1999
30 June 1999
$5,750,000[18]
40%
$2,300,000
2000
31 October 1999
$7,250,000[19]
2%
$145,000
2001
1 July 2000
$2,500,000[20]
2%
$50,000
2006
April 2006
$11,500,000
2%
$230,000
Total
$2,725,000
[18] The total paid by WPS Pty Ltd on 30 June 1999 in respect of the deposits on the Contract of Sale and the Purchase of Business Agreement: see [8], [9] and [11] above.
[19] This sum is made up of the balance of the purchase price payable under cl 2.2.2 and 1.11 of the Purchase of Business Agreement ($5,510,000) together with the amount of $1,740,000 payable on the Settlement Date under the Contract of Sale: see [8] above.
[20] This is the First Post Settlement Amount under the Contract of Sale: see [8] above.
Archer Property: resolutions dated 30 June 2006 regarding distribution of income of Woodchester No. 4 Trust, income returned by it and TVKS and Commissioner’s assessments
A. The resolutions
On 30 June 2006, Archer Property made a series of resolutions as trustee of the Woodchester No. 4 Trust. It did so through its sole director, Martin. The first of those resolutions related to the income of the Trust Fund when it resolved:
“Income of the trust fund:
In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2006 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust.”[21]
[21] T documents; T23 at 445
On 30 June 2006, Archer Property resolved to distribute the income of the Woodchester No. 4 Trust as follows (Archer Property Resolution):
“Distribution of trust income:
It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2006 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is:
Beneficiary
Amount
… [TVKS]
100% of income”[22]
[22] T documents; T23 at 445
Archer Property also made a further resolution on the same day (Archer Property Further Resolution) as follows:
“Variation of income:
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2006 in the following manner:
Beneficiary
Amount
… [Carson Underwriting Pty Ltd]
100% of income”[23]
[23] T documents; T23 at 445
As at 30 June 2006, the Balance Sheet for the Woodchester Trust No. 4 showed a profit of $10,374,993.[24] That profit is also shown in the Balance Sheet, a distribution to the beneficiaries in the same amount.[25]
B.Returns by Archer Property and TVKS and the Commissioner’s assessments regarding the 2006 year
[24] T documents; T22 at 443
[25] T documents; T22 at 444
TVKS lodged her return for the year of income ended 30 June 2006 (2006 Year) on 20 December 2016. She declared assessable income of $9,000 but did not return any amount as a distribution from a trust.[26] On 25 January 2007, the Commissioner of Taxation (Commissioner) assessed TVKS’s income tax on the basis that her taxable income was $9,000.[27]
[26] T documents; T27 at 455 and ST documents; ST1 at 671
[27] T documents; T28 at 473
As trustee for the Woodchester No. 4 Trust, Archer Property prepared and lodged an income tax return in respect of the 2006 Year on 16 May 2007. It did so on the basis that it had a net income of $676,209 and carried forward losses of $11,053,152.[28]
[28] T documents; T24 at 448 and ST documents; ST2 at 672
By letter dated 14 October 2009, Martin asked that amendments be made to the return lodged in respect of the Woodchester No. 4 Trust as there had been an inadvertent error. Omitting consequential amendments, the main amendments Martin wished to make were:
Lodged
Should be
“Item 5S
Net income from Business
$676,209
$5,346,209
Item 8
Trust distributions
Nil
$4,762,412
Item 13
Total of items 5-12
$676,209
$10,108,621
Item 17
Net Australian Income
$676,209
$10,108,621
Item 21
Total of Items 17 to 20
$676,209
$10,108,621
Item 22
Tax losses deducted
$676,209
$10,108,621
Item 23
Total net income
Nil
Nil
Item 24
Tax Losses Carried fwd
$11,053,152
$1,620,740”[29]
[29] ST documents; ST6 at 676
Martin referred to a letter dated a week earlier, 7 October 2009, in which he had notified the Commissioner that the Net Income from Business shown for the Woodchester No. 4 Trust should be adjusted by $4,670,000.
Shee Investments: resolutions dated 30 June 2007 regarding distribution of income of Bristol Trading Trust, income returned by it and TVKS and Commissioner’s initial assessments
A. The resolutions
On 30 June 2007, Shee Investments made a series of resolutions as trustee of the Bristol Trading Trust. It did so through its sole director, Martin. The first of those resolutions related to the income of the Trust Fund when it resolved:
“Income of the trust fund:
In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2007 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust.”[30]
[30] T documents; T32 at 481-482
On 30 June 2007, Shee Investments resolved to distribute the income of the Bristol Trading Trust (Shee Investments Resolution):
“Distribution of trust income:
It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2007 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is:
… [Isaacs Investments Pty Ltd]
… [TVKS]
First $3,500,000
The balance”[31][31] T documents; T32 at 481-482
Shee Investments also purported to make a further resolution (Shee Investments Further Resolution) in the following terms:
Variation of income:
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so as to include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2007 in the following manner:
… [Isaacs Investments Pty Ltd]
100%”[32]
[32] T documents; T32 at 481-482
As at 30 June 2007, the Balance Sheet for the Bristol Trading Trust showed a profit of $6,643,498.[33] That profit is also shown in the Balance Sheet, a distribution to the beneficiaries in the amount of $6,643,498.[34]
B.Returns by Shee Investments and TVKS’s returns and the Commissioner’s initial assessments regarding the 2007 year
[33] T documents; T31 at 480
[34] T documents; T31 at 479
TVKS lodged her return for the year of income ended 30 June 2007 (2007 Year) on 30 January 2008.[35] She returned assessable income as $9,500 but did not return any trust distribution.[36] On 22 February 2008, the Commissioner assessed TVKS’s income tax liability on the basis that her taxable income was $9,500.[37]
[35] ST documents; ST3 at 673
[36] T documents; T34 at 488-489
[37] T documents; T35 at 505
On 27 March 2008, TVKS lodged an amended return for the 2007 year. In it, she declared an additional amount of $40,083 as assessable income from franked dividends with franking credits of $12,000. Rather than $9,500 shown as allowances, directors fees and the like shown in her initial return for the 2007 year, TVKS returned a figure of $9,000. The total assessable income was returned as $61,832. She did not return any trust distribution.[38]
[38] T documents; T36 at 508-509
For the 2007 year, Shee Investments prepared and lodged its income tax returns on 12 March 2008.[39] It did so on the basis that it had net income of $6,643,498 and carry forward losses of $2,143,060 resulting in a net taxable income of $4,500,438.[40]
[39] ST documents; ST4 at 674
[40] T documents; T33 at 484-485
The Commissioner’s audit
The Commissioner conducted an audit of Martin and associated entities which focused primarily on the years of income ending 30 June 1999 to 2009 inclusive. An Amended Audit Management Plan (AAM Plan) was prepared as at 13 October 2011. It set out the scope and process of the audit. The AAM Plan noted that, as part of the Preliminary Risk Review, the Commissioner had asked Martin on 27 January 2009 for full details of all of the entities with which he was associated. Martin was asked to provide financial statements in relation to each entity he named. In a response dated 27 April 2009 by Pitcher Partners on his behalf, Martin named the Woodchester No. 4 Trust and the Bristol Trading Trust as discretionary trusts for his benefit and/or members of his family.[41]
[41] T documents; T38 at 533
On 18 August 2009, the Commissioner wrote to Martin care of Pitcher Partners advising that it intended to conduct an audit of his income taxation affairs and those of his controlled entities.[42] In a letter dated 10 November 2010, TVKS wrote to the ATO authorising Pitcher Partners to act on her behalf in relation to its examination of her husband’s income tax affairs and those of entities associated with him.[43]
[42] T documents; T39 at 537
[43] ST documents; ST10 at 690
On the following day, 11 November 2010, the ATO wrote to Pitcher Partners:
“Income Tax: Request for consent to extension of time to amend
In relation to audit of … [Martin]
Income Tax years: Years ended 30 June 1999 to 2008We refer to the telephone conversation between our David McConnell and yourself and the authorisation for you and Pitcher Partners Advisors Pty Ltd on behalf of … [TVKS] in relation to the examination of the income tax affairs of … [Martin] and associated entities. We now enclose a consent to request for extension of time to amend …[TVKS’s] assessment for the year ended 30 June 2006.
Please return the signed and dated consent to this office by Friday 19 November 2010. In the absence of receipt of the signed and dated consent by 19 November 2010, we will need to consider other options to protect the position of the Commissioner of Taxation, such as the issue of an amendment to … [TVKS’s] assessment for the 2006 year.
