York Developers Pty Ltd v Teri Serviced Apartments Pty Ltd
[2022] VMC 17
•20 June 2022
IN THE MAGISTRATES’ COURT OF VICTORIA
AT MELBOURNE
Case No. L11793221
| YORK DEVELOPERS PTY LTD | Plaintiff |
| (ACN 114 677 191) | |
| v | |
| TERI SERVICED APARTMENTS PTY LTD | Defendant |
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MAGISTRATE: | J.P. FOSTER |
WHERE HELD: | Melbourne (Online) |
DATE OF HEARING: | 7, 17, 18 February 2022 & 11 May 2022 |
DATE OF DECISION: | 20 June 2022 |
CASE MAY BE CITED AS: | York Developers Pty Ltd v Teri Serviced Apartments Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VMC 17 |
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CORPORATIONS – Corporations Act 2001 s 1305 – Books kept by a body corporate – Prima facie evidence of any matter stated or recorded in the book – Oral evidence – Conflict of evidence.
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APPEARANCES: | COUNSEL | SOLICITORS |
| For the Plaintiff | Mr T L Bevan | E.C. Legal |
| For the Defendant | Ms C Jones | HWL Ebsworth Lawyers |
HIS HONOUR:
Background
The Plaintiff seeks to recover $54,916 in unpaid distributions which, says the Plaintiff, were declared by Teri Serviced Apartments Unit Trust (the Trust) in the financial year ended 2018 (FYE2018) and the financial year ended 2019 (FYE2019).
The claimed sum of $54,916 happens to accord with a liability of $54,916 shown as owing by the Trust to the Atwell Family Trust (AtwellFT) in tax returns lodged by the Trust with the Australian Taxation Office for the financial year ending 30 June 2019 (the Trust’s 2019 Tax Return)[1] and further accords with a liability of $54,916[2] shown as owing by the Trust to the AtwellFT in financial reports prepared for the Trust for the financial year ending 30 June 2019 (the Trust’s 2019 Financial Reports).[3]
[1]Plaintiff’s Court Book 68 (‘PCB’).
[2]Being the sum of $34,210 plus $20,706.
[3]PCB 53 (one must add back the $10,000 drawings which, as will become apparent, ought never to have been deducted).
The Plaintiff is the corporate trustee of the AtwellFT.
The Defendant is the corporate trustee of the Trust.
The Plaintiff’s claim is disputed by the Defendant.
The Defendant has share capital comprising of 100 ordinary issued shares.
At the time of its incorporation, 50 of those shares were held by each of the Plaintiff and Ski Investment Fund Pty Ltd (SkiIF).
SkiIF is a company controlled by Mr Luke Mellor.
Mellor is also the Defendant’s sole director and continues to work in the business operated by the Defendant to this day.
The Defendant operates a short-stay apartment leasing business, managing and operating apartments in the Teri Building in South Melbourne (Teri Building).
The business model involves securing long-term residential leases in apartment buildings, which leases are held in separate holding companies, furnishing the apartments and then subletting them on booking platforms such as Airbnb for profit.
The Trust, which is governed by the Teri Serviced Apartments Unit Trust Deed (Deed),[4] has 100 units.
[4]Defendant’s Court Book 35-69 (‘DCB’).
At the time of the establishment of the Trust 50 of those units were held by the Plaintiff (as corporate trustee of the AtwellFT) and 50 of those units were held by SkiIF (as corporate trustee of the Mellor Family Trust) (MellorFT).
Evidence in this proceeding was given by:
(a) Mr Michael Atwell - director of the Plaintiff;
(b) Mr Luke Mellor - director of the Defendant; and
(c) Mr Peter Vasta - accountant for the Defendant who prepared the Trust’s financial reports and its tax returns.
Key Evidence
Financial Year Ended 30 June 2018
(Trust’s 2018 Financial Reports & Trust’s 2018 Tax Returns)
The financial reports prepared for the Trust for the financial year ending 30 June 2018[5] (the Trust’s 2018 Financial Reports) show a net profit of $68,419.[6]
[5] Plaintiff’s Supplementary Court Book 377-388 (‘PSCB’).
[6] PSCB 379.
The Trust’s 2018 Financial Reports contain a “Distribution Statement” which shows that the income was distributed equally to each of the beneficiaries.[7]
[7] PSCB 380.
None of the income appears to have been retained or accumulated by the Trust.
The AtwellFT is recorded as receiving a half share (or $34,210) of the net profit for the FYE 2018.[8]
[8]PSCB 380.
That sum of money is recorded as a current liability on the books.[9]
[9] PSCB 381 (note 6); PSCB 383 (note 6).
Mellor (as director of the corporate trustee of the Trust) declared that the Trust’s 2018 Financial Reports “present fairly the trust’s financial position as at 30 June 2018”.[10]
[10] PSCB 385.
The Trust also passed a resolution adopting the accounts.[11]
[11] PSCB 387.
The distribution is confirmed in the tax returns lodged by the Trust with the Australian Taxation Office for the financial year ending 30 June 2018 (the Trust’s 2018 Tax Return), which shows a liability to the AtwellFT of $34,210.[12]
[12] DCB 351.
