Stamp v. Federal Commissioner of Taxation

Judges:
Pincus J

Court:
Federal Court

Judgment date: Judgment handed down 7 October 1988.

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Pincus J.

This is an income tax appeal direct to this Court in which the principal question is one of construction of sec. 260 of the Income Tax Assessment Act 1936. The point arising under that section is whether the voidness of arrangements caught by the section may be used by the Commissioner against taxpayers not involved in those arrangements. The case relates to an assessment in respect of the year ended 30 June 1981.

The tax-avoidance scheme, described below, was not one for the appellant's benefit, nor did it in fact benefit her. The income which is the subject of the disputed assessment is purely notional; she did not receive it, nor is she entitled to it.

The facts in the matter are quite complex and are set out below; they may be explained accurately enough, so far as relevant to the main point, as follows. The appellant had the right, under a trust deed of 1976, to share in income of a trust in so far as that income was not, under a discretionary power to do so, distributed by the trustee. The trustee, in an elaborate way, made a distribution of income which was effective to deprive the appellant of any right to share in it; the purpose of the scheme was to make the distribution tax-free. The appellant obtained, and can obtain, none of it. Yet because the means adopted to achieve the distribution was, as is contended by the Commissioner, void under sec. 260, the Commissioner claims to be entitled to say that there never was a distribution, so the appellant is deemed to have received a share of the income. The appellant swore that she did not even know that she was named in the deed and that was not challenged.

The legal point involved may be illustrated as follows. Suppose that an arrangement struck down by sec. 260 includes as a first step a purchase by the participants of shares listed on the stock exchange and as a last step the sale by the participants of those same shares, again on the exchange. If both of those steps are tainted by the tax-avoidance purpose, they are good inter partes but may be treated by the Commissioner, as against the participants in the scheme, as never having occurred; for example, a loss on the participants' sale would not be deductible.

But may the Commissioner treat the transactions on the open market as void when considering the tax affairs of the vendor, as to the first transaction, and the purchaser, as to the second? One would immediately be inclined to say, obviously not; sec. 260 can hardly have been intended to achieve such an absurd result as to affect the Commissioner's position against perfectly ``innocent'' parties having nothing to do with any scheme.

Another way of putting the Commissioner's point is that the effect of sec. 260 can be to avoid an arrangement ``so far as it has or purports to have the purpose or effect of'' reducing or eliminating tax liabilities, even as against persons who have nothing to do with either the purpose or the effect. If, for example, a borrowing of money from a stranger to a scheme takes place as part of it, then the

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ATC 4805

Commissioner may if his contention is right ignore that borrowing for the purposes of the tax affairs of the innocent lender.

In my opinion, this is not what the section is intended to achieve. If, of two parties to a contract caught by the section, one can say there is a tax-avoiding ``purpose or effect'' as to one but not the other, the section works only so far as the contract has or purports to have that purpose or effect - i.e. only so far as it relates to the party avoidance of whose tax is in question. That proposition appears to me to have the support of the decision of the Full High Court in
Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106.

That was a sequel to the Court's decision in
Hancock v. F.C. of T. (1961) 108 C.L.R. 258. The earlier case concerned an arrangement held to be void under sec. 260 under which shares in a company with accumulated profits were sold to Rowdell Pty. Ltd., which caused the profits to be distributed to itself; the shares were then resold by Rowdell to some of the original vendors, the Hancocks. The idea was to escape:

``the tax that must attach either to the company or to the shareholders if the profits were undistributed and alternatively... the tax which as shareholders they would pay if the profits were simply distributed as dividends''

(per Dixon C.J. at p. 278).

The ``company'' referred to in this passage, whose shares were sold, was Mulga Downs Pty. Ltd. and at first instance it was held that:

``the transaction... the parties to which were Rowdell and the Hancocks and Mulga Downs, constituted or involved, within the meaning of s. 260 of the Assessment Act, a contract agreement or arrangement which had the purpose or effect of avoiding any liability imposed on Mr. George Hancock by the Act''

(p. 270).

On appeal, Dixon C.J. defined the parties to the arrangement so as to include Rowdell (p. 278) and Windeyer J. agreed with his Honour's reasons (p. 300). But when in the later case the Commissioner sought to use sec. 260 against Rowdell, he was unsuccessful. Kitto J. said:

``To grasp that s. 260 defeats as against the Commissioner the tax-avoiding efficacy of an arrangement, and not any part of the arrangement itself or anything done under it, is to see at once that it cannot support an assessment made against Rowdell on the footing that any of the transfers of shares to it were void - unless, of course, the arrangement was a means of tax-avoidance by Rowdell itself''

(111 C.L.R. at p. 125).