…”[44]
[44] Exhibit 4
Ultimately, TVKS signed four consents that began with the words:
“In accordance with subsection 170(7) of the Income Tax Assessment Act 1936, … TVKS hereby consents to the request by the Commissioner of Taxation to an extension of the period within which the Commissioner may amend the assessment for the year ended 30 June … under subsection (1) of section 170 of the Income Tax Assessment Act 1936.
This extension of time ends on ….”[45]
[45] T documents; T40 at 539
The dates on which TVKS signed consents in this form in relation to both the 2006 and 2007 years. The dates on which she did so, the years in respect of which she did so and those to which the time was extended were:
Date of consent:
Year(s):
Time extended to:
15 November 2010
2006
1 July 2011[46]
16 June 2011 and
27 June 20112006
24 December 2011[47]
23 November 2011
2006 and 2007
1 October 2012[48]
18 July 2012
2006 and 2007
31 March 2013[49]
[46] T documents; T40 at 539
[47] Initially, an email in the name of TVKS was sent to the ATO on 16 June 2011 stating that she agreed to extend the amendment period in which to issue an assessment for the 2006 year to 24 December 2011: Exhibit 3. She signed a formal document to the same effect on 27 June 2011: T documents; T42 at 547
[48] T documents; T43 at 549-550
[49] T documents; T44 at 551-552
On 20 December 2012, the ATO sent Martin a Position Paper setting out the Commissioner’s position in relation to the losses of the Woodchester No. 4 Trust in the 1999 and 2000 years. That paper also addressed the consequences for TVKS in the 2006 Year. The ATO invited Martin’s comments and views. The period under audit was 1 July 1998 to 30 June 2009.[50]
[50] T documents; T45 at 553-570
The ATO followed its paper with a further Position Paper in relation to the losses of the Bristol Trading Trust in the 2000 year and the consequences for TVKS in the 2007 Year. It was dated 22 January 2013 and again invited Martin’s comments.[51]
[51] T documents; T46 at 571-585
On 19 February 2013, TVKS signed two further consents. One related to the 2006 Year and the other to the 2007 year. Both consented to the Commissioner’s request for an extension of time within which he might amend the assessment. TVKS consented to an extension of the time until 31 May 2013.[52]
[52] T documents; T48 at 589-590
In a letter dated 1 May 2013, the ATO wrote to Pitcher Partners regarding the audit of Martin and associated entities and the adjustments to TVKS’s income for the 2006 and 2007 Years. The letter noted Pitcher Partners’ responses to the Position Papers and advised that the Commissioner’s position had not changed. Reasons for his reaching that conclusion were attached to the letter. The Commissioner did not impose any penalties on TVKS in respect of the tax shortfall for those two years. Shortfall Interest Charges (SIC) would be charged on the additional tax she owed and was calculated from the date the additional tax was originally due until the day before the amended assessments were issued. The Commissioner remitted the SIC in part.[53] Amended assessments for each of the 2006 and 2007 Years would follow shortly, the letter stated.
[53] T documents; T48 at 591-602
The amended assessments issued on 14 May 2013
The Commissioner issued notices of amended assessment to TVKS on 14 May 2013 in respect of both the 2006 and 2007 years.
(1)In relation to the 2006 Year, the Commissioner did so on the basis that TVKS’s taxable income was $10,117,621.[54] He determined that amount on the basis that:
[54] T documents; T49 at 603
(a)Archer Property, the trustee of Woodchester No. 4 Trust, did not incur a tax loss under s 36-10 of Income Tax Assessment Act 1936 (ITAA36) for the 1999 year;
(b)the section 95 net income of the Woodchester No. 4 Trust for the 2006 Year was $10,108,621;
(c)TVKS is presently entitled to 100% of the net income of Woodchester No. 4 Trust; and
(d)Division 6 of ITAA36 applies to include in TVKS’s assessable income the corresponding share of the Woodchester No. 4 Trust’s net income under s 95 of that legislation (section 95 net income).[55]
[55] T documents; T49 at 605 and see Martin’s request for amendment dated 14 October 2009 at [21] above and the Commissioner’s Position Paper at T documents; T45 at 553-569
(2)In relation to the 2007 Year, the Commissioner did so on the basis that TVKS’s taxable income was $3,204,593.[56] He determined that amount on the basis that:
[56] T documents; T50 at 607 and the Commissioner’s Position Paper at T documents; T46 at 571-585
(a)Shee Investments, the trustee of the Bristol Trading Trust, did not incur a tax loss under s 36-10 of ITAA36 for the 2000 Year;
(b)the section 95 net income of the Bristol Trust for the 2007 Year was $3,143,510;
(c)TVKS is presently entitled to 100% of the net income of the Bristol Trading Trust; and
(d)Division 6 of ITAA36 applies to include in TVKS’s assessable income the corresponding share of the Bristol Trust’s section 95 net income.[57]
(3)Shortfall interest charge (SIC) was charged for the 2006 Year in the amount of $2,653,872.11 and for the 2007 Year in the amount of $590,856.05.
[57] T documents; T50 at 609. Under the terms of the SIPL Resolution, all but $3,500,000 of the income of the Bristol Trust was distributed to TVKS. The Bristol Trading Trust’s Balance sheet showed a profit of $6,643,498 and that amount as being distributed to the beneficiaries. The Commissioner took into account a carried forward tax loss of $299 from the 2006 year.
Objection
On 5 July 2013, TVKS objected to the amended assessments.
TVKS’s authorisation
TVKS signed a document dated 26 May 2014 to the effect that she:
“… [TVKS] hereby authorize my husband (and Tax Agent) … [Martin] to act on my behalf in respect of my dealings with the Aust. Tax Office.
…”[58]
[58] T documents; ST11 at 691
Commissioner’s decisions on TVKS’s objections
On 9 July 2015, the Commissioner gave notice that he had allowed her objection in part in relation to the 2006 year. He allowed that part of her objection relating to the calculation of the net income of Archer Property as trustee of the Woodchester No. 4 Trust. The Commissioner disallowed TVKS’s objection in full in relation to the 2007 year. This meant that:
(1)Archer Property was entitled to a deduction of $230,000 in the 2006 year in relation to the Winslow Property Syndicate; and
(2)the amount of $9,878,621 was included in TVKS’s assessable income in the 2006 year as a result of her being presently entitled to 100% of the net income of the Woodchester No. 4 Trust.[59]
[59] T documents; T2 at 33-34 and 36-37
On 18 August 2015, the Commissioner issued to TVKS a further amended assessment for the 2006 year.[60]
[60] T documents; T53 at 647
Disclaimer of entitlement to income
On 15 December 2015, TVKS executed, as deeds, two documents each of which was headed “Disclaimer of Entitlement to Income”. Each was in the same terms with one relating to Woodchester No. 4 Trust and the other to the Bristol Trading Trust:
“I understand and acknowledge that I am one of the beneficiaries of the … [Woodchester No. 4 Trust/Bristol Trading Trust].
I hereby disclaim and reject absolutely any entitlement I have to any interest whatsoever that I may have now or in the future or have had at any time since 1 July 2005, to any income, capital or gift at all from … [Woodchester No. 4 Trust/Bristol Trading Trust].
This disclaimer takes effect on and from 1 July 2005.”[61]
[61] Exhibit E; Attachments 1 and 2.
THE ISSUES
The first set of issues arises from s 14ZZK of the Taxation Administration Act 1953 (TA Act). It requires TVKS to show that the amended assessment issued for each of the 2006 and 2007 years is excessive. Omitting references to franking assessments, which are not relevant in this case, that section provided at the relevant time that:
“On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the objection decision to which the decision relates: and
(b) the applicant has the burden of proving that:
(i)if the taxation decision concerned is an assessment … - the assessment is excessive; or
(ii)…
(iii)in any other case – the taxation decision concerned should not have been made or should have been made differently.”
The consequence is that TVKS has the burden of proving her position with respect to each of the following issues:
(1)Should TVKS be given leave to:
(a)rely on the disclaimer of her entitlements by deeds of disclaimer dated 15 December 2015 attached to her witness statement bearing the same date?
(i)If leave is given, whether the deeds of disclaimer are effective to prevent TVKS’s being presently entitled to the net income of the Woodchester No. 4 Trust for the 2006 Year and for the Bristol Trading Trust for the 2007 Year.
(b)contend that, in purporting to distribute the Income of the Woodchester No. 4 Trust for the 2006 Year to TVKS, the Archer Property Resolution was ineffective as the trust deed only permitted Archer Property to distribute “Net Income”.
(i)If leave is granted, whether the Archer Property Resolution was ineffective to appoint the Net Income to TVKS with the consequence that she does not have any present entitlement to income from the Woodchester No. 4 Trust in the 2006 Year.