Despite this recording of a liability in the Trust’s 2018 Tax Return, the Trust’s 2018 Tax Return records a net income loss of $(154,310) and did not record any amount as a distribution of income to beneficiaries.
On 1 August 2018 Vasta, the Trust’s accountant, sent an email to Mellor and Atwell which stated that the taxable income of the Trust was “NIL” and attached the draft 2018 Financial Report and 2018 Tax Return.[13]
[13]DCB 362.
Financial Year Ended 30 June 2019
(Trust’s 2019 Financial Reports & Trust’s 2019 Tax Returns)
The Trust’s 2019 Financial Reports[14] show a net profit of $41,413.[15]
[14] PSCB 389-401.
[15] PSCB 392.
The Trust’s 2018 Financial Reports contain a “Distribution Statement” which shows that the income was distributed equally to each of the beneficiaries.[16]
[16] PSCB 393.
None of the income appears to have been retained or accumulated by the Trust.
The AtwellFT is recorded as receiving a half share (or $20,706) of the net profit for the financial year ended 30 Jun 2019[17].
[17]PSCB 393.
That sum of money (namely $20,706) together with the previous year’s distribution (namely $34,210), less a “drawing” of $10,000, is recorded as a current liability of $44,916 on the books.[18]
[18] PSCB 394 (note 5); PSCB 396 (note 5).
Mellor (as director of the corporate trustee of the Trust) declared that the Trust’s 2019 Financial Reports “present fairly the trust’s financial position as at 30 June 2019”.[19]
[19] PSCB 398.
The Trust also passed a resolution adopting the accounts.[20]
[20] PSCB 400.
The distribution is confirmed in the Trust’s 2019 Tax Return which shows a liability to the AtwellFT of $54,916[21] and the $10,000 in drawings against the AtwellFT is separately listed.
[21] DCB 361.
Despite this recording of a liability in the Trust’s 2019 Tax Return, the Trust’s 2019 Tax Return records net income of $0 after carry-forward tax losses of $154,310.00 and did not record any amount as a distribution of income to beneficiaries.
Financial Year Ended 30 June 2020
(Trust’s 2020 Financial Reports & Trust’s 2020 Tax Returns)
The financial reports prepared for the Trust for the financial year ending 30 June 2020 (the Trust’s 2020 Financial Reports) continue to show a current liability to the AFT under the sub-heading “UPE Sub Trust – Atwell Family Trust”.[22]
[22]DCB 394 (FYE2020:- Share of Profit – Atwell Family Trust - $44,916 - which form part of the “Total Liabilities” of $378,355.00 for the FYE 2020 – see DCB 391.
This current liability is noted as $44,916 – which equates to the $54,916 claimed by the Plaintiff less the $10,000 so-called drawings[23], deducted in the accounts in FYE 2019.
[23]Which was improperly deducted as such by Mellor and Vasta, based on what I determine to be their erroneous assumption that Atwell had used $10,000 to make payments for private purposes.
The Trust’s liabilities (incorporating a stated liability to the Plaintiff, as trustee of the AtwellFT) is confirmed in the tax returns lodged by the Trust with the Australian Taxation Office for the financial year ending 30 June 2020 (the Trust’s 2020 Tax Return).[24]
[24]See liabilities declared at DCB 401 whereby the Total Liabilities described in Note 36:- Total Liabilities: $378,355.00 matches the Total Liabilities of $378,355.00 noted in the Trust’s 2020 Financial Reports – see DCB 391.
The Trust Deed
The Plaintiff’s entitlement to a distribution of income from the Trust and the Defendant’s powers as trustee are set out in the Deed.[25]
[25] PSCB 402-436.
The Deed defines, amongst other things, the following terms:[26]
[26] PSCB 406-7.
ActMeans (as the context requires) either or both the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth).
Determination Date Means the last day of the Financial Year or any later date permitted:
(a)under the Act;
(b)by the relevant statutory authorities charged with enforcing the requirements set out under the Act; or
(c)at law,
by which the Trustee may make the Unitholders presently entitled, within the meaning of the Act, to the Income of the Trust for that Financial Year.
DistributeMeans to pay, apply, or set aside including by placing sums to the credit of a Unitholder in the books of the Trust, and ‘Distribution’ has a similar meaning”
Income of the Trust Means in respect of any Financial Year:
(a)An amount equal to the Net Trust Income plus any capital gains not otherwise included in the Net Trust Income; or
(b)Any other amount that the Trustee determines on or before the Determination Date under this document.
Net Trust Income Means the amount calculated as the net income of the Trust under section 95 of the Act (1936), excluding any amount that would otherwise be included pursuant to section 207-20(1) of the Act (1997)
The Deed further provides, amongst other things, that:[27]
[27] PSCB 415-16.
9 DISTRIBUTION OF INCOME
9.1 In each financial year the Trustee may, on or before the Determination Date, decide to accumulate any part or parts of Income of the Trust and such accumulation forms part of the Capital of the Trust Fund.
