• The impact of this case on ATO policy is discussed in Decision Impact Statement: Bell v Deputy Commissioner of Taxation (M40 of 2013 (High Court) VID 792/2012 (Full Federal Court) VID 151/2012 (Federal Court) 2010/3362 (Administrative Appeals Tribunal)).

BELL v FC of T

Judges:
Jessup J
Jagot J
Robertson J

Court:
Full Federal Court, Melbourne

MEDIA NEUTRAL CITATION: [2013] FCAFC 32

Judgment date: 22 March 2013

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Jessup, Jagot and Robertson JJ

Introduction

1. This appeal is from orders made by the primary judge on 8 October 2012 dismissing the present appellant's appeal on a question or questions of law from a decision of the Administrative Appeals Tribunal (the Tribunal) given on 30 January 2012. The decision of the Tribunal affirmed the Commissioner's decision that the maximum net asset value test prescribed by s 152-15 of the Income Tax Assessment Act 1997 (Cth) (the ITAA) was not passed, but set aside the Commissioner's decision to impose penalty at the recklessness rate of 50% and replaced it with a decision to impose penalty at the 25% rate for failing to take reasonable care.

2. The notice of appeal, dated 10 October 2012, identifies six grounds and includes two subparagraphs of each such ground. Grounds 4 and 5 were not pressed. The respondent Commissioner has filed a notice of contention dated 30 October 2012 in relation to one of the subject matters of the grounds of appeal.

3. In summary, there are three issues before the primary judge which remain before the Full Court. First, there is the issue of the balance in an Adelaide Bank account (or accounts), being an account (or accounts) in the name of Ms Cotterill, the appellant's partner. The appellant submits that the primary judge erred in dismissing his appeal from the Tribunal in this respect. Second, there is the issue of a debt of $2,018,000 claimed to be owed by the Bell Family Trust (the "Trust") to the Barry Plant Holdings Unit Trust ("BPHT"). The respondent Commissioner, by notice of contention, submits that the primary judge was in error in finding error on the part of the Tribunal in this respect. Third, there is the issue of penalties: as we have said, the Tribunal imposed an administrative penalty at the "failing to take reasonable care rate" of 25%. The appellant submits the primary judge erred in dismissing his appeal in that respect.

4. It may be noted that although the primary judge found for the present appellant on the second issue we have identified above, the order made by her Honour was that the appeal be dismissed. This was because the present appellant needs to succeed both in relation to the Adelaide Bank account or accounts and in relation to the debt of $2,018,000 in order to meet the maximum net asset value test prescribed by s 152-15. Despite this, the respondent Commissioner asked the Court to deal with his notice of contention in any event and we accede to that request.

The legislation

5. We first set out the statutory provisions relevant to the first two issues as in force at the relevant time, during the 30 June 2007 year.

6. Section 152-10 of the ITAA relevantly provided:

• (1) A capital gain … you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
  • …
  • (c) you satisfy the maximum net asset value test (see section 152-15); …

7. Section 152-15 of the ITAA, entitled "Maximum net asset value test", at the relevant time, provided:

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You satisfy the maximum net asset value if, just before the CGT event, the sum of the following amounts does not exceed $5,000,000:

• (a) the net value of the CGT assets of yours;
• (b) the net value of the CGT assets of any entities connected with you;
• (c) the net value of the CGT assets of any small business CGT affiliates of yours or entities connected with your small business CGT affiliates (not counting any assets already counted under paragraph (b)).

8. The "net value of the CGT assets of an entity" was defined in s 152-20 of the ITAA at the relevant time as:

• (1) The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:
  • (a) the liabilities of the entity that are related to the assets; and
  • (b) the following provisions made by the entity:
    • (i) provisions for annual leave;
    • (ii) provisions for long service leave;
    • (iii) provisions for unearned income;
    • (iv) provisions for tax liabilities.

9. Sections 152-20(3) and (4) provided:

• (3) In working out the net value of the CGT assets of:
  • (a) your small business CGT affiliate: or
  • (b) an entity that is connected with your small business CGT affiliate;

    include only those assets that are used, or held ready for use, in the carrying on of a business by you or another entity connected with you (whether the business is carried on alone or jointly with others).

  • (4) However, disregard assets under subsection (3) that are used, or held ready for use, in the carrying on of a business by an entity that is connected with you only because of your small business CGT affiliate.

    …

10. "CGT asset" was defined in s 108-5 of the ITAA to mean:

• (1) A CGT asset is:
  • (a) any kind of property; or
  • (b) a legal or equitable right that is not property.
• (2) To avoid doubt, these are CGT assets :
  • (a) part of, or an interest in, an asset referred to in subsection (1);
  • (b) goodwill or an interest in it;
  • (c) an interest in an asset of a partnership;
  • (d) an interest in a partnership that is not covered by paragraph (c).

