• The impact of this case on ATO policy is discussed in Decision Impact Statement: Gutteridge and Commissioner of Taxation (2012/2724 and 2725).

GUTTERIDGE & ANOR v FC of T

Members:
FD O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2013] AATA 947

Decision date: 24 December 2013

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FD O'Loughlin (Senior Member)

1. These applications concern disputed entitlements to Small Business Relief pursuant to Division 152 of Part 3-3 of the 1997 Assessment Act^[1] Income Tax Assessment Act 1997 (C’th) in connection with a sale of assets in the 2008 Year^[2] A Year being a 12 month period that ends on 30 June. by the Trust,^[3] Balanced Investment Group Pty Ltd (the Company) as trustee of the Machja Family Trust. under which the Applicants were beneficiaries, and the consequent effect on amounts that the Applicants are liable to be assessed under s 97 of the 1936 Assessment Act.^[4] Income Tax Assessment Act 1936 (C’th) The issues in dispute are the 50% small business reduction provided for by s 152-205, the small business retirement exemption provided for by s 152-305 and the small business roll-over provided for by s 152-410 and penalty.

2. The principal dispute is whether, for the purposes of s 328-125 of the 1997 Assessment Act, the Trust was controlled, either alone or with others, by Mr Gutteridge's daughter, Ms Sarah McKenzie. The Commissioner contends that Ms McKenzie was a controller of the Trust and, therefore, the Trust was connected with another entity controlled by Ms McKenzie, Jigsaw,^[5] Jigsaw Corporate Childcare Pty Ltd. with the effect that the Trust was not eligible for any of the Division 152 Small Business Relief. The Applicants dispute the Commissioner's refusal to accept that Mr Gutteridge controlled the Trust in the requisite sense and Ms McKenzie did not.

3. The appropriate penalty payable pursuant to the Administration Act^[6] Taxation Administration Act 1953 (C’th) in respect of any shortfall amount is also disputed.

Facts

4. The facts emerge in a setting that the Trust carried on a business that was linked with that of Jigsaw. The Trust sourced suitable properties for conducting childcare businesses, secured long term leases of the properties, had them fitted out, obtained approvals and then offered the facilities as a package able to be let or licensed by corporate clients wanting to provide child care facilities for use principally by their own employees. Jigsaw operated the childcare facilities on behalf of the corporate clients. The majority of the facts are substantially agreed. Subject to some particular contentions the Commissioner has as noted below, the facts are as stated in the Applicants' Statement of Facts, Issues and Contentions as set out below:

