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WENSEMIUS & ANOR v FC of T

Members:
J Block DP
S Frost M

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2007] AATA 1006

Decision date: 11 January 2007

J Block and S Frost (Deputy President; Member)

Part A - background and preliminary

1. The objection decisions under review are the disallowance by the Respondent of objections by the Applicants against an amended tax assessment referable to the Second Applicant, a Fringe Benefits Tax ("FBT") assessment referable to the Second Applicant, and an amended tax assessment referable to the First Applicant. The objection decisions in question are linked in such manner that it was convenient to hear these matters together. As appears from the heading to these reasons, there are in fact four relevant case numbers and thus four applications before the Tribunal. The Respondent's Outline of Submissions dated 8 December 2006 contains a helpful outline of the relevant issues; clauses 1 to 4 inclusive of that outline are therefore included in these reasons as follows:

  • "1. There are four proceedings before the Tribunal. The issues in each proceeding concern an amount of $60,000 which was purportedly paid in the income year ended 30 June 2000 (' 2000 year ') by Arlette Holdings Pty Ltd as trustee for the National Building & Maintenance Trust (the ' Trust ') to IF Trustees (NZ) Limited as trustee for the Arlette Holdings International Super Fund (the ' Fund '), purportedly for the benefit of employees of the Trust.
  • 2. NT 2006/64 & 66 : The issues in these proceedings are:
    • (a) whether the amount is allowable as a deduction to the Trust under section 82AAE of the Income Tax Assessment Act 1936 (the '1936 ITAA ') or section 8-1 of the Income Tax Assessment Act 1997 (the ' 1997 ITAA ');
    • (b) if so, whether the provisions of Part IVA of the 1936 ITAA apply to disallow the deduction.

    • NB: The Commissioner no longer contests the applicants' claim that $3,081 of interest had not previously been claimed in the 2000 year.

  • 3. NT 2006/58 : If the amount is not allowable as a deduction to the Trust, the further issue arises:
    • (a) whether the assessable income of Roy Wensemius, a beneficiary of the Trust, included the amount of $60,000 pursuant to Part III, Division 6 of the 1936 ITAA;
    • (b) if not, whether the provisions of Part IVA of the 1936 Act apply to include the amount in the assessable income of Wensemius.
  • 4. NT 2006/65 : The issues in this proceeding are:
    • (a) whether the payment by the Trust to the Fund was a fringe benefit on which the Trust is liable to pay fringe benefit tax under the Fringe Benefits Tax Assessment Act 986 [sic] (the ' FBT Act ') in respect of the FBT year ended 31 March 2001;
    • (b) if not, whether s 67 of the FBT Act applies to include the payment in the fringe benefits taxable amount of the Trust.

  • …"

2. The Applicants were represented by Mr D. Ash of counsel; the Respondent was represented by Ms J. Davies, SC and Mr J. Hmelnitsky of counsel instructed by Mr M. Donohoe of the Australian Government Solicitor.

3. The Tribunal had before it the T documents and also supplementary T documents furnished pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with exhibits as follows:

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Exhibit A1: A statement by the First Applicant dated 1 November 2006.
Exhibit R1: Group certificates in respect of the year ended 30 June 2000 (referred to in these reasons as "the 2000 year" or "the Relevant Year") in respect of the First Applicant, his partner Ms Clough, and Ms Donnelly, who was an employee of the Second Applicant in respect of the Relevant Year.
Exhibit R2: A brochure ("the Brochure") issued by Corporate Financial Advisory Services Pty Ltd ("CFAS") entitled "NZ Contributory Super Fund" and which details the nature of the structure proposed therein. The Executive Summary, which appears at the commencement of the Brochure, is as will be seen, of considerable relevance; it is convenient to include its content at this juncture in these reasons as follows:
  " I.F. Trustees (N.Z.) Limited
  Contributory superannuation
  Executive Summary
  Deductibility of Contributions
  Contributions are deductible under Section 82AAE of the Australian Income Tax Assessment Act 1936 ('the Act').
  The deduction is available under Section 82AAE to the extent that the contributions are made to a non-complying superannuation fund for the purpose of providing superannuation benefits to an 'eligible employee', who is not an exempt visitor to Australia as defined by Section 517 of the Act.
  The deduction under Section 82AAE is not limited to employers only. The definition of 'eligible employee' at Section 82AAA(1) of the Act suggests that a deduction is also available to a natural person who makes superannuation contributions to the Fund for the benefit of themselves, where the condition of 'eligible employee' is satisfied. In satisfying this condition, the individual must have a controlling interest in the employing company.
  Care must be taken that the contribution is within actuarial limits.
  Taxation of Contributions
  Contributions to the Fund are not taxable contributions to the Fund, as the contribution is made as corpus.
  Section 274(1)(aa) states that taxable contributions include the making of a provision for superannuation benefits for another person. The individual undertaking contribution superannuation is making a contribution for their own benefit rather than for another person, therefore Section 274(1)(aa) does not apply.
  Additionally, under the Australia/New Zealand Double Tax Agreement, no tax would be payable.
  FBT Implications of Contributions to the Fund
  A contribution made by an employer will constitute a fringe benefit as defined by Section 50 of the Australian Fringe Benefits Tax Assessment Act 1986 ('the FBT Act').
  However, the taxable value of the benefit should be reduced by the 'otherwise deductible rule' pursuant to Section 52 of the FBT Act.

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  Under the 'otherwise deductible rule', the taxable value of the fringe benefit would be reduced to the extent to which the employee would have obtained a tax deduction if he/she had made the contribution instead of the employer.
  The employee would have obtained a tax deduction for a personal superannuation contribution pursuant to Section 82AAE of the Act, provided he/she satisfied the requirement in the definition of an 'eligible employee' in that he/she had a controlling interest in the employer company or the casting vote in the event of a 50/50 shareholding.
  Confirmation of Tax Counsels' opinion that a Fringe Benefits liability should not arise at the time the contributions are made is being sought as a result of the recent Australian Taxation Office statement that such contributions may constitute a Fringe Benefit.
  Application of Part IVA of the Act
  The sole purpose of making contributions to the Fund is for the provision of superannuation benefits. Consequently, provided the Fund is conducted in this manner, Part IVA would have no application."
Exhibit R3: A letter dated 25 June 2000 by George Nowak ("Nowak") addressed to Laurie Brett of Brett & Watson Pty Ltd setting out employee details for the Arlette Holdings International Super Fund and reading as follows:
  "Dear Laurie
  ACTUARIAL CALCULATIONS - INTERNATIONAL SUPERFUND
  Please find listed below employee details for the ARLETTE HOLDINGS INTERNATIONAL SUPER FUND.

Member Full Name Address D.O.B. Full/Part Time Gross Salary
…        
Roy Wensemius …      

  Anticipated contribution level to fund is $60,000.00
  Please perform actuarial calculations and return to this office at your earliest convenience.
  Yours faithfully"
Exhibit R4: A letter dated 25 June 2000 by Cannings & Co to Sue Liddle; and
Exhibit R5: A document entitled "Request for the Investment of Moneys and Indemnity" dated 25 June 2000 addressed to Security Life Insurance Co Limited ("Security Life") by IF Trustees (NZ) Limited ATF Arlette Holdings International Super Fund; Exhibit R5 does not, on its face, bear a signature by or on behalf of the proposer but it does bear the signature of Kevin James Minotti ("Minotti") as witness.

4. The T documents relate to the applications before the Tribunal. The T documents in case number NT2006/58 (referable to the First Applicant) run to 47 pages. In respect of NT2006/64-66 (referable to the Second Applicant), the Tribunal was furnished with both T documents and supplementary T documents; however the T documents and supplementary T documents are numbered sequentially from pages 1 to 417 and so that a page reference preceded by "T" relates both to the T documents and also the supplementary T documents.

5. 

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In addition to the T documents and the supplementary T documents referred to in clause 4 of these reasons, the Tribunal was furnished with outline submissions and Statements of Facts and Contentions (and also certain other material) by both parties. We acknowledge our indebtedness in particular to the outline submissions on which we have drawn (and in particular the Respondent's Outline of Submissions) for the purpose of preparing these reasons.