First issue - one bank account or two? - grounds 1, 2 and 3

11. The Tribunal correctly identified the issue which it had to decide at [30] - [31] of its reasons for decision in these terms:

• 30. The Commissioner contends that the Adelaide Bank account shows that the Applicant had a cash asset of $1,252,112 which must be taken into account for the purposes of the maximum net asset value test, and a loan liability of $1,085,824 which related to the acquisition of a main residence and hence must be excluded.
• 31. The Applicant contends that his spouse held a single account which was in credit. The loan facility was for $1,085,824 but, because the account was in credit, the Applicant's spouse was able to draw up to $1,252,112. Put simply, the Applicant contends that there was a credit balance of $166,288, that this is the only relevant asset, and that the ability to borrow is not an asset for the purposes of the maximum net asset value test.

12.

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The Tribunal resolved the issue as follows:

• 32. The balance of the evidence does not support the Applicant's contention. An Adelaide Bank advice on which the Applicant relies described a Total Balance Outstanding (Loan minus Offset) of $1,608.24 as at 1 April 2007. However, that advice showed that the balance comprised a Loan Balance and an Offset Balance, an amount of interest that would have accrued and an Offset benefit (interest saved) and a net interest accrual for a month. Such a presentation does not suggest a single account. If there was only one account, a single balance could be expected and little, if any, purpose is served by identifying amounts of interest that would have accrued and interest that has been saved. Other Adelaide Bank records disclose two accounts with separate account numbers, one with a debit balance and one with a credit balance. Further, those records show that there were transfers between the accounts. These records are not consistent with an assertion that there was a single facility that was $166,288 in credit.
• 33. The account with the debit balance reflects borrowings used to purchase the Applicant's residence (owned by his spouse). This asset is not included in the maximum net asset value calculation. Accordingly, the debt of $1,085,824 is not included either. The fact of multiple accounts with the one institution, with or without an interest offset link or arrangement, does not of itself make an account with a debit balance a liability related to another account with a credit balance. If funds in the credit balance account are the product of drawings from the debit balance account, then the liability would relate to the asset. In the present circumstances, the liability has its origins in moneys borrowed to purchase a residence. It is that asset to which it is related.
• 34. The Commissioner's contention that the cash asset of $1,252,112 must be taken into account for the purposes of the maximum net asset value test is correct.

13. The primary judge noted the following at [72] of her reasons:

…the Adelaide Bank records disclosed two separate account numbers with two separate account balances - the Offset Account and the Loan Account: AAT Decision at [32]. The records also disclosed transfers between the Loan account and the Offset account and recorded the interest that would have accrued but was saved by reason of the Offset: AAT Decision at [32]. It was common ground that the Applicant did not adduce any evidence before the AAT of the terms and conditions governing the two accounts. After the hearing, the Applicant sought to adduce evidence of the terms governing the Adelaide Bank accounts. The Court has a limited jurisdiction to receive further evidence (s 44(8) of the AAT Act) and to make further findings of fact (s 44(7) of the AAT Act). That jurisdiction ought not to be exercised in the present case. The Applicant is bound by the case he ran below:
Coulton v Holcombe (1986) 162 CLR 1 at 7-8.

14. The primary judge also rejected the appellant's substantive arguments at [83]-[87] on the basis that the Tribunal made findings of fact which were reasonably open to it and supported by at least some evidence and at [88]-[91] on the basis that the so-called relevant and irrelevant considerations the appellant identified were misconceived.

15. On appeal the appellant maintained that the primary judge had erred in not receiving the further evidence (ground 1) and contended that the primary judge erred in law by, first, not "as a matter of statutory interpretation characterising the Adelaide Bank account as a single bank account or as in substance a single account" (ground 2) and, second, "in holding that the debit balance did not relate to the credit balance of the Adelaide Bank account" (ground 3).

16. As to ground 1, the primary judge's refusal to receive further evidence, the appellant said nothing disclosing why her Honour's exercise of discretion under s 44(8) of the Administrative Appeals Tribunal Act 1975 (Cth), which provides that in an appeal under s 44 the court may receive further evidence for

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the purpose of making findings of fact under s 44(7), involved an error of principle founding appellate intervention consistent with the reasoning in
House v The King (1936) 55 CLR 499 at 504-505. We too rejected the appellant's application for leave to rely on further evidence. Our reasons for so doing are the same as those of the primary judge. The appellant is bound by the case he ran below (
Coulton v Holcombe (1986) 162 CLR 1 at 7-8) and in particular should not be permitted to depart from that case in an appeal limited to a question of law. Ground 1 of the appeal, accordingly, cannot be sustained.