• (a) [The Company] was incorporated on 4 August 2005 and from that date to 28 February 2008 (" the relevant period ") the Applicants' daughter, Sarah McKenzie, was the sole director and shareholder and performed the duties and obligations required of her as a director.
• (b) [The Trust] … was settled by the Trust Deed dated 17 March 2006 (" the Trust Deed ") with [the Company] as trustee and Steven Roy Coffey (" Steven Coffey ") as principal (appointor) a role he has continued to occupy at all times since. The Trust is discretionary trust or non-fixed trust.
• (c) Pursuant to clause 27 of the Trust Deed, Steven Coffey has the power to remove the trustee.
• (d) At all material times Steven Coffey, notwithstanding clause 27.3 of the Trust Deed, has only been prepared to exercise his powers as appointor of the Trust with the approval of … [Mr Gutteridge] including, if necessary in the case of conflict, to remove … [the Company] as trustee.
• (e) The range of "Beneficiaries" as that term is defined in the Trust Deed includes the Applicants and their children as potential beneficiaries with the Applicants classified as Tertiary Beneficiaries and Sarah McKenzie as a Primary Beneficiary.
• (f) Pursuant to clause 5 of the Trust Deed, the trustee has wide powers to determine and distribute trust income including capital gains.
• (g) In its capacity as trustee of the Trust, [the Company] was the proprietor of the child care business the proceeds of the sale of which are the subject matter of these proceedings.
• (h) The child care premises occupied by [the Company] for the purpose of conducting its business were the subject of lease/s requiring due compliance with all statutory requirements relating to the specified use of the premises - the operation of a child care business …
• (i) At all material times, it has been a statutory requirement for the legal operation of a child care business that relevant persons hold "blue cards" or similar authorising them to deal with children and otherwise comply with the provisions of, inter alia, the Commission for Children and Young People Act 1998. So far as [the Company] was concerned, Sarah McKenzie already qualified in that regard whereas neither of the Applicants had had any prior need to do so.
• (j) In addition to child care requirements, commercial reality (particularly with regard to bank requirements) necessitated the provision of personal guarantees on the part of directors or shareholders by way of collateral support for funding. Sarah McKenzie was required to provide, and did so provide, personal guarantees in respect of funding provided by [the Company's] financiers but, by not occupying any formal role, the Applicants were able to avoid doing so.
• (k) During the relevant period, [Mr Gutteridge] gave advice and support to Sarah McKenzie on the running of the business of the Trust and she did not act contrary to that advice.
• (l) Notwithstanding that he was not a director (in terms of being "on the record" from an ASIC standpoint), … [Mr Gutteridge] attended meetings of directors of [the Company] with the relevant parties accepting that he played a major role (particularly from a management and finance perspective) in ensuring the successful operation of [the Company's] business.
• (m) At all material times, the Trust was considered by those with relevant knowledge to be a "Tim Gutteridge entity" and, consistent with that, all non-bank funding was provided by the Applicants.
• (n) During most of the relevant period, Sarah McKenzie was also the sole director and shareholder of [Jigsaw] … and she performed the duties and obligations of a director in relation to Jigsaw and the child care business operated by Jigsaw in its own right and not as Trustee. At all material times, Jigsaw was considered by those with relevant knowledge to be a "Sarah McKenzie entity".
• (o) The net income of Jigsaw, as disclosed in the profit and loss statements for the years ended 30 June 2007 and 2008, was $4,732,555 and $6,757,684 respectively.
• (p) By Sale Agreement in writing dated 29 January 2008 (" Sale Agreement" ) Sarah McKenzie agreed to sell 50% of her shares in [the Company] and 50% of her shares in Jigsaw to Abacus Jigsaw Holders Pty Ltd (" Abacus "). Pursuant to the Sale Agreement, [the Company] (in its trustee capacity) also agreed to assign (sell) 50% of its interest in the business assets of the Trust to Abacus.
• (q) The aggregate purchase price payable under the Sale Agreement was $6.9 million of which (pursuant to clause 3.6(a) of the Sale Agreement) [the Company's] share was $4,299,998.
• (r) Subsequent to the Sale Agreement being settled (on or about 28 February 2008), Fish & Wish Pty Ltd was appointed the new trustee of the Trust and on 29 June 2008 the new trustee resolved to distribute 100% of the Trust's "net taxable income" equally to be Applicants which was subsequently confirmed by lodgment (sic) of the Trust's 2008 income tax return.
• (s) At all material times, (including for the year ended 30 June 2008), all of the Trust's income (including capital gains) was distributed by … [the Company] as trustee (by means of a resolution of its sole director) to the Applicants in approximately equal shares.

5. The Commissioner does not agree with the contention at [4(d)] above and required the Applicants to prove that fact. The evidence is sufficient to allow that finding to be made and the Tribunal so finds that fact. Mr Coffey provided an unchallenged statutory declaration to the effect that the Trust was controlled by Mr Gutteridge from behind the scenes and that no action is to be taken in relation to the Trust unless it is in accordance with Mr Gutteridge's wishes and/or directions. In the event that there was a difference of opinion in the running of the Trust (which had not happened) or there were steps to be taken in the running of the Trust that were contrary to Mr Gutteridge's wishes, Mr Coffey would act in accordance with any directions from Mr Gutteridge including, if necessary, removing a trustee from that role. Mr Coffey stated that he would disregard any instructions or entreaties from Ms McKenzie to the contrary.

