Case V4
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question at issue revolves around a share of net income of a trust estate to which an infant beneficiary is presently entitled which is not paid over to the beneficiary but is treated by the trustee as an interest-bearing loan to the trustee by the beneficiary. Is there created a separate trust estate so that the interest payable to the beneficiary in respect of the loan is net income of another trust estate to which the infant beneficiary is presently entitled?
2. The consequence of finding that there is a separate trust estate is, according to the respondent's case, that sec. 7A of the Income Tax (Rates) Act 1976 applies in respect of the multiple trusts.
3. Section 96 of the Income Tax Assessment Act 1936 (``the Assessment Act'') provides that a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate except as provided in the Assessment Act. By virtue of sec. 98 of the Assessment Act where any beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual. Section 95 defines ``the net income of a trust estate'' to mean the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions. Certain exceptions contained in the definition do not apply to the facts of this application.
4. Neither party relied upon sec. 260 of the Assessment Act. It is not necessary that I consider that provision.
5. For the year of income ended 30 June 1978 the Income Tax (Rates) Act 1976 (the ``Rates Act'') applied to declare the rates of tax in respect of assessments made pursuant to sec. 98 as follows:
``6B(4) The rates of tax payable by a trustee in pursuance of section 98 or 99 of the Assessment Act are as set out in Schedule 8.
...
6C(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 6B(4) in respect of that share of the net income.
6C(2) Subject to section 7A, where -
- (a) the trustee of a trust estate (other than the estate of a deceased person) is
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liable to be assessed and to pay tax 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 exceeds $1,040 but does not exceed $3,124,
the amount of tax payable by the trustee under sub-section 6B(4) in respect of that share of the net income shall not exceed 20 per centum of the amount by which the amount of that share exceeds $1,040, less any rebate or credit to which the trustee is entitled.
...
7A(1) Subject to sub-section (2) of this section, sub-section 6C(1) or (2) or sub-section 6F(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 -
- (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.
(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.
(3) In forming an opinion for the purposes of sub-section (2) in relation to the 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 -
- (a) the Commissioner shall have regard to the circumstances in which and the conditions (if any) upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised;
- (b) if a person who has, at any time, directly or indirectly -
- (i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or
- (ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or other persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate, whether or not the right or privilege has been exercised,
has not, at any time, directly or indirectly -
- (iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate being a trust estate in which the beneficiary is or was a beneficiary; or
- (iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or other persons, that has resulted in the conferring or attaching of any special right or privilege on or to property of another trust estate, being a trust estate in which the beneficiary is or was a beneficiary, whether or not the right or privilege has been exercised,
the Commissioner shall have regard to that fact;
- (c) if, in relation to the year of income, the Commissioner has formed the opinion mentioned in sub-section (2) in relation to a share of the net income of
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another trust estate to which the beneficiary is presently entitled, the Commissioner shall have regard to the fact that he formed that opinion; and- (d) the Commissioner shall have regard to such other matters (if any) as he thinks fit.''
6. By virtue of sec. 4 of the Rates Act the Assessment Act is incorporated and read as one with the Rates Act.
7. The hearing of the application proceeded on the basis of an agreed statement of facts. An edited and adapted version of that statement (to comply with subsec. 14ZK(2C) of the Taxation Administration Act) is as follows:
- 1. The Family Trust was created by Deed of Trust executed by B as settlor and V Pty. Ltd. as Trustee on 3 November 1975.
- 2. Beneficiaries of the Family Trust include R, his wife, and their children. Each child was under 16 years of age at all relevant times.
- 3. V Pty. Ltd. was duly incorporated in the State of Queensland and has at all material times acted as trustee of the Family Trust.
- 4. At all material times the directors and shareholders of the said V Pty. Ltd. have been R, his wife and F who is a chartered accountant.
- 5. V Pty. Ltd. as trustee owns one of the two units issued in (``Unit Trust''), a unit trust carrying on business as Surveys.
- 6. In the year ended 30 June 1978, the said Family Trust derived income by way of a trust distribution from the Unit Trust and by way of interest upon a bank fixed deposit, as set out in the income and expenditure account attached to the 1978 tax return for the Family Trust.
- 7. Expenses incurred and allowed by the Commissioner in the calculation of the net income of the Family Trust for the year ended 30 June 1978 were in respect of accounting fees and interest as set out in the aforesaid income and expenditure account.
- 8. By resolution made on 8 August 1978, the trustee resolved to apply the net income of the Family Trust to certain beneficiaries and credit their loan accounts as set out in the copy minutes. The relevant parts of the minutes of the trustee read as follows:
- ``It was resolved that the net income of the Family Trust available for distribution for the period ended 30 June 1978 be applied pursuant to clause 2 of the Trust Deed as follows:
- By applying for the benefit of the undermentioned beneficiaries as follows -
Beneficiary Wife $Balance 2nd child $1,040 1st child $1,040 3rd child $1,040 4th child $1,040It was resolved that the net income of the trust for the period ended 30 June 1978 appropriated to beneficiaries be credited to their loan accounts in accordance with the preceding resolution.''