17. Grounds 2 and 3 are equally without substance. Although the appellant attempted to characterise these grounds of appeal as raising questions of law on the basis that the effect of a statutory provision involves a question of law (citing
Collector of Customs v Agfa-Gevaert Limited (1995) 186 CLR 389 at 384), the appellant failed to identify any error of construction by the Tribunal in respect of the statutory provision. The appellant also failed to identify that, in these circumstances, the applicable principles are those set out in
Hope v Bathurst City Council (1980) 144 CLR 1 at 7-8, in particular, the quoted observations from Kitto J in
NSW Associated Blue-Metal Quarries Ltd v Federal Commissioner of Taxation (1956) 94 CLR 309 at 23 that the common understanding of ordinary English words is a question of fact and, in such a case (excluding citations):

The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words as so determined; and that is a question of law. If different conclusions are reasonably possible, it is necessary to decide which is the correct conclusion; and that is a question of fact.

18. Nothing in the appellant's case indicated why it might properly be concluded that different conclusions as to the characterisation of the Adelaide Bank account(s) were not reasonably possible. Putting it another way, the appellant did not (presumably because he could not) explain why the facts as found by the Tribunal about the Adelaide Bank account(s) necessarily engaged the statutory provisions in question. Without explaining why this was necessarily the case, the appellant could not succeed in establishing the existence of any question of law. This is because once the facts as found are reasonably capable of supporting different conclusions about the operation of a properly construed statutory provision, the issue is purely one of fact. The observations of Gummow J in
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175, cited by the appellant, do not suggest to the contrary. At 182 Gummow J repeated the critical distinction between the question whether the material before the Tribunal reasonably admits of different conclusions as to the satisfaction of a statutory provision (which is a question of law) and the question whether, that being so, which conclusion should be drawn (which is a question of fact).

19. In the present case the Tribunal had to decide whether the statutory criterion of "the liabilities of the entity that are related to the assets" was satisfied or not in respect of the Adelaide Bank account(s). The appellant submitted that the Tribunal erred in the result reached but did not explain what incorrect construction of the statutory criterion the Tribunal had applied. The reason for this is that the statutory criterion involves ordinary English words. The Tribunal applied the ordinary meaning of "related to" when it concluded that the liability related to the borrowing for the purchase of a house (at [33]). That conclusion was reasonably open on the material; it was not a conclusion necessarily excluded by the statutory language. Accordingly, any error by the Tribunal would be an error of fact and not give rise to any question of law (and we do not accept any such error of fact was made in any event).

20. The same reasoning must apply to the Tribunal's characterisation of the Adelaide Bank account(s). The Tribunal's conclusion that there were two accounts and not a single facility was reasonably open on the available material. The question of characterisation is one of fact for the Tribunal. The appellant alleges error in the result but failed to explain how any such error could raise a question of law. Nor, it must

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be said, would it have been possible for the appellant to do so, the question being one of fact from beginning to end and thus for the Tribunal alone to determine.

21. For these reasons grounds 2 and 3 of the appeal also cannot be sustained.

Second issue - the notice of contention concerning the debt of $2,018,000

22. The issue which arises under the Commissioner's notice of contention is whether the debt of $2,018,000 which the Trust, of which the appellant was the trustee and to the income of which he was presently entitled, owed to Barry Plant Holdings Pty Ltd ("BPH") as trustee of the BPHT, "related to" the CGT assets of the Trust within the meaning of s 152-20(1)(a) of the ITAA. The time by reference to which that issue was to be resolved was "just before the CGT event": s 152-15. The CGT event in question - the sale by the Trust of units which it held in the BPHT - occurred on 14 March 2007.

23. According to findings made by the Tribunal, in October 2006 the appellant decided to make a contribution to his own superannuation fund, and also to provide his partner with sufficient funds to enable her to pay out the debt on their residence, which was in her name. The appellant's assets were substantially held by the Trust, and the Trust's assets, in turn, were substantially in the form of units in the BPHT. In that month (October 2006), the appellant, as trustee of the Trust, resolved to distribute $2,018,000 from the capital of the Trust to himself to provide funds for the above purposes. Although the Trust's assets were amply sufficient to make such a distribution, its cash assets were not. The appellant concluded that the Trust would need either to borrow money or to sell assets to make the distribution. The former course was preferred, at least in the first instance.

24. The relevant transactions took place on 13 March 2007. BPH had a facility with Macquarie Bank. The bank lent the sum of $2,018,000 to BPH which in turn lent the same sum to the Trust. The funds were, by direction, disbursed by the bank directly to the appellant's superannuation fund and to the mortgage account of the appellant's partner. Thus, by the end of 13 March 2007, the Trust owed $2,018,000 to BPH (as trustee for the BPHT), BPH (in that capacity) owed $2,018,000 to the bank and the end purpose for which the money had been borrowed had been achieved.

