BRK (BRIS) PTY LTD v FC of T
Judges:Cooper J
Court:
Federal Court
MEDIA NEUTRAL CITATION:
[2001] FCA 164
Cooper J
The applicant, at all material times, was the trustee of the Wagner Family Trust (``the Trust''). On 4 August 1998 the respondent, by notices of assessment of that date, assessed the applicant to income tax and imposed penalty tax for the financial years 1993, 1994 and 1995. The respondent assessed the applicant as trustee pursuant to s 99A of the Income Tax Assessment Act 1936 (Cth) (``the Act'').
2. The applicant lodged notices of objection to the assessments contending that Westside Commerce Centre Pty Ltd, as trustee of the Hendon Unit Trust (``WCC'') was beneficially entitled to all of the income in each of the relevant income years. Alternatively, it contended that the other beneficiaries upon default were presently entitled to the income.
3. The respondent disallowed the objections in full and the applicant appeals to this Court to set aside the decision to disallow the objections.
4. The Trust was settled by Deed of Settlement dated 12 June 1980 (``the Deed''). So far as is presently relevant, the Deed provided:
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5. On 28 June 1993 the applicant, then known as Burradale Pty Ltd, held a meeting, the business of which is recorded in minutes of the same date. The minutes record:
``MINUTES OF A MEETING OF DIRECTORS OF
BURRADALE PTY LTD
HELD AT:
ON: The 28th day of June 1993 at am/pm
PRESENT: Bill Wagner Chairman
Jessica Wagner
TRUSTEE STATUS: It was noted the Company acts as trustee of the
............... Discretionary Trust (`the
Trust') and that under the provisions of the
relevant Trust Deed the Company in its trustee
capacity in the circumstances set out in clause
1(b)(1)(iii) has power to nominate further
General Beneficiaries for the purposes of the
Deed.
THE WESTSIDE
DISCRETIONARY
TRUST: The Chairman advised that Astion Pty Ltd ACN
060 572 581 had provided advice in writing to
the company confirming that the Specified
Beneficiaries under the Trust were included
within the classes of beneficiaries under the
Westside Discretionary Trust.
In the circumstances it was noted that Astion
Pty Ltd as trustee of the Westside Discretionary
Trust qualified for nomination as a General
Beneficiary under the Trust.
NOMINATION OF
GENERAL
BENEFICIARY: The Chairman tabled a nomination form and IT
WAS RESOLVED to nominate Astion Pty Ltd as
trustee of the Westside Discretionary Trust as a
General Beneficiary of the Trust and IT WAS
FURTHER RESOLVED to affix the Common
Seal of the Company to the nomination form.
The meeting closed at o'clock.
SIGNED as correct.
[Signature]
Chairman''
6. At that date the Westside Discretionary Trust did not exist and there is a real question as to whether or not it was ever settled. Similarly, as at that date there was no advice in writing from Astion Pty Ltd confirming that the Specified Beneficiaries under the Trust were included within the classes of beneficiaries under the Westside Discretionary Trust. There is a real question whether or not any such advice ever was given; an issue I will return to later.
7. On 28 June 1993 the applicant caused its common seal to be applied to a document entitled ``NOMINATION OF GENERAL BENEFICIARY''. The document provided:
``WHEREAS:
A. The Deed described in Part 1 of the Schedule (`the Deed') constituted the trust described therein (`the Trust').
B. The party described in part 2 of the Schedule is the trustee of the Trust (`the Trustee').
C. Clause 1(b)(iii)A of the Deed makes provision for the nomination in writing by the Trustee as a General Beneficiary of the Trust, the trustees (in their capacity as such) of any trust or settlement under which any General Beneficiary is a beneficiary whether present or contingent.
D. It is noted that:
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- (1) Astion Pty Ltd ACN 060 572 581 as Trustee of the Westside Discretionary Trust is a General Beneficiary of the Trust.
- (2) Astion Pty Ltd in its trustee capacity is the holder of one or more units in the Hendon Unit Trust created by Deed of Trust dated the 25th day of March 1988 ('the Unit Trust').
- (3) Westside Commerce Centre Pty Ltd ACN 008 149 764 (`WCC') is the Trustee for the time being of the Unit Trust.
E. It is further noted that by virtue of the circumstances outlined in D above WCC in its capacity as Trustee of the Unit Trust qualifies for nomination as a General Beneficiary of the Trust.
THEREFORE:
1. The Trustee hereby nominates WCC in its capacity as trustee of the Unit Trust `the nominated General Beneficiary' as a General Beneficiary of the Trust such nomination to take effect immediately.
2. In nominating the nominated General Beneficiary as a General Beneficiary of the Trust and the Trustee notes that the terms of the Deed do not provide any General Beneficiary not being a Specified Beneficiary under the Deed with any residual rights under the Deed arising from any default or failure on the part of the Trustee to appoint income or capital and the Trustee specifically declares its intention not to confer any such rights on the nominated General Beneficiary.
THE SCHEDULE
PART 1:THE DEED OF SETTLEMENT Date: The Settlor: The Trustee: Name of Trust:
PART 2:THE TRUSTEE (if not the Trustee in Part 1):
EXECUTED AND DELIVERED as a Deed the 23rd day of June 1993.
THE COMMON SEAL of BURRADALE PTY LTD ACN 010 140 299 was[Seal]
Applied in accordance with[Signature] its Articles of Association in The presence of:
[Signature]''
8. The details required by Part 1 were left incomplete. At the time the seal was applied, Astion Pty Ltd was not the trustee of the Westside Discretionary Trust and did not hold units in the Hendon Unit Trust.