9.2 On the Determination Date, subject to any earlier decision under clause 9.1, the Trustee is deemed to Distribute all of the Income of the Trust (if any):
(b)to the Unitholders;
(c)in proportion to each Unitholder’s Proportionate Interest; and
(d)such that each Unitholder has a vested and indefeasible interest and is presently entitled to the Income of the Trust Distributed in respect of each Unit.
9.3 Subject to this document, the Trustee may:
(a)determine the quantum and timing of the payments for Distributing the Income of the Trust, however any decision to defer the making of a payment to a Unitholder does not defeat that Unitholder’s vested interest and indefeasible interest or present entitlement in the amount; or
(b)issue additional Units in partial or total satisfaction of the Distribution of the Income of the Trust.
…
9.6 If in any Financial Year the income and capital gains under tax law differs from the Income of the Trust in respect of that Financial Year, the Trustee may determine that:
(a)all or any part of the excess of the income and capital gains under trust law over the Income of the Trust is added to the General Reserve
10 POWERS ABOUT DISTRIBUTIONS
10.1 Where the Trustee has decided to hold any amount absolutely for any Unitholder, the Trustee may do any one or more of the following:
(a)place that amount to the credit of the Unitholder in the books of the Trust Fund, other than as a loan by the Unitholder, so that it will be held on a separate trust for the Unitholder, although still part of the Trust Fund;
(b)with the prior written consent of the unitholder, place that amount to the credit of the Unitholder, although still part of the Trust Fund as an at call loan by the Unitholder;
(c)apply the amount towards satisfying money owing by the Unitholder to the Trustee, or owing to a this person by the Unitholder
(d)pay the amount by cash, cheque or electronic funds transfer made payable to or for the credit or benefit of the Unitholder;
(e)pay that amount in cash to of for the benefit (via a third person) of the Unitholder; or
(f)make an in specie transfer of Property of the Trust Fund in satisfaction of that amount.
…
11 RESERVES
11.2 The Trustee may determine to use the General Reserve for any purpose under this document including:
(b)to make any Distribution to the Unitholders;
(c)to meet any expenses of the Trust Fund;
(d)maintaining the value of the Trust Fund; and
(e)as a reserve against any liabilities or contingencies arising in relation to the Trust Fund.
…
11.4 Each unitholder has an interest in the General Reserve and Asset Revaluation Reserve in proportion to their Proportionate Interest.
Contentions of the Parties
The Plaintiff contends that:
(a) it is apparent from the books of the Trust that there was no accumulation of income to capital as might have been permitted pursuant to clause 9.1 of the Deed;
(b) as a result, the income was deemed to be distributed proportionately to the unit holders in accordance with clause 9.2 of the Deed and the Plaintiff became immediately entitled to the money;
(c) the Defendant did not exercise its powers under 10.1(b)-(f) of the Deed;
(d) the money is therefore held by the Defendant on a bare trust in favour of the Plaintiff;
(e) the Defendant admits that no part of either distribution was paid to the Plaintiff;[28] and
(f) the Defendant must therefore pay the Plaintiff the full amount of the claim.
[28] See Defence to Amended Complaint at [8], [10] & [12].
The Defendant contends that:
(a) the Trust’s 2018 Tax Returns record net taxable loss of $154,310 which do not correspond with the Trust’s 2018 Financial Reports which record net profits of $68,419.
(b) the Trust’s 2019 Tax Returns record net taxable income of $0 which do not correspond with the Trust’s 2019 Financial Reports which record net profits of $41,413.
(c) the conflict between the Trust’s Financial Reports and the Trust’s Tax Returns arises primarily because of a tax deduction for accelerated depreciation (SBE instant asset write-off) which is recorded in the Trust’s 2018 Tax Return and gives rise to a net taxable loss of $154,310 in the Trust’s 2018 Tax Return and carry over losses recorded in the Trust’s 2019 Tax Return.
(d) the Court cannot be satisfied that the Trust had Income of the Trust capable of distribution – the Trust having nil taxable income in the relevant years and there being no Trustee determinations made in respect of the Income of the Trust prior to 30 June in the relevant years;
(e) the Court cannot be satisfied that the Trustee made valid and effective determinations in respect of the Income of the Trust or the distribution of same - the evidence of entries in the Trust’s Financial Reports falling well short of being conclusive evidence of the Trustee’s determinations and, in any event, there being no evidence of determinations being made prior to 30 June in the relevant years;
(f) the authorities establish, consistent with the Australian Taxation Office’s position, that trustee determinations in respect of trust income and trustee distributions of such income are only valid if they are made on or before 30 June in a relevant financial year; and
(g) in the circumstances established above, the Court cannot be satisfied that the Plaintiff is entitled to payment of the “Alleged 2018 Distribution” and the “Alleged 2019 Distribution”[29].
[29]Defendants Closing Submissions, 4 March 2022. Paragraph 4 & 47.
As best that I can determine, the profit differential between the Financial Reports and the Tax Returns for the FYE 2018 is reconciled as follows.