6. The hearing commenced with an address by Mr Ash and during the course of which he went into some detail as regards Exhibit A1 and more particularly, the numerous annexures to Exhibit A1. Mr Ash made it clear that he would be calling one witness only and being the First Applicant. Mr Cannings, who is the accountant to the Applicants, sat in the hearing throughout. After the First Applicant's evidence had been completed (and this occurred towards the end of the first hearing day), Mr Ash advised the Tribunal that he had changed his mind and thought it desirable that he call Mr Cannings as a witness. Ms Davies objected on the basis that no witness statement had been produced in respect of Mr Cannings, Mr Cannings had been present throughout the hearing and in particular throughout the evidence of the First Applicant, and moreover the Applicants had been on notice for a considerable period as to the nature of the case which they would be obliged to meet. After consultation with the First Applicant and Mr Cannings, the application to call Mr Cannings was withdrawn.

7. NT2006/65 can conveniently be referred to as the "FBT issue". Ms Davies in closing submissions, made it clear that the FBT issue would arise if and only if (in respect of NT2006/64 and 66) the Tribunal held that the amount of $60,000 referred to in those applications was deductible and that Part IVA of the Income Tax Assessment Act 1936 ("the 1936 Act") did not operate so as to disallow the deduction. The Tribunal has come to the conclusion that the amount in question is not deductible or if it is deductible, Part IVA of the 1936 Act would apply so as to disallow it. Accordingly, it is unnecessary for the Tribunal to deal with the FBT issue otherwise than in brief (and passing) terms only.

8. The central issue in this matter concerns an amount of $60,000 alleged to have been contributed by the Second Applicant to I.F. Trustees (NZ) Limited ("IF") as trustee for the Arlette Holdings International Super Fund ("The Fund"). In fact, that amount of $60,000 can be regarded as consisting of two parts, being an amount of $6,000 paid to CFAS and an amount of $54,000 said to have been borrowed. As regards the Division 6 issue, the Tribunal is concerned with the amount which can or should be included in the First Applicant's income for the Relevant Year.

9. Although the Second Applicant is referred to in the heading as the National Building Maintenance Trust ("the Trust"), a trust is not a legal entity so that all references to the Second Applicant should be construed so as to include, or where required, relate to Arlette Holdings Pty Limited ("Arlette") in its capacity as trustee of the Trust.

Part B - Mr Ash's opening address

10. Exhibit A1 is a very lengthy document indeed, although the statement proper is comparatively short. Exhibit A1 includes a large number of annexures contained in a folder separated by tabs lettered from A to Z. References in these reasons to a tab should be construed as references to that tab in Exhibit A1.

11. The Deed of Settlement ("the deed") constituting the Trust (tab A to Exhibit A1) is contained in a deed of settlement dated 26 February 1998 and prepared by KJ Minotti & Company, solicitors. Mr Ash drew attention in particular to clauses 4.1 and 4.3 of the deed, which effectively give the Second Applicant as trustee of the Trust the right to appoint income in its discretion, and indeed allows the Second Applicant in that capacity to accumulate income. The Beneficiaries are (as set out in item 2 of the Schedule) in broad terms, the First Applicant, Kim Christine Clough (who was his partner and who is henceforth referred to as "Ms Clough") and their children and grandchildren. It is perhaps relevant to note that subclause (ii) of item 2 provides for the inclusion of the children of the First Applicant and Ms Clough. In fact distributions were made in respect of the Relevant Year, in favour, inter alia, of 10 children. Of those children eight bear the name "Wensemius" while two bear the

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name "Clough". During his evidence the First Applicant indicated that only the children named "Clough" are children of both of them and so that it is conceivable that distributions to the other eight children were ex facie the deed not competent. We do not, on grounds of natural justice, deal with this aspect further because it was not claimed in submissions that those distributions to the Wensemius children were not valid (See in this context clause 14 below).

12. Tab B is a search of Arlette made 1 November 2006. Arlette was incorporated in 1998. The First Applicant owns all of its issued shares; previous members included Minotti who was the Applicants' solicitor. The First Applicant is the only director and secretary having been appointed as such on 13 September 2002. Prior to that date, Minotti was a director. The First Applicant and Minotti were never members of the board of directors of Arlette at the same time.

13. Tab C is the tax return of the First Applicant for the 1999 income year (that is the year prior to the Relevant Year). It indicates that in that year the First Applicant derived $10,000 from Arlette and $5,340 from National Building Maintenance Pty Limited ("NBM"). Bearing in mind that NBM and the Trust have names which are very similar and also the fact that the Second Applicant derived substantial income from building maintenance services, the First Applicant was asked, when he came to give evidence, what function was performed by NBM. He said that the Second Applicant and NBM are one and the same but on the evidence before the Tribunal that statement cannot be correct.

14. Tab D is the minutes of a meeting by Arlette held on 26 June 2000. Its content under the head of Resolutions (but excluding its content under the head of "Fourthly" and "Fifthly") is included in these reasons as follows:

"…

It was resolved to distribute the taxable and net income if any, of the Trust for the year ended 30th June 2000 as follows:

FIRSTLY to the following beneficiaries, the amounts of net income or taxable income of the trust, excluding franked dividends and franked dividend imputation credits, if any, in the following proportions:

Elisha F Clough $640.00 or 10%
Shane G Clough $640.00 or 10%
Carla Wensemius $640.00 or 10%
Ryan Wensemius $640.00 or 10%
Adam Wensemius $640.00 or 10%
James Wensemius $640.00 or 10%
Kurt Wensemius $640.00 or 10%
Rene Wensemius $640.00 or 10%
Lachlan Wensemius $640.00 or 10%
Corey Wensemius $640.00 or 10%
TOTAL $ 6400.00 or 100 %

SECONDLY to the following beneficiaries the amount of net income or taxable income of the trust that includes only franked and unfranked dividends and franked dividend imputation credits, if any, in the following proportions:

Kim Christine Clough 100%
TOTAL 100%

THIRDLY to the following beneficiaries the amount of net income of the Trust, excluding franked dividends and franked dividend imputation credits that are greater than $6400.00, if any, in the following proportions:

To: Roy Wensemius - $22000.00 or that amount that lies between $6400.00 to $28400.00; and,

To: Kim Christine Clough - the excess above $28.400.00, if any.

…"

The Tribunal was informed that there was no income falling within the provisions of "Secondly". Mr Ash contended that the effect of the resolution was that the First Applicant's entitlement under the Trust for the Relevant Year was confined to $22,000.

15. Tab F is the Trust tax return, in respect of the Trust for the Relevant Year. It includes a claim for $60,000 in respect of superannuation expenses. Page 6 of that return indicates that the

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First Applicant received $22,000 by way of distribution from the Trust.

16. Tab G is the tax return of the First Applicant for the Relevant Year. It discloses amongst other items the amount of $22,000 derived by way of distribution and a salary of $4,300 received from the Second Applicant.

17. Tab H is an extract at 1 November 2006 as to the prior bankruptcy of the First Applicant; it indicates that the First Applicant is no longer a bankrupt.

18. Tab I is a resolution of Arlette dated 25 June 2000 resolving to enter into the scheme set out in the Circular annexed marked A. That Circular is referable to the Brochure previously referred to (Exhibit R2). As noted, and under that resolution, Arlette resolved to enter into the transactions referred to in the Circular and appointed Minotti to sign the necessary documents on its behalf.

19. Tab J is another resolution by Arlette passed on 25 June 2000. Arlette resolved to nominate Minotti and the First Applicant to become members of the Fund.

20. Tab K is a further resolution of Arlette dated 25 June 2000 and pursuant to which Arlette resolved to contribute $60,000 to the Fund having considered an actuarial calculation, a copy of which was said to be annexed (although no such calculation was in fact annexed).