9. On 28 June 1993, the applicant held a further meeting, the business of which is recorded in a minute of the same date. The minute records:
10. On 30 June 1993 the applicant held a meeting as trustee of the Trust, the business of which meeting is recorded in minutes of that date. The minutes provide:
11. On 30 June 1994, the applicant held a meeting as trustee of the Trust, the business of which meeting is recorded in minutes of that date. The minutes provide:
``RESOLUTION OF DIRECTORS OF
Burradale Pty Ltd
Made on 30th June 1994
by the signatories to this Resolution
IT WAS RESOLVED
1. To appoint the net income of The Wagner Family Trust for the year
ended 30th June 1994 as follows:
(a) The sum of $304,021.72 to Westside Commerce Centre Pty Ltd
as trustee of the Hendon Unit Trust for its absolute benefit.
(b) The following sums to the following beneficiaries for their
absolute respective benefits: NIL
(c) the Balance to Jessica Wagner and Bill Wagner equally
between them for their absolute benefit.
2. To the extent: if any, that, in respect of specific sums appointed to
specific beneficiaries, the net income may be established to be less
than the specified sums:
(a) The excess of the specified sums over the net income shall be
deemed to be appointments of capital.
(b) That deeming effect shall apply pro-rata to the appointments in
paragraph 1(b) first, before applying, if necessary, to the
appointment in paragraph 1(a).
[Signature] [Signature]
Trustee Trustee''
12. On 30 June 1995, the applicant held a meeting as trustee of the Trust, the business of which meeting is recorded in minutes of that date. The minutes provide:
13. There is no evidence as to the circumstances by which it is alleged that the Northbourne Trust became a beneficiary of the Trust and became entitled to income of the Trust in the financial year ended 30 June 1995. However, the respondent has not assessed the applicant to tax on any distribution to the Northbourne Trust and no issue arises in the present proceedings as to that distribution.
14. A comparison of the terms of the resolutions passed by the applicant on 28 June 1993, and the nomination of appointments which preceded them, indicates that they were not prepared by reference to the Deed which contains the trusts and powers of the Trust. The applicant, as trustee under the Trust, had no power to appoint WCC and Astion Pty Ltd as beneficiaries entitled to benefit from the trusts provided for in the Deed. The applicant had no power to appoint any income in any income year to WCC as it was outside the class eligible to be the object of an appointment of income under the terms of the Trust:
In re Gulbenkian's Settlements [1970] AC 508 at 518;
In re Hays Settlement Trusts [1982] 1 WLR 202 at 210.
15. The purported resolutions were nullities and liable to be set aside ab initio by a Court:
Re Cavill Hotels Pty Ltd (1998) 1 QdR 396 at 402;
Turner v Turner [1984] Ch 100 at 111. WCC was at no relevant time a beneficiary under the Trust or entitled to have income in any income year appropriated, set aside or applied to it. In consequence, WCC was never presently entitled to any of the income of the Trust in the financial years 1993, 1994 and 1995.
16. Ultimately and correctly, I find, the case was litigated on the basis that the attempt by the applicant to appropriate, set aside or apply the income of the Trust in each income year to WCC failed. The issue litigated was what consequences flowed from such a failure?
17. The applicant submits that, as a matter of construction of the Deed, the failure of the applicant as trustee to pay, divide or apply the income which it attempted to appropriate, set aside or apply to WCC in each income year, had the consequence that the income for that year was distributed equally between the beneficiaries under the Trust as tenants in common. Such an outcome followed, the applicant submits, from a consideration of the terms of clauses 5 and 7 of the Deed. The applicant submits that as the default beneficiaries were presently entitled in respect of each year, the applicant was not assessable under s 99A of the Act in respect of any income and that, in consequence, the assessments were excessive and no income tax, penalty tax or interest was payable by the applicant. In those circumstances it submits the objections ought to have been allowed and the decisions disallowing the objections should be set aside.
18. Senior Counsel for the applicant submitted that although the Deed was inelegantly drawn, its purpose was clear; that was, to ensure that no income remained in any income year so as to be assessable in the hands of the applicant as trustee.
19. The respondent submits that:
- (a) The trusts or trust powers contained in clause 5 were subject to the trustee's absolute and uncontrolled discretion under clause 4 to accumulate any of the income of the Fund (as defined) and to hold the same
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as an accretion to and part of the capital of the Fund. - (b) Clause 5 as a matter of construction did not require that the discretion to pay or apply the income in any financial year had to be exercised by the end of that financial year and that, subject to the power to accumulate income which could be exercised at any time within a reasonable period after the end of the income year, the trustee could at any time pay, divide or apply the income referrable to any particular year to or for the benefit of one or more of the beneficiaries in such proportions and manner as the trustee thought fit.
- (c) If there has been a default by the applicant to appoint the income, no beneficiary became presently entitled because the default provisions in clauses 5 and 7 were void.
20. The structure of the Deed, in my view, reveals the intention of the settlor as to the treatment of capital and income and the proper construction to be given to the trusts provided for in the Deed.
21. Clause 3 of the Deed established a trust as to the capital and income of the Fund, as defined. The Trust was to be known as ``The Wagner Family Trust''.
22. Clause 4 gives the trustee an absolute and uncontrolled discretion to accumulate any income of the Fund and to hold it as an accretion to the capital of the Fund.
23. Clause 5 deals with the income of the ``Trust Fund''; although not defined, and at first glance different from the Fund as defined, it is clear enough that it is concerned with income of the Fund, as defined, of the Trust, as defined ie the income of ``The Wagner Family Trust''.
24. Clause 5 also only deals with income which has not been accumulated by the trustee exercising the power contained in clause 4.