25. The question which then arose was whether the Trust's liability of $2,018,000 related to its CGT assets. The appellant's case in the Tribunal was that the Trust had an obligation to pay the capital distribution (resolved upon in October 2006) to himself, which obligation attached to the whole of trust fund. That liability related to the CGT assets of the Trust because the loan preserved and freed up those assets.

26. The Tribunal did not accept that characterisation of the Trust's liability. It said:

• 19. The liability related to a discharge of resolutions and obligations to distribute capital. The debts incurred to the Barry Plant Holdings Unit Trust arose out of considerations that were independent of the assets of the Bell Family Trust and too remote for the necessary relationship to exist. The requirement for a liability to be related to an asset taken into the maximum net asset value test does not encompass every conceivable relationship, no matter how remote or tenuous. Incurring a debt so as to preserve or retain assets when the debt funds are used for purposes quite separate from the relevant assets is not a sufficient relationship for the purposes of s 152-20. If it were the scheme of the maximum net asset value test would be readily frustrated by an entity with assets included in the test valued above the threshold, and no other assets or liabilities, who could borrow to pursue an objective that does not produce an asset to be included in the test and then claim the borrowings on the basis that assets would need to have been realised to pursue that objective.

(footnote omitted)

27. The primary judge upheld the appellant's challenge to this aspect of the Tribunal's decision. Her Honour held that the Tribunal had "ignored or misunderstood the legal effect" of the events described above. Her Honour held that, upon the passing of the resolution for a capital distribution in favour of the appellant (in October 2006), the appellant was "presently

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ATC 14698

entitled to a portion of the corpus of the Trust to the extent of the distribution and entitled to call for it", referring in this regard to
Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. Her Honour referred to the deed by which the Trust was constituted, and said:

• 64. Under cl 12.7(a) of the Trust Deed, the Trustee (with the consent of the Guardian of the Trust), was entitled out of the capital of the trust fund to raise any sum and pay that sum to any of the beneficiaries in such manner as the Trustee in its absolute discretion considered fit. The manner of its distribution was addressed in cll 4 and 5. Capital was able to be distributed in the same manner as the income of the Trust or by the transfer in specie of any asset of the Trust: cl 5.3. Clause 4.5 (dealing with the distribution of income) stated that upon a resolution being made, the beneficiary had an immediate vested indefeasible interest in and to that part or parts of the trust fund to which the determination or resolution relates. Here, the finding by the AAT was that the Trust resolved to distribution [sic] $2,018,000 of capital to the Applicant (as a beneficiary of the Trust). Although that resolution was not reduced to writing, the AAT found that the resolution was passed and was effective: AAT Decision at [15]. As mentioned above, the Commissioner did not seek to challenge these findings.
• 65. What then was the effect of the resolution? Absent the $2,018,000 debt to the BPHUT, the Trust would have held less CGT assets in an amount equal to the distribution, subject of course to the Trustee's right of indemnity. Indeed, so much was accepted by the Commissioner in his subsequent written submissions when he said:

  … if the borrowing from Barry Plant Holdings Pty Ltd had not been distributed by the … Trust just before the CGT event, then those borrowings would have been included as a CGT asset of the Trust in the tables.

  But the analysis at that time does not stop there. At the same time there would have been a corresponding liability - the right of the Applicant (as beneficiary) to call for that portion of the corpus (ie, the assets of the Trust) to meet the distribution of capital. The assets would not have been unencumbered:
  Saunders v Vautier and Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th ed, Butterworths, 2006) at [2308].

• 66. As is apparent, the $2,018,000 debt did not exist independently. The purpose of the debt was to meet the Trust's obligation to distribute capital, namely a portion of the corpus of the Trust, to the Applicant. The Trust Deed provided for that obligation to be met by the Trust borrowing and that is in fact what did occur. The $2,018,000 debt was necessary to meet the obligation and thereby protect or maintain the CGT assets of the Trust. Absent the $2,018,000 debt, the encumbrance over the assets of the Trust (the CGT assets) had to be met by sale or direct delivery up of those assets of the Trust sufficient to meet the distribution of capital.
• 67. Given the resolution and the distribution of capital by the Trust and its legal effect, there was and remained a direct relationship or connection between the CGT assets of the Trust and the $2,018,000 debt of the Trust. The Commissioner submitted the connection must be real and substantial, not remote. Here, the relationship between the $2,018,000 debt of the Trust and the CGT assets of the Trust and, in particular, the Units, was real and substantial. It was not remote.

28. Under his notice of contention, the Commissioner did not suggest that the primary judge was in error to have treated this aspect of the controversy as involving a question of law. Rather, he submitted that the primary judge was in error to have held there to be a relevant relation between the debt which the Trust owed to the BPHT just before the CGT event and the CGT assets of the Trust, the preservation of which provided the reason for the incurring of the debt. These submissions were made at two levels. It is convenient to deal first with the submission that the primary judge misread the trust deed, the result of which was said to be her Honour's acceptance of the proposition that the liability of the Trust to make the capital

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distribution to the appellant related to the CGT assets of the Trust.

