Case U157

Members:
R Balmford SM
JE Stewart SM
HC Trinick M

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 July 1987.

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R. Balmford (Senior Member), J.E. Stewart (Senior Member) and H.C. Trinick (Member)

This is an application for review of a decision of the respondent disallowing an objection to an assessment in respect of the year ended 30 June 1979, treating a sum of $1,087 as income received by a trustee, G Pty. Ltd. (the trustee of the G family trust) under a separate trust for TB, who was born on 28 May 1978.

2. The notice of objection was lodged on 12 December 1980, and disallowed on 22 June 1981. On 14 July 1981, the trustee, by its agent, requested that the decision be referred to a Board of Review. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 and sec. 189(2) of the Income Tax Assessment Act 1936 ("the Act") that referral of the decision on the applicant's objection is deemed to constitute the making by the applicant of an application to the Tribunal for review of the decision.

3. Evidence was given at the hearing by Mr K, the accountant for the trustee. An agreed statement of facts and supporting documents were lodged with the Tribunal. Mr Cohen, for the applicant, conceded that, save in one respect, the facts in this matter were, for practical purposes, identical with those in case Nos. VT.85/333 and 334 ("F's case") [reported as Case U111,
87 ATC 667] decided by a Tribunal constituted by the President, Davies J., on 12 May 1987. However, in his submission, the facts in this matter were, in that one respect, sufficiently distinct from the facts in F's case to enable his client to succeed on this application for review.

4. On 30 June 1979, two amounts were credited to the account of what was described as "Loan: [TB]" in the books of the G family trust. An amount of $1,019 was allocated to TB in the course of a distribution of income of the G family trust. The other amount, of $1,087, was described as "interest". Each amount was retained in the hands of the trustee. The question before the Tribunal is whether the amount of $1,087 was, in respect of the year ended 30 June 1979, held on trust for TB under a separate trust; or whether that amount was, as the trustee contends, interest credited to TB by the trustee as debtor in the course of an ordinary debtor-creditor relationship, and not the income of any trust.

5. The G family trust was a discretionary trust, i.e. in terms of sec. 101 of the Income Tax Assessment Act 1936 ("the Assessment Act"), the trustee had "a discretion to pay or apply the income of [the] trust estate to or for the benefit of specified beneficiaries". Accordingly by virtue of sec. 101, TB was deemed to be presently entitled to the amount of $1,019, being his share of the income of the trust for the year ended 30 June 1979. And as TB was a minor and therefore under a legal disability, the amount of $1,019 was income in respect of which the trustee would have been liable to be assessed for tax under sec. 101 of the Assessment Act. However, the effect of sec. 6F(1) and 7A(1) of the Income Tax (Rates) Act 1976 ("the Rates Act") was that no tax would be payable on that amount unless TB was presently entitled to a share of the net income of one or more other trust estates and the sum of $1,019 and the other share or shares exceeded $1,040.

6. Sections 6E(4), 6F(1) and 7A(1) and (2) of the Rates Act read:

"6E(4) The rates of tax payable by a trustee in pursuance of section 98 or 99 of the Assessment Act are as set out Schedule 12."

"6F(1) Subject to section 7A, where -

• (a) the trustee of a trust estate (other than the estate of a deceased person) is liable to be assessed under section 98 of the Assessment Act in respect of a share of the net income of the trust estate to which a beneficiary under the age of 16 years on the last day of the year of income is presently entitled; and
• (b) the amount of that share of the net income does not exceed $1,040,

no tax is payable under sub-section 6E(4) in respect of that share of the net income."

"7A(1) Subject to sub-section (2) of this section, sub-section 6C(1) or (2), sub-section 6F(1) or (2) or sub-section 6J(1) or (2) does not apply in relation to a trustee of a trust estate who is liable to be assessed and to pay tax in pursuance of section 98 of the Assessment Act in respect of the share of the net income to which a beneficiary under the age of 16 years on the last day of the year of income is presently entitled if -

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• (a) the beneficiary was presently entitled to a share of the net income of the year of income of one or more other trust estates of the kind referred to in paragraph (a) of that sub-section; and
• (b) the sum of the amounts of the shares of the beneficiary of the net incomes of the first-mentioned trust estate and that other trust estate or those other trust estates exceeds $1,040.