21. Tab M is a letter by IF dated 25 June 2000 addressed to Arlette and reading in full as follows:

"Please find enclosed your copy of the trust deed establishing the Arlette Holdings International Super Fund.

We have also received:

  • • The application for membership of the Fund; and
  • • Initial contribution of AUD60,000.00

We take this opportunity to thank you for your participation. Subject to the terms of the trust deed, we will work together with you to maximise the value of the Superannuation Fund.

In the first instance, as suggested by you, we have invested the net contributions after deducting establishment fees into one or more insurance bonds issued by Security Life Insurance Company Limited.

As you know, Security Life insurance bonds involve a number of investment programs which offer good returns, consistent with the security appropriate to this type of investment.

Please contact us with any queries you may have concerning this Superannuation Fund.

Yours faithfully"

Mr Ash contended that that letter constituted evidence that $60,000 was paid. As will be seen, Tab U to Exhibit A1 makes it clear that a cheque was issued in favour of CFAS in an amount of $6,000 on 26 June 2000 (the following day); there was no acceptable evidence as to any payments of any kind by Arlette or anyone else.

22. Tab N is the deed in respect of the Fund. It was signed on behalf of Arlette on 25 June 2000 and by Minotti as its sole director. Clauses 11 to 18 inclusive of that deed read as follows:

"…

  • 11. RETIREMENT OR DEATH PAYMENT OF BENEFITS

  • If a Member dies or retires the benefit payable shall be such moneys as are determined by the Trustees in their absolute discretion and without being obliged to provide any reason for their decision.

  • 12. IRREVOCABLE RESOLUTION FOR ENTITLEMENT

  • In the event that the Trustees shall pass a resolution in respect of any Member in or to the effect of the following:

  • " Resolved:

    • (a) That this resolution shall be irrevocable;
    • (b) That the sum of $............................. shall be paid to ........................... being a Member of the Fund, and/or
    • (c) That all moneys standing to the Member's credit shall paid [sic] to him on ceasing to be a Member of the Fund notwithstanding the

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      circumstances of him ceasing to be such a Member"

  • then notwithstanding any other provision of this Deed contained or implied (including dismissal for cause) the amount or value of the moneys so resolved to be paid shall upon him ceasing to be a Member be payable and paid accordingly.

  • 13. PAYMENT OF BENEFITS ON RETIREMENT

  • The benefit referred to in Clauses 9, 11, 14, 15.1 and 16 shall be paid to the Member either as a capital sum, a pension or a combination of these or in such other manner as the Trustees in their absolute discretion determine.

  • 14. BENEFITS ON DEATH

  • If the Member dies prior to retirement then the Trustees shall pay or apply the benefits payable in accordance with Clause 11 hereof to or for the benefit of such one or more of the Dependants of the deceased Member and in such shares and proportions and in such manner whether by lump sum or pension or otherwise as the Trustees in their absolute discretion determine.

  • 15. BENEFITS ON TOTAL AND PERMANENT DISABLEMENT
    • 15.1 Subject always to the terms of Clause 11 hereof a Member becomes totally and permanently disabled (as determined by the Trustees and, where necessary, within the meaning of the definition agreed upon from time to time by the Trustees and any underwriter) and retires from the service of the Company and the benefit payable to him or her shall be an amount such as the Trustees in their absolute discretion determine.
    • 15.2 The Trustees shall pay or apply the benefit payable in accordance with Clause 15.1 hereof to or for the benefit of the Member or any one or more of his or her Dependants in such shares and proportions and in such manner as the Trustees shall in their absolute discretion determine PROVIDED HOWEVER that if the Member dies before the whole of the benefit payable in respect of the Member has been paid or applied in accordance with Clause 15.1 hereof the benefit payable or the balance thereof (as the case may be) shall be paid to the appropriate person or persons in the manner referred to in Clause 14 above.
  • 16. BENEFITS ON CEASING TO BE IN THE EMPLOYER'S SERVICE

  • If a Member prior to his or her Retirement Date ceases (other than in any of the circumstances set forth in Clauses 11, 14 and 15.1 hereof) to be in the service of the Company the Trustees may at their discretion and subject to Clauses 7.3 and 26.1 hereof pay a benefit being the amount determined by them in their absolute discretion and without being obliged to provide any reason for their decision.

  • 17. CESSATION OF MEMBER'S ENTITLEMENT

  • Any Member who:

    • 17.1 in the reasonable opinion of the Company commits any fraud or dishonesty defecation [sic] or gross wilful or serious misconduct in relation to the Company or its affairs; or
    • 17.2 assigns or charges or attempts to assign or charge his estate in the Fund; or
    • 17.3 is declared an insane or incapable person; or
    • 17.4 does or attempts to do or suffers any act or thing or if any event happens whereby if his benefit or any part thereof were payable to him absolutely he would be deprived of the right to receive it or any part of it or it would be disposed of or dealt with other than in accordance with this Deed; or
    • 17.5 is suffering from any physical or mental disability which in the opinion

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      of the Trustees renders him unable to manage his own affairs;

  • shall in any such event cease to be presently or presumptively entitled to any and all benefits conferred by this Deed.

  • 18. DISCRETIONARY PAYMENT

  • In any such event as aforesaid the Trustees may in their absolute discretion apply an additional amount for his benefit out of the Fund for the maintenance and support or otherwise of such Member and or such one or more of his Dependants as the Trustees may in their absolute discretion determine PROVIDED THAT whilst the Member remains in the service or employ of the Company any such application by the Trustees shall be restricted to the maintenance and support of the Member and/or his said Dependants to the extent necessary to relieve his or their genuine hardship sickness accident or other misfortune causing hardship. The payment or application of moneys by the Trustees in pursuance of this sub-clause shall be a complete discharge to the Trustees thereof.

…"

Mr Ash contended that clause 17 of the Deed suggests that a benefit was provided in respect of the Relevant Year even if that benefit was inchoate only.

23. Tab X is a statement entitled "Loan Statement" addressed by Equity Investment Group Limited ("Equity Group") to Arlette indicating a loan balance at 30 September 2006 of $39,795.17.

24. Tab Y is a statement entitled Insurance Policy Statement issued by Security Life Insurance Co. Limited addressed to Equity Investment Trust Co (NZ) Limited ("Equity Trust") as trustee of the Fund indicating that a policy or a bond on the life of Minotti had a value of $63,255.52. The date referable to that amount is not included, although it is likely, having regard to the reference to a period from 1 October 2004 to 31 December 2004, that the latter date was intended. The reference to Equity Trust is entirely unclear given that the Trustee of the Fund was ex facie most other documents before the Tribunal in fact IF.

25. Mr Ash noted that the post office box addresses of Security Life and Equity Group are identical i.e. PO Box 1401, Port Vila, Vanuatu.

26. Although not mentioned, at that particular juncture, it is relevant to note that a consideration of Exhibit A1 and in particular its tabbed annexures reveals that:

  • (a) Tab U is a copy of a cheque dated 26 June 2000 issued by Arlette in favour of CFAS in the sum of $6,000;
  • (b) Tab V is a copy of a letter dated 25 June 2000 from CFAS to Arlette confirming receipt of $6,000;
  • (c) Tab R is a copy of the loan agreement between Equity Investment Bank Limited ("Equity Bank") as lender and Arlette as borrower of $54,000 Items 4, 6 and 7 of the loan agreement read as follows:

    " The Schedule

    …

    ITEM 4 - The Interest Rate 6.40%
      The Effective Rate 7.04%
        including with-holding tax at the current rate
    ITEM 5 - …    
    ITEM 6 - 24 Monthly Interest Payments of: $316.80
        including with-holding tax at the current rate
    ITEM 7 - 96 Monthly Installments [sic] of $737.30
        including with-holding tax at the current rate

    …"

  • (d) Tab S is a direction by Arlette to Equity Bank dated 25 June 2000 reading as follows:

    "Dear Sirs

    Re: Direction to transfer loan moneys

    We recently applied for a business loan to fund working capital.