29. Clause 5 of the trust deed did deal with the distribution of capital. However, the provisions in question dealt only with a distribution made "as from the termination date". Clause 5.3, which linked capital distributions to distributions of income in the way summarised by her Honour at [64] of her reasons, and which permitted the transfer in specie of a Trust asset, was so limited. Accordingly, cl 4.5, upon which her Honour relied, had no application to a distribution of capital before the termination date. The termination date, as defined in the trust deed, had not occurred at the time of the events which are presently relevant. The primary judge was, therefore, in error to have held that cll 4 and 5 of the trust deed prescribed the manner in which the capital of the Trust was to be distributed to the appellant, or that those clauses were relevant to the consequences of a resolution in favour of such a distribution. They did not produce the result that, after the passing of the resolution of October 2006, the appellant "had an immediate vested indefeasible interest in and to that part or parts of the trust fund to which the … resolution relate[d]".

30. Further reference should also be made to the rule in
Saunders v Vautier, the modern formulation of which is -

… an adult beneficiary (or a number of adult beneficiaries acting together) who has (or between them have) an absolute, vested and indefeasible interest in the capital and income of property may at any time require the transfer of the property to him (or them) and may terminate any accumulation.

(
CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 at 119 [47], quoting Thomas on Powers (1998) at 176).

31. The rule in
Saunders v Vautier thus operates when there is "an absolute, vested and indefeasible interest in the capital and income of property". Whether such an interest exists depends, of course, on the terms of the particular trust under consideration. Since we were not addressed in any detail upon the nature of the appellant's interest in the property held by the Trust, we propose to say nothing more about the operation of the rule in relation to that property generally. However, there is nothing in the rule which, absent a consideration of the terms of the deed governing the Trust, would give the appellant a present entitlement to a particular "portion of the corpus" simply upon the making of the resolution for distribution in October 2006. Neither, as pointed out above, did the trust deed itself produce such a result.

32. The provision of the trust deed under which the resolution for distribution was passed was the following clause:

• 12.7 The Trustee may in its absolute discretion notwithstanding anything to the contrary herein contained or otherwise provided:-
  • (a) subject to Clause 13 hereof, at any time or times and from time to time before the termination date out of the capital of the trust fund raise any sum or sums and pay the same in addition to any entitlement to income or share of income to any of the Beneficiaries for his or her or its own use and benefit or apply the same to or for the benefit of such beneficiaries in such manner as the Trustee in its absolute discretion shall think fit;
  • ….

33. The resolution gave the appellant an immediate entitlement to the sum of $2,018,000 as against the Trust, but, according to the submissions of the Commissioner, that meant no more than that "there was simply a general figure for which a capital distribution had to be made". Because there was no specific property from which the distribution had to be made, the liability to make the distribution did not relate, within the meaning of s 152-20, to the Trust property. We do not accept that submission. The resolution to distribute created a liability, and the trustee was required, by the terms of the resolution, to fund the resolution from capital. The liability did, therefore, relate to the assets of the Trust, notwithstanding the appellant's inability to call for any specific asset of the Trust to be advanced, or paid over, to him pursuant to the resolution.

34. The second aspect of the Commissioner's submission was that, even if the Trust's liability to pay the distribution sum to the appellant related to the CGT assets of the

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Trust, the liability which existed on 14 March 2007 did not so relate. That was a liability to the BPHT created by the loan made to the Trust the previous day. Albeit that the purpose of the loan was to put the Trust in funds to discharge its obligation to make a distribution of the corresponding sum to the appellant, the result, and therefore the position which obtained immediately before the CGT event, was that the debt owing to the BPHT was a general one, and bore no relation to the assets of the fund. As is apparent from the passages from her Honour's reasons set out above, the primary judge held (or, more accurately, noted) that the $2,018,000 debt was "necessary to meet the obligation and thereby protect or maintain the CGT assets of the Trust". In the view of her Honour, that provided the relationship required by s 152-20.

35. In addressing this question of relationship, it is useful to return to, and to develop a little, some of the matters discussed by the primary judge in [65] and [66] of her reasons, set out above. The starting point must be the Trust with net CGT assets of, say, $X. Once the trustee resolved to distribute $2.018m to the appellant, the net asset position was ($X−$2.018m) because, as explained above, the resolution gave rise to a liability which related to the assets of the fund. Had that liability been discharged by payment to the appellant, the net assets would still be ($X−$2.018m), but in a different way: the liability which "related" to the assets would no longer exist, but the Trust would be $2.018m the poorer for having made the distribution. Had the Trust then borrowed $2.018m to restore its cash position, its net assets would still be ($X−$2.018m), made up of $X in assets and a new liability of $2.018m to the lender. As to this last scenario, we do not understand the Commissioner to contend that a debt brought into existence by the borrowing of funds would not relate to those funds as an asset in the hands of the borrower.