(2)Whether the Archer Property Further Resolution and the Shee Investments Further Resolution were effective in preventing TVKS from being presently entitled to a share of the income of the Woodchester No. 4 Trust for the 2006 Year or the Bristol Trading Trust for the 2007 Year.
(3)Whether the Commissioner was out of time to issue amended assessments to TVKS in either or both of the 2006 and 2007 years:
(a)Whether the Commissioner’s power to issue amended assessments under s 170(7) of ITAA36 predicated on his having commenced an examination of her affairs when he requested TVKS’s consent to extend the limited amendment time.
(b)Whether the Commissioner had commenced that examination.
(4)Whether carried forward losses were available to Archer Property in its capacity as trustee of the Woodchester No. 4 Trust in the 2006 Year.
(a)That issue depends on the amounts that were incurred pursuant to two contracts entered on 30 June 1999. One was for the sale of land and construction of a residential complex and the other for the sale of a residential complex.
(b)If the amounts were incurred under those contracts, the parties agree that they were incurred on revenue account and not on capital account.
(5)Whether the shortfall interest charge imposed in respect of the 2006 Year and the 2007 Year should be remitted in whole or in part.
ISSUE 1(a):Should TVKS be given leave to rely on the disclaimers of her entitlements?
The submissions
Mr Broadfoot, now of senior counsel submitted that TVKS should be granted leave to rely on the deeds of disclaimer as she had been, until recently, unaware of the existence of the trust distributions, the trusts or the notices of assessment. Her husband did not tell her about the trust resolutions or the amended assessments issued to her. TVKS cannot be said to have acted with wilful blindness because she has left all of the family’s financial affairs to her husband while she raised their children and now cares for their grandchildren. Her actual knowledge of the distribution is required. Only when she became aware of them and advice was sought did she become aware that she could disclaim the distributions. Once she had become aware, she acted reasonably promptly.
On behalf of the Commissioner, Mr Linden of counsel submitted that leave should not be given. His first submission focused on the prejudice to the Commissioner arising from TVKS’s delay in making the disclaimers. If effect were to be given to the disclaimers, the Commissioner’s ability to recover tax from either or both of Archer Property and Shee Investments would be prejudiced. Their liability would arise on the disclaimed income under s 99A of ITAA36 in the 2006 Year for Archer Property and in the 2007 Year for Shee Investments. That is eight or nine years since the income was derived and there is no evidence that either has retained funds sufficient to meet any such liability. Liability would not fall on the default beneficiaries in that period as their entitlement would only arise after the 2006 Year in the case of Archer Property and 2007 in the case of Shee Investments.
Mr Linden also submitted that regard should be had to the context in which TVKS made her disclaimers. Part of that context was formed by the eight years that had passed since the Archer Property Resolution was made and the nine since the Shee Investments Resolution was made. In that time, TVKS had variously authorised her husband, Martin, Pitcher Partners and Mr Young to act on her behalf first in relation to the objections she lodged against the amended assessments and then in relation to the application to the Tribunal. Relying on her statement, Mr Linden submitted that she chose not to acquaint herself with her husband’s business activities or the family’s financial affairs.
Mr Linden also relied on a second basis in support of his submission that TVKS’s disclaimers were ineffective. That basis was that TVKS had already received the benefit of the distributions.
The authorities: scope of power under s 14ZZK(a)
I have looked first to the scope of my power under s 14ZZK(a). It is expressed in terms that suggest that Parliament intended that it be an unfettered power. Every statutory power, however, is implicitly fettered in that it must be exercised within the boundaries set by the enactment conferring it. Those boundaries are found within that enactment where they are either expressly stated or identified by reference to the subject matter of the enactment under which the decision is made as well as from its object and underlying policy.[62]
[62] Alexandra Private GeriatricHospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265 at 375; 272-272 per Woodward J and see also Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24; 66 ALR 299; 60 ALJR 560; Gibbs CJ, Mason, Brennan, Deane and Dawson JJ at 39-40; 308-309; 565 per Mason J with whom Gibbs CJ and Dawson J agreed
The boundaries within which the power granted by s 14ZZK of the TA Act have been considered by the Full Court of the Federal Court in Lighthouse Philatelics Pty Ltd v Commissioner of Taxation[63] (Lighthouse Philatelics), to which the Full Court referred in Commissioner of Taxation v Ramsden[64] (Ramsden). The Full Court considered generally the Commissioner’s powers and duties when considering an objection:
“… The Commissioner cannot be said to be confined in the course of considering the Taxpayer’s ‘objection’ to the matters raised by the taxpayer in that ‘objection’. He has an obligation to administer the Act and may determine to allow the objection for grounds totally unrelated to those raised by the taxpayer, if that be the correct course, just as he could form the view, based on a reconsideration of the matter, that the assessment should be confirmed for reasons which he had not previously considered. His task is to ensure that the correct amount of tax is paid, ‘not a penny more, not a penny less’.”[65]
[63] (1991) 32 FCR 148; (1991) 103 ALR 156; 22 ATR 707; 25 ALD 257; 91 ATC 4942; Lockhart, Burchett and Hill JJ
[64] [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136
[65] (1991) 32 FCR 148; (1991) 103 ALR 156; 22 ATR 707; 25 ALD 257; 91 ATC 4942 at 155; 154; 714-715; 263; 4948
The Court and the Tribunal were in a different position for they were precluded by what was then s 190(a) of ITAA36 from going beyond the taxpayer’s grounds of objection unless they permitted otherwise. That provision is now found in s 14ZZK(a) of the TA Act. Speaking of it in its earlier form, the Full Court said:
“… [t]he whole statutory background leads to the conclusion that the natural meaning of the words used should be given effect to. The amendment to s 190(a) … was of a remedial kind and thus must be construed in accordance with well-established principles relating to ameliorating legislation. It follows that the Tribunal or the court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and ‘excessive’ for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process.
The decision whether to allow an amendment 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 s 190 should not be considered with reluctance, but on its merits.
One further comment may be made. To refuse to allow the amendment of the grounds of objection on the basis that the failure to claim deductions otherwise properly allowable was a mistake of the taxpayer’s accountant would involve an error of law. … So too would an error of law be involved in refusing to permit a taxpayer to rely on new grounds because he had commercially adopted a structure involving two companies ‘with tax and commercial objectives in mind’. A decision on that basis would take into account irrelevant considerations. …”[66]
[66] (1991) 32 FCR 148; (1991) 103 ALR 156; 22 ATR 707; 25 ALD 257; 91 ATC 4942 at 156; 164; 714-715; 263; 4948 The two companies to which the Full Court referred had been established well before the Commissioner had issued his assessment and so before the taxpayer lodged its objection.
A few weeks later, Davies J considered the same issue in Gilder v Federal Commissioner of Taxation[67] (Gilder) when Mr Gilder appealed to the Federal Court against assessments issued by the Commissioner. His Honour began by acknowledging the Full Court’s judgment in Lighthouse Philatelics and continued:
“ The discretion is unfettered. But that is not to say that regard should not be had to the time limits imposed by the Act. The Act gives effect to a policy that taxation affairs should be dealt with efficiently and promptly. There are time limits for the lodgement of returns (s 161), for the lodgement of objections (s 185), for the lodgement of requests for reference (s 187), and upon the Commissioner for the amendment of assessments (s 170). This policy should be taken into account. And so also should the policy of this court that proceedings in the court be handled efficiently. These present proceedings, like other proceedings in the court, have been the subject of directions hearings in which a judge has given directions to ensure that the parties were aware of the legal and evidentiary issues which would arise at the hearing. In such circumstances, the court would rarely permit additional and different issues to be raised at the hearing, certainly not unless good reason for doing so has been shown, which in the present case has not been done.
I take into account not only the fact that the proposed grounds raise matters entirely different from those presently before the court but also the fact that they do not stand out as matter which, in the interests of justice, must be considered by the court. …”[68]
[67] (1991) 22 ATR 872; 91 ATC 5062
[68] (1991) 22 ATR 872; 91 ATC 5062 at 884; 5072. Like Lighthouse Philatelics, this case preceded the repeal of s 190(a) and the enactment of s 14ZZK(a) by the Taxation Laws Amendment Act (No. 3) 1991.
I refer also to the case of McLean and Dean v Commissioner of Taxation[69] (McLean and Dean). The Tribunal had declined to give leave to the taxpayers to amend the grounds of their taxation objections to include a ground that the relevant retention payments constituted exempt income on the grounds that they constituted income by way of the provision of fringe benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTA Act). In declining to grant leave to amend, the Tribunal took into account the late stage at which the application had been made, the detailed procedures that had been followed in preparing the matter for hearing including the exchange of Statements of Facts and Contentions, the fact that evidence had already been given when the ground was raised in final submissions and that the taxpayers had legal representation.