    We understand our application is acceptable and therefore request the loan moneys be transferred as follows:

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    Arlette Holdings Pty Ltd ATF the National Building Maintenance Trust

    Account: …

    Amount: $54,000.00

    Yours faithfully"

Part C - the evidence of the First Applicant

27. The evidence in chief of the First Applicant was very brief indeed, perhaps because it had been covered to a large extent by Mr Ash in his opening statement. The First Applicant confirmed in relation to T p176 that the signature was his; T p176 is an application by the First Applicant to become a member of the Fund; (it may be noted that there was no evidence before the Tribunal that Minotti made a similar application to become a member of the Fund; equally there was no evidence that the Fund accepted the First Applicant or Minotti as members of the Fund).

28. Exhibit A1 makes it clear that on 25 June 2000 Arlette received a package of documents from CFAS. As to what precisely was included in that package is not altogether clear. But apparently all of the documents to be signed by Arlette were signed on that date. The acknowledgment by IF which is Tab M cannot be correct. The only amount paid by Arlette was $6,000 in respect of which a cheque dated 26 June 2000 was drawn in favour of CFAS, the promoter of the scheme. In respect of the balance of $54,000 no amounts whatever were paid by Arlette and the probabilities are that no moneys were paid by any other person. That amount of $54,000 was in fact the subject of a "round-robin" arrangement. The lender in Vanuatu lent $54,000 to Arlette under the loan agreement but that amount was allegedly paid to IF as trustee of the Fund and in turn (allegedly) invested by IF in a policy or bond on Minotti's life issued by Security Life in the same amount. Certainly, there was no evidence before the Tribunal that except for the fee of $6,000 paid to CFAS, any moneys changed hands. As set out previously the lender and the insurance company in Vanuatu operate from the same address and are plainly closely associated. There was no evidence as to how the shares in IF are owned; it is likely that the Vanuatu companies or their shareholders own them.

29. The remainder of this Part C relates to the cross-examination of the First Applicant. This is a convenient point at which to note that the First Applicant repeatedly answered questions with words to the effect that his accountant (Mr Cannings) could provide the answers, that he, the First Applicant, saw to the performance of the actual work performed by the Second Applicant, i.e. remedial building work but that everything of an accounting nature was performed by Mr Cannings. Sometimes his answers were that he did not know; sometimes he qualified answers by "to the best of my recollection" or "to the best of my knowledge" or words such as "I assume that this is right". On numerous occasions he answered that he simply did not recollect, sometimes qualified by references to the fact that there had been a gap of six years since the transaction was entered into.

30. When asked to confirm that Arlette was the trustee of the Trust in the Relevant Year, the First Applicant answered that this is what he had been told.

31. The First Applicant said as regards a person named Price (who appears in the search referred to in clause 12) when it was put to him that Price had been a member of the Second Applicant, that Price was deceased. And when asked when Price ceased to be a member, he answered that he did not know.

32. The First Applicant was shown a trial balance for the Trust in respect of the Relevant Year (Tab E to Exhibit A1). It was pointed out to him that three employees only were listed and he answered, "So far as I know". He agreed that the three were himself, his partner Ms Clough, and Ms Donnelly. He said that Ms Donnelly performed part-time secretarial work and Ms Clough did letter drops but had nothing to do with the actual maintenance work. He agreed that his group certificate indicated that he earned $4,300 only from the Trust and agreed that this was a very small amount.

33. It was pointed out to the First Applicant that Tab E reflected gross management fees and reimbursed expenses of $135,819 and professional fees of $17,995.26. He said "You will have to ask my accountant" and "I didn't understand the structure". He confirmed also that Minotti who prepared the Trust Deed for the Trust is a solicitor and that Minotti is the person who signed the documents referred to previously as director of the Second Applicant.

34. 

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The First Applicant's attention was drawn to the fact that the beneficiaries of the Trust were himself and members of his family; he was asked whether Minotti was a beneficiary and he answered "to the best of my knowledge, no".

35. The First Applicant agreed that although he worked full-time for the Trust and that it constituted his sole means of earning a living he received $4,300 by way of salary and $22,000 by way of Trust distribution.

36. When it was put to the First Applicant that the structure was designed to ensure that profits were distributed to his family, he answered that he assumed that this was the reason why it was set up.

37. A number of questions as to whether the Trust ever contributed superannuation for him before the Relevant Year were answered by words to the effect that his accountant would know the answers. But after some pressure he agreed that he had no other superannuation.

38. The First Applicant was asked whether the contribution was made on the basis that only he would benefit and his answer was "I can't recall - it's six years ago". But again after pressure, he agreed "to my knowledge I was the only person". The First Applicant was referred in this context to clauses 20 to 23 of Exhibit A1 reading as follows:

"…

The relevant transactions

  • 20. I was previously a bankrupt. Attached and marked "H" is a copy of my ITSA record dated 1 November 2006.
  • 21. It was important to me to build up my own assets.
  • 22. The Trustee determined to provide superannuation for me. I am aware that this, especially in recent times, has been a common way to build assets.
  • 23. The Trustee determined to do this by entering a series of transactions on or around 25 June 2000.

…"

39. The First Applicant said that he came to be aware of the CFAS arrangement through his accountant. When asked how long it was before 30 June 2000 that his accountant brought the scheme to his attention he answered, "I can't remember". Similar answers were given in response to a number of other similar questions.

40. The First Applicant said that it was important that he have some superannuation and that his accountant advised him that for an initial cost of $6,000 and monthly payments over 10 years, he would have at the end an amount of $60,000.

41. When again asked whether this occurred not long before the end of the Relevant Year, his answer was that he could not remember. He repeated though that all of his advice came from Cannings. It may be noted that the business of the Second Applicant is conducted in Bondi while Cannings practises in Dee Why.

42. The First Applicant was cross-examined at some length as to how the Fund came into existence. His attention was drawn in particular to resolution 1(d) of Tab I to Exhibit A1 reading as follows:

"…

  • (d) since the Fund is located and invests overseas and is managed by experienced overseas fund managers, it offers greater investment diversification and opportunities for the moneys contributed than may be the case of such benefits being restricted to within Australia and therefore subject to the vagaries of the relatively small Australian market.

…"

43. All of these questions were answered to the effect that the First Applicant did not know why this was so and that he relied on his accountant and that he took no interest in any of these matters. His answers were of such a nature that the only possible conclusion is that the First Applicant signed Exhibit A1 without considering it in any detail. He answered on one occasion that "I took no interest whatever".

44. It was put to the First Applicant that he would have heard that the trustee of the Fund has a complete discretion as to payments of benefits. He answered that "I can't recall". When asked when he first appreciated that any entitlement depended purely on the discretion of the trustee of the Fund he answered "today".

45. 

ATC 2046

Referred again to Tab I and in particular subclause (d) quoted at clause 42 of these reasons his answers were that he relied on his accountant.

46. When questioned as to documents produced under summons the First Applicant said that he had never seen Exhibit R2 before the hearing. When it was put to him that the documents produced under summons would have been in his office, he answered that in response to the summons, he produced the documents but repeated that he had not seen Exhibit R2 previously. When asked how it came into his possession, his answer was simply that he had never seen it before.

47. The First Applicant was insistent that the Fund was set up to provide superannuation only for him. Referred to clause 1(c) of Tab I to Exhibit A1 and when asked whether it was a true statement (as to the selection of employees as members of the Fund), he answered that "my accountant advises me on these things" and as to Tab J which refers to both himself and Minotti as prospective members and when asked why Minotti was selected, he answered that this arose at the suggestion of Mr Cannings. When asked why this was so, his answer was "I don't recall" and when asked "Did you ask him?" his answer was "Why?"

48. The cross-examination proceeded in this unsatisfactory fashion for most of the afternoon. The First Applicant answered all questions with answers, which varied only as to their vagueness. Referred to (inter alia) T p196 he said that he knew of no actuarial calculations. He said that an amount of $60,000 was selected on the advice of Mr Cannings.

49. The First Applicant denied that he had ever seen Exhibit R3 even though it was produced under summons. The First Applicant could not explain why Exhibit R3 lists as employees for the purposes of the Fund both himself and Minotti.