25. The Trust upon which income is held is a discretionary trust empowering the trustee from time to time during the perpetuity period:
``... to pay divide or apply the whole or any part of the income of the Trust Fund to or between or for the maintenance education support or benefit of all or any one or more of the beneficiaries in such proportions and in such manner as the Trustee shall in his uncontrolled discretion think fit...''
26. The Trust as to income is subject to two provisos.
27. The first empowers the trustee to deal with and apply the capital of the Fund as provided by the proviso. That is, the trustee is not obliged to maintain the capital throughout the perpetuity period in order to earn income for the purpose of the trusts with respect to the income specified in clause 5.
28. The second proviso deals with a failure of the trustee to exercise any discretion with respect to income ``as aforesaid''.
29. In my view, ``as aforesaid'' refers back to the terms of the trust and trust power to deal with income during the perpetuity period as provided for in clause 5.
30. The applicant submits that the default provision in clause 5 will be triggered by a failure of the trustee to exercise any discretion as to the application of income within and before the end of each financial year. This conclusion, it submits, flows from the words:
``... then the Fund in relation to any income year shall be distributed equally between the beneficiaries as tenants in common.''
These words, it submits, disclose an intention on the part of the settlor that the trustee was not to hold any income at the conclusion of an income year and that any income not dealt with by the trustee was to vest in the beneficiaries as tenants in common in equal shares and that for the purposes of s 97 and 99A of the Act, those beneficiaries would be presently entitled to such income.
31. The respondent submits that the intention of the settlor without reference to the proviso is clear and that there is no obligation of the trustee to deal with the income under clause 5 within the income year. This is because the power to accumulate under clause 4 is totally unrestrained and may be exercised after the end of any financial year in respect of the income for that year. The respondent further submits that the proviso requires the distribution of the Fund, a defined term which includes both capital and income, and, would cause the Trust to be brought to an end at the end of the first year, if the whole of the first year's income was not accumulated as capital, or, dealt with by the trustee so that none was left in the trustee's hands or power of disposition at the conclusion of the financial year. Such a result, the
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respondent submits, is unlikely to have been intended.32. The presence of the default proviso in clause 5, in my judgment, indicates that the trustee has a duty to consider the exercise of the discretion to accumulate income under clause 4 and to consider the exercise of the discretion to apply the income in respect of each income year:
Lutheran Church of Australia v Farmers' Co-Operative Executors and Trustees Ltd (1970) 121 CLR 628 at 652; Gulbenkian's Settlements at 518;
McPhail v Doulton [1971] AC 424 at 456;
In re Locker's Settlement [1977] 1 WLR 1323 at 1325-1326;
Breadner v Granville-Grossman [2000] 4 All ER 705 at 719. However, the default proviso does not require that the duty be discharged within the income year.
33. The trustee under clause 4 of the Deed has a reasonable time within which to decide, in respect of the income earned from the Fund in any income year, whether to accumulate all or part of the income earned in that year as a capital accretion to the Fund. That duty falls to be satisfied within a reasonable time after the income for the financial year is, or is capable of being, ascertained by the trustee:
Pearson v Inland Revenue Commissioners [1981] AC 753 at 773, 786;
In re Allen-Meyricks Will Trusts [1966] 1 WLR 499 at 505; In Locker's Settlement at 1326; Breadner v Granville- Grossman at 720.
34. The duty of the trustee to consider whether or not to exercise the discretionary power of appointment for the income contained in clause 5 of the Deed falls to be satisfied when the trustee has determined not to accumulate the whole or part of the income, or a reasonable time has expired without the exercise of a discretion to accumulate. Once this duty has arisen, the trustee has a reasonable time within which to satisfy it.
35. The duties of the trustee as set out above apply to the discrete income of particular income years. Although they may be satisfied within the relevant income year, there is no obligation under the Trust to do so and there will be no breach of trust or duty provided that the duty is satisfied within a reasonable time after the end of the income year.
36. The effect of clauses 4 and 5 of the Deed, in my judgment, is that the trustee is bound by obligatory discretionary powers, to accumulate such income, if any, as the trustee thinks fit and to apply the income not accumulated in any income year in accordance with the terms of the discretionary power to the objects of the power in default of which the income for that income year is to be distributed in accordance with the default proviso. The exercise of the discretions is only constrained by the requirements that they be exercised bona fide for the proper objects of the Trust within a reasonable time of the duty to consider their exercise arising. The use of the term ``Fund'' in the proviso means the Fund, insofar as it is constituted by income and not capital earned in the income year.
37. It follows, in my judgment, that the circumstances necessary to trigger the default proviso in clause 5 had not arisen in any of the financial years in issue in these proceedings. Assuming the validity of the default proviso, the default beneficiaries had no present entitlement to the income of the Trust in each relevant income year. At the end of each of the financial years in issue, there was no beneficiary presently entitled to the income which the applicant had ineffectively attempted to appoint to WCC.
38. Even if, as the applicant contends, the discretion was to be exercised in the income year, as a matter of construction of clause 5, it remained open to the trustee until the last moment of the income year to exercise the discretion. Default, in these circumstances, would not have occurred until the income year had expired. Thereafter, if the default proviso were effective and valid, it would have taken effect according to its tenor. The consequence would be that in the subsequent financial year, the default beneficiaries would become entitled to income of the Trust earned in the previous financial year. However, the position would remain that as at the end of the financial year, there was no beneficiary presently entitled to the income.
39. The terms of clause 7 do not assist the applicant. This clause is intended to ensure that the Fund will, in default of, and subject to any prior action of the trustee, vest on the expiry of the perpetuity period in the beneficiaries named in the schedule in equal shares.