[69] [1996] FCA 1459; (1996) 66 FCR 106; 32 ATR 647; 96 ATC 4443; Northrop J
Northrop J decided that the Tribunal had been in error in refusing to allow the amendments sought by the taxpayers. He underlined the unfettered nature of the discretion which had been conferred to overcome a mischief resulting from injustice. The Tribunal had placed a fetter in the nature of a straight-jacket manufactured from its practice and procedure. His Honour continued:
“… The practice and procedure should be seen as facilitating the identification of the nature and determination of the issues in dispute. Practice and procedure is not an end in itself. The interests of the litigants are to be determined by applying justice between them, not on whether their representatives have followed the practices and procedures of the Tribunal. The substantial issues must be determined.”[70]
[70] [1996] FCA 1459; (1996) 66 FCR 106; 32 ATR 647; 96 ATC 4443 at [43]; 116; 656; 4452
The taxpayers had objected on the basis that the retention payments were not considered as income in any sense of the word and were not taxable. Northrop J considered that it should have been apparent to the Commissioner that the retention payments could be exempt income. It was strange that neither the Commissioner nor the Tribunal had considered the possibility of the retention payments being fringe benefits under the fringe benefits law. Whether the taxpayers’ legal representatives were at fault or not, their failure to comply with practice and procedures of the Tribunal should not prevent the taxpayers themselves from having their objections determined according to law. The case was very different from that considered by Davies J in Gilder where the proposed grounds were completely different from those originally put forward. In McLean and Dean, the reality was that the grounds sought to be added formed part of the original grounds i.e. whether the retention payments formed part of the assessable income of each taxpayer and, in particular, do they constitute exempt income as fringe benefit payments.[71]
[71] [1996] FCA 1459; (1996) 66 FCR 106; 32 ATR 647; 96 ATC 4443 at [44]-[45]; 116-117; 656; 4452
Consideration
Unlike the case of McLean and Dean, the grounds of objection as originally made were not drafted in terms that were sufficiently broad to encompass an objection based on TVKS’s having disclaimed the benefit of the distributions. Unlike that case, the factual basis that existed when the original grounds of objection were made may have changed through TVKS’s own actions. The grounds on which TVKS seeks to rely are based on an assumption that her actions have in fact changed that factual basis.
Whether or not the interests of justice require me to give TVKS leave in those circumstances led me to consider whether or not her actions did in fact change that factual basis. I have done that later in these reasons where set out my findings regarding TVKS’s delegation of responsibility for her financial affairs to her husband, Martin. I have found that she has done so without fetter upon his powers to act on her behalf. In addition, I have set out the course of events taken by the ATO. Even if I were to assume that Martin knew nothing of the distributions to TVKS before the ATO issued its position papers in December 2012 and January 2013, I have found that is the latest time at which Martin would have been aware that the ATO regarded distributions to TVKS as taxable income in her hands. Despite that knowledge and despite having unfettered authority as her husband in relation to her financial affairs, Martin took no action on behalf of TVKS to disclaim those distributions. He took no action as her tax agent after his appointment in that role on 26 May 2014. TVKS took no action until 15 December 2015 when she executed the disclaimers and attached them to her witness statement of the same date in these proceedings.
If effective, the disclaimers would have retrospective effect so that TVKS would be regarded as never having received the distributions. That would mean that the disclaimed income would be taxable in the hands of the trustees, Archer Property and Shee Investments, under either ss 99A or 99 of ITAA36. They would not be taxable in the hands of the default beneficiaries for their entitlements would only arise from 15 December 2015 when TVKS executed the disclaimers. The default beneficiaries would have no entitlements in the 2006 Year and the 2007 Year. This is consistent with the conclusion reached by Tamberlin J in Nemesis Australia Pty Ltd v Federal Commissioner of Taxation.[72]
[72] [2005] FCA 1273; (2005) 150 FCR 152; 225 ALR 576; 61 ATR 119; 2005 ATC 4881 at [51]; 164; 587; 129-130; 4890-4891
Whether or not the Commissioner will be able to recover from Archer Property or Shee Investments is not a matter on which I can make a finding. Despite that, it remains an open question and not one that can be answered by saying that the Commissioner should have issued alternative assessments to the trustees and to TVKS. The Commissioner is entitled to assess tax on the basis of the affairs of a taxpayer as they stand at a particular time while being aware that, in some circumstances, a taxpayer may change those affairs quite legitimately by disclaiming an entitlement. Until that time, the Commissioner is entitled to assume that affairs are as they seem and is not required to issue alternative assessments to cover all possible courses of action that might be taken by a taxpayer.
As I set out below, the law relating to disclaimers limits the circumstances in which they may be made. To permit TVKS to extend the grounds of her objection so that she may rely on the disclaimers would, for the reasons given in the previous paragraph, prejudice the Commissioner in carrying out his statutory functions to administer the taxation laws. It would do so in circumstances in which TVKS, at least through Martin and her advisers, has been aware of the distributions for at least three years and, until December 2015, has taken no steps to execute disclaimers, to raise the distributions as a ground of objection or to pursue it in her application for review lodged in September 2015. In the course of its investigations, the ATO has conducted its investigations on the basis of the distributions as made by the trustees and Martin, to whom TVKS has delegated responsibility for her affairs, has been fully aware of their progress. It would be not be in the interests of justice to give TVKS leave to extend the grounds stated in the objection decision which itself reflected the grounds of objection she had previously made. In none of them has she touched on the issue of disclaimer and, as I have already indicated and for the reasons I set out in the following section, TVKS has no basis on which she can make out the objection.
ISSUE 1(a)(i): Could TVKS disclaim her entitlements?
Although I have decided not to give TVKS leave to extend the grounds on which she relies, I have considered whether her disclaimers were effective. The findings of fact that I have made in this section of my reasons as to the course of events have informed my consideration in relation to the previous issue. I also note that TVKS has submitted that the Archer Property Resolution distributing 100% of the income of the Woodchester No. 4 Trust to her has been invalidly made. For the reasons I give below, I have concluded that the resolution was validly made. Therefore, I have considered the disclaimer in relation to any distribution made to TVKS from the Woodchester No. 4 Trust in the 2006 Year among the disclaimers made by TVKS.
The evidence
Management of TVKS’s finances
TVKS’s evidence is to the effect that she has always left the family’s financial affairs in the hands of her husband. She uses a supplementary credit card tied to a credit card issued to him and he pays the account when the statement is issued to him. TVKS and Martin have a joint cheque account to which each is a signatory. The cheque account and the credit card are her only means to finance her expenses and those of her family.
TVKS gave evidence that she does not know the means by which the cheque account is kept in funds or the sources from which the money is drawn to pay the credit card accounts. As far as she is aware, she said, credit card and the cheque account are the product of her husband’s business activities.[73]
[73] Exhibit E at [6]
Martin said in his statement that, at all times since at least the mid 1980s, he has attended to the taxation affairs of his wife, himself and of the various corporations and trusts that he controls. He does not generally discuss his business affairs with his wife as she has little or no interest in them. His wife has access to a credit card in her name but using a credit facility in his name. She also has access to a cheque account. Martin funds those two accounts from the Martin Family Trust and has done so since at least the mid 1980s. The Martin Family Trust derives its income from consultancy and management fees from the services that he and others provide. None of the funds in those accounts has been derived from either the Woodchester No. 4 Trust or the Bristol Trading Trust.[74]
[74] Exhibit F at [9]-[10]
Martin gave an example of what he described as “… the complete trust the applicant has put in me when it comes to the financial affairs of our family. …”.[75] That example related to her having signed an authority for Pitcher Partners to act for her in relation to the audit. The authority had, he said, been prepared by Pitcher Partners in consultation with him as his wife’s tax agent and she simply signed it when he asked her to do so.[76]
[75] Exhibit G at [2]
[76] Exhibit G at [2]
Management of TVKS’s taxation affairs
With regard to the ATO’s investigation of her taxation affairs, TVKS explained that:
“7. I have been aware for some time that the Australian Taxation Office (ATO) has been looking into … [Martin’s] financial affairs but I had no idea as to how I could have somehow been involved in this examination. I have never had been interviewed by an ATO officer and really only became aware of my involvement through the fact that … [Martin] asked me on a number of occasions sign forms which I now know were intended to enable the ATO to continue to look at my personal tax affairs longer than it would have otherwise been able to do.
8. Back in late 2014 … [Martin] asked me to sign some form of authority enabling him to speak with ATO officers on my behalf but, consistent with what has been going on for many years dating back to when we got married in 1979, … [Martin] did not explain exactly what was going on at that time. I do remember telling him that I don’t want anything to do with the ATO and that I don’t want to be involved in any form of dispute because, from my perspective, I had nothing to do with the financial side of our relationship.