50. Referred to T pp174-175 and also T pp165-173 the First Applicant agreed that T p175 reflected him alone as an employee for superannuation purposes. When asked whether these disclosures were made with his authority, he said that he assumed so.

51. The First Applicant insisted that $60,000 was selected as the appropriate amount on advice by Mr Cannings.

52. The First Applicant was then referred to T p195, the last box of which reads as follows:


"Date Name of employee Amount … date of birth Address …
25/6/00 Kevin J Minotti 30,000 … …
25/6/00 Roy Wensemius 30,000 … …"

53. He was asked whether it was correct and he answered, "It appears that way".

54. Referred again to Tab I and resolution 1(c), the First Applicant insisted that the Fund was set up to provide superannuation only for him.

55. Referred to Tab U the First Applicant said that $6,000 was paid to CFAS because this was what he was asked to pay.

56. The First Applicant could not explain why the bond or policy was on the life of Minotti. Nor could he explain why Minotti gave a guarantee and indemnity (which does not appear to be limited in any way) as to the amount borrowed.

57. The First Applicant agreed that the $6,000 was in the nature of a fee to enter into the transaction.

58. The First Applicant had insisted that monthly payments over 10 years had to be made. He was referred to T p265, which is a demand for arrears made on 30 September 2000 and also to T pp266-269, which reflect payments made from 2002 but not earlier. It was put to him that the whole arrangement was one where the loan was linked to the policy or bond (and if necessary its surrender). His answer was that "If that's the way it was, that's the way it was".

59. The First Applicant could not explain Exhibit R4 pursuant to which Cannings asked that the transaction be processed by the end of the Relevant Year (i.e. 30 June 2000). Nor did he have any knowledge as to why there was a request for investment in a stable program (Exhibit R5).

60. 

ATC 2047

In the same way the First Applicant could not explain why it was necessary or desirable to go offshore.

61. The First Applicant said that Minotti has moved to the North Coast of New South Wales and that he last had contact with him some five months ago.

62. In re-examination, the First Applicant was referred to T pp194 and 197. T p194 is a letter by CFAS dated 25 June 2000 acknowledging receipt of $6,000. Given the cheque for $6,000 was dated on 26 June 2000, T p194 cannot be accepted as truthful.

63. The First Applicant insisted yet again that the superannuation was for him only.

Part D - analysis of the evidence

64. To say that the evidence given by the First Applicant was unsatisfactory is of course clear. It may be that the First Applicant was as ignorant as he purported to be (and that degree of ignorance was on the face of it substantial indeed), but it is also possible that he did rely on Cannings's advice at least to some extent. On this basis, the evidence of Cannings was clearly vital. That he did not give evidence must give rise to an adverse inference under
Jones v Dunkel (1959) 101 CLR 298 that that evidence would not have assisted the Applicants. The same inference must arise from the fact that evidence was not given by any of the other participants and in particular CFAS, either of the two Vanuatu companies, IF, Minotti and Ms Clough. The same point could be made in respect of the other entity referred to as trustee of the Fund assuming that there was such another entity at all, which appears to be doubtful.

65. The evidence indicates in the clearest possible terms that on 25 June 2000 (very close to the end of the financial year) and in a year in which the Second Applicant derived significant earnings, Exhibit R2 was obtained and implemented. The resolutions to the effect that it was necessary to invest offshore to achieve diversification in broader markets and to escape the "vagaries" of the Australian market must on the balance of probabilities, be simply "window-dressing".

66. One payment and one payment only was made and that was $6,000 on 26 June 2000 (not 25 June 2000). Letters acknowledging receipt of $6,000 or $60,000 on the previous day must be regarded as untrue.

67. It is difficult to comprehend why there is evidence before the Tribunal, which included Minotti as a member entitled to benefits, and equally evidence which does not so include him. We are inclined to accept that the First Applicant's evidence that the "superannuation" was always intended for him alone may have been correct. Why then does Minotti appear in the picture? Ms Davies suggested that it was possible that he was included at least briefly and on occasion for reasons connected with FBT.

68. Exhibit R2 indicates, at the very least on the balance of probabilities, that the structure was driven by considerations of tax. It is true that the documentation issued by CFAS contains references to the structure being "for the sole purpose of providing retirement benefits" but the evidence before the Tribunal did not indicate that this was so. As pointed out elsewhere in these reasons there was no evidence by anyone except the First Applicant and as these reasons demonstrate his evidence was far from satisfactory. In the Relevant Year the Trust derived considerable income. The First Applicant derived the benefit, but to a large extent indirectly and through distributions to members of his family; he received a salary which was nominal.

69. The only evidence before the Tribunal as to payments is that a cheque for $6,000 was issued to CFAS on 26 June 2000.

70. Although the Deed establishing the Fund would appear to have been executed on 25 June 2000, there is no evidence that the Fund did in the Relevant Year either receive the loan amount of $54,000 (or any amount at all) or invest it in a bond or policy on Minotti's life. Given the somewhat tight nature of the timing there must be doubt as to the fact that this did in fact occur. The evidence as to receipt of $60,000 on 25 June 2000 cannot, as we have noted, be accepted just as the receipt on that date by CFAS of $6,000 cannot be accepted.

71. It will be clear by now that the scheme regarded as a whole involved the selection of an amount, in this case $60,000. The evidence was that this amount was selected because this was what could be afforded. The reference to "afforded" is presumably a reference to the

ATC 2048

amount of $6,000 which was the only amount which was in fact available at the relevant time.

72. Leaving aside the fee of $6,000 which was admitted to be the fee required to enter into the scheme, the remaining documents indicate a "round-robin" in which no moneys changed hands. The loan was "provided" by the Vanuatu lender who at least in theory paid it to the Fund in New Zealand (although there is some doubt on the papers as to who the trustee of the Fund was) and the Fund in turn "invested" in a bond or policy on the life of Minotti with an insurer in Vanuatu closely linked to the lender. The nature of the bond or policy is not clear nor was there any evidence as to how the moneys were in fact invested. As to why Minotti was involved and why his life was relevant is equally unclear.

73. From the point of view of the First Applicant the position is decidedly unsatisfactory. The Fund is cast in a fashion which is entirely discretionary and such that IF need not ever pay him anything at any time and moreover need not give any reasons as to its actions. Mr Ash suggested that clause 17 of the Fund at least has a contrary effect but that assertion is not tenable.

74. There are no answers to the questions posed by the "now-and-then" participation of Minotti nor is there any reason why he would have given an unlimited guarantee for the loan unless the solution is that there was some kind of understanding that it was entirely non-recourse. There is evidence that the loan amount has reduced while the policy value has increased. As to how the figures are arrived at is not clear. The value of the bond or policy must equally be a matter of conjecture, given that there was no evidence as to the investments taken in respect of the bond or policy.

75. That the scheme was predominantly driven by considerations of tax cannot be doubted.

Part E - section 82AAE of the 1936 Act

76. In the Relevant Year section 82AAE of the 1938 Act was in the following terms:

A deduction is allowable under this Subdivision in respect of an amount paid by a taxpayer as a contribution to a non-complying superannuation fund (as defined by subsection 267(1)) for the purpose of making provision for superannuation benefits for an eligible employee other than such an employee who is an exempt visitor to Australia for the purposes of section 517 in relation to the year of income in which the amount is paid.

77. It will be noted then that under section 82AAE of the 1936 Act a deduction is allowable only if the contribution is made to a non-complying superannuation fund and moreover the purpose (and the only purpose) is the provision of superannuation benefits for an eligible employee.

78. A "non-complying superannuation fund" was defined by section 267(1) of the 1936 Act as follows:

"…

in relation to a year of income, …a fund that, at all times during the year of income when the fund is in existence, is a provident, benefit, superannuation or retirement fund , but does not include a fund that is a complying superannuation fund in relation to the year of income. (emphasis added)

…"

The section also provided that a "complying superannuation fund" had the meaning given by section 45 of the Superannuation Industry (Supervision) Act 1993 ("the SIS Act"). It was common ground that the Fund was not a "complying superannuation fund".