The applicant, in an alternative argument, submits that in the 1994 and 1995 income years the trustee exercised its power of appointment in such a way that it had the effect of appointing the income in question in each of the years to Wilhelm Wagner and Jessica Wagner. This
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follows, it submits, from the use of the words in the 1994 distribution resolution:``The balance to Jessica Wagner and Bill Wagner equally between them for their absolute benefit''
and the words in the 1995 distribution resolution:
``WILHELM J WAGNER REMAINDER OF
JESSICA O WAGNER BALANCE EQUALLY''
40. In my judgment the submission is misconceived. In the 1994 income year the clear intention of the applicant was to appoint to Mr and Mrs Wagner only so much of the Trust income, if any, as exceeded $304,021.72. It was not intended that Mr and Mrs Wagner take the sum of $304,021.72 in addition to any income in excess of that amount, in the event that the appointment to WCC should fail. The position is no different in respect of the 1995 year. The trustee purported to appoint discrete amounts of income to the Hendon Unit Trust as to the first $220,000, and to the Northbourne Trust as to the next $100,000. Finally, as to any remainder after the application of the first $320,000 of income, that remainder was to be appointed to Mr and Mrs Wagner; they did not as a matter of construction or intention on the part of the trustee, take by default all of the income in the event of failure of the other two appointments.
41. In the view that I take as to the proper construction of clauses 4 and 5 of the Deed, it is unnecessary to determine the question of the validity of the default provisos as contained in clauses 5 and 7.
42. It follows in my judgment that there was no beneficiary presently entitled to the income of the Trust which the applicant had unsuccessfully attempted to distribute to WCC in each of the financial years 1993, 1994 and 1995. In consequence of there being no such beneficiary, the applicant became assessable as trustee pursuant to the operation of s 99A(4) of the Act.
43. No question as to the operation of s 100A of the Act arises for consideration in these proceedings as WCC was not a beneficiary presently entitled to income under the Trust in any income year.
44. I turn now to the issue of the penalty tax imposed pursuant to s 226H of the Act.
45. Section 226H provides:
``226H Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.''
46. The term ``tax shortfall'' is defined in s 222A(1) of the Act as follows:
```tax shortfall' , in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year;''
47. The following definitions contained in s 222A(1) are also relevant to the determination of whether or not there has been a tax shortfall as defined:
```proper tax' , in relation to a taxpayer and a year, means the tax properly payable by the taxpayer in respect of that year on the taxpayer's taxable income after allowing credits properly allowable to the taxpayer;
...
`statement tax' , in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer;
`taxation officer' means a person exercising powers or performing functions under, or in relation to, this Act or the regulations;
`taxation officer statement' means a statement made to a taxation officer orally,
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in a document or in any other way, and includes a statement:
- (a) made in an application, certificate, declaration, notification, objection, return or other document made, prepared or given, or purporting to be made, prepared, or given, under this Act or the regulations; or
- (b) made in answer to a question asked under this Act or the regulations; or
- (c) made in any information given, or purporting to be given, under this Act or the regulations; or
- (d) made in a document given to a taxation officer otherwise than under this Act or the regulations;
but does not include a statement made in:
- (e) a document produced under paragraph 264(1)(b) or 264A(1)(d) or (e) (other than a document containing particulars of the basis of the calculation of taxable income of a year of income and the tax payable in respect of that taxable income that were specified in a return in accordance with section 221AZD or 221AZS); or
- (f) a document produced under subparagraph 451(2)(c)(ii) or paragraph 453(1)(e);
`taxation purpose statement' means a statement made to a person, other than a taxation officer, for a purpose relating to the operation of this Act or the regulations orally, in a document or in any other way, and includes a statement:
- (a) made in an application, certificate, declaration, notification or other document made, prepared or given to the person; or
- (b) made in answer to a question asked by the person; or
- (c) made in any information given to the person;
`taxation statement' , in relation to a person, means:
- (a) a taxation officer statement made by the person; or
- (b) a taxation purpose statement made by the person;
but does not include a statement:
- (c) in which an income tax law is treated as applying to a taxpayer in respect of a year of income in relation to a matter; and
- (d) that is made:
- (i) in an objection under this Act against an assessment or determin- ation; or
- (ii) in relation to the Commissioner's consideration of such an objection;''
48. In the income tax returns furnished by the applicant for the years ended 30 June 1993, 30 June 1994 and 30 June 1995, it made the statement that WCC was presently entitled to a share in the net income of the Trust in each of the relevant years. The statement tax of the applicant, on the basis of the taxation statements, was therefore nil. The present entitlement disclosed was $119,987 in 1993, $306,758 in 1994 and $220,053 in 1995. In each of the relevant income years the proper tax in relation to the applicant in respect of the income as returned in the taxation statements was the tax payable by the applicant assessed pursuant to s 99A of the Act on income of $119,987, $306,758 and $220,053. There was a tax shortfall in each of the relevant years in an amount equal to the proper tax because of the statement contained in the returns as to the present entitlement of WCC.
49. It follows that there was in each tax year a tax shortfall for the purposes of s 226H(a).
50. The question is whether the tax shortfall was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of the Act or regulations within the meaning of s 226H(b) of the Act. In my judgment, for the purposes of the present appeal, the relevant operation of the Act or regulations which has to be considered is the operation of ss 97 and 99A of the Act to the income of the Trust. For s 97 of the Act to operate, it was necessary that WCC be both a beneficiary of the Trust and presently entitled to a share of the income of the Trust for the relevant income year. Section 97 of the Act had no operation in respect of the income of the Trust disclosed in the income tax returns as having been distributed to WCC because WCC satisfied neither condition. The applicant did not have the power to appoint WCC as a beneficiary under the Trust. Nor did it have the
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power to appoint income to it under clause 5 unless it was an eligible beneficiary.51. Senior Counsel for the applicant submits that there was nothing in the conduct of the applicant which was reckless. The applicant's position is summed up in the following submission:
``In relation to any penalties that might arise, the question in this context is whether the liability under section 99A which arises because there was no presently entitled beneficiary rather than because of any possible operation of section 100A, we would say that there is simply no causal link. I mean, there was admittedly sloppy documentation, but everyone concerned, including the Commissioner, until the 21st of this month was proceeding on the assumption that nonetheless the present entitlement - sorry, that a trust law entitlement to the income in question had been established in Westside Commerce Centre.