Income Tax Loss:
Profit declared in Tax Return for FYE 2018
($154,310.00) Add back claimed depreciation (for tax purposes) for FYE 2018[30]:
$236,563.00
Deduct depreciation specified in Financial Reports for FYE 2018[31]: ($7,885.00)
Deduct Expense Reconciliation Adjustments[32]:
($5,948.00)
SUB-TOTAL (“A”):
$68,420.00
Profit declared in Financial Reports for FYE 2018 (“B”)[33]:
$68,419.00
Difference between “A” and “B”[34]:
$1.00 [30]See “Depreciation expenses” line at PSCB 35 (Trust’s 2018 Tax Returns).
[31]See “Depreciation” expense line at PSCB 22 (Trust’s 2018 Financial Reports).
[32]See “Expense Reconciliation Adjustments” line at PSCB 35 (Trust’s 2018 Tax Returns).
[33]PSCB 22 (Trust’s 2018 Financial Reports).
[34]Attributable to rounding. Note that $34,210.00 is attributed to each beneficiary PSCB 23.
The Defendant further contends that the difference between the Trust’s 2018 and 2019 Tax Returns (showing no profit) and the Trust’s 2018 and 2019 Financial Reports (showing substantial profits) is explained by Vasta who gave evidence to the following effect:
(a) he prepared the Trust’s Financial Reports and Tax Returns;[35]
[35]Witness Statement of Peter Vasta (Vasta Witness Statement), paragraphs 9 and 12 (PSCB 14).
(b) he was instructed by Atwell and Mellor to prepare financial reports for the Trust that would look strong for financiers and investors and minimised depreciation;[36]
[36]Vasta's evidence in cross-examination and re-examination; Vasta Witness Statement, paragraphs 11, 21 and 23 (PSCB 14, 16-17); Mr Atwell’s evidence in cross-examination.
(c) the Trust’s Financial Reports record its accounting profits and the Trust’s Tax Returns record its taxation profits;[37]
[37]Vasta's evidence in cross-examination and re-examination; Vasta Witness Statement, paragraphs 15 to 23 (PSCB 15-17).
(d) the difference between the Trust Financial Reports and Tax Returns arises primarily because of the small business enterprise (SBE) instant asset write-off method which entitled the Trust to a taxation deduction for depreciation;[38]
[38]Vasta's evidence in cross-examination and re-examination; Vasta Witness Statement, paragraph 16 (PSCB 16).
(e) the Trust is not a reporting entity and was legitimately entitled to record minimal depreciation in the Trust Financial Report and apply the deduction for depreciation based on the SBE instant asset write-off in the Trust’s 2018 Tax Returns;[39]
[39]Vasta’s evidence in cross-examination, Vasta Witness Statement, paragraphs 15 and 16 (PSCB 15- 16).
(f) if the Trust had income and distributions to declare in the 2018 and 2019 financial years, the value of the distributions would have been recorded in the 2018 and 2019 Trust Tax Returns and those returns would have included beneficiary schedules for each beneficiary to whom a distribution was declared identifying the distributable income to which that beneficiary was entitled;[40]
[40]Vasta Witness Statement, paragraph 17 (PSCB 16).
(g) if the Trust’s 2018 Financial Report included an adjustment for the SBE instant asset write off, key financial information would have changed, the balance sheet would have changed and it would have recorded a net loss;[41]
[41]Vasta’s evidence in re-examination.
(h) the Trust had nil taxable income in both the 2018 and 2019 financial years and did not declare any distributions;[42] and
(i) he was never told to distribute income to the beneficiaries of the Trust.[43]
Findings
[42]Vasta's evidence in cross-examination and re-examination; Vasta Witness Statement, paragraphs 17 and 28 (PSCB 16-17).
[43]Vasta’s evidence in cross-examination.
For reasons which follow (and having due regard to the Trust’s 2018 Financial Reports, the Trust’s 2019 Financial Reports, the Trust’s 2020 Financial Reports, the Trust 2018’s Tax Returns, the Trust’s 2019 Tax Returns and the Trust’s 2020 Tax Returns) I am satisfied on the balance of probabilities that:
(a) the Plaintiff is entitled to $54,916 being the liability of $54,916.00 shown as owing by the Trust to the AtwellFT in:-
i.the Trust’s 2019 Tax Returns[44];
[44]PSCB 68.
ii.the Trust’s 2019 Financial Reports (after adding back the $10,000 drawings which ought never to have been deducted by Mellor or Vasta)[45].
[45]PSCB 53.
(b) the Trust had Income of the Trust capable of distribution despite the Trust having “nil” taxable income disclosed in the Trust 2018’s Tax Returns and the Trust’s 2019 Tax Returns;
(c) the Trustee made valid and effective determinations in respect of the Income of the Trust and the distribution of same;
(d) there was no accumulation of income to capital as might have been permitted pursuant to clause 9.1 of the Deed;
(e) the income was deemed to be distributed proportionately to the unit holders in accordance with clause 9.2 of the Deed;
(f) the Plaintiff became immediately entitled to the money;
(g) the Defendant did not exercise its powers under 10.1(b)-(f) of the Deed;
(h) the money is therefore held by the Defendant on a bare trust in favour of the Plaintiff; and
(i) there was never any agreement in place (as pleaded by the Defendant) whereby Mellor and Atwell agreed that all profits from the Business would be reinvested in the Business so as to grow the Business (Reinvestment Agreement)[46].