79. There is no definition of "provident, benefit or retirement fund" in the 1936 Act. A definition of "superannuation fund" is provided by section 6(1) of the 1936 Act (which incorporates by reference a definition contained in the SIS Act as follows:

"…

superannuation fund means:

  • (a) a scheme for the payment of superannuation benefits upon retirement or death; or
  • (b) a superannuation fund within the definition of "superannuation fund" in section 10 of the Superannuation Industry (Supervision) Act 1993.

…"

80. In that same section, "superannuation benefits" is defined as:

ATC 2049

"…

individual personal benefits, pensions, or retiring allowances.

…"

81. A "superannuation fund" within the definition of that expression in section 10 of the SIS Act is:

  • "(a) a fund that:
    • (i) is an indefinitely continuing fund; and
    • (ii) is a provident, benefit, superannuation or retirement fund; or
  • (b) a public sector superannuation scheme."

82. The SIS Act does not define the expression "provident, benefit, or retirement fund".

83. Consistently with the statutory meaning of "superannuation benefits", a provident, benefit, superannuation or retirement fund is commonly understood as a fund which gives each employee who is a member of the fund the secured right to be paid future benefits out of the monies set aside (i.e., a fund for the provision of real benefits to identifiable employees:
Scott v Commissioner of Taxation (No. 2) (1966) 40 ALJR 265 at p278 Windeyer J;
Mahony v Commissioner of Taxation (1967) 41 ALJR 232; Kitto J. And this must be its exclusive purpose: per Hill J in
Walstern v Commissioner of Taxation 2003 ATC 5076; (2003) 138 FCR 1 at pp15-16).

84. The decision usually regarded as seminal is Scott (supra) where at p278 Windeyer J said:

"…

There is no definition in the [Income Tax Assessment] Act of a superannuation fund. The meaning of the term [superannuation fund] must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have. … the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance … I have come to the conclusion that there is no single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age (emphasis added).

…"

85. See also
Compton v Commissioner of Taxation (1966) 116 CLR 233, in particular at pp244, 246, 248 and 252, cited with approval by the High Court in
Driclad Pty Ltd v Commissioner of Taxation (1966) 121 CLR 45. In Driclad (supra) Barwick CJ and Kitto J at p67 (with whom McTiernan and Menzies JJ agreed), in their consideration of the requirements for eligibility for exemption from tax under section 23(j) of the Income Tax and Social Services Contribution Assessment Act 1936 (which exempted from tax the income of a provident, benefit or superannuation fund established for the benefit of employees), and the deductibility under section 66 of the same Act (being the precursor to section 82AAC, which in 1994 was then split into section 82AAC (complying funds) and section 82AAE (non-complying funds)), of amounts set aside or paid to a fund for the purpose of making provision for individual personal benefits, pensions or retiring allowances for employees or their dependants, observed as follows:

"…

If the fund was not exclusively for the benefit of employees, then it did not fall within s. 23 (j) as has recently been held in
Compton v. Federal Commissioner of Taxation (2). Turning to s. 66 we find in that section a very precise requirement that the payments allowed as deductions must be for the purpose of making provision for individual personal benefits of employees and for that purpose only . If, therefore, it were the case that payments were simply made to the trustees of a fund, and, that the fund had been established from which such benefits are to be provided and for another purpose as well, e.g., to return to the company as loans payments made by the company to trustees, we ourselves would think that the income of the fund would not be within s. 23 (j) nor would payments to the fund be allowable deductions under s 66. So, for instance, if a deed were to contain a clause requiring the trustees to lend to taxpayers the payments made by them to the trustees as and when made, and to do so at favourable rates of interest, we would think

ATC 2050

that much could be said against treating such a deed as constituting a fund falling within either s. 23 (j) or s. 66 (emphasis added).

…"

86. Although these cases concerned the phrase "provident, benefit or superannuation fund established for the benefit of the employees", as Kitto J in Mahony (supra) said at p232:

"…

There was no definition in the Act of "a provident, benefit or superannuation fund", and the meaning of the several expressions must therefore be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefits, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognized is that just as "provident" and "superannuation" both referred to the provision of a particular kind of benefit- in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so "benefit" must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example (emphasis added).

…"

87. An essential attribute identified by the Courts is that rights of the employees, in respect of whom the monies are paid into the fund, are not illusory. As Owen J observed in
Winchcombe Carson Ltd v Commissioner of Taxation (NSW) (1938) 5 ATD 69 at p74:

"…

What appears to be a benefit may, on closer investigation, turn out to be nothing more than a mere expectation of benefit, as where the right to receive pension payments depends solely on the will of the employer.

…"

88. The requirement that there be individual employees who are to benefit out of the moneys so set aside is reflected in the language of section 82AAE itself (i.e. that the payment be made for the purpose of making provision for superannuation benefits for an eligible employee). As Davies J in
Raymor Contractors Pty Ltd v Federal Commissioner of Taxation 91 ATC 4259 at p4261 said:

"…

Subdivision AA of Division 3 was very much concerned with the relationship between the sum set apart or paid and an individual employee or employees. Section 82AAC(1) uses the expressions "an eligible employee" and "the employee". Section 82AAE specifies the amounts allowable in respect of the amount set aside or paid "for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee". These provisions, which reflect the concept in s. 66 of the former, namely "individual personal benefits", are concerned to ensure that moneys are set aside or paid for the purpose of providing benefits for individual employees who have rights in the fund and that those rights are fully secured. It is not necessary that an employer should turn his attention to the particular circumstances of each employee when making a contribution for it is sufficient that the contribution is made for the purpose of benefiting all or identifiable members of the fund (emphasis added).

…"

89. The Commissioner submits that the Fund to which the Trust purportedly contributed the amount of $60,000 does not have the requisite characteristics of a superannuation fund: cf Raymor (supra) at p4261; Walstern (supra) pp16-17. The terms of the deed governing the Fund (T p208) had the effect that the provision of superannuation benefits to members was

ATC 2051

entirely at the discretion of the Trustee. The terms of the deed, particularly clauses 11 to 15 (T p214), conferred on the trustee an unfettered and absolute discretion in relation to both the payment of any benefit and the amount of any such benefit.

90. Mr Ash in relation to Walstern (supra) contended that it was decided at a time when the statutory language was different and that Walstern (supra) was of doubtful validity for this reason. In fact and as Ms Davies pointed out in closing submissions, the statutory regime when Walstern (supra) was decided was not relevantly different from that which obtained in the Relevant Year. In particular, the Tribunal agrees with her submission that the definition of "superannuation fund" taken from the SIS Act is circular. That definition was as has been noted, taken from section 10 of the SIS Act; if one refers to paragraph (a) of that definition and in particular if one omits the words other than "superannuation fund", in sub-paragraph (a) (ii) one is left with the proposition that a superannuation fund is a superannuation fund.

91. In this case the Fund was, as has been noted, entirely discretionary in nature. Leaving aside any and all problems or difficulties arising from the role performed by Minotti, it cannot be said that the alleged contribution resulted in any benefit of any kind, which can with certainty be identified as such in relation to the First Applicant. Nor for that matter can it be said that is so in relation to Minotti, although this is probably of little relevance. Mr Ash argued that clause 17 of the deed in respect of this Fund would tend to indicate that there was in fact some form of vesting. Regarded as a whole, the terms of the deed in question do not support any such contention.

92. Section 82AAE of the 1936 Act requires that the contribution be made for the purpose only of providing superannuation benefits. As we have demonstrated, the scheme was entered into predominantly for tax purposes.

93. In any event, the onus falls upon the Applicants under section 14ZZK of the Taxation Administration Act 1953. In respect of this deduction aspect, the Applicants have failed to discharge that onus and indeed, it cannot be said that they have made any real attempt to do so.

94. Moreover, the Second Applicant has not discharged the onus of establishing that any of its employees were admitted as members of the Fund. In this regard, the position of the First Applicant may perhaps be marginally stronger than that of Minotti, but the Tribunal did not receive any evidence that the Fund itself agreed to admit either of them as members of the Fund.