Dixon C.J. agreed with the reasons of Kitto J. on this aspect (pp. 116-117) and Menzies J. adopted a similar approach:

``The purpose and effect of the arrangement... was to avoid the tax obligations which the Act imposed upon the Hancocks and this alone: accordingly, it is avoided by s. 260 so far and no further. When, therefore, the question is not as to the Hancocks' obligations under the Act, nothing is avoided by s. 260''

(p. 135).

It should be added that in Rowdell there were purchases and sales in issue other than those which had been considered in the Hancock case, but they were part of similar schemes and Menzies J. in the passage I have quoted took the Hancock facts as an example.

The facts of this case are distinguishable from those of Rowdell, but in a way which helps the present appellant. There, Rowdell was very much a party to the arrangement; if it matters, a Mr Watson, who controlled Rowdell, promoted the scheme. Here, the appellant was not a party to the scheme; no transaction in it involved her.

It should be added that the reading of sec. 260 adopted in these reasons is not necessarily unfavourable to the Commissioner, in every case. If a contract of sale forming part of a tax-avoidance scheme must be treated as void as between the Commissioner and a vendor who simply sells on the stock exchange and knows nothing of the scheme, that presumably would prevent the Commissioner from recovering tax on that vendor's sale, if profitable.

The Commissioner's attempt to extend what has previously been understood to be the operation of sec. 260 therefore fails. It appears to me desirable, however, to deal (albeit, as to some, briefly) with the most substantial of the other points argued, as well as to explain the facts relating to the scheme in detail. The other points will of course be discussed on the basis (which I do not accept) that the Commissioner is correct in his fundamental submission, just dealt with.

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ATC 4806

Deed of settlement

The deed of settlement referred to above established the ``McCracken Family Trust'' and was made on 24 June 1976, the settlor being Vivienne June Price and the trustee Kenmac Investments Pty. Ltd. It established a trust fund consisting initially of a sum of $5, with provision for feeding the trust. The principal provisions with respect to the income of the trust fund are to be found in cl. 3.1 and 3.2, which read as follows:

``3.1 The Trustee shall in each year determine the income of the Trust Fund after allowing for all expenses of the Trust Fund.

3.2 The Trustee may at any time prior to the expiration of any year which ends before or upon the Perpetuity Date determine with respect to all or any parts of the Income of the Trust Fund of such year:

• (i) To pay apply or set aside the same or any part thereof for all or one or more of the Primary, Secondary and Tertiary Beneficiaries living or in existence at the time of the determination;
• (ii) To accumulate the same or any part thereof;

PROVIDED THAT if the Trustee shall not by the Thirtieth day of June have exercised its discretion to pay apply set aside or accumulate the whole or any part of such Income in the manner aforesaid then the Trustee shall hold the Income not so paid set aside or accumulated for that year in trust for such of the Primary Beneficiaries as are then living if more than one absolutely as tenants in common in equal shares.''

The expression ``the Trust Fund'' is defined so as to include the initial $5 and other property held under the trust. The identity of the secondary and tertiary beneficiaries is of no present consequence and it is enough to say that they are defined, in a schedule. The primary beneficiaries are three people one of whom is the appellant.

The appellant was, at the time the settlement was executed, the secretary of Kenmac Investments Pty. Ltd., the trustee, and in that capacity she signed the deed on an imprint of the company's common seal. However, her role appears to have been purely formal. She also signed, according to her recollection, some company returns, but did not attend directors meetings (assuming that any in truth took place).

Mr Harrison Q.C., who appeared with Mr D.R. Cooper for the appellant, sought to undermine the Commissioner's reliance upon sec. 260 of the Act by setting up at the hearing a case that the deed of settlement itself was void against the Commissioner under sec. 260. The raising of that point required leave, since no attack on the deed was made in the notice of objection. I declined to allow the point to be raised, as it appeared to me impractical to attempt to investigate the circumstances surrounding the execution of the deed 12 years ago - a point on which very little information seemed to be available.

It was argued for the Commissioner that if there was, in fact, an exercise of discretion by the trustee under the provisions of cl. 3.2 quoted above, but that exercise was struck down under sec. 260, then under the proviso to cl. 3.2 the primary beneficiaries would, for tax purposes, be regarded as taking the income. The appellant contended that on its proper construction the proviso does not have that effect; it operates, so it was argued, if the discretion is not exercised and the question whether the exercise is effective for tax purposes has nothing to do with the matter.