36. Next, let the order of things subsequent to the resolution to distribute the $2.018m to the appellant be reversed. Instead of paying the appellant immediately, suppose the Trust to have borrowed to make that payment. Having received the funds from the lender, the net asset position of the Trust would have been ($X+$2.018m−$2.018m−$2.018m), ie ($X−2.018m). That is to say, in addition to its original assets of $X, the Trust would have had the cash received from the lender. It would still have been in debt to the appellant in the amount of $2.018m because of the unpaid distribution; and it would now also be in debt to the lender in the amount of $2.018m. Each of those liabilities would have related to the assets of the Trust: the first because it was based on a resolution to distribute capital to a beneficiary, and the second because it corresponded with the funds received from the lender. If, having reached this stage, the Trust then made the payment of the distribution to the appellant, the Trust's net asset position would be ($X - $2.018m) because its cash position would have moved adversely by $2.018m, but it would no longer have a liability to the appellant.

37. As a matter of analysis, it is at this point that the Commissioner's case parts company with the reasons of the primary judge. As we understand it, her Honour would have it that the $2.018m debt to the lender would still relate to the assets of the Trust because it came into existence to preserve those assets in circumstances where they would otherwise have been diminished by the discharge of a liability which itself (while it existed) related to the assets. The Commissioner submits that this is not enough to invoke the operation of s 152-20. He would contend, in such a situation as is here proposed, that the debt to the lender related not to the assets of the Trust generally but to the cash which had been received by way of loan. Once that cash had been disbursed, there was no longer an asset in the Trust to which the liability represented by the debt could, or did in the circumstances postulated, relate.

38. The clarity of the central issues which require consideration here is compromised somewhat by the circumstance that, where money is borrowed, the "asset" may well, and will usually, have been added to the general cash assets of the entity in question. The position presents more clearly if it be assumed that the borrowing was for the purpose of acquiring a tangible asset, say a motor vehicle. Its indebtedness under the borrowing would then be a liability which related to the vehicle. If the vehicle were traded in on a second vehicle (assuming, perhaps unrealistically, that this was a straight swap without money

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changing hands), it might then be the case that the liability to the original lender related to the second vehicle. However, if, instead of trading in the first vehicle, the Trust sold it and used the cash to make a distribution to a beneficiary under cl 12.7(a), the asset to which the loan liability had originally related would no longer exist. It could not then be said that the liability related to assets of the Trust.

39. It follows from the above discussion that we do not agree with the primary judge that a liability would forever relate to assets of the Trust by reason only of having been undertaken to preserve existing assets of the Trust, in the sense of having been necessary to avoid the need for the Trust to spend its existing cash on a particular outlay. If the outlay, made with borrowed funds, was to purchase an asset, then the liability represented by the borrowing would relate to the asset, but only for so long as that asset was held by the Trust. If the borrowing was for another purpose, such as to discharge an income tax obligation (and was immediately and identifiably used only for that purpose), the corresponding liability would not, in our view, relate to any asset of the Trust.

40. Returning to the facts of the present case, there is no need for us to investigate the issues which potentially arise where the asset arising from a borrowing is the cash itself, mixed into and used as part of the general cash resources of the taxpayer concerned. What actually happened here was that, as part of the one series of transactions on a single day, the borrowed funds were applied directly by Macquarie Bank to the appellant's own end purposes. Although, as a matter of accounting, the records of the Trust ultimately (although not, it seems, originally - as the result of a mistake) showed that the sum of $2,018,000 had been disbursed to the appellant pursuant to the distribution resolution of October 2006, in fact no money ever passed through the Trust. It may be correct to conclude that the Trust never had an asset to which the debt to the BPHT related. It is, however, sufficient to note that any such asset had been disposed of (to the appellant) on 13 March 2007, and that, "just before the CGT event" there was no asset to which the liability to the BPHT related.

41. The error into which the primary judge fell, in our respectful view, was to regard the Trust's purpose - that of preserving its existing assets - as dispositive of the question arising under s 152-20. In a situation in which the trustee of the Trust had resolved to make a distribution of capital, his decision to borrow funds rather than to use the existing resources of the Trust gave rise to a relation between the liability arising from the borrowing and the borrowed funds in the hands of the Trust. But, that purpose having been effected by disposing of the cash which represented the borrowing, there was not, in our view, a relevant ongoing relation between the liability and the generality of the assets of the Trust for no other reason than that the decision to borrow was made in the alternative to using existing resources. This conclusion, and the analysis on which it is based, is not affected by characterising the thinking of the trustee as one involving the protection or maintenance of the existing CGT assets of the Trust.