9. It was not until I met with my tax barrister and tax solicitor on 28 October 2015 that I saw copies of amended assessment notices issued by the ATO to me showing that I was liable to pay the ATO considerable sums of money for the 2007 and 2008 income years. I had been unaware of the amended assessments until this time.
10. I now know the disputes relate to two trusts but although I have heard the word ‘trust’ mentioned on a number of occasions by … [Martin], I don’t have any real understanding as to what a trust is. I was specifically asked by my lawyers at the meeting on 28 October 2015 whether I had ever heard of a company called … [Archer Property Pty Ltd] … or the … [Woodchester No. 4 Trust] and my answers were ‘no’ as they were when I was whether I had ever heard of a company called … [Shee Investments Pty Ltd] or a trust called the … [Bristol Trading Trust]. I was unaware of the existence of these trusts or … [Archer Property] or … [Shee Investments] until they were drawn to my attention during a conference that my barrister requested me to attend after this proceeding was commenced.
11. When I was told that the reason I owe the ATO the amounts shown on the amended assessments issued to me related to me being a beneficiary of those two trusts, told my tax barrister and tax lawyer and … [Martin] that I wanted absolutely nothing to do them and that as far as I knew I had never received any money from them.
12. It was explained to me that if I have never received an actual distribution from either of those trusts and don’t want to in the future then I may be able to disclaim my interest in them and that the disclaimers could operate from a point of time prior to when the ATO has argued that I somehow became entitled to distributions from those trusts. After considering that explanation, I decided I wished to disclaim my interest and reject absolutely any entitlement to a gift of any kind from either trust. I was unaware until the recent meeting with my barrister that distribution resolutions had been made to distribute income to me.”[77]
[77] Exhibit E
These issues were examined further in cross-examination by Mr Linden. TVKS agreed that she had done typing, filing and end of month accounts for Martin on a part-time basis. He was her employer and would give her a cheque book to write cheques to pay for the bills that he gave her. TVKS did that work from his office at home. In her return for the 2006 Year, TVKS agreed that the figure of $9,000 was shown at Item 2 for allowances, earnings, tips, directors fees, etc. When asked what she had received that sum for, she replied that she could not tell and nor could she tell what the same amount in the return for the 2007 Year had been paid to her for.
When shown the letter of consent dated 10 November 2010 and addressed to the ATO, TVKS acknowledged that she had signed it. She had “probably” read it before she signed it.[78] Although the letter stated that she authorised Pitcher Partners to act on her behalf in relation to the examination of Martin’s affairs and those of entities associated with him, TVKS said that she did not know that they are tax accountants. She knew nothing about them. As for the ATO, she may have noticed that the letter was directed to it but did not take any notice of it. She chose not to ask Martin what the letter meant because she was not interested in whether she had a liability or not.[79]
[78] Transcript at 39
[79] Transcript at 40
TVKS’s attention was drawn to the consent to the Commissioner’s request that she had signed on 15 November 2010. In it she had given her consent to an extension of the period within which the Commissioner might amend the assessment for the 2006 Year under s 170(1) of ITAA36. When Mr Linden suggested to her that, when she signed the document, she suspected that she might have a tax liability, TVKS replied that she did not know what it was about. The following exchange then took place between Mr Linden and TVKS:
“But you knew it related to the Commissioner of Taxation? --- I sign things without – I didn’t read it. I may have looked at it but I didn’t understand so – I trust my husband so if he asked me to sign it, I would sign it.”[80]
[80] Transcript at 41
TVKS agreed that she had signed a similar consent dated 24 December 2011.[81] She said that she had probably not read it before she signed it. While she might have seen that it related to the Commissioner, she did not question it and chose not to ask her husband about it. TVKS gave evidence to the same effect in relation to the remaining consents that she had signed. TVKS did not agree with Mr Linden’s suggestion that those consent documents gave her an idea that she could have become involved in an examination of Martin’s affairs. She thought that she knew late in 2014 that something was going on with her husband but she did not know that it involved her. When asked whether she did not want to know about the audit, she replied that her “… husband never discussed those things and I didn’t have any interest in them, so no.”[82] As to the document dated 26 May 2014 authorising Martin to act on her behalf in her dealings with the ATO, the following exchange took place between Mr Linden and TVKS:
[81] T documents; T42 at 547
[82] Transcript at 43
“And did you read it before you signed it? --- Probably.
And you were aware, therefore, that he was dealing with the Tax Office on your behalf? --- Yes, I can see this, yes.
And you were aware, therefore, there was some dispute with the Tax Office? --- No.
Is that right? ---- No.
Just that he was dealing on your behalf with the Tax Office? --- Yes.
You said to your husband that you don’t want anything to do with the ATO, and you don’t want to be involved in any form of dispute, is that right? --- Yes, I did say that. Yes.
So you were aware, when you said that, that there was a dispute? --- I can’t recall whether there was at that time or later.”[83]
[83] Transcript at 43
Martin gave evidence regarding the basis on which he had prepared TVKS’s returns. In his statement, he explained that:
“When the Notices of Amended Assessment dated 14 May 2013 were received, they were sent to my business address … I did not inform my wife of their existence. Rather, I instructed that objections be lodged on her behalf without informing my wife that I was doing so. Nor did I inform her when an Objection Decision was made. My wife was unaware, to the best of my knowledge, of the existence of the … [Woodchester No. 4 Trust], the … [Bristol Trading Trust], the Amended Assessments and the Objection Decision until late October 2015 when the barrister acting for her requested a conference and advised that she should attend. At that point, to the best of my knowledge, she was shown for the first time the Notices of Amended Assessment.”[84]
[84] Exhibit F at [11]
Martin also referred to his having set up an email account in his wife’s name so that he could respond on 16 June 2011 to the ATO’s request for her consent to extend the amendment period relating to the assessment issued to her for the 2006 Year.
Martin said that Pitcher Partners had never conveyed to him that the ATO was investigating TVKS’s taxation affairs. Martin had earlier acknowledged that he knew that the ATO was investigating his affairs and those of his associated entities. He had also acknowledged that the ATO had requested his wife’s consent to its extending the limited amendment period in relation to her assessment for the 2006 Year. Martin did not agree with the proposition that the ATO’s request showed that it was investigating her taxation affairs. He responded:
“No, not – not quite. At the time I was going through an extensive audit of which you were aware and I did not at any stage connect the dots that she would be caught in the web as she has been.”[85]
[85] Transcript at 52
Martin instructed Mr Young to prepare and lodge an objection to the amended assessments issued to TVKS for the 2006 and 2007 Years. Mr Linden and he had the following exchange regarding his role in that decision:
“You believed you had authority from TVKS to engage a lawyer to act on her behalf? --- I believe I was in charge of matters and I was dealing with it. I didn’t ask her for express authority.
But you believed you had that authority? --- I believed as a tax agent and her husband, yes.
And you approved the grounds of objection? --- Yes, I believe so.”[86]
[86] Transcript at 55
Consideration
Mr Broadfoot referred me to the judgment of the Full Court of the Federal Court in Ramsden[87] in support of his submission that TVKS was entitled to disclaim the distribution made from each of the trusts. I will return to that in the following section of my reasons but, for the moment, accept that, in certain circumstances, a beneficiary may disclaim an entitlement of this kind.
[87] [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136 at [31]; 492-493; 4144; Lee, Merkel and Hely JJ
The authorities: the right to disclaim and its boundaries
Turning to the case of Ramsden, I note that it was decided at first instance by Spender J, who considered disclaimers in the context of s 190(a) of ITAA36. The objections to an assessment issued to the taxpayers had been lodged on 19 September 2000, the objection decisions were given on 26 April 2001 and an appeal to the Federal Court lodged on 5 June 2001. Each of the taxpayers executed a deed of disclaimer on 17 April 2001. In his judgment, Spender J accepted the following propositions:
(1)“… [A] beneficiary of a discretionary trust may disclaim for each exercise of the discretion, that is to say, the fact that the beneficiary has accepted benefits previously does not bar a disclaimer in respect of later exercises of discretion …”[88]
[88] Ramsden v Federal Commissioner of Taxation [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [71]; 56; 4672
(2)“… [A] beneficiary has entitlement to income under a trust for the purposes of s 97 of the ITAA 1936 from the moment it arises, notwithstanding that the beneficiary has no knowledge of it and might be able later to disclaim entitlement.”[89]
[89] [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [72]; 57; 4672 The relevant provisions of Division 6 of Part III of ITAA36 are attached at Annexure A
(3)A person is entitled to disclaim an appointment of income whether as a discretionary beneficiary or whether taking in default of appointment by the trustee.[90]
[90] [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [75]; 57; 4672
(4)A beneficiary may not disclaim if he or she has accepted the distribution:
“… A beneficiary will be taken to have accepted the interest where the beneficiary is made aware of it and does not, before a reasonable time has elapsed, seek to disclaim it … The act of disclaimer must, usually, occur before any act constituting assent to the distribution. …”[91]
(5)A mere statement that a person is a beneficiary of a trust does not equate with acceptance of an interest.[92]
(6)“In Re Paradise Motor Co Ltd [1968] 1 WLR 1125, it was said (at 1133):
‘ In order that someone should be treated as having, by words or actual conduct, disclaimed a gift, it must, I think, be shown that he possessed reasonably full information as to the nature and amount of the gift. Here, Johns, like many before him, proved ready to pocket his pride when he learned on the amount at stake.