[46]The pleaded “Reinvestment Agreement” (paragraphs 8(d) and 8(e) of the FANOD), in which it was apparently agreed between Mellor and Atwell that all profits from the Business would be reinvested in the Business so as to grow the Business, was not greatly pressed in closing submissions. The evidence of Mellor with respect to the alleged Reinvestment Agreement was terribly unsatisfactory, insofar as Mellor was unable to identify with any precision the terms of the so-called agreement or the date upon which it was made. The alleged Reinvestment Agreement was, to some extent, dependent upon the Trust actually making a profit, whereas Mellor (by reason of the belated amendment to the FANOD) was at pains to assert throughout the proceeding that the Trust had not made any profits.
No effective determination? No income capable of distribution?
The Defendant’s primary defence, first raised on 4 February 2022, just days before the commencement of the hearing on 7 February 2022 (and not permitted until leave was granted on 7 February 2022 to file the Further Amended Notice of Defence)[47] (FANOD) is that:
“the Trust’s tax return… prepared by Seed Accounting records a net tax loss of… and therefore the Trust had no distributable income for that year from which to make a distribution.”[48]
[47]Further Amended Notice of Defence dated 4 February 2022 but filed on 16 February 2022 (‘FANOD’).
[48] FANOD [7(a)] & [11(a)].
I agree with the submission put by counsel for the Plaintiff, that this pleading sits uneasily with the subparagraph that follows it (which is not pleaded in the alternative):
“the financial reports
statementsof the Trust… as prepared by Seed Accounting do not show a distribution to beneficiaries but shows net accounting profit of the Trust… [and] each beneficiary's net share of accounting profits… (to each of the Atwell Family Trust and the Mellor Family Trust) and retained profits…”[49]
[49] FANOD at [7(b)].
The admission that the financial reports show the beneficiary’s net share of profits, accounting or otherwise causes me great intellectual discomfort when assessed against the position put by the Defendant’s counsel (orally in closing) that these reports were ineffective to establish any entitlement for the beneficiaries because they were adopted after the end of the financial year.
The Defendant, in essence, argues that the Determination Date for a determination of the Income of the Trust was 30 June of each year based on the meaning of “presently entitled” as set out in the case law and ATO rulings.
“Presently entitled” was considered in Harmer v Federal Commissioner of Taxation[50] where it was accepted that a beneficiary would be so entitled if, and only if:
(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. [51]
[50](1991) 173 CLR 264.
[51] Ibid 271.
This has been understood to mean that a beneficiary is presently entitled to a share of trust income in a particular year if the entitlement arises “within the relevant tax year”.[52]
[52] Colonial First State Investments Ltd v Federal Commissioner of Taxation (2011) 192 FCR 298, 309-310.
Under the Deed, the beneficiaries are “presently entitled” to income earned in any particular year because a deemed distribution occurs by clause 9.1 of income earned in that financial year which then is distributed according to the formula in clause 9.2.
The Defendant places reliance on the Notice of Withdrawal of Tax Ruling IT 329.[53] The Notice concerns the operation of s 101 of the Income Tax Assessment Act 1936 (ITAA) and discretionary trusts. Section 101 reads:
[53]The Defendant also refers to parts of the ATO’s “Tax issues for trusts - tips and traps” relating to discretionary trusts to similar effect.
Discretionary trusts
For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee's discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary's benefit by the trustee in the exercise of that discretion.
The effect of the Notice is that for a beneficiary of a discretionary trust to be “presently entitled” to income pursuant to s 101 of the ITAA, the trustee must exercise its discretion to pay income to that beneficiary prior to the end of that financial year, namely 30 June.
However in this case, the Trust is unit trust not a discretionary trust. The trustee has no discretion in how to pay or apply the income of the trust but must distribute according to the formula. Neither s 101 of the ITAA nor the Notice are applicable to this Trust and the Defendant’s reliance on this material is, in my view, misplaced.
Determination of income in each financial year
Having argued that determinations of what constituted Income of the Trust needed to be made prior to 30 June of each year, the Defendant did not lead any direct evidence that there were no such determinations[54] notwithstanding that Mellor was in a unique position to give that evidence.
[54]A belated attempt was made to do this during the course of re-examination (after no such evidence arose in examination in chief) but that attempt was refused by the court.
The Defendant primarily seems to rely upon what it describes as an “absence of evidence”[55] that determinations were made prior to 30 June.
[55] Defendant’s submissions at [36].
The Defendant concluded its case in the negative by asserting that:
“the Court cannot be satisfied that York has discharged its onus of proving that the Trust had Income of the Trust capable of distribution, or that the Trustee made valid determinations on or before the Determination Date as to what constituted Income of the Trust”.[56]
[56] Defendant’s Closing Submissions at [47]. See also [4].
That submission, says the Plaintiff, is unsustainable.