- 9. Each of the minor beneficiaries was credited with $1,040 pursuant to that exercise of the trustee's power of appointment.
- 10. The balance sheet attached to the 1977 income tax return for the Family Trust discloses that the minor beneficiaries' loan accounts as at 30 June 1977 were as follows:
2nd child $7,165 1st child $7,165 3rd child $7,164 4th child $7,164The source of these loan accounts was the net income of the Family Trust available for distribution for the period ended 30 June 1977. The relevant parts of the minutes of the trustee read as follows:
- ``It was resolved that the net income of the Family Trust available for distribution for the period ended 30 June 1977 be applied pursuant to clause 2 of the Trust Deed as follows:
- By applying for the benefit of the undermentioned beneficiaries as follows -
Beneficiary Wife 2nd child 20% 1st child 20% 3rd child 20% 4th child 20%
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It was resolved that the net income of the trust for the period ended 30 June 1977 appropriated to beneficiaries be credited to their loan accounts in accordance with the preceding resolution.''
- 11. As set out in an attachment to the 1978 tax return for the Family Trust, interest was paid by credit entry to those beneficiaries' loan accounts.
- 12. Having regard to the loan account balances as at 30 June 1977, the interest was calculated at the rate of 15% per annum for the whole of the 1978 year.
- 13. The amounts of interest were credited to the beneficiaries' loan accounts and are included in the balances of those accounts disclosed in the balance sheet for the year ended 30 June 1978 as attached to the 1978 tax return of the Family Trust.
- 14. Interest was not paid or credited on the said beneficiaries' loan accounts in any other year of income.
- 15. The said beneficiaries' loan accounts as at 30 June 1978 were calculated as follows:
Balance 30.6.77 Share of Net Interest Balance Income for Credited 30.6.78 1977/78 Year as at 30.6.78 $ $ $ $ 2nd child 7,165 1,040 1,075 9,280 1st child 7,165 1,040 1,075 9,280 3rd child 7,164 1,040 1,074 9,278 4th child 7,164 1,040 1,074 9,278 - 16. Tax returns were prepared and lodged for each of the aforesaid minor beneficiaries for the year ended 30 June 1978. Each such return included the trust distribution as in para. 9 above and the interest credited on loan account as in para. 11.
- 17. The Commissioner, in respect of each minor beneficiary, issued two assessments to the trustee under sec. 98 as evidenced by the relevant assessment notices.
8. The return of income lodged in respect of the Family Trust included the following:
``BALANCE SHEET AS AT 30 JUNE 1978
1978 1977 TRUST CAPITAL $ 10 $ 10 Represented by: - CURRENT ASSETS Cash at bank 1,105 2,522 Loan - The Unit Trust 37,309 25,353 - R 2,303 2,037 ------ ------ 40,717 29,912 ------ ------ NON CURRENT ASSETS - at cost Fixed deposit - Bank 6,300 5,920 Investment - The Unit Trust 1 1 ------ ------ 6,301 5,921 ------ ------ TOTAL ASSETS 47,018 35,833 ------ ------
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Less CURRENT LIABILITIES Loan - wife 9,892 7,165 - 1st child 9,280 7,165 - 2nd child 9,280 7,165 - 3rd child 9,278 7,164 - 4th child 9,278 7,164 ------ ------ TOTAL LIABILITIES 47,008 35,823 ------ ------ NET ASSETS $ 10 $ 10 ------ ------''
``INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 30 JUNE 1978
1978 1977 INCOME Distribution received - The Unit Trust $11,956 $25,353 Interest - term deposit 868 397 Fees received - 11,845 ------- ------- 12,824 37,595 ------- ------- Less EXPENDITURE Accountancy 150 - Wages - 1,500 Rent of equipment - 217 Filing fees - 35 Interest 5,373 - Bank charges - 12 ------ ------ 5,523 1,764 ------ ------- NET PROFIT FOR YEAR $7,301 $35,831 ------ -------''
9. The return of income also disclosed that the interest amounting to $5,373 was paid to beneficiaries of the trust as follows:
Wife $1,075
1st child $1,075
2nd child $1,075
3rd child $1,074
4th child $1,074
------
$5,373
------
10. Income tax returns signed by R were lodged in respect of each infant beneficiary disclosing the distribution of $1,040 from the Family Trust and also disclosing the amounts of interest derived from the Family Trust together with interest derived from a building society. In each case a Deputy Commissioner of Taxation advised the infant beneficiary that no tax was payable on the income shown in the return.