42. For the foregoing reasons, we would uphold the Commissioner's contention that the Trust's debt of $2,018,000 to the BPHT did not relate to the CGT assets of the Trust within the meaning of s 152-20(1)(a) of the ITAA. In our opinion the primary judge was, with respect, in error in finding that the Tribunal had erred in law in relation to this issue.

Third issue - penalty - ground 6

43. The decision of the Tribunal in relation to penalty began, at [37], with the finding that in filing income tax returns for the 2007 and 2008 years without including the full amount of the net capital gain of the Trust, the present appellant or his tax agent made statements that were false or misleading in the relevant sense.

44. The Tribunal then considered the Commissioner's arguments as to recklessness and rejected those arguments.

45. We do not understand either of these matters to be in contention.

46. The Tribunal then said:

• 50. In this matter, the sums involved were large relative to the Applicant's income from other sources. In some circumstances that of itself might call for more than the usual amount of care. Here the Applicant can demonstrate that he took that care. First,

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  he consulted a tax agent, who was not sure of the position. He then consulted a solicitor who holds a Master of Taxation degree and who he perceived to have expertise in the area. The solicitor gave advice. Moreover, the solicitor was sufficiently diligent to contact the Applicant after he had given advice to indicate that the Commissioner had issued a determination that contradicted the advice given and that, if that view prevailed, the Applicant would not pass the maximum net asset value test. The solicitor reviewed his advice and confirmed his view, and indicated that in his view the Commissioner was wrong.

We have set out this paragraph, [50], because the appellant relied on it. Shortly after that paragraph the Tribunal said:

• 53. The conclusions reached in relation to the $2,018,000 and $591,840 were matters of judgment, not recklessness.
• 54. Save for the Adelaide Bank account balance, the context in the present case requires the conclusion that the Applicant and his tax agent took reasonable care and adopted a position that, while not correct, could be advanced on a reasoned basis with an expectation that it might be accepted as correct. It was a reasonably arguable position.
• 55. Whether the Adelaide Bank account balance was $1,252,112 or $166,288 was a question that turned on the detail of the arrangements with the Adelaide Bank. Failure to appreciate the difference between a single facility, as contended for, and two separate accounts, as the records show, was a matter of detail and was a matter of the Applicant taking insufficient care. The position was not reasonably arguable.
• 56. The Adelaide Bank account balance of $1,252,112 was enough to take the aggregate net asset value over the maximum net asset value test threshold.
• 57. Accordingly, penalty on the basis of having failed to take reasonable care is the appropriate penalty.

47. The relevant question of law in the appeal from the Tribunal was:

8. Whether, given the findings of fact made by the Tribunal, the Tribunal erred in law in finding that the Applicant was liable to pay an administrative penalty on the basis of having failed to take reasonable care?

48. The relevant ground of appeal from the Tribunal was as follows:

1.8 In circumstances where the Tribunal made the findings of fact at paragraphs 50, 53 and 54 of its reasons for decision, the Tribunal erred in law in finding at paragraph 55 that the position taken by the Applicant with respect to the characterisation of the Adelaide Bank facility was not reasonably arguable and at paragraph 57 that the Applicant was liable to penalty on the basis that he has failed to take reasonable care. Further or alternatively, those findings were irrational and manifestly unreasonable. Accordingly the Tribunal erred in law in making those findings and in concluding that the Applicant was liable to penalty on the basis of having failed to take reasonable care.

49. The primary judge said:

• 109. The Applicant appeals the penalty on the basis that:
  • 1. the AAT erred in finding that there was a failure to take reasonable care;
  • 2. the AAT's findings were irrational and manifestly unreasonable.
  • These complaints are also dismissed.
• 110. Reasonable care suggests an objective test, but the particular (and subjective) circumstances relevant to the taxpayer are to be considered in applying the test. So, the taxpayer must exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer:
  Commissioner of Taxation v Traviati [2012] FCA 546; (2012) 205 FCR 136 at [36]-[39] and [70]-[71].
• 111. The Applicant's submissions simply assert that given the factual findings, the Applicant must be regarded as having taken reasonable care. That contention fails at the outset. No findings of fact or facts were identified by the Applicant to support such a contention.
• 112. Indeed, on the facts found by the AAT, it was open for the AAT to conclude that the

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  Applicant, or his agent, did not exercise reasonable care:
  • 1. the Applicant failed to appreciate that there were 2 separate Adelaide Bank accounts as demonstrated by the records and that the inclusion of the Offset Account balance of $1,252,112 (as an asset in the MNAV test) combined with the exclusion of the Loan Account was sufficient to cause the $5,000,000 threshold to be breached.
  • 2. the Loan Account related to the purchase of a residence which was excluded as an asset from the MNAV test and the Loan Account was therefore also excluded from the test.
• 113. The AAT's decision was not irrational and manifestly unreasonable and the conclusion it reached was reasonably open to it.