6. While the Commissioner accepts the general contentions at [4(i)] and [4(j)] above, he does not admit the facts in relation to the Applicants. Mr Gutteridge's evidence was that the facts as contended were correct and that evidence was not challenged. Accordingly, the Tribunal so finds those facts.

7. While the Commissioner accepts that Mr Gutteridge gave advice and support to Ms McKenzie referred to at [4(k)] above, he does not admit that Ms McKenzie would not act contrary to that advice and required the Applicants to prove that fact. The evidence is sufficient to allow that finding to be made and the Tribunal so finds that fact.

• (a) Ms McKenzie gave written and oral evidence which the Tribunal accepts. Her evidence was to the effect that the Trust's business was her father's business, Jigsaw's business was her business, and that the Trust's money was her father's money and not hers. In terms the Tribunal accepts were not meant to be taken literally, Ms McKenzie indicated that …[i]t wouldn't be worth my life dealing with the Trust's money without consulting her father. Ms McKenzie's evidence also revealed that she undertook administrative functions associated with operating child care businesses at the properties of the Trust and assisted in design of fit out of the premises for that purpose and executed documents on behalf of the Trust. However, these tasks she performed do not reveal that she was in any way a controller of the Trust. Ms McKenzie acknowledged that she would not blindly implement a decision that she thought unwise and would refer it to Mr Coffee (her and her father's professional advisor). Operating as a safety valve or buffer and referring a matter back to a decision maker through a trusted professional adviser for reconsideration is as much a reflection of the authority of the decision maker as it is a challenge to that authority. It is a reflection of a lack of independent decision making power in Ms McKenzie.
• (b) Ms Becky Bland, Mr Gutteridge's other daughter, Ms Jody Warren, Jigsaw's General Manager and Mr Gregory Nosworthy, the Trust's and Jigsaw's Bankwest relationship manager, all gave written evidence which was not challenged by the Commissioner. The consistent theme of that evidence was that Mr Gutteridge controlled the Trust from behind the scenes and that Ms McKenzie would not act contrary to his wishes, Mr Gutteridge is a person who is concise and firm with his directions and that Ms McKenzie is the public face of the business.
• (c) Mr Gutteridge gave written and oral evidence. His written evidence was to the effect that he was the controller of the Trust as he made the decisions. His oral evidence was a little understated, at times suggesting that questions ought be directed to Ms McKenzie. Mr Gutteridge's oral testimony displayed a perceptible reticence to blow his own trumpet. While not inconsistent with his written evidence, Mr Gutteridge's oral testimony concerning his control of the Trust was not as assertive as his written evidence. His written evidence was consistent with Ms McKenzie's evidence, both written and oral, and the written evidence of Ms Bland, Ms Warren, and Mr Nosworthy.

8. The evidence concerning the public face of the business needs to be understood in the particular light of the two businesses that were conducted and the activities associated with each. The Trust's business was concerned with sourcing properties, fitting them out and securing a term sub-lease or license with a corporate customer. The Trust's engagements were substantial but not repetitive on a daily basis. Jigsaw's business was quite different. Its business involved daily interaction with parents and children at each childcare center. Jigsaw's business was Ms McKenzie's business and being one involving interactions with end consumers of that business on a daily basis, it would be easy to misinterpret her activities as the public face as involving more of a role in the Trust's business than she in fact had.

9. The Commissioner does not agree with the contention at [4(m)] above. Without saying so, he requires the Applicants to prove that fact. The evidence is sufficient to allow that finding to be made and the Tribunal so finds that fact. Mr Coffey's evidence was to the effect contended for as noted above as was Mr Gutteridge's and Ms McKenzie's evidence.

10. The Commissioner says he does not understand and therefore, does not accept the contention at [4(n)] above. Again, without saying so, he requires the Applicants to prove that fact. The evidence is sufficient to allow that finding to be made and the Tribunal so finds that fact. Ms McKenzie explained the difference between the Trust, which owned what she described as her father's business and held his money, and Jigsaw which was hers. Mr Gutteridge's evidence was consistent with that contention. Mr Coffey's evidence was silent on the point.