So, in our respectful submission - and advice was sought on any view as to what was necessary to achieve that result, as a result of a mistake in the documentation, something which could quite easily have been achieved if the right documents had been executed or the right things done didn't occur, but to describe that in the circumstances is reckless. It is, in our respectful submission, inappropriate, particularly since, in any event, the recklessness to which the Commission is referring in his assessment is an entirely different recklessness to that - or an entirely different circumstance to that which now confronts the Court. Likewise, if there is a tax shortfall, it doesn't arise because of a tax avoidance scheme within the meaning of section 224(1) of the Act; it arises because the parties, notwithstanding an attempt to do so, failed to constitute presently entitled beneficiaries to the Wagner Family Trust, and in those circumstances subsection 224(i) has no application.''
52. He further submits that the issue is ``whether there is an attempt at delinquency on the part of the taxpayer with respect to its tax obligations as opposed to its own affairs...''.
53. The affairs of the Trust were controlled effectively by Mr Wagner, firstly as one of two trustees, the other being Mrs Wagner, when the Trust was originally settled and at all material times to the issues in these proceedings, as one of two directors of the applicant, Mrs Wagner being the other. Mr Wagner and the Trust have for many years been clients of Harts Accountants and Auditors (``Harts''). Importantly, Mr Wagner and the applicant relied upon Harts, and in particular Mr Steven Hart, to attend to the taxation affairs of the Trust and to advise Mr Wagner and the Trust as to its business affairs.
54. In 1993 Mr Wagner, and through him the applicant, were concerned to reduce the amount of income tax which the applicant would, in the ordinary course, be assessed on in the 1993 income of the Trust. I find that Mr Wagner determined to find a way to reduce the amount of tax which would otherwise be payable by the applicant or the beneficiaries of the Trust on a distribution of Trust income.
55. I accept the evidence of Mr Wagner that had the applicant not become involved in the arrangements being promoted by Harts and appointed income to the WCC, it would not have appointed income to any other beneficiary of the Trust, but would have invested in other ventures or its own investments which would have involved borrowing money at interest. These investments, I am satisfied, would have been structured in such a way as to reduce the incidence of income tax payable on Trust income or the prospect of such reduction would have been an attribute of such an investment.
56. Mr Wagner, I find, had no real understanding of the arrangements the applicant entered into upon the advice of Mr Steven Hart. His limited understanding was that the appointment of income of the Trust to WCC would avoid payment by the applicant of income tax in relation to that income, that the money would remain available to the Trust to be used for Trust purposes until called for some time in the future for development of the Westside Commerce Centre in Adelaide, and that out of the income appointed to WCC, twelve percent of that sum was to be paid to Astion Pty Ltd and Tinkadale Pty Ltd, companies associated with Harts.
57. The applicant did not receive legal advice or advice independent of Harts as to the arrangements put to it by Harts, or as to the commercial viability of the proposed development in South Australia. The applicant,
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by Mr and Mrs Wagner, simply signed the documentation put before them as directors of the applicant, relying on Harts to be acting in the best interests of the Trust. As appears from the documentation signed by them on 28 June 1993, they failed to complete the documentation by supplying the information required for insertion in the blank spaces and without regard to truth or otherwise of the statements contained in the documentation. Mr and Mrs Wagner, I find, had neither the skills nor experience to act independently in the best interests of the Trust, and thus relied upon Harts, and in particular Mr Steven Hart, for advice, to take all such steps as were necessary to ensure that the applicant and the Trust complied with their obligations under the Act with respect to income of the Trust, and, to ensure that the steps necessary to enable the applicant to appoint income to the WCC were properly and effectively carried into effect.58. The Westside Commerce Centre was a real estate development in South Australia. In 1993 it was owned by WCC. WCC had substantial accrued losses, recorded in its 1993 tax return as $5,472,742 at 30 June 1993. It was also in default with its financier, had external creditors, and was unwilling, or more likely unable, to borrow additional funds to complete the development.
59. Robert Adcock was aware of the Westside Commerce Centre development and the position of WCC and other associated companies and trusts prior to his taking up employment with Harts in May 1993. The details of the proposal put by Harts to the applicant and other clients was developed by Steven Hart and Robert Adcock and was to take the form of a joint venture. The object of the proposal was to take advantage of the accumulated tax losses of WCC by appointing the income of the Trust and of other of Hart's clients to WCC and then to isolate that income from the secured creditor and general creditors of WCC by providing that the appointed income was only to be paid over to the project manager, provided under the joint venture, when called for and then only to be used for development purposes as defined.
60. Save for the sum of twelve percent of the money appointed to WCC, the income appointed in 1993, 1994 and 1995 has been retained by the applicant and spent in various ways unrelated to the Westside Commerce Centre development.
61. In putting together the proposal, Harts sought the professional advice of Cleary & Hoare, Solicitors. That firm drew up the joint venture documentation and also provided proforma documentation for use by the applicant and others to give effect to the arrangement.