The Court of Appeal said (at 1142):
Pennycuick J … considered that, for disclaimer of a gift to be effective as such, the donee must possess reasonably full information as to the nature and amount of the gift. We do not think, with respect, that the generalisation is of universal application, and we do not think that it applies here. The message to Watson was quite plainly couched in language which showed the he was in no circumstances accepting entitlements to any shares.”[93]
[91] [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [80]; 58; 4673-4674
[92] [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [79]; 58; 4673
[93] [2004] FCA 632; 56 ATR 42; 2004 ATC 4659 at [78]; 58; 4673
On appeal,[94] the Full Court of the Federal Court considered whether the taxpayers had effectively disclaimed their interests. The Full Court began with reference to the principles discerned by Spender J and then summarised the position:
“ Until disclaimer, a beneficiary’s entitlement to income under a trust is operative for the purpose of s 97 of the ITAA 1936 from the moment it arises from notwithstanding that the beneficiary has not knowledge of it …. A beneficiary may disclaim an entitlement on its coming to his or her knowledge. At law an effective disclaimer operates retrospectively, and not merely from the time of disclaimer.
To be effective, a disclaimer may constitute an absolute rejection of the gift, as a qualified disclaimer may constitute a form of assent to the gift. Any gift is the donor’s gift, and must be assented to or disclaimed on the donor’s terms. Thus a gift of residue by will, although comprising many assets, can only be disclaimed in its entirety. … A disclaimer operates only in relation to the gift disclaimed. …”[95]
[94] Commissioner of Taxation v Ramsden [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136; Lee, Merkel and Hely JJ
[95] [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136 at [30]-[31]; 492; 4144
Later, the Full Court added:
“ A donee may indicate acceptance of a gift by positive conduct. In addition, if a donee knows of a gift, and does not disclaim it within a reasonable period having regard to the circumstances of the particular case, the donee is ordinarily treated as tacitly accepting it: JW Broomhead (Vic) Pty Ltd (In Liq) v JW Broomhead Pty Ltd [1985] VR 891 at 930-931. In that case McGarvie J pointed out that the significance of inactivity over time is that it may operate in an evidentiary way to found an inference that the beneficiary has accepted the gift. …”[96]
[96] [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136 at [53]; 496; 4147
The first step in determining whether a beneficiary has lost the right to disclaim a gift is to identify that gift that he or she has been given. In Ramsden, the Full Court identified the gift to have been made under cl 3(e) of the trust deed. It was so much of the net income of the trust fund for each accounting period that was not the subject of a determination under cl 3(b) of that same deed. It was held in trust for the persons described in cll 4(a), (b) and (c) of the deed. The first to take were descendants of a specified beneficiary. There were four in all, including Ms Ramsden, who took in equal shares as tenants in common. That was a gift made on the execution of the trust deed and not on the exercise of any discretion by the trustee at a later stage. The trust deed had been executed on 1 May 1981 and so that was the date of the gift.
The Full Court then turned to the time at which the beneficiaries became aware of the gift made by cl 3(e) of the trust deed. In the absence of any other evidence, it thought that an inference was available that they became aware of the gift shortly after 19 July 2000 when the Commissioner gave each a notice of the assessment. In the alternative, the Full Court said:
“… the probabilities are that the respondents (if only by their advisers) became aware of that gift made by the time that the notices of objection against the amended assessments were lodged on 19 September 2000. In any event, the respondents (if only by their advisers) must have known that the gift at the end of April 2001 when the Commissioner gave his decision on the objection. …
Thus from September 2000, or April 2001, the respondents had to determine whether they wished to disclaim their interests under cl 3(e), such a disclaimer having effect from the commencement of the trust. Whether the respondents wished to accept the entitlement which accrued to them for the year ended 30 June 1996 was not the question. They had to determine, within a reasonable time from September 2000 or April 2001, whether they would renounce the vested interest they had in the annual income of the trust for the duration of the trust. The fact that the respondents were then contesting whether cl 3(e) had been enlivened in relation to the year ended 30 June 1996 is beside the point.”[97]
[97] [2005] FCAFC 39; (2005) 58 ATR 485; 2005 ATC 4136 at [59]-[60]; 497-498; 4148
The Full Court then found that the period of three years between September 2000 or April 2001 and 8 October 2003 was well in excess of a reasonable period within which to disclaim their entitlements under cl 3(e). Their failure to do so until the day before the trial before Spender J led to an inference that they were reluctant to do so. Limited and ineffectual disclaimers had been made in April 2002 and October 2003. They were consistent with an intention not to disclaim their entire interests in the trust income and consistent with an implied acceptance of the gift. Therefore, there was no valid disclaimer.
McGarvie J considered a related issue in JW Broomhead (Vic) Pty Ltd (In liquidation) v JW Broomhead Pty Ltd[98] (Broomhead). Mrs Wood was one of five persons named as a beneficiary under a unit trust of which JW Broomhead (Vic) Pty Ltd (BPL) was the trustee. BPL carried on business as a builder and did so as trustee of the unit trust. Under the trust deed, 24% of the units were attributed to her. When BPL resolved to go into a creditors’ voluntary winding up, the liquidator brought proceedings against the beneficiaries. The liquidator claimed that, as BPL had conducted its business as trustee for the beneficiaries, it was, to the extent that BPL’s assets were insufficient to cover its liabilities, entitled to be indemnified by those beneficiaries personally against liabilities incurred in carrying on that business.
[98] [1985] VR 891
McGarvie J accepted the principle that a beneficiary under a trust deed may disclaim a beneficial interest but may lose that right by inaction, for silence may amount to acceptance of that interest.[99] With regard to Mrs Wood’s disclaimer, his Honour made the following findings:
“ I accept the evidence of Lynette and Graham Wood that she knew nothing of her beneficial interest or this action until a few days before she gave her evidence. At the earlier relevant times she left her financial affairs to her husband and he relied mainly on Mr. Calver to look after his and his wife’s affairs. However, I do not regard them on the evidence as having authority to commit Mrs. Wood in respect of the new and unexpected beneficial interest that became available to her pursuant to the trust deed. By her actions in opposing the claim in this action since she knew of the pleadings, she has ratified what her legal representatives had alleged in the deed and has thus disclaimed the beneficial interest which was available to her.”[100]
[99] [1985] VR 891 at 931-932
[100] [1985] VR 891 at 932
Mr Broadfoot drew my attention to the decision of Senior Member McCabe, as he then was in Re Applicant and Federal Commissioner of Taxation[101] (Case [2008] AATA 927). He found that the Commissioner had raised a default assessment against the taxpayer under s 167 of ITAA36 because of his failure to disclose trust distributions as part of his assessable income in 2002. Senior Member McCabe accepted that the taxpayer had no personal knowledge of his interest in the trust or the distributions until shortly before he disclaimed his entitlement. The date of that default assessment is not given in the reasons but it is apparent that the taxpayer lodged an objection. In August 2006, he instructed a solicitor to represent him in discussions with the ATO. It is not clear whether he did that before or after he lodged the objection. What is clear is that Senior Member McCabe found that, during those discussions with the ATO, the solicitor became aware of the taxpayers’ interest under the trust. He also found that the solicitor never communicated his knowledge to the taxpayer. Relying on the principles expressed by Mason J in Sargent v ASL Developments Ltd[102] (Sargent), Senior Member McCabe accepted that the solicitor was under a duty to communicate to the taxpayer the information that he had learned about his interest under the trust. That meant that the taxpayer was “fixed” with the solicitor’s knowledge and his actions in disclaiming the entitlement were assessed from a date in 2006 but after August 2006 when the taxpayer had instructed the solicitor.[103]
[101] [2008] AATA 927; (2008) 73 ATR 675
[102] (1974) 131 CLR 634; 48 ALJR 410; 4 ALR 257 at 658; 420; 276
[103] [2008] AATA 927; (2008) 73 ATR 675 at [8]-[12]; 677-678
Mr Broadfoot submitted that I should not find the reasoning in Case [2008] AATA 927 to be persuasive. The case of Sargent, on which that reasoning relied, was dealing with a very different situation, he submitted, and that took it outside the circumstances such as those in Case [2008] AATA 927. In Sargent, two groups, the Sargents and the Turnbulls, agreed to sell to ASL Developments Limited (ASLDL) three parcels of land that adjoined each other. A clause in each contract provided that either party would be entitled to rescind the contract if it were established prior to completion of the contract that, at the date of the contract, the relevant property was affected by any planning scheme or proposal otherwise than a planning scheme or proposal disclosed in a schedule to the contract. The schedule specified that the property was affected as shown in a certificate attached to the schedule. No certificate was attached. At all material times including the date on which the contract was signed, the property was affected by planning schemes. At the date of the contract the Sargents knew of the planning schemes. The Turnbulls’ solicitors knew of them but there was a question whether the Turnbulls did. After the date of the contract and before completion, the vendors received from ASLDL payments of interest, instalments or principal and increased rates. They also joined with ASLDL in bringing the land under the operation of the Real Property Act 1900 (NSW).