11. The Commissioner does not contend that Ms McKenzie is taken to have controlled the Trust by operation of s 329-125(4). Accordingly, the fact noted at [4(s)] should be taken to confirm that for the 2004 to 2008 years neither Ms McKenzie nor any of her affiliates (either individually or collectively) had 40% of the total amount of income or capital payments made from the Trust paid or applied for their benefit.

12. The gain made by the Trust was $4,227,622. Subject to any reductions or exemptions and roll-overs available under Division 152, $2,113,811 of the $4,227,622 gain is to be included in the net income of the Trustee under s 95 of the 1936 Assessment Act.

13. Taken together, the aggregated turnover of Jigsaw and the Trust exceeded $2 million and the asset values at the time of the CGT event in question exceeded $6 million.

The issue in dispute

14. The matter has proceeded and heard on the footing that it is common ground that, if Ms McKenzie has direct control of the Trust for the purposes of s 328-125(3) … relief is not available under Division 152.^[7] Commissioner’s Statement of Facts, Issues and Contentions [36] and Commissioner’s submissions [9] to [13]

15. The issue on which the present matter will turn is whether Ms McKenzie is a person in accordance with whose directions or wishes the Trust could reasonably be expected to act.

16. The parties have helpfully agreed that the question for determination is as follows:

Is Sarah McKenzie an entity who controls … [the Trust] within the meaning of section 328-125(3) of the [1997 Assessment Act]?

and have agreed that if she is, the Commissioner succeeds and if she is not, the Applicants succeed.

THE LEGISLATION

17. The terms of s 328-125 of the 1997 Assessment Act which are operative in the present matter are as follows:

328-125 Meaning of connected with an entity

• (1) An entity is connected with another entity if:
  • (a) either entity controls the other entity in a way described in this section; or
  • (b) both entities are controlled in a way described in this section by the same third entity.

  ….

  Direct control of a discretionary trust

• (3) An entity (the first entity ) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.
• (4) An entity (the first entity ) controls a discretionary trust for an income year if, for any of the 4 income years before that year:
  • (a) the trustee of the trust paid to, or applied for the benefit of:
    • (i) the first entity; or
    • (ii) any of the first entity's *affiliates; or
    • (iii) the first entity and any of its affiliates;

    any of the income or capital of the trust; and

  • (b) the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

The Commissioner's contentions

18. The Commissioner's contentions that Ms McKenzie controlled the Trust are based not just on the fact that Ms McKenzie was the sole director formally appointed pursuant to corporate law rules, but also on Ms McKenzie being the public face of the businesses of the Trust and Jigsaw and the steps she took in relation to the Trust's business.

Consideration

19. In the present matter it is accepted that both Applicants are controllers of the Trust by operation of s 328-125(4). However, that does not determine the matter.

20. The controller test s 328-125(3) has parallels with the definition of director in the Corporations Act 2001 (C'th). That text was effectively considered in
Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd.^[8] (2011]) 81NSWLR 47 . Hodgson, Young and Whealy JJA The court considered the terms of the same definition in s 9 of the Corporations Law as the relevant events occurred before the commencement of the Corporations Act The following principles can be derived from the discussion of the scope of the words accustomed to act in accordance with wishes limb^[9] director of a company or other body means: (b) unless the contrary intention appears, a person who is not validly appointed as a director if: …. (ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes. Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body. in that definition:

• (a) treating another person's instructions or wishes as a sufficient reason so to act, rather than making personal decisions where those wishes or instructions are merely a factor considered, meets the test of being accustomed so to act;^[10] (2011) 81 NSWLR 47 at 51[9] Hodgson JA
• (b) it is not necessary that the behaviour be universal, at least some decisions, one or more important decisions, would be enough,^[11] (2011) 81 NSWLR 47 at 51[10] Hodgson JA some or all decision making is the focus;^[12] (2011) 81 NSWLR 47 at 74 [208] Young JA (with whom Hodgson and Whealy JJA agreed) endorsing Finn J in ASC v AS Nominees Ltd (1995) 62 FCR 504
• (c) decisions made in pursuit of one's own business goals even, if consistent with the wishes of another party, do not necessarily render the decision maker accustomed to acting in accordance with the other party's wishes. The other party may have superior bargaining power;^[13] (2011) 81 NSWLR 47 at 70/71 [192] Young JA (with whom Hodgson and Whealy JJA agreed).
• (d) while not significantly different, acting in accordance with a person's wishes covers a wider field than acting in accordance with a person's instructions;^[14] (2011) 81 NSWLR 47 at 70 [187] Young JA (with whom Hodgson and Whealy JJA agreed). and
• (e) it is necessary to undertake a critical assessment of the way in which the trustee is managed.^[15] Gordon J in Australian Securities and Investments Commission v Murdaca [2008] FCA 1399 at [11] as endorsed in a corporate law context in Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 at 74[203] Young JA (with whom Hodgson and Whealy JJA agreed).

21. These principles can be applied in the present context as a reasonable expectation to act in the prescribed way can be formed if a person is accustomed to act in that way.

22. The statutory test calls for an examination of all of the circumstances of a case.^[16] If it were needed, support for that proposition is found in the Explanatory Memorandum to Tax Laws Amendment (Small Business) Bill 2007 (C’th) at [2.52] Formal occupation of offices, such as a director of a company that is a trustee, and documented terms of instruments, such as limitations on trustees' ability to have regard to an entity's wishes or directions, do not prevent an examination of the actual circumstances when addressing the question posed by s 328-125(3). If the actual circumstances are that a formal office holder does not control a trust, or that the terms of an instrument are not observed, the conclusion that the controller is found in the person occupying the office or the person identified by the terms of the instrument does not necessarily follow. As noted by Gordon J in a parallel context, it is necessary to undertake a critical assessment of the way in which the Trust is managed.^[17] Gordon J in Australian Securities and Investments Commission v Murdaca [2008] FCA 1399 at [11] as endorsed in a corporate law context in Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 at 74[203] Young JA (with whom Hodgson and Whealy JJA agreed). This is an enquiry into activities and decision making, and the circumstances in which they occur, not an enquiry into occupation of offices or terms of instruments per se.

23. The circumstances of the present case call for conclusions that the Trust was not accustomed to act in accordance with Ms McKenzie's wishes independently of her father's wishes in circumstances where her wishes and directions were her father's. She was acting as the director of the trustee in circumstances where the trustee could be removed at the will of Mr Coffee and Mr Coffee regarded himself bound by the wishes and directions of Mr Gutteridge. Further, if it were necessary to find that Ms McKenzie was a puppet director, or that Mr Gutteridge was a shadow or de facto director, there is ample material on which to rest such a finding.

24. The facts as found above require a finding that Mr Gutteridge alone was the person who controlled the Trust within the meaning of s 328-125(3) of the 1997 Assessment Act. Accordingly, as that was the only matter in controversy, the Applicants have demonstrated that the Trust is entitled to the Small Business Relief as claimed.

Penalty

25. The Administration Act creates a penalty regime for false or misleading statements that lead to shortfall amounts.

26. Subsection 284-75(1) of Schedule 1 to the Administration Act applies if:

• (a) the taxpayer or its tax agent makes a statement to the Commissioner;
• (b) the statement is false or misleading in a material particular; and
• (c) because of the statement there is a tax shortfall.

27. The Applicants' 2008 Year income tax returns were the relevant statements. The consequence of the Tribunal's findings above that the Small Business Relief was not incorrectly claimed means that there was no false or misleading statement and therefore no penalty liability arises.

Penalty remission

28. Because there is no shortfall, and no penalty, penalty remission does not arise.

DECISION

29. The Tribunal sets aside the decisions under review and in lieu thereof allows the objections in full.