62. On 24 June 1993, Cleary & Hoare wrote a letter of advice to Harts. The advice dealt specifically with the matter of present entitlement. It said, so far as is relevant:
``9.11 There has been a number of cases relating to the concept of present entitlement. The CCH Australian Federal Tax Reporter at paragraph 50-615 notes that various general principles as to when a beneficiary is presently entitled to trust income can be extracted from those cases as follows:
- 9.11.1 A beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income and must be able to demand immediate payment of the trust income.
- 9.11.2 A beneficiary can only be presently entitled to income which is legally available for distribution to the beneficiary, even though at the relevant time it may not actually be in the trustee's hands for distribution.
- 9.11.3 A beneficiary may be presently entitled even if under the terms of the Trust the entitlement is not to have the money paid directly to the beneficiary, but to have money otherwise applied for the benefit of the beneficiary.
9.12 In relation to the Joint Venture Agreement:
- 9.12.1 Clause 6.1.2 provides that the appointment of income is for the absolute benefit of the Proprietor (that is, the Company as trustee of the Trust).
- 9.12.2 The Proprietor appoints the Project Manager as its agent to receive those distributions, that is, the Initial Development Funds.
- 9.12.3 The Project Manager is prohibited from using the Initial Development Funds except to pay Development Costs at the direction of the Proprietor. The Proprietor
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has an obligation to pay the Development Costs under the Joint Venture Agreement. Development Costs do not include existing debt or holding charges.- 9.12.4 The Proprietor warrants that there will be no creditors claims in relation to the property and that the Lots comprising the property may be sold at agreed prices and agrees to subject its rights in respect of the Initial Development Funds to a security for liquidated damages (equal to the Initial Development Funds) which would flow from any breach of those warranties. However, notwithstanding the security, the Proprietor is entitled to cause the Project Manager to apply the Initial Development Funds to the payment of Development Costs in discharge of the Proprietor's obligations under the Joint Venture Agreement to meet those costs.
- 9.12.5 Clause 6.5 specifically provides that nothing in the Agreement derogates from the absolute entitlement of the Proprietor, both in interest and in possession, to the Initial Development Funds.
9.13 There is no case directly equivalent to the proposed circumstance. However, subject to our later observations in relation to Section 100A and to Part IVA, it would seem that the Proprietor ought be presently entitled to the Initial Development Funds so that they constitute assessable income of the Proprietor rather than of the Contributors (your clients). This observation is subject to the appointments of income by your clients being effective and valid according to their constituent trust deeds and trust law generally. However, if, contrary to our view, the Proprietor is not presently entitled to the Initial Development Funds, the client trustees will probably be assessed to the highest rate of tax because, notwithstanding the provisions of those trust deeds or the distribution minutes which may cover residual income, at general law (as distinct from tax law) the income will have been appointed for the benefit of the Proprietor so that, to the extent of that appointment, it is not available for distribution to other beneficiaries so that the other beneficiaries cannot, at general law and, therefore, tax law, be presently entitled to that income. All the requirements of the constituent trust deeds in making distributions of income will need to be met.
9.14 In this respect, it will be necessary for us to review each trust deed for your clients and to ensure that appropriate steps are taken to cause the Proprietor to become a beneficiary of each of those trusts.''
63. There is no evidence to suggest that the necessary review of each client's trust deed referred to in paragraph 9.14 was ever carried out. Having regard to what occurred in the case of the applicant, it is impossible to believe that any review of the Deed of the Trust was ever undertaken. What is clear however, and I so find, is that Harts were on notice that whether or not the applicant had a taxation liability as trustee of the Trust under s 99A of the Act was dependent upon WCC being a beneficiary under the Trust, and that all the requirements of the Deed be complied with in order to appoint income to it so that it became, for the purposes of s 97 of the Act, presently entitled to that income. Indeed, in a circular letter to clients promoting that proposal, Harts stated:
``If a client does not have a discretionary trust able to distribute to the property owning trust, you may need to either vary the deed of their current trust or establish a trust with sufficient income in the current year to distribute the required amount. Precedents to vary their current trust to establish a new trust will be available.''
64. Cleary & Hoare provided Harts with a set of proforma documents which totalled eight in number. There was also created a document entitled ``CHECKLIST FOR CLIENTS WITH EXISTING DISCRETIONARY TRUSTS''. The list stated:
``1. Participation
2. Power of Attorney
3. Legal opinion acknowledged
4. Letter from Astion Pty Ltd to client trust
5. Form re nomination of general beneficiary #1
6. Form re nomination of general beneficiary #2
7. Minutes re nomination
8. Distribution minute''
65. The proforma participation letter provided:
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``28 June 1993
Mr R T Adcock Harts Accountants & Auditors Level 5 Harts Building 240 Margaret Street BRISBANE QLD 4000
Dear Mr Adcock
THE WESTSIDE COMMERCE CENTRE JOINT VENTURE
We refer to recent discussions regarding our proposed involvement in the above joint venture. Having decided to proceed we enclose the following documents:-
- 1. Power of Attorney in your favour duly executed under Seal;
- 2. A copy of the Minutes of the Meeting at which the decision to distribute trust income was made;
- 3. Cheques for a total of $representing 12% of the total distribution, made payable to:
* Astion Pty Ltd 10% * Tinkadale Pty Ltd 2% --- 12% ---In making the decision to proceed, we confirm having received and read the letter from Messrs Cleary & Hoare to Harts dated 24th June 1993 and we further acknowledge that professional and other fees in aggregate amounting to not more than 12% will be received by your firm and other parties and/ or their advisers involved in the formation of the joint venture and preparation of the necessary documentation. Further accounting fees may be payable to assist in restructuring our entities if required.
Yours sincerely''
This letter was signed by Mr and Mrs Wagner and returned to Harts, although the amount of the cheques was left blank.