It appears to me that the dispute just mentioned reflects a deeper one, namely whether the avoiding effect of sec. 260 may be relied on by the Commissioner against people (like the appellant) who have in no sense participated in the impugned scheme, nor in any transaction forming part of it. But if sec. 260 had indeed such a universal effect, then it appears to me that the Commissioner's argument on the construction of the proviso would have to be accepted. Putting that point another way, the assumption on which the Commissioner's contention about the proviso is based is that the avoiding effect of sec. 260 operates against all taxpayers, whether or not taking part in the scheme; if that is so, then it would appear to follow that, as against the appellant, the trustee must be deemed not to have exercised the discretion referred to in the proviso (although it did so in fact). As appears from what is written above, I do not accept the correctness of the assumption.

The exercise of discretion to which I have referred was effected by a resolution of the

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ATC 4807

trustee on 21 May 1981, providing for distribution of $370,100 to A. & B. Management (No. 72) Pty. Ltd. and $29,900 to A. & B. Management (No. 83) Pty. Ltd. Although the Commissioner formally submitted that the resolution, like all other steps taken in the scheme, was a sham, there is nothing to support that, nor any other reason to doubt the effectiveness of the distribution as against the appellant. It follows that she in fact obtained no entitlement to income in the relevant year.

The arrangement

The arrangement attacked by the Commissioner was rather a complex one. All the principal steps occurred within a few minutes of 5.25 p.m. on 21 May 1981.

In outline, the idea was that $400,000 of trust income would be dealt with through an accountant's trust account, the promoters of the scheme taking a commission of about 7.5%. The rest would go down to an exempt beneficiary which, after deduction of a small sum, would return the bulk. The crux was the presence of the exempt beneficiary, which, if the scheme worked, would make the distribution a tax free one without (except to a small extent) incurring the disadvantage of actually benefiting the exempt beneficiary. It is clear that the scheme's purpose was not to save the appellant tax; she was not intended to receive or become entitled to any income on which she might be taxed.

The sequence in which the transactions forming part of the scheme took place was not fully proved, and to some extent the order of transactions set out below is arbitrary. Nor did the evidence contain much detail as to the precise means whereby the scheme was put into effect, for example, as to how cheques drawn as part of the scheme were physically paid over to their intended recipients. The parties seemed to have argued the case on the assumption that such details were not of any present importance, subject to one reservation. This is that the argument for the Commissioner included, as I have said, a suggestion that the whole roundabout of cheques was a sham. That point was not, however, elaborated upon, nor pursued by putting appropriate suggestions to the deponents who gave evidence about the way the scheme was effected.

The essential steps were:

• 1. Kenmac Investments Pty. Ltd. as trustee of the McCracken Family Trust (referred to above) resolved to distribute $29,900 to A. & B. Management (No. 83) Pty. Ltd. as trustee of the Conduit Discretionary Trust, and $370,100 to A. & B. Management (No. 72) Pty. Ltd. as trustee of the McCracken Subscribable Unit Trust.
• 2. Cheques No. 218533 and 218534 drawn on the trust account of Ahern Betar and Dunn (the accountant who promoted the scheme) were paid to make the distributions just mentioned.
• 3. Josby Pty. Ltd. as trustee of the Centaur Memorial Fund for Nurses resolved to apply $368,000 (i.e. the $370,100 referred to in step one, less $2,100 which was intended to remain with the Fund) for the benefit of the Fund by purchasing ``B'' class units in the McCracken Subscribable Unit Trust in the name of Intercontinental Shelf No. 104 Pty. Ltd. as trustee of the Centaur Trust (No. 2).
• 4. A. & B. Management (No. 72) Pty. Ltd. as trustee of the McCracken Subscribable Unit Trust resolved to issue 368,000 one dollar ``B'' class units in the trust to Intercontinental Shelf No. 104 Pty. Ltd. as trustee of the Centaur Trust (No. 2).
• 5. The units just mentioned were paid for by a cheque. No. 218536 drawn on the same trust account in the sum of $368,000.
• 6. A. & B. Management (No. 72) Pty. Ltd. as trustee of the McCracken Subscribable Unit Trust resolved to distribute income of $370,100 to the holder of the ``B'' class units, that is, to Intercontinental Shelf No. 104 Pty. Ltd. as trustee of the Centaur Trust (No. 2).
• 7. That distribution was effected by cheque No. 218535 drawn on the same trust account.
• 8. A. & B. Management (No. 83) Pty. Ltd. as trustee of the Conduit Discretionary Trust resolved to distribute the $29,900 mentioned above to Tarbet Investments Pty. Limited as trustee of the Betar and Ahern Trust trading as Rocklea Industries.
• 9. That distribution was effected by cheque No. 218539 drawn on the same trust account.
• 10. Intercontinental Shelf No. 104 Pty. Ltd. as trustee of the Centaur Trust (No. 2)