I agree with the Plaintiff’s submission for the following reasons:
First, the Financial Reports were prepared by a professional accountant under Mellor’s instructions. They show that the Defendant determined to make distributions to the beneficiaries in the financial years 2018 and 2019.
Vasta, in cross-examination, denied that these Reports needed to be amended or revised.
Secondly, the Financial Reports are to be given special treatment pursuant to s 1305(1) of the Corporations Act which provides that they are prima facie evidence of the matters recorded therein.
In Australian Securities and Investments Commission v Rich,[57] Austin J stated:
The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a ‘first view’. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.[58]
[57][2009] NSWSC 1229.
[58] Ibid 174-175 [396].
The Court will be confident in relying on the accounts where they “are comprehensive, internally consistent, and prepared by an independent firm of accountants”.[59]
[59] Quin v Vhlahos (2021) 64 VR 319, 336 [59].
The Defendant correctly submits that the “books” are not conclusive evidence of the matters recorded therein.
However, the “books” are sufficient for proof in a civil trial and if that presumption is to be overturned, it can only be overturned with cogent persuasive evidence.
Similarly, while the Defendant correctly submits that evidence of the director’s actual intention may be relevant, evidence of intention is not required. The “books” speak for themselves.
The cases of Tosich Construction Pty Ltd (in liquidation) v Tosich[60] and Shot One Pty Ltd (in liq) v Day[61] cited by the Defendant are instructive.
[60][1997] FCA 252.
[61][2017] VSC 741.
In Tosich, the company advanced funds to purchase a property for the director’s daughter at a time when the director was a creditor to the company for a larger amount. Mr Tosich gave evidence that the intention was that the money be applied in reduction of his outstanding loan balance. Although it was treated differently in the books, there was also evidence to explain how the mistaken book entry was made. Lehane J concluded that:
“his evidence as [to] his intention is supported by the evidence of Mr Wyand-Brooks. It is that the amount paid was to be debited to his account with the company. Since, at the time, Mr Tosich had recently become a substantial creditor of the company that intention is not inherently a surprising one.”
In Shot One, the evidence showed that there were multiple versions of the financial statements for the relevant years with each presenting a different and inconsistent treatment of the loan accounts[62] and no version of the financial statements was ever signed or adopted by the director.[63] As a result, no clear prima facie position emerged from the “books”. The director gave detailed evidence about his actual intentions.
[62] Ibid [243].
[63] Ibid [275].
The type of evidence lead by the Defendants in Tosich and Shot One is lacking here.
Thirdly, section 286 of the Corporations Act relevantly provides:
286 Obligation to keep financial records
(1) A company, registered scheme or disclosing entity must keep written financial records that:
(a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited.
The obligation to keep financial records of transactions extends to transactions undertaken as trustee.
…
(3) A person commits an offence if the person contravenes subsection (1) or (2).
Directors are personally liable if records are not maintained in accordance with s 286. Section 344(1) is a civil penalty provision that renders the director liable if he fails to take all reasonable steps to comply with or to secure compliance with s 286.
By law, each year the director must sign a declaration that the accounts of the company represent a true and fair statement of its financial affairs; ss 295(4) & 297.
Vickery J in Ambridge Investments Pty Ltd v Baker & Ors[64] held that in light of these duties a director’s conduct gives rise to an inference of the following sort:
in not taking issue at any time with the form of accounts prepared for [the company], when the state of those financial records would naturally call for action or comment from [the director] if they did not correctly record and explain its transactions, it is to be inferred that the… accounts in fact correctly recorded and explained the transactions of the company.[65]
[64] [2010] VSC 59.
[65] Ibid [180].
Such conduct amounts to admissions by the director which may be adverse to him in a proceeding.[66]
[66] Ibid [181].
From these principles, it follows that the Financials Reports establish, on a prima facie basis, that there were determinations that the Income of the Trust in 2018 and 2019 be the accounting profit resulting in distributions to the beneficiaries.
That prima facie evidence is buttressed by Mellor’s own conduct when he reviewed and made declarations adopting the Financial Reports in 2018, 2019 and 2020 — inviting an Ambridge inference that they are correct.
The declarations are not themselves the relevant determinations as to what constituted the Income of the Trust[67] and therefore the date of the declarations is immaterial.
[67] See Defendant’s Submissions at [46].
Rather, the declarations are conduct from which the Court infers that the relevant determinations had been made.
The Plaintiff’s case thus established in this way (on a prima facie basis) it fell to the Defendant to lead contradicting evidence. It failed to do so.
Mellor and Vasta did not give evidence that no determinations were made in each relevant financial year.
If I am wrong, and that such evidence (of there being no determination) was given, I would reject such evidence especially when I have regard to the fact that the Trust’s 2018 Tax Returns, the Trust’s 2019 Tax Returns and indeed the Trust’s 2020 Tax Returns, all make express reference to the Trust’s liability to the AtwellFT that must have arisen because determinations had been made.
Neither Mellor nor Vasta was able to give a satisfactory answer as to why Trust’s 2018 Tax Returns, the Trust’s 2019 Tax Returns and indeed the Trust’s 2020 Tax Returns, all make express reference to the Trust’s liability to the AtwellFT even when there was no profit being declared in those very same returns.