95. It follows then that the Second Applicant was not entitled to a deduction of the amount of $60,000 or for that matter any amount under section 82AAE of the 1936 Act.

Part F - section 8-1 of the Income Tax Assessment Act 1997 ("the 1997 Act")

96. The fact that the amount of $60,000 is not deductible under section 82AAE of the 1936 Act does not preclude a deduction under section 8-1 of the 1997 Act.

97. The objective circumstances do not support a finding that the purported contribution to the Fund was incidental and relevant to the derivation of assessable income of the Trust:
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at pp57-58;
Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation 80 ATC 4542; (1980) 49 FLR 183 per Deane and Fisher JJ at p208:

  • (a) the payment to the Fund was entirely voluntary;
  • (b) the Trust had no entitlement to any income from the Fund;
  • (c) the terms of the deed governing the Fund did not create any immediate or future rights in or for any employee of the Trust in relation to any part of the monies purportedly contributed nor any expectation of such rights; whether such rights would be conferred was at the sole discretion of the trustee of the Fund, an apparently unrelated and arm's length entity (in relation to the Trust) and over which the Trust had no control;
  • (d) in the absence of the trustee of the Fund exercising its discretion to determine to pay a benefit, the making of the payment secured no benefit for the Trust for or in the course of its business or for its employees;
  • (e) the discretionary nature of the benefits denied the contribution the essential

    ATC 2052

    character of reward for services rendered to employees of the Trust.

98. Specifically in respect of the second limb of section 8-1 of the 1997 Act, it cannot be said that the relevant expenditure was incurred in the course of the Trust's business. As set out previously in these reasons, one payment only and of $6,000 was made. It was made as we have found, and as was admitted, as a fee for entry into the scheme which in turn brought about tax advantages and such that the income of the Trust was distributed for the benefit of the First Applicant and his family but (largely) indirectly through members of his family. It was certainly not done in order to retain the services of the First Applicant or to ensure that he remained in the employ of the Trust. When all is said and done, the Trust was no more or less than, in effective and economic terms, his, the First Applicant's own business.

99. In any event and assuming that the advantage sought was the creation of a fund to secure future benefits from a Trust, the making of that payment was of a capital nature and not tax deductible:
GP International Pipecoaters v Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124, at p137.

100. In
British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205, the House of Lords held that an initial contribution to a pension fund to benefit employees was not deductible because it was in the nature of capital. Their Lordships said that the initial contribution was made 'once and for all' and 'with a view to bringing into existence as asset or advantage for the enduring benefit of a trade': see in particular the observations of Viscount Cave LC at pp213-214. The principles stated in Atherton (supra) are applicable to the present case.

101. It follows that a deduction under section 8-1 of the 1997 Act is not available. It should be noted that here too the Applicants have entirely failed to discharge the onus under section 14ZZK of the Taxation Administration Act.

Part G - Part IVA of the 1936 Act

102. We deal with Part IVA of the 1936 Act in the interests of completeness and in case it can be said that we are in error as to our findings that the contribution of $60,000 was not deductible under either section 82AAE of the 1936 Act or section 8-1 of the 1997 Act.

103. The type of fund which the Trust had established, being a New Zealand resident non-complying "superannuation" fund, and the steps taken in implementation of the arrangements under which the Trust contributed to the offshore fund, including the borrowing of money to make the contribution and the manner of investment of the funds so contributed, were devised, packaged and promoted by CFAS, in return for which CFAS received a promoter's fee of $6,000.

104. The structure of this "superannuation" package was premised on the following tax implications, that:

  • (a) contributions to the fund would be tax deductible to the employer company under s 82AAE of the 1936 Act and not subject to fringe benefits tax because of the discretionary nature of the fund;
  • (b) contributions to the fund would not be taxable contributions to the fund itself because of the operation of the Australia/New Zealand Double Tax Agreement; and
  • (c) any benefits paid to fund members would be assessed to tax in Australia in accordance with s 27CAA of the 1936 Act on, essentially, only the fund's earnings referable to the member's entitlement.

105. In this matter, in the implementation of pre-ordained steps, (although there was no acceptable evidence that all of those steps were in fact in all respects implemented):

  • (a) the Trust had the Fund established to facilitate the making of the contribution and nominated the First Applicant and Minotti to become the sole members of the Fund;
  • (b) the Trust made application for and was (ostensibly) loaned the amount of $54,000 by a Vanuatu bank, Equity Bank;
  • (c) the loan was guaranteed by Minotti;
  • (d) at the direction of the Trust, Equity Bank (ostensibly) had the loan moneys applied to the acquisition from Security Life, another Vanuatu company connected with Equity Bank of a bond or policy in the name of and on the life of Minotti;
  • (e) Security Life (ostensibly) "invested" the premium paid for the policy back with Equity Bank.

106. 

ATC 2053

This all happened in the week prior to the end of the 2000 financial year: the steps all took place within a period of one day, and were implemented at a time at which the Trust had trust income for distribution to the beneficiaries.

107. The only advantage which was secured by the taking of these steps was the taxation benefits. The particular form of the "superannuation" fund into which the contribution was made did not give any employee of the Trust any vested or assured entitlement to payment out of the Fund, even in the event of death, disablement or retirement. The purported rationale for using an offshore fund, namely that "since the Fund is located and invests overseas and is managed by experienced overseas fund managers, it offers greater investment diversification and opportunities for the moneys contributed than may be the case of such benefits being restricted to within Australia and therefore subject to the vagaries of the relatively small Australian market" (T p245) - cannot explain the particular fund which the Trust had established and to which it made the contribution. The "superannuation" package put together by CFAS was predicated on the basis that the moneys contributed would be reinvested with the bank that was the source of the funds for the contribution by the Trust; see T pp245, 207, 257, 262, 266, 277.

108. Mr Ash contended (somewhat disingenuously) that the Second Applicant's purpose was in equal measure the avoidance of income tax and the avoidance of FBT. Put in other words if these purposes were equal, so he contended, neither can be dominant. We do not think that even if such a contention were tenable at all, that this is the correct approach. The correct approach is rather to have regard to purpose in the context of income tax for the purposes of Part IVA of the 1936 Act and to have regard (but separately) for the purposes of section 67 of the FBT Act in relation to FBT.

109. This is not a case in which it is necessary for us to deal in detail with each of the tests prescribed by section 177D of the 1936 Act. A scheme was entered into a few days before the end of the financial year in circumstances, which suggest in strong terms that the only possible purpose was the avoidance of tax. The quite extraordinarily ephemeral superannuation benefit was plainly involved only because it formed a part of the scheme, which was entered into in order to secure tax advantages. If superannuation was indeed desired, this "round-robin" scheme, which conferred no definite or certain advantage on the First Applicant or for that matter anyone else involving a fund in New Zealand and two associated companies in Vanuatu, was hardly the optimum way in which to proceed. The resolutions by Arlette as regards diversification were no more than (as we have said) "window-dressing" The matter can be tested thus; assume that the First Applicant were to approach IF in order to demand a benefit ex the Fund. Under the terms of the deed referable to the Fund such a demand could not succeed. This would be so even if demand were made at the end of 10 years or for that matter at any time. It is impossible to follow the relevance of a policy on Minotti's life; as to whether he does or does not survive the period of 10 years cannot be significant.

110. The Second Applicant had available at the relevant time, that is towards the end of June 2000, an amount of $6,000. That amount together with monthly contributions of about $700 or so over ten years paid to a super fund might perhaps have built up a fund of approximately $60000 for the benefit of the First Applicant. (We make this statement by way of surmise only since clearly the eventual amount of the fund would depend on earnings or perhaps interest rates as applicable from time to time). But such a methodology would not have resulted in the tax benefits, which were so plainly sought. We note in this context that the First Applicant spoke of payments at monthly intervals over ten years, but there was evidence to the effect that this was not in fact what happened. We refer in this context to the arrears notice previously referred to in these reasons.