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  ATC 4808

  resolved to distribute income of $370,100 to Josby Pty. Ltd as trustee of the Centaur Memorial Fund for Nurses.
• 11. That distribution was effected by cheque No. 218537 drawn on the same trust account.
• 12. A. & B. Management (No. 72) Pty. Ltd. as trustee of the McCracken Subscribable Unit Trust resolved to declare that that trust vest on 22 May 1981 (i.e. the following day) and resolved pending that vesting to distribute $368,000 being the capital of the Fund to the holder of the ``A'' class units, Ronald Graham McCracken as trustee of the McCracken Final Discretionary Trust by way of advance distribution upon the vesting.
• 13. That advance distribution of $368,000 was made by cheque No. 218540 drawn on the same trust account.
• 14. Ronald Graham McCracken as trustee of the McCracken Final Discretionary Trust resolved to lend $368,000 to Kenmac Investments Pty. Ltd. as trustee of the McCracken Family Trust.
• 15. That loan was made by cheque No. 218532 drawn on the same trust account.

It should be added that it is not entirely clear, as to step No. 12, how it came about that R.G. McCracken was entitled to the capital in question. The relevant trust deed does not appear to create that entitlement; however, it does not seem to be necessary to pursue that point.

The way in which the original $400,000 flowed was therefore:

• 1. $29,900 went to A. & B. Management (No. 83) Pty. Ltd. and then to Tarbet Investments Pty. Ltd.; that was in substance the promoter's fee.
• 2. $370,100 was distributed by Kenmac Investments Pty. Ltd. to A. & B. Management (No. 72) Pty. Ltd. and then to Intercontinental Shelf No. 104 Pty. Ltd. and then to Josby Pty. Ltd. from which point that sum was divided into two streams:
  • (a) $368,000 was paid by Josby Pty. Ltd. to A. & B. Management (No. 72) Pty. Ltd. for ``B'' class units and the same sum was distributed by A. & B. Management (No. 72) Pty. Ltd. to R.G. McCracken as the holder of 10 ``A'' class units and then paid by way of loan to Kenmac Investments Pty. Ltd. (the originator of the flow);
  • (b) $2,100 remained with Josby Pty. Ltd. as trustee of the Centaur Memorial Fund for Nurses.

The money went around in a circle from Kenmac Investments Pty. Ltd. to Kenmac Investments Pty. Ltd., $29,900 being syphoned off on the way to the promoters and $2,100 to the Centaur Memorial Fund for Nurses.

Does sec. 260 catch the arrangement?

There was some discussion at the hearing about Lord Denning's test in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p. 8 and it was said that the transactions are capable of explanation by reference to ``ordinary business or family dealing''. In my opinion, they cannot be so characterised. It has to be admitted that inter vivos trusts are very common in our community, as are dealings relating thereto. The reasons for the existence of such trusts, since the abolition of death duty, are primarily concerned with income tax. It must further be said in favour of the appellant on this point that the trust dealings which were upheld in
Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330 were no less artificial than those with which I am concerned: making a stranger a $1 unit holder (that sum not even being paid) could hardly pass the Newton test.

It does not appear, however, that it is necessary for the purposes of resolution of this point to attempt to frame a test by which one can determine which uses of trust mechanisms do, and which do not, collide with sec. 260. Where one has a basically circular movement of money, making no commercial sense, prima facie sec. 260 applies, in my opinion, subject to the possibility of application of the choice principle. It is true that, as was argued at the hearing, it is now established by decisions of the Full Court that sec. 260 cannot affect deductions otherwise allowable under sec. 51;
Australian National Hotels Limited v. F.C. of T. 88 ATC 4627 at p. 4635, but even that general proposition may be subject to a qualification covering arrangements which are wholly artificial and circular and lack any commercial foundation;
F.C. of T. v. Lau 84 ATC 4929 at p. 4947 per Beaumont J., with whom Jenkinson J. agreed. Further, it is not clear whether the

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ATC 4809

general exemption of sec. 51 deductions from the operation of sec. 260 rests on the choice principle or some other basis; if on the former, that must be regarded as depending on special reasons. There is nothing in the cases on sec. 51, in my respectful opinion, which assists the appellant here, for the most important recent authority on the scope of the choice principle is
F.C. of T. v. Gulland 85 ATC 4765; (1985) 160 C.L.R. 55; there the test was so stated as to make it impossible for the scheme outlined above to pass. Gibbs C.J. used the expression:

``if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct...''