Although the books show money being set aside to the credit of the beneficiaries, Mellor did not provide any explanation for these entries. Nor did Mellor give evidence that he had some other intention inconsistent with those entries.
Neither Mellor nor Vasta said that the Financial Reports contained mistakes or errors. Indeed, such evidence would have been highly implausible even if it had been given.
There was no evidence lead that could lead the Court to conclude that the entries are anything other than they what they appear to be.
The declarations ratifying the accounts were made three years in a row and would have required a special explanation. The accounts were confirmed in the 2020 Financial Report prepared after this proceeding was commenced and the Defendant then relied upon those same accounts for a valuation of the trust. The Defendant also made a distribution by payment of $10,000 to the MellorFT.
The Financial Records are sufficient to prove the plaintiff’s case and the Plaintiff is entitled to rely on them and the Ambridge inferences to establish its case until and unless the Defendant adduced clear or compelling evidence to the contrary (which it did not).
Defence of Irregularity not open to the Defendant
Even if I was not persuaded that the distributions were made consistent with the trustee’s powers under the Deed, distributions were made.
The Financial Reports, tax returns and Mellor’s own evidence of actual payments establish this.
Clause 17.7 of the Deed provides:
No person dealing with the Trustee is required to enquire as to:
(a)the adequacy of the powers of the Trustee in relation to that dealing;
(b)the proper exercise by the Trustee of any of the powers, authorities and discretions vested in the Trustee by the provisions of this document; or
(c)the propriety or regularity of any transaction affecting the Trust Fund.
The Defendant is therefore prohibited from denying the efficacy of the distributions on the ground that it conducted the affairs of the Trust irregularly.
Similarly, the Defendant is estopped from denying the distributions for the reasons canvassed in the plaintiff’s primary submissions. The plaintiff was compelled to sell its units at a valuation calculated on the basis of accounts showing that the Trust had an actual liability to pay the very monies now sought to be recovered.
Pleading Issues
Whilst it is not strictly necessary for me to make findings on the following pleading issue which arose between the parties, I do so for the sake of completeness.
After the close of evidence, the Defendant revealed for the first time that a material element of the Defence was that the financial statements were not adopted until after the end of the relevant financial year and are therefore ineffective (unpleaded contention).
That unpleaded contention, says the Plaintiff, should not be permitted in this proceeding.
The Plaintiff submits, and I agree, that the FANOD does not comply with the requirements of a proper pleading insofar as the unpleaded contention is concerned:
(a) The function of a pleading in civil proceedings is to alert the other party to the case they need to meet (and hence satisfy basic requirements of procedural fairness) and further, to define the precise issues for determination so that the court may conduct a fair trial.
(b) The cardinal rule is that a pleading must state all the material facts to establish a reasonable cause of action (or defence).
(c) Every pleading must contain in a summary form a statement of all material facts upon which the party relies, but not the evidence by which the facts are to be proved.
(d) Pleadings, when well-drawn, serve the overarching purpose of the Civil Procedure Act 2010 (Vic)
(e) Whatever level of generality is adopted in a pleading, it must be consistent with the purpose of pleadings, namely, to define the issues and thereby inform the parties in advance of the case they have to meet and so enable them to take steps to deal with it.[68]
[68] See Hoh v Frosthollow Pty Ltd [2014] VSC 77 [13]-[20].
A properly drawn pleading will contain all material facts and particulars to ensure that the other party is not taken by surprise.[69] The pleading must disclose to the Judge or Magistrate “what the case is about”.[70]
[69]Downer Connect Pty Ltd v McConnell Dowell Constructions (Aust) Pty Ltd [2008] VSC 77 [2].
[70] Ibid [4].
Quite apart from the defective pleading, the Defendant did not refer to this unpleaded contention in its written opening nor raise it in the extensive oral argument when seeking leave to amend its defence.
The effect of these omissions is that the Plaintiff was quite unaware of a key issue in dispute. Indeed, so too was the Court, until closing submissions.
The prejudice suffered by the Plaintiff is reasonably clear. The Plaintiff did not have an opportunity to lead evidence from Atwell or cross-examine Mellor and Vasta about any discussions relating to a decision to make a distribution prior to the end of each financial year. The Plaintiff also had no opportunity to tender interim reports showing distributions.
The Defendant ought not be permitted to now put its case (and rely upon the unpleaded contention) in this way without having given the proper notice.
I have already made factual findings, earlier in this judgment, that the necessary distributions were made by the Defendant prior to the end of each financial year.
Had I not done so, I would have acceded to the Plaintiff’s submission that I not permit the Defendant to rely upon the unpleaded contention as a defence to the claim.
I agree that raising the unpleaded contention, at the late stage that it was, was akin to litigation by ambush and ought not be permitted.
Ultimately however, nothing turns on this point because of my earlier findings.
Estoppel
Whilst it is not strictly necessary for me to make findings on the following contention asserted by the Plaintiff, I do so for the sake of completeness.