Even if WP Syndicate did not obtain approval for itself, it is clear from cl 3.6 that Osborne Properties would hold certain other approvals and assets, being vital to the operation of the business, in trust for WP Syndicate. If the approvals were still not forthcoming within 12 months of the Completion date, the WP Syndicate would be obliged under cl 3.6.2 to dispose of the assets and property.
That arrangement does not take from the fact that the parties agreed to certain things on Completion Day. For Osborne Properties’ part, these were all matters that were within its control to deliver. It is apparent that, whether or not the WP Syndicate had all of the approvals it required was of no matter. There were arrangements in place if the WP Syndicate did not obtain the necessary approvals as I have said. Provided it had used its best endeavours to obtain them, its failure to obtain them was not taken as a default by the WP Syndicate and nor was the Purchase of Business Agreement regarded as conditional upon its obtaining them.
Having regard to the Purchase of Business Agreement as a whole, I have concluded that the liability to pay the balance of the purchase price arose on the Completion day and not on the signing of the contract. That was the day on which Osborne Properties would deliver what it was required to deliver. Until that date, it was not known whether the Contract of Sale would proceed. As each contract stated, a breach of one was a breach of the other and, if either the WP Syndicate or Osborne Properties was entitled to terminate or rescind the other, it was entitled to rescind that contract as well.[210] If, for example, an insolvency event occurred in relation to Osborne Properties, the WP Syndicate would be entitled to terminate the Contract of Sale provided that it followed a specified process.[211] That would mean that the WP Syndicate could terminate the Purchase of Business Agreement as well.
[210] Contract of Sale; cl6.2; T10 at 204 and Purchase of Business Agreement; cl 11.2; T11 at 264-265
[211] Contract of Sale; cll 11.11 and 11.12; T10 at 208-209
Clause 8 of the Contract of Sale specifies the time at which the three amounts are payable by the WP Syndicate. Its 40% share of the deposit of $1m has been allowed by the Commissioner as a deduction for the 1999 Year for that was incurred on the signing of the contract on 30 June 1999. The Settlement Amount was to be paid on 31 October 1999 or such other date on which settlement occurred. The First Post Settlement Amount was payable on 1 July 2000 or on the date of the issue of the Planning Permit, whichever was the later. Payment of the Final Post Settlement Amount was payable on the Date of Completion which would occur 14 days after the date on which the Certificate of Completion was issued. A “Certificate of Completion” was defined in cl 1.12 to mean a certificate of completion issued by architects confirming that, in their opinion, the building had generally been completed in accordance with the relevant plans, fixtures, fittings and furnishings and an Occupancy Permit had been issued by a registered Building Surveyor.
If the Planning Permit were not granted, the WP Syndicate’s liability to pay the First Post Settlement amount would never arise. Until the Planning Permit was issued and 1 July 2000 had arrived, the WP Syndicate’s liability to pay the First Post Settlement amount did not arise. Until that time, the WP Syndicate’s liability was contingent upon that event’s occurring. It was not a liability incurred under the Contract of Sale. Its liability to pay the Final Post Settlement Amount was necessarily contingent for it did not arise until there was first a Planning Permit, then the construction works and, finally, a Certificate of Completion. That could not occur until after 1 July 2000.
For these reasons, I do not accept TVKS’s position that, by reason of its interest in the WPS Syndicate, that Archer Property was entitled to further deductions arising from the Contract of Sale or the Purchase of Business Agreement.
ISSUE 5:Should the Shortfall Interest Charge be remitted?
Legislative background
Part 4-25 of Schedule 1 to the TA Act provides for the imposition of charges and penalties. I am concerned only with the shortfall interest charge (SIC). SICs are applied to shortfalls of various taxes, including income tax, that are revealed when the Commissioner amends an assessment. When income tax is involved, a person is liable to pay SIC on the additional amount of income tax that the Commissioner has assessed that the person is liable to pay by issuing an amended assessment.[212]
[212] TA Act; s 280-100(1)
The formula for calculating SIC is provided in section 280-105 of Schedule 1 to the TA Act. The rate per day is calculated on a compounding basis by taking the base interest rate, adding 3 percentage points divided by the number of days in the year. In general terms, the base interest rate is the 90-day Bank Accepted Bill rate published by the Reserve Bank for the quarter in which the day falls.[213]
[213] ITAA97; s 995-1 and TA Act; s 8AAD(2)-(4)
Generally, liability to pay the SIC begins from the day on which income tax was due to be paid, or would have been due to be paid if there had been any, under the first assessment. Under s 204(1) of ITAA36, the due date falls 21 days after the notice of assessment is given to the taxpayer. Liability to pay the SIC ends the day before the Commissioner gave notice of the amended assessment.[214] The Commissioner must give notice of the amount of the SIC a person is liable to pay for a period.[215] No provision is made for a person to object to the amount of SIC that is imposed by the Commissioner.
[214] TA Act, Schedule 1, s 280-100
[215] TA Act, Schedule 1, s 280-110
The Commissioner may remit a shortfall interest charge under s 280-160 of Schedule 1 to the TA Act if he “… considers it fair and reasonable to do so.”[216] That is provided for in s 280-160(1) but regard must also be had to s 280-160(2), which provides:
“Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
(a)the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and
(b)the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.”
[216] TA Act; s 280-160(1)
PS LA 2006/8
The Commissioner has issued a Practice Statement Law Administration, PS LA 2006/8, relating to, among other matters, the remission of the SIC for shortfall periods. At cl 2A, he explains why SICs are imposed:
“Taxpayers have a responsibility to lodge, report correctly and pay their tax debts on time. GIC[217] and SIC are intended to encourage the timely payment of tax. They also deny late payers, including people who have paid late because they have reported too little in tax or claimed too much, an advantage over those who pay on time. Taxpayers who have underpaid have had the use of those moneys.”
[217] General Interest Charge. The GIC applied up to and including the year ending 30 June 2004 but does not arise in this case which is concerned with later years.
PS LA 2006/8 sets out examples of circumstances in which remission of SIC may, or may not, be appropriate. They are not intended to be exhaustive and are not intended to limit the discretion to remit.[218]
[218] PS LA 2006/8 at cl 7
Background
The decisions that I have reached on each issue mean that I also affirm the objection decisions made by the Commissioner in relation to the 2006 Year and the 2007 Year. That means that the combined tax shortfall for those two years of income remains at $6,477,794.46. In so far as it relates to the 2006 Year, the tax shortfall became payable on 21 March 2007 and, in so far as it relates to the 2007 Year, it became payable on 18 March 2008. In each case, the period ends on the day before the Commissioner issued the amended assessment.
The Commissioner has remitted the SIC in part on three bases. One related to the 2006 Year. It was that it had not commenced the audit within a period equivalent to half the four year period of assessment permitted under s 170(1) of ITAA36. The Commissioner remitted the SIC to the base rate i.e. the rate less the addition of the 3 percentage points in the formula.
The other two bases related to both the 2006 Year and the 2007 Year. Finding that the audit had exceeded the two year period contemplated for a Comprehensive Audit by the HWI Booklet, the Commissioner remitted the SIC in each case to the base rate from the day after the end of that two year period. The third base related to the unavailability of the case officer who was working on the audit for a period greater than 30 days and to his or her not being replaced. That fact led to the Commissioner’s remitting the SIC in full for the period from 2 January to 7 March 2012.