50. The grounds of appeal to the Full Court in relation to penalty were as follows:

• 6.
  • (a) Her Honour erred in law in holding that on the facts before the Administrative Appeals Tribunal it was open for the Tribunal to conclude that the Appellant or his agent did not exercise reasonable care and that the decision of the Tribunal was not irrational and manifestly unreasonable…
  • (b) Her Honour should have held that given the findings of fact made by the Tribunal at paragraphs 50, 53 and 54 of its reasons for decision, the Appellant took reasonable care or alternatively the Tribunal's decision that the Appellant did not take reasonable care was manifestly irrational and unreasonable.

51. The submissions advanced in support of this ground were as follows.

52. First, the appellant said that the issue concerned the proper construction of the expression "reasonable care" in s 284-215 of Sch 1 to the Taxation Administration Act 1953 (Cth). It was then submitted: "If, on the evidence, the court concludes that the Appellant and his agent took reasonable care in the relevant statutory sense then he is taken not to have a shortfall amount as a result of a statement that is false and misleading in a material particular and will not be liable to penalty under Division 284 of schedule 1 of the Taxation Administration Act 1953."

53. The lynchpin of the argument was the findings by the Tribunal at [50] which we have set out above, that is, the appellant could demonstrate that he took reasonable care. It followed, so the submission went, that the appellant must be regarded as having satisfied the statutory test of "reasonable care" so that he was relieved from any penalty liability.

54. A further submission was that it appeared that the Tribunal proceeded upon the premise that the statutory test of "reasonable care" in s 284-215 could only be satisfied if the position held by the taxpayer was reasonably arguable. Further, it was put, the Tribunal isolated the bank account balance and its relevance to the maximum net asset value test and considered that separate advice was called for. It is not clear whether these submissions were advanced to the primary judge.

55. We accept that at the relevant time s 284-215(2) provided that, for the purposes of determining whether a person was liable to an administrative penalty, that person did not have a shortfall amount as a result of a statement that was false or misleading in any material particular to the extent that the person and the person's agent (if any) took reasonable care in making the statement.

56. The balance of the submission, however, involves a misreading of the Tribunal's reasons. The Tribunal dealt separately with the Adelaide Bank issue, and there was no error of law in so proceeding, because, as it said, the Adelaide Bank account balance of $1,252,112 was enough to take the aggregate net asset value over the maximum net asset value test threshold. Paragraph [50] of the Tribunal's reasons does not relate to the Adelaide Bank issue as the Tribunal made clear by the terms of [53] and the opening words of [54] of its reasons.

57. The Tribunal found as a fact, albeit implicitly, that the taking of advice by the appellant did not extend to the detail of the arrangements with the Adelaide Bank. No basis has been established for the Court to interfere with that conclusion.

58. The submission which centred on the Tribunal's use of the words: "The position was

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not reasonably arguable." in relation to the Adelaide Bank issue also fails. Those words immediately follow the Tribunal's conclusion that failure to appreciate the difference between a single facility, as contended for, and two separate accounts, as the records showed, was a matter of detail and was a matter of the present appellant taking insufficient care. While it is true to say that the legislation, in s 284-90, uses both the expression "take reasonable care" and the expression "not reasonably arguable", we see no error of law in the Tribunal considering whether a position was reasonably arguable in its assessment of whether or not the taxpayer had taken reasonable care. Again, it is not clear whether these submissions were advanced to the primary judge.

59. No question therefore arises in the circumstances of the proper construction of the expression "reasonable care" in s 284-215 of Sch 1 to the Taxation Administration Act 1953 (Cth).

60. We also note that we reject the submission that on an appeal under s 44 of the Administrative Appeals Tribunal Act 1975 it is for the Court to conclude that the appellant and his agent took reasonable care in the relevant statutory sense. The Court's role, relevantly, is limited to a question or questions of law.

61. We see no error in the conclusion of the primary judge that there was no error of law on the part of the Tribunal on the issue of penalty.

62. We have said nothing so far about the alternative part of the ground of appeal that the Tribunal's decision that the appellant did not take reasonable care was manifestly irrational and unreasonable. There is no basis for such a contention. No submissions were made in support of it and in our view it should not have been put.

63. We reject this ground of appeal.

Conclusion and orders

64. The appeal should be dismissed with costs, as agreed or taxed. Because of our decision with respect to the first issue in the appeal, even successfully to resist the contention of which the Commissioner gave notice (the second issue) would not have been sufficient for the appellant. However, the contention raised an important question, and we have resolved it in a way that restores the basis of the Commissioner's success in the Tribunal. We consider that we should record our decision on the contention by way of a declaration in the orders disposing of the appeal.