66. The proforma letter from Astion Pty Ltd provided:
``30th June 1993
The Directors Pty Ltd C/- Level 5 240 Margaret Street BRISBANE QLD 4000
Dear Sirs,
THE WESTSIDE DISCRETIONARY TRUST
You are advised that by Deed of Settlement dated 29th June, 1993, Astion Pty Ltd was appointed Trustee of the above Discretionary Trust.
You are also advised that the provisions of the Deed relating to Tertiary Beneficiaries are such that they are defined as including the Specified Beneficiaries under theTrust of which you are Trustee.
You are further advised that Astion Pty Ltd as Trustee of the above Trust also holds units in the Hendon Unit Trust, the Trustee of which is Westside Commerce Centre Pty Ltd A.C.N. 008 149 764.
Yours faithfully ASTION PTY LTD
per:
............................. Director''
67. In respect of clients other than the applicant, the evidence indicates that Harts completed the blanks in handwriting providing the relevant details of the client. In the case of the applicant, there is a fully typed letter dated 30 June 1993, which the respondent submits was created later to overcome a deficiency in the documentation relating to the applicant's involvement in arrangements. This is the written advice from Astion Pty Ltd which the minutes of meeting dated 28 June 1993 incorrectly state had been made available to the applicant.
68. The other documents were supplied to the applicant and, where required were executed, although generally not otherwise completed.
69. In 1994, Harts, using its own word processing programs, regenerated the proforma documentation which had been supplied by Cleary & Hoare and apparently photocopied by Harts for use in 1993. In doing so Harts made changes to the Power of Attorney execution clause, bringing it up to June 1994, as it did with the Nomination of General Beneficiary forms and the Minutes of Directors Meeting of the trustee nominating general beneficiaries. The Distribution Resolution Minute was varied from that used in 1993. The letter from Astion Pty Ltd dated 30 June 1993 advising of the
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settlement of the Westside Discretionary Trust was also regenerated retaining the original date of 30 June 1993.70. A set of the proforma documentation generated by Harts in 1994 was tendered into evidence. It uses a markedly different font, format and set out to the documentation produced by Cleary & Hoare in 1993. The distribution minute produced in 1994 provides for signature above the word ``Director'' twice appearing on the page. The proforma letter from Astion Pty Ltd concerning the Westside Discretionary Trust is produced bearing the date 30 June 1993 and it is addressed to ``The Directors'' of a trust the name of which is to be included in the letter. The word processing program allows the operator to insert the details of each client in the ``endfield'' spaces provided in the proformas and then produce a complete original document referrable to the client's personal circumstances.
71. The minute of the distribution of income of the Trust for 1994 used by the applicant has been altered when generated to replace the word ``director'' where it appears at the bottom of each page with the word ``Trustee'' below where Mr and Mrs Wagner signed. A comparison of the letter from Astion Pty Ltd to the Trustees Burradale Pty Ltd (Exhibit 41) dated 30 June 1993 advising of the settlement of the Westside Discretionary Trust with the same letter generated as a proforma in 1994, shows that the letters are identical, save for the alteration of the address of the letters from ``The Directors'' in the case of the proforma, and to ``The Trustees'' in the case of the letter to the applicant.
72. I infer that both documents were altered at the same time for whatever reason the person then generating the documents may have had for effecting the change. I am satisfied that the letter Exhibit 41 did not come into existence on or about the date which it bears and was not brought into existence before June 1994 at the earliest. I am satisfied that it is more probable than not that the letter was created when the bundle of documentation necessary for the 1994 joint venture in which the applicant participated was generated.
73. I am satisfied that no-one at Harts read the proforma documentation produced by Cleary & Hoare for use in the joint venture to see whether it was appropriate to the circumstances of the Trust. Anyone reading the documentation could not fail to recognise that the documents were prepared with reference to a particular form of trust deed. Unless the trust deed of the Trust was in the same form, the documentation was meaningless. I am satisfied that the only matters of concern to Harts in the last days of June 1993 were to ensure that the proforma documentation was executed, and in particular that there were resolutions appointing WCC as a beneficiary of the Trust, and appointing income of the Trust to it before 30 June 1993.
74. It was not a matter of concern to Harts whether or not the applicant had power under the terms of the Trust to pass the resolutions or make the appointments as beneficiaries or of income. It was not, as senior counsel for the applicant submits, merely a case of sloppy paperwork and mere oversight on the part of the applicant and Harts that the applicant had no power to appoint WCC as a beneficiary of the Trust or to appoint income of the Trust to WCC.
75. I am also satisfied that in June 1994 and June 1995 when the applicant became a party to further joint ventures which required the applicant to appoint further income to WCC, no consideration was given to whether or not the applicant was empowered under the terms of the Trust to make the appointments. Rather, I am satisfied the only concern of Harts was to obtain from the applicant and its other clients participating in the joint ventures duly executed proforma documentation which contained, amongst other things, the executed minutes of a resolution appointing income to WCC.