11. The Commissioner made assessments in relation to the first child as follows in respect of the year of income ended 30 June 1978:
- (a) on ``the Trustee for (name of 1st child)''
Taxable income $1,040 Tax assessed 138.77; and - (b) on ``the Trustee for (name of child)''
Taxable income $1,075 Tax assessed 143.44.
12. In relation to the other child beneficiaries of the Family Trust the Commissioner took the same course. Objections were duly lodged by a firm of accountants against each assessment and those objections were disallowed by the Commissioner.
13. In due course the accountants asked that each objection decision be referred to a Board of Review.
14. In referring the eight matters to Taxation Board of Review No. 3 the Commissioner apparently had second thoughts about the identification of the taxpayers. Each reference identified the taxpayer in different terms to the
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name of the person (if there is such a person) appearing on the respective notices of assessment.15. In relation to the first child the reg. 35 statement forwarded by the Commissioner to the Board of Review named the taxpayer assessed to the distribution of $1,040 from ``the Family Trust on account (name of 1st child)''. The name of the taxpayer assessed to the interest amounting to $1,075 was shown on a separate reg. 35 statement as ``the Trustee for the (name of 1st child) Beneficiary Trust''. The Commissioner used a different name, in both cases, to that appearing on the notice of assessment.
16. A similar course of action was taken by the Commissioner in relation to the other children.
17. The applicant's representative stated the question at issue as follows:
``... whether or not there is a second trust in existence in relation to the income which has been credited to the beneficiaries loan accounts.''
18. Counsel for the respondent Commissioner defined the respondent's case in the following words:
``... each of the beneficiaries is presently entitled to a share of the net income of another trust estate - a second trust estate, in respect of which the trustee of that estate is assessable under sec. 98 of the Act, and consequently sec. 7A(1) of the Income Tax (Rates) Act applied so as to determine the amount of tax payable by the applicants in respect of the shares of the net income (of) the trusts assessable under sec. 98 in respect of those beneficiaries... upon the making of the resolutions to apply income, there was, in effect, a separate disposition bringing into existence a new settlement, and in respect of that new settlement which was brought into existence, the beneficiary of the disposition became the beneficiary of that new settlement...''
19. The resolution of the trustee dated 30 June 1977 had the effect of making the infant beneficiaries presently entitled to the specified share of the net income of the Family Trust for the year ended 30 June 1977. (
Taylor & Anor v. F.C. of T. 70 ATC 4026; (1970) 119 C.L.R. 444.) The resolution of the trustee dated 19 August 1977 quantified this share of the net income for each beneficiary as $7,164(5). The $7,164(5) was credited to the loan accounts of the beneficiaries in accordance with a further resolution of the trustee dated 30 June 1977 as set out above at para. 7.
20. There is no evidence that the trustee, in crediting these amounts to the loan accounts was in any way intending to create a trust in respect of those amounts. It seems that the trustee was attempting to create a debtor/creditor relationship between itself and the beneficiaries. The effect sought is quite clear. The trustee wanted to be in a position to be able to pay interest at 15% to the beneficiaries in respect of their loan account thereby generating allowable deductions for the trustee and income not subject to tax in the hands of the beneficiaries.
21. The trustee had power to accumulate for the benefit of the infant beneficiaries while in their infancy (cl. 4 of Exhibit B) (cf. sec. 50
Trustees and Executors Act (Qld) and Austin v. Abigail & Ors (1933) 49 C.L.R. 177). What it did was to seek to alter the status of the amounts credited to each beneficiary's loan account from amounts impressed with the terms of the trust to amounts owed by the trustee to the beneficiary as a creditor of the beneficiary. The loans were made by the trustee to itself at a rate of interest determined by the trustee.
22. What the trustee did not seek to do was create trusts. However, counsel for the respondent Commissioner contended that a second trust was created by the trustee (or perhaps R) when the net income was distributed and accumulated for the benefit of the infant beneficiaries. Reliance was placed upon the decision of the Court of Appeal in
Re Vestey's Settlement (1951) Ch. 209; (1950) 2 All E.R. 891 and the decision of the New Zealand Court of Appeal in
Commr of I.R. (N.Z.) v. Ward 69 ATC 6050.
23. In Case 93
(1950) 1 T.B.R.D. 380 Mr Gibson (Chairman) defined trust estate to mean the ``legal estate'' which is vested in the trustee or, in other words, the trust property. That view is consistent with the decision of the High Court in
F.C. of T. v. Everett 80 ATC 4076; (1980) 143 C.L.R. 440. Here the ``legal estate'' is the share of the net income of the Family Trust allocated to each beneficiary and held by the trustee for the absolute benefit of
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the nominated beneficiary. The share of the net income so set aside is the trust property held in trust for the individual beneficiaries.24. Those cases establish, beyond doubt in my view, that each beneficiary became the sole beneficiary of a separate trust estate.