The Plaintiff asserts that the defence now raised in the FANOD is subject to an estoppel by convention. Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ said in Con-stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd:
Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted upon by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying.[71]
[71](1986) 160 CLR 226, 244.
The Plaintiff asserts that the parties jointly adopted the financial reports as the basis for a valuation of the plaintiff’s units in the Trust in Supreme Court proceeding no. S ECI 2020 03188. An independent valuer was given the reports (which included the disclosed liabilities) and provided a valuation of the plaintiff’s units in the Trust. The plaintiff’s units were subsequently sold at the assessed value.[72] Having accepted the existence of the liabilities for the purpose of the valuation (to its advantage), the Plaintiff asserts that the Defendant cannot now reprobate and deny the liabilities in this proceeding because it is expedient to do so.
[72] FANOD at [16(b)].
Finally, even if it were accepted that there was no “Income of the Trust” in financial years 2018 and 2019 because the taxable income of the Trust (as disclosed in the Trust 2018 Tax Returns and the Trust 2019 Tax Returns) was nil, there was still a distribution to the AtwellFT and the MellorFT which must be paid.
On its own case, there is a difference between the trust’s ‘accounting income’ and its taxable income. For this reason, clauses 9.6, 11.2 and 11.4 of the Deed become relevant.
The distinction drawn in cl. 9.6 between the “Income of the Trust” and “the income of the trust… under trust law” becomes significant when the “Income of the Trust” is a nil taxable income and this differs from the income of the trust which is “income ascertained by the trustee according to appropriate accounting principles and the trust instrument”[73] or the “accounting profit” to use Vasta’s words.
[73] Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70, 74-75.
Where the “accounting profit” exceeds the net taxable income, the effect of these clauses is that there is a residual power to distribute the excess “accounting profit” to the beneficiaries as a Distribution from the General Reserve. The Determination Date is immaterial to the exercise of powers under cl 9.6 or 11.2.
I agree with the submissions of the Plaintiff, that:
(a) the accounts, tax returns and other records show a long-standing intention over many years to make distributions from the Trust.
(b) there was power under the Deed, whatever the facts to make the distributions which in fact appear in the accounts.
(c) the Defendant, as trustee, had obligations to prepare a complete and accurate written accounting report including the Trust’s balance sheet for each financial year.[74]
[74] See clause 19.1(b).
(d) those obligations were only fulfilled if the distributions were actually made.
(e) the Court should proceed as far as possible on the assumption that the trustee acted consistent with its obligations.
(f) the Court should give effect to the trustee’s clear intention evinced over a number of years and find that there were the distributions as alleged either by finding that there was a distribution under clause 9 of the Deed or alternatively under clause 11.
Ultimately however, nothing turns on this point because of my earlier factual findings.
Conclusion
I am satisfied that the Plaintiff is entitled to $54,916 as evidenced by the liability of $54,916.00 shown as owing by the Trust to the AtwellFT in the Trust’s 2019 Tax Returns[75] and which is further evidenced by the liability of $54,916.00 shown as owing by the Trust to the AtwellFT in the Trust’s 2019 Financial Reports (after adding back the $10,000 drawings which ought never to have been deducted by Vasta, at the behest of Mellor, when preparing the Trusts 2019 Financial Reports)[76].
[75]PSCB 68.
[76]PSCB 53.
In the proceeding before this court, despite what appears to be the relative simplicity of the claim, the following documentation was filed by the parties:
(a) Plaintiff’s Court Book (hard copy) consisting of 497 pages (PCB);
(b) Plaintiff’s Supplementary Court Book (electronic copy) consisting of 641 pages. (PSCB)[77];
[77]Exhibit P-1.
(c) Defendant’s Court Book (electronic copy) consisting of 515 pages. (DCB)[78];
[78]Exhibit D-1.
(d) The FANOD filed 16 February 2022[79];
[79]Further Amended Notice of Defence dated 4 February 2022 but filed on 16 February 2022.
(e) Reply to the FANOD filed 10 February 2022;
(f) A further witness statement of Michael Atwell dated 13 February 2022[80];
[80]Exhibit P-2.
(g) Plaintiff’s closing submissions filed 25 February 2022 (consisting of 9 pages);
(h) Defendant’s closing submissions filed 4 March 2022 (consisting of 15 pages) which referenced an updated list of authorities and an updated bundle of authorities (1096 pages); and
(i) Plaintiff’s reply submissions filed 7 March 2022 (consisting of 7 pages) which referenced an index of cases and a bundle of cases (232 pages).
Much time, expense and effort has been expended by the Plaintiff pursuing a claim that ought to have been readily conceded by the Defendant.
That so much electronic ink has been spilt over this dispute is testament, perhaps, to the ongoing legal warfare between the two parties that has been (and continues to be) waged in various court jurisdictions, in a multitude of separate proceedings, throughout the state.
I suspect that this judgment is unlikely to mark the end of that legal warfare.
I give judgment to the Plaintiff in the sum of $54,916.00.
I will hear from the parties on the question of interest and costs.
Magistrate J. P. Foster
20 June 2022
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