76. Harts, as accountants and tax agents for the applicant, prepared the income tax returns for the years 1993, 1994 and 1995. Those returns recorded that the income of the Trust in 1993 was $123,189, which was distributed wholly to the WCC, that in 1994 it was $306,758, and was distributed wholly to WCC, and that in 1995 it was $311,388, which was distributed as to $220,053 to WCC and as to $91,335 to the Northbourne Rural Property Trust. I infer that the tax returns were prepared on the basis of the proforma documentation executed by the applicant in each of the relevant years. There can have been no attempt made to ascertain whether or not WCC was in fact and law beneficially entitled in each income year by reference to the Deed and a consideration of the applicant's powers of appointment under the
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Trust. Such an investigation would have revealed that WCC was not presently entitled to the income, as was discovered when belatedly such an investigation was undertaken.77. In s 226H of the Act the recklessness of the taxpayer, or of a registered tax agent, must be with regard to the correct operation of the Act. In the context of s 226H, the definitions in s 222A(1) to which reference has been made, and Part VII of the Act generally, it is necessary in my view that the conduct which gives rise to the tax shortfall must be reckless as to whether or not the Act or regulations will operate correctly so as to lead to an assessment of the proper tax payable by a taxpayer. Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
78. The applicant relied upon Harts to act as professional accountants, tax agents and investment advisers in its interests in relation to the joint ventures and in relation to the preparation and lodgment of its income tax returns seeking assessment by the respondent on the basis of the material contained in those returns. To rely on Harts in those circumstances, when it did not have the knowledge and experience to understand what was proposed and the effect of the documentation which it signed, was not unreasonable, and in the circumstances the lodgment of the income tax returns by the applicant by its tax agent Harts was not reckless conduct on the part of the applicant for the purposes of s 226H. However, reliance in this way on the tax agent carries with it the risk that the tax agent may be ``reckless'' within the meaning of s 226H and that the tax consequences of such recklessness will be borne by the taxpayer as s 226H in fact provides.
79. This case is different to one where a tax agent prepares an income tax return on the basis of material provided by the taxpayer. Harts was so intimately involved with the promotion of the Westside Commerce Centre Joint Venture that it was in a better position than the taxpayer to know the true facts. Harts knew from Cleary & Hoare Solicitors that the effectiveness of the resolutions appointing the additional beneficiaries and the appointment of income to WCC depended entirely upon the terms of the Trust authorising such a course to be followed. Harts failed in June 1993, and at all times thereafter, to make the necessary investigation to enable it to advise the applicant to take the steps provided for in the proforma documentation and to execute the same, and to enable Harts to act upon the basis that the actions of the applicant and the executed documentation were effective to create in WCC a present entitlement to the income of the Trust in the 1993, 1994 and 1995 income years. Harts had no basis to rely upon the proforma documentation executed by the applicant in preparing the income tax returns because it knew there was a real risk, in the sense that it was not a fanciful risk, that the resolutions recorded therein may not have been effective under the terms of the Trust to create a present entitlement to the income in WCC.
80. I am satisfied that Steven Hart and Robert Adcock in June 1993 determined to rely upon the proforma documentation to be executed by the applicant, and the steps to be taken by it as recorded in the documentation, as being effective to appoint WCC as a beneficiary of the Trust and to appoint income of the Trust to it. They took the risk that any existing trust deed may not have empowered the applicant to effectively pass the resolutions or appoint the income. They conducted themselves on that basis at all times thereafter in the conduct of the applicant's taxation affairs and continued to take the risk that no effective appointment of beneficiaries or of income had been made in each relevant income year. I am satisfied that Steven Hart and Robert Adcock, when the income tax returns were prepared and lodged, were indifferent as to whether or not the statements as to the distribution of income contained in the returns were correct. It was reasonably foreseeable to a person in their position that to allow the preparation and lodgment of the tax returns on that basis would
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cause the Act to operate so as to bring the income of the Trust to account under s 97 of the Act rather than s 99A(4), when there was a real risk that that was not the correct basis on which the income ought to be assessed. In my judgment, to lodge the returns in the form in which they were lodged containing the statement as to the distribution to WCC was reckless.81. The requirements of s 226H(b) were satisfied.
82. The assessments of tax made by the respondent were made on the income of the Trust as returned by the applicant. The assessments were made on the basis that there was no beneficiary presently entitled, and that accordingly the applicant was to be assessed pursuant to s 99A of the Act to that income. In respect of the 1993 and 1995 income years, that is undoubtedly correct. However, the applicant submits that the resolution as to the distribution of income in the 1994 tax year only appointed $304,021.72 to WCC, and that the balance, being the difference between that sum and $306,758, was appointed equally to Mr and Mrs Wagner. On that basis the applicant submits Mr and Mrs Wagner were presently entitled to $2,737 on 30 June 1994 and that the assessment of the applicant to income and penalty tax on that amount is in error and that the assessment is thus excessive. The respondent submits that I should not give effect to the resolution because it conflicts with the statement in income tax return. There is no evidence as to how the income came to be returned in the 1994 return as entirely distributed to WCC in an amount exceeding that appointed to it by resolution of the applicant as recorded in the minute dated 30 June 1994. I am satisfied that the resolution recorded in the minute more probably than not was intended to be given effect to according to its tenor at a time before the accounts of the Trust were finalised, and that the sum appointed to WCC was an estimate of the likely income for the 1994 income year. Mr and Mrs Wagner were eligible beneficiaries. I am satisfied that they each became entitled to one-half of $2,737 of the income of the Trust in the 1994 income year. To that extent, the assessment of income in that year is excessive. Otherwise, the 1994 assessment as made by the respondent is correct.
83. The applicant has substantially failed and should pay the costs of the application, including reserved costs, to be taxed if not agreed. The issue of the distribution to Mr and Mrs Wagner in the 1994 income tax year has had no effect on the length or conduct of the proceedings and has not had any impact on the total costs of the proceedings. Accordingly, no separate order as to costs should be made in respect to that issue.
THE COURT ORDERS THAT:
1(a) The objection decision in respect of the objection to the assessment of income for the year ended 30 June 1994 be set aside in part.
- (b) The objection be allowed in part;
- (c) The applicant be assessed to income tax and penalty tax in the year ended 30 June 1994 on an assessable income of $304,021 in lieu of an assessable income of $306,758;
- (d) The application otherwise is dismissed.
2. The applicant pay the respondent's costs of and incidental to the application including reserved costs to be taxed if not agreed.
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