111. Attention is drawn also to the entirely artificial nature of the scheme and in particular the unsatisfactory manner in which some aspects were documented. The issue of receipts in advance of payment is indicative of the haphazard manner in which the scheme was carried out. We have previously noted that in fact the trustee of the Fund was IF; yet there is documentation which refers to an entirely

ATC 2054

different entity as the trustee of the Fund. By way of example we do not know who the directors of or shareholders in the trustee of the Fund are although the probabilities favour the view that the Vanuatu companies control that trustee (whoever it was or is).

112. We would find, were it necessary to do so, on an objective assessment of all of the tests specified in section 177D(b) of the 1936 Act that the dominant purpose was the avoidance of tax. By this means the significant profits of the Trust for the relevant year were available for distribution to members of the First Applicant's family while the First Applicant received a salary, which was by any standards purely nominal. It is clear of course that for the purposes of Part IVA of the 1936 Act there was both a scheme and a tax benefit. See generally in this context the judgment of the High Court in
Commissioner of Taxation v Hart 2004 ATC 4599; (2004) 217 CLR 216 which makes it clear that in relation to a Part IVA determination one must have regard on an objective basis to the factors enumerated in s 177D(b). See also
Commissioner of Taxation v Sleight 2004 ATC 4477; (2004) 136 FCR 211,
Puzey v Commissioner of Taxation 2003 ATC 4782; (2003) 131 FCR 244 and
Macquarie Finance Limited v Commissioner of Taxation 2005 ATC 4829; (2005) 146 FCR 77. On an objective basis it is our view that the sole purpose was tax avoidance; there was in fact no other purpose.

Part H - fringe benefits tax

113. It is unnecessary for us to deal with fringe benefits tax for the reasons set out previously. We observe merely that in our view and although
Essenbourne Pty Ltd v Commissioner of Taxation 2002 ATC 5201 is binding on this Tribunal, that judgment is distinguishable simply because ex facie the evidence of the First Applicant himself the benefits were provided solely and only for the benefit of the First Applicant as an employee of the Second Applicant and so that the necessary identification of an employee, would, were it necessary to find that this is so, be present.

Part I - Division 6 of the 1936 Act

114. The Respondent having succeeded as regards deductibility it follows that for the relevant year the net income of the trust estate (in respect of the Second Applicant) must be increased by $60,000.

115. The Tribunal was referred in particular to the judgment of the Federal Court in
Zeta Force v Commissioner of Taxation 84 FCR 70.

116. In accordance with section 95(1) of the 1936 Act the net income in relation to a Trust Estate is:

"…

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 16C or Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

…"

117. Section 97(1) of the 1936 Act provides that where a beneficiary of a trust estate is presently entitled to a share of the income of the trust estate, the assessable income of that beneficiary includes that share of the net income of the trust estate.

118. We refer in particular to pages 74 and 75 of the judgment in Zeta Force (supra) under the heading "That share of the net income of the trust estate" as follows:

"…

In the ensuing discussion I put earlier authorities aside. I return to them later to determine whether they require me to depart from the conclusion I reach under this heading.

The words 'income of the trust estate' in the opening part of s 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument. That the words have this meaning is confirmed by the use elsewhere in Div 6 of the contrasting expression 'net income of the trust estate'. The beneficiary's

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'share' is his share of the distributable income.

Having identified the share of the distributable income to which the beneficiary is presently entitled, s 97(1) requires one to ascertain 'that share of the net income of the trust estate'. That share is included in the beneficiary's assessable income. The expression 'net income of the trust estate' in par (a) (i) has the meaning given it by s 95(1) - taxable income as opposed to distributable income. The words 'that share' in par (a)(I) refer back to the word 'share' in the expression 'a share of the income of the trust estate', and indicate that the same share is to be applied to an income amount calculated according to a different formula (taxable income as opposed to distributable income). Since the income amount may differ according to which formula is applied, the natural meaning to give to 'share' where it appears for the second time is 'proportion' rather than 'part' or 'portion'. When Parliament wanted to convey the latter meaning, as it did in ss 99 and 99A, it used the word 'part'.

The contrast between the expressions 'share of the income of the trust estate' and 'that share of the net income of the trust estate' shows that the draftsman has sought to relate the concept of present entitlement to distributable income, and not to taxable income, which is, after all, an artificial tax amount. Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate.

That construction of s 97(1)(a) seems reasonably clear to me, although it may, as I have indicated, result in unfairness to beneficiaries. Had the legislature intended a beneficiary to be assessed on no more than the amount of the distributable income to which he is presently entitled, it could easily have said so. Section 97(1) (a) (i) would have read along the lines:

'Where a beneficiary … is presently entitled to an amount of the income of the trust estate, the assessable income of the beneficiary shall include so much of that amount as does not exceed the net income of the trust estate.'

…"

119. In Zeta Force (supra), his Honour Sundberg J then went on to deal, and in some detail with decided cases, in respect of the "proportionate approach" and the "alternative approach" and found that in line with the authorities referred to by him it is the "proportionate approach" which is to be preferred.

120. It might be thought at least on a prima facie basis that where the resolution in question provides, after the award of specific amounts to named beneficiaries, for the distribution of the residue to a specific beneficiary (in this case Ms Clough) any increase in the net income of the trust estate would where a deduction is disallowed, devolve upon her. However that approach is not the correct approach. Zeta Force (supra) is authority for the proposition that in order to determine the extent of a beneficiary's liability under Division 6 it is necessary in the first instance to determine whether the beneficiary is entitled to a share of the distributable income of the trust estate. In respect of the relevant year the Second Applicant had distributable income of $54,566 (T pp282-283); the First Applicant in accordance with the resolution of 26 June 2000 (T p249) obtained a present entitlement to $22,000 or put in proportional terms to 40.318 percent.

121. Having identified the share of the distributable income to which the first beneficiary was presently entitled, section 97(1) requires that "his share of the net income of the trust estate" be ascertained. It is that share or that proportion of the taxable income, which is included in the amount to be assessed as against him through the operation of section 97(1) of the 1936 Act. In this matter the net income of the trust estate in respect of the Relevant Year is increased by $60,000 in consequence of the disallowance of the deduction of $60,000 claimed by the Second Applicant. Because the First Applicant's share of the distributable income was in proportionate terms 40.318 percent it is that proportion of $60,000, which must be assessed to him.

122. 

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In respect of the First Applicant, the Respondent sought to assess him in respect of the whole amount of $60,000. The Respondent now concedes that the First Applicant should be assessed in respect of 40.318 percent of the total taxable income of the Second Applicant. $22,000 was previously reflected and it follows that the assessment in respect of the Second Applicant should be increased and the objection decision should be affirmed, but only to the extent that 40.318 percent of $114,566 exceeds the amount previously assessed.

123. Reference was made during the course of the hearing to a recent Full Court judgment in
Cajkusic v Commissioner of Taxation 2006 ATC 4752; [2006] FCAFC 164. Our decision in this regard as regards Division 6 is, in our view, in accordance with the Full Court judgment in Cajkusic (supra).

Part J - penalties

124. Penalties were assessed at 50 percent of the tax shortfall reduced to 40 percent. The relevant penalty provisions are sections 226H of the 1936 Act, or alternatively, if Part IVA applies, section 226 of that Act. The Respondent's discretion to remit the whole or any part of the penalty is found in section 227 of the 1936 Act. There was in the hearing virtually no discussion as to the level of penalty. In this instance we have found that the deduction should be disallowed so that Part IVA is not in its terms applicable. It is our view that in all the circumstances, the level of penalty is appropriate and we see no reason to disturb it.

Part K - conclusion

125. Accordingly:

  • (a) the objection decision in respect of the Second Applicant in relation to NT2006/64 and 66 is affirmed in full;
  • (b) the objection decision in respect of the Second Applicant in relation to NT2006/65 (FBT) falls away and is set aside;
  • (c) the objection decision in respect of the First Applicant in respect of NT2006/58 is affirmed but only to the extent set out in clause 122.


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