25. As in Ward's case these applications concern the steps taken by the trustee in the prior year of income rather than the year of income before the Tribunal. By the resolution dated 30 June 1977 the trustee resolved that the net income of the Family Trust available for distribution for the period ended 30 June 1977 be applied pursuant to cl. 2 of the Trust Deed. The reference to cl. 2 seems to be an error, cl. 4 being the relevant clause. The terms of that resolution are not the same but of similar effect as the terms of the resolution in Ward's case.
26. In that case North P. decided that there had been an application in favour of the beneficiaries in the following dicta (69 ATC at p. 6059):
``I read Vestey's case therefore as laying down the principle that if a trustee takes the necessary step of exercising a power `to pay or apply' income for the benefit of infants, who only have a contingent interest in the income, it is immaterial whether the income is immediately used for the benefit of the infants and is sufficient if it is allocated to them in terms which makes the parts of the income so allocated the separate property of each infant.''
And later at p. 6061:
``In the light of the authorities I have referred to, I find myself brought to the conclusion that the declaration of the trustee in exercise of the power... did have the effect of immediately vesting a specific portion of the income... and that in result there was a change in title from a contingent interest to an absolute interest in the sums allotted to them... Once the trustee made her declaration the sums allotted to her children, although not immediately paid out to them, became their absolute property and would form part of their individual estates in the event of their death under the age of 21 years.''
McCarthy J. came to the same conclusions as North P. In the course of his reasons McCarthy J. had this to say at p. 6071:
``I would like to add something regarding the argument that the resolution of 29 March 1963 should not be regarded as applying income unless it acted as a declaration of trust imposing a trust on the trustee in favour of beneficiaries or created a debtor-creditor relationship between them.''
and later on:
``The moneys covered by the resolution were of course held on trust both before and after the resolution; held, basically, under the trusts created by the original deed. The effect of the resolution was to fix the beneficiaries to whom payment would eventually have to be made and to that extent one could perhaps speak of a new trust.''
27. It is clear enough that the amounts standing to the credit of the beneficiaries' loan accounts were not loaned by the beneficiaries per se. The loans were made by the trustee on behalf of the beneficiaries to itself in its capacity as trustee of the Family Trust. The trustee was acting as trustee for the beneficiary on a separate trust and it was acting as trustee of the Family Trust when it made the loans to itself.
28. The amounts retained by the trustee in its hands and held on trust for the beneficiaries were not part of the Family Trust having been distributed to the beneficiaries. The trustee's deliberate decision to lend those amounts to itself as trustee of the Family Trust does not alter the position. Neither is the position altered by the lack of any provision in the Trust Deed of the Family Trust requiring the trustee to hold sums distributed to beneficiaries on trust for those beneficiaries absolutely.
29. As I have already indicated I am satisfied that although there are not express trusts created for the beneficiaries the obligations on the trustee to hold the amounts distributed by the Family Trust for the beneficiaries are clearly established so that the trustee is liable in equity to account for those amounts held for the benefit of the beneficiaries absolutely.
30. I am also satisfied that the debtor/creditor relationship was established in respect of the loans but it was established between the trustee for the Family Trust and the trustee as constructive trustee for the beneficiaries. The beneficiaries were not the lenders - they did
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not enter into any contractual relationship with the trustee. The interest was therefore derived by the trustee in its capacity as trustee for each of the beneficiaries and because the trustee held the estates for the beneficiaries absolutely the beneficiaries were presently entitled to the income derived.31. It follows that each of the infant beneficiaries was presently entitled to the income of two trust estates and therefore prima facie within the terms of subsec. 7A(1) of the Rates Act. That subsection does not apply if this Tribunal is of the opinion that it would be unreasonable that the subsection should apply in relation to the subject share of net income of a trust estate. (See subsec. 7(2) Rates Act and subsec. 43(1) Administrative Appeals Tribunal Act 1975.)
32. The criteria to be considered for the purposes of subsec. 7A(2) are set out in the following subsection. In this case income of the Family Trust distributed to the infant beneficiaries has been loaned back to the Family Trust at commercial rates of interest thereby generating allowable deductions for interest in the Family Trust - hence the income of the second trust. In effect the deductions for interest have been generated from the net income of the Family Trust. Clearly there is nothing objectionable about these transactions but they appear to be the very kind of transactions envisaged by subsec. 7(3). It is difficult to envisage any reason for the transactions other than taxation savings - this is reinforced by the failure to pay interest on the loans in subsequent years - certainly no commercial reasons for the transactions can be envisaged.
33. In my view there is no basis for finding that it would be unreasonable for subsec. 7(1) to apply in respect of each of the subject trust estates and I so find.
34. The applicant in each application has failed to prove that the assessment is excessive.
35. The respondent's objection decisions under review were correct and will be affirmed.
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