7A(2) Sub-section (1) does not apply in relation to a share of the net income of a trust estate to which a beneficiary under the age of 16 years on the last day of the year of income is presently entitled if the Commissioner is of the opinion that it would be unreasonable that that sub-section should apply in relation to that share of the net income."

7. Thus, subject to the exercise of the Commissioner's discretion under sec. 7A(2), if the amount of $1,087 was the income of a trust estate separate from the G family trust, so that TB was in the year ended 30 June 1979, presently entitled to a share of the net income for that year of more than one trust estate (the amount of $1,019 being income of the G family trust) then, as the sum of $1,087 and $1,019 exceeds $1,040, the trustee would lose, in respect of TB's share of income, the benefit of sec. 6F(1).

8. The amount of $1,087 was shown in the books of the trustee as interest at 12% on the sum of $9,054, that sum being the opening balance in the account of TB at 1 July 1978. That sum of $9,054 derived from a distribution of income of the trust on 30 June 1978, shortly after the birth of TB. It was said to have been lent by the trustee, as trustee of the amount standing to the credit of TB in its books, to itself as trustee of the G family trust, and the interest to have been paid accordingly. No minute recording the transaction was prepared, and it was evidenced by book entry only. The interest formed part of an amount shown as "interest paid" in the operating and profit and loss account of the business conducted by the trust, and thus was a deduction from the assessable income of the trust.

9. The transaction created, Mr Cohen submitted, a relationship purely of lender and borrower. On that basis, the only trust estate in respect of which TB was presently entitled to a share of net income was the G family trust, and the only relevant income for that year was the amount of $1,019, which did not exceed $1,040.

10. In F's case (Case U111, 87 ATC 667), Davies J. referred to a specific provision in the trust deed requiring that any amount of income set aside for a beneficiary should be held as a separate trust fund on trust for that beneficiary. His Honour went on to find that the moneys paid by way of interest were held by the trustee as a trustee and held on separate trusts for each of the minor beneficiaries who then were presently entitled under more than one trust estate. Mr Cohen submitted that the absence, in the present case, of any such specific provision in the trust deed establishing the G family trust, distinguished the present case from F's case so as to maintain the debtor-creditor relationship for which he contended.

11. Mrs Moshinsky, for the respondent, submitted that the specific provision in the trust deed in F's case merely set out what would be the position in any case, by operation of law. The Tribunal accepts that submission. The decision in F's case relied not merely on the specific provision in the trust deed, but on broad principles of equity which are set out by his Honour and which it is not necessary to repeat here. In the present case, as in F's case, the trustee had held property (i.e. the sum of $9,054) on behalf of a beneficiary of the trust. As a trustee, it was bound to hold that property on trust for its beneficiary. As that property was held specifically for the individual beneficiary TB, it was not subject to the trusts of the G family trust. It must, therefore, have been held on a separate trust for TB. That being so, the income earned by that property, i.e. the sum of $1,087 interest, was "a share of the net income of one or more other trust estates" in terms of para. 7A(1)(a) of the Rates Act.

12. Mr Cohen said that should the Tribunal, as it has done, find that sec. 7A(1) applied so as to render the amount of $1,019 assessable in the hands of the trustee, he would not, in view of the decision in F's case, pursue the ground of objection in which he had submitted that the Commissioner should have exercised the discretion contained in sec. 7A(2) of the Rates Act. Had he not followed this course the Tribunal would in any case have adopted mutatis mutandis the words of his Honour in F's case at p. 671:

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"The manner in which the affairs of the trusts were managed, that is to say, the obtaining of a deduction totalling $5,644 in respect of the two sums of interest for the F family trust and a distribution to each of DF and CF of only $1,040, the total allowed by sec. 6F(1), appears to have been selected with a view to obtaining a favourable tax position for the F family. As to this I offer no criticism, but it does not seem to be unreasonable that the normal taxation rates should apply to a situation so brought about. Furthermore, in a case such as this, it would not accord with the policy of sec. 6F(1), which limits the non-taxable trust income to a total of $1,040 and of sec. 7A, which is designed to limit avoidance of tax through trust splitting, not to apply the provisions of sec. 7A(1)."

13. For the reason given, the decision under review will be affirmed.