In summary, the Commissioner’s decisions regarding remission of the SIC led to SIC’s being payable as follows:
Year
2006
2007
Date Commissioner gave notice of assessment
28 January 2007
25 February 2008
Date tax debt would have been due for payable
21 March 2007
18 March 2008
Date four year assessment period under s 170(1) ends
27 January 2011
24 February 2012
Half period between notice of assessment and s 170(1) period
28 January 2009
25 February 2010
Full rate of SIC
22 March 2007 to 27 January 2009
No SIC payable
Base rate of SIC (remission from full rate on basis that audit not commenced more than half way through assessment period permitted under s 170(1) of ITAA36)
28 January 2009 to 18 August 2009
No SIC payable
Full rate of SIC
19 August 2009 to 17 August 2011
19 March 2008 to 17 August 2011
Base rate of SIC (remission from full rate on basis of the audit’s having exceeded the expected completion date of two years concluding on 17 August 2011)
18 August 2011 to 1 January 2012
18 August 2011 to 1 January 2012
Full remission (total remission on basis that no action on case for period in excess of 30 days)
2 January 2012 to 7 March 2012
2 January 2012 to 7 March 2012
Base rate[219]
8 March 2012 to 1 May 2013
8 March 2012 to 1 May 2013
[219] No reason is given in the Commissioner’s reasons for the imposition of the base rate in this period: ST documents; ST9 at 688-689
Consideration
TVKS’s Amended Statement of Facts, Issues and Contentions lodged on 4 March 2016 contended that the SIC should be remitted in full or, alternatively, in part on the basis that she was unaware of the existence of the trust distributions, the trusts themselves, or the notices of assessment issued to her. In view of the findings I have made, I do not consider that the SIC should be further remitted. This is a situation in which TVKS has chosen to place entire responsibility for her financial, including taxation, affairs in the hands of another whether as her husband or as her tax agent. Having done that, she cannot now rely on her lack of knowledge to avoid or minimise the consequences of decisions made on her behalf by persons to whom she entrusted that task.
DECISION
For the reasons I have given, I affirm the objection decisions made by the Commissioner on in relations to assessments of income tax for the years ended on 30 June 2006 and 30 June 2007.
LEGISLATIVE BACKGROUND: Division 6 and Trust Income
“Income” and related terms defined
Division 6 of Part III of ITAA36 is concerned with trust income. Section 95 defines relevant terms. Among them is “net income” which s 95(1) provides:
“… in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of the previous years as are required to be met out of corpus.”
The expression “exempt income”:
“… in relation to a trust estate, means the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident.
Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements and structured orders.”[220]
Finally:
“non-assessable non-exempt income, in relation to a trust estate, means the non-assessable non-exempt income of the trust estate calculated as if the trustee were a taxpayer who was resident.”[221]
[220] ITAA36; s 95(1)
[221] ITAA36; s 95(1)
Liability of trustee as trustee limited by ITAA36
Section 96 in that Division provides that:
“Except as provided in this Act [ITAA36] a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.”
Division 6 goes on to prescribe those situations in which the trustee is liable to pay income tax upon the income of the trust estate and those in which a beneficiary is liable and to what extent each is liable. I am concerned only with a situation in which a beneficiary is an individual, a resident and not under any legal disability[222] and the trust estate is a resident trust estate. For the purposes of Division 6, a trust estate is taken to be a “resident trust estate” in relation to a year of income if:
“(a) a trustee of the trust estate was a resident at any time during the year of income; or
(b)the central management or control of the trust estate was in Australia at any time during the year of income.”[223]
Section 97: Identifying assessable income in hands of beneficiary not under legal disability and presently entitled to a share of the income of the trust estate
[222] Where a beneficiary of a trust estate is under a legal disability and is presently entitled to a share of income of the trust estate, the trustee of the trust estate is assessed and liable to pay tax in on that share in accordance with s 98.
[223] ITAA36; s 95(2) A trust estate that is not a resident trust estate in relation to a year of income is referred to in Division 6 as a “non-resident trust estate” in relation to that year of income: ITAA36; s 95(3).
A. General rules to identify assessable income
Section 97 of ITAA36 is concerned with a beneficiary who is not under a legal disability. Section 97(1) provides:
“Subject to Division 6D,[[224]] where a beneficiary of a trust estate who is not under legal disability is presently entitled to a share of the income of the trust estate:
[224] Division 6D is concerned with certain closely held trusts. It is not relevant in this case.
(a) the assessable income of the beneficiary shall include:
(i)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and
(b)the exempt income of the beneficiary shall include –
(i)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
except to the extent to which the exempt income to which that individual interest relates was taken into account in calculating the net income of the trust estate; and
(c) the non-assessable non-exempt income of the beneficiary shall include:
(i)so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(ii)so much of the individual interest of the beneficiary in the non-assessable non-exempt income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.”
B. Exclusion from general rules by reference to status of beneficiaries
The reference in s 97(1) to the income of a trust estate to which a beneficiary is presently entitled:
“… shall be read as not including a reference to income of a trust estate –
(a)to which a beneficiary is deemed to be presently entitled by virtue of the operation of subsection 95A(2) where the beneficiary -
(i)is a natural person;
(ii)is a resident at the end of the year of income;
(iii)is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and
(iv)is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; or
(b)to which a beneficiary is presently entitled where the beneficiary –
(i)is a non-resident at the end of the year of income;
(ii)is not a beneficiary to whom subsection (3) of this section or subsection 97A(1) or (1A) applies in relation to the year of income; and
(iii)is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate.”
That is the effect of s 97(2) but it has to be understood in light of ss 95A(2) and ss 97A(1) and 97A(1A). Section 95A(2) provides:
“For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate.”
Sections 97A(1) and 97A(1A) are concerned with beneficiaries who are the owners of income equalization deposits or farm management deposits.
Section 98: Liability of trustee
Again, I am not concerned with the situation in which a beneficiary is not resident or is a company. That means that I am concerned only with ss 98(1) and (2) when they provide for the liability of a trustee:
“(1) Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of –
(a)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
(b)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
as if it were the income of an individual and were not subject to any deduction.”
(2) Where a beneficiary of a trust estate –
(a)is deemed to be presently entitled to a share of that income of the trust estate of a year of income by virtue of the operation of subsection 95A(2);
(aa)is a natural person and is not, in respect of the share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate;
(b)is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; and
(c)is not under a legal disability,
the trustee of the trust estate shall be assessed and liable to pay tax in respect of –
(d)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was resident; and
(e)so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia,
as if it were the income of an individual and were not subject to any deduction.”
Section 99: certain trust income to be taxed as income of an individual
A. General rule
Section 99 applies in relation to a trust estate in relation to a year of income only if s 99A does not apply in relation to that trust estate in relation to that year of income.[225] I will return to s 99A shortly. For the moment, I will set out s 99(2):
“Where there is no part of the net income of a resident trust estate –
(a)that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
(b)in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or
(c)that represents income in which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia,
the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.”
[225] ITAA36; s 99(1)
B. Qualification to the general rule
As I noted, s 99 applies only if s 99A does not. In essence, s 99A takes certain types of trust outside the ambit of s 99 but only if the Commissioner is of the opinion that it would be unreasonable for the section – s 99A – to apply in relation to that trust estate in relation to a year of income. If s 99A does not apply, the trustee is liable to pay tax on the net income of the trust estate at the rate declared by Parliament for the purposes of s 99A.[226] The Commissioner may only come to that opinion in relation to particular types of trust estates being those:
[226] ITAA36; s 99A(4)-(4C) applying to a resident trust estate
“(a) that resulted from:
(i)a will, codicil or an order of a court that varied or modified the provisions of a will or a codicil; or
(ii)an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate;
(b)that consists of the property of a person who has become bankrupt, being property that has vested in the Official Receiver in Bankruptcy, or in a registered trustee, under the Bankruptcy Act 1966;
(c) that is administered under Part XI of the Bankruptcy Act 1966; or
(d) that consists of property of a kind referred to in paragraph 102AG(2)(c); …”[227]
[227] ITAA36; s 99A(2)(a)-(d)
Section 99A(3) sets out the matters to be considered by the Commissioner in forming the relevant opinion.
I certify that the two hundred and thirty seven preceding paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: ………...........[sgd]...........................................
Associate
Dates of Hearing 15 – 17 March 2016 and 30 November 2016
Date of Decision 9 December 2016
Counsel for the Applicant Mr A Broadfoot SC
Solicitor for the Applicant Mr J Young
John Young Consulting
Counsel for the Respondent Mr S Linden
Solicitor for the Respondent Mr M Crowley
ATO Review and Dispute Resolution
8
11