(ATC p. 4771; C.L.R. p. 66).

Dawson J. spoke of provisions of the Act other than sec. 260, which:

``contemplate means by which a taxpayer may organize his affairs so as to incur a greater or lesser tax liability according to the decision which he makes''

(ATC p. 4793; C.L.R. pp. 105-106).

Wilson J. agreed in substance with the reasons of both Gibbs C.J. and Dawson J.

I cannot identify provisions of the Act relevant to the present case which answer either of these descriptions; in particular, there appears to be nothing in the trust provisions of the Act, such as sec. 97, suggesting an intention to offer a choice of ``alternative tax consequences'' or an intention to offer ``certain tax benefits''. I am of opinion, then, that sec. 260 captures the circular flow of money.

Mr Harrison pointed out that, even if that were so, then the effect of sec. 260 is annihilating only. He contended that there is a degree of reconstruction in postulating of the taxpayer that she obtained a right to trust income, when in truth she obtained no such right.

In my opinion, the effect one gives to the principle on which Mr Harrison relies depends very largely on how one chooses to describe the transactions in question. It must be admitted that one could contend that there is more than annihilation involved, for if the Commissioner is right, there notionally comes into existence (so far as the appellant's tax affairs are concerned) a right having no previous or other existence. Alternatively, one could say that there is no reconstruction, for one simply strips away the distribution which in fact occurred, leaving exposed a set of facts having adverse tax consequences for the appellant. Similarly, in
F.C. of T. v. Kareena Hospital Pty. Ltd. 79 ATC 4667, on which Mr Harrison relied, it could perhaps have been said that once the introduction of the loss company was annihilated, the Commissioner was entitled to treat its income as having been received by the entity previously running the business, as in
Peate v. F.C. of T. (1966) 116 C.L.R. 38 at p. 44 (Privy Council). Conceding that these difficulties exist, I am of the view that the ``annihilation only'' principle cannot save the appellant here. That is so because one does not have to postulate the occurrence of any additional event or transaction to achieve the result for which the Commissioner contends. It is true that one treats as existing a right to income which would not otherwise exist, but that does not appear to me to require any reconstruction.

Full and true disclosure

The assessment in respect of the year I have mentioned, viz. that ended 30 June 1981, as originally issued on 8 March 1982 did not seek to tax the income in question. The appeal relates to an amended assessment issued on 13 June 1984, less than three years after the relevant date. Section 170(3) reads:

``Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact; and no such amendment shall be made after the expiration of three years from the date upon which the tax became due and payable under that assessment.''

Mr Harrison said that there was a ``full and true disclosure of all the material facts necessary'' for the appellant's assessment. Therefore, he said, an assessment increasing her liability would be permissible only ``to correct an error in calculation or a mistake of fact''. The point taken was that at the time when the first assessment was made, the

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ATC 4810

Commissioner had in his possession enough of the details of the scheme to apply sec. 260 against the appellant. They were contained, so it was said, in various of the returns lodged by the trusts involved in the scheme. It is true that some details (but by no means the full picture) could have been dug out of those returns.

It was not suggested that the taxpayer had herself made a full and true disclosure of any facts relating to the scheme; she made no such disclosure, as she knew nothing of it. Mr Harrison contended that there was no need for disclosure of matters of which the Commissioner was already aware.

The problem of construction of sec. 170(3) so raised has no obvious solution. It is difficult to say, with any pretence to accuracy, that a taxpayer has made a full and true disclosure of facts when she has disclosed nothing. But it would seem an odd result that such a taxpayer should fail on the ground of non-disclosure, if the Commissioner needs to know no more than he has already been told by others. What might be described as a compromise interpretation is that the taxpayer is excused from disclosure of facts in the Commissioner's possession if he or she knows that the Commissioner has them:
Foster v. F.C. of T. (1951) 82 C.L.R. 606 at p. 619 per Dixon J.

That view is of no consequence for present purposes, for the appellant did not have any reason to think the Commissioner knew anything about the scheme. In my opinion a broad construction should be given to the words ``made... a full and true disclosure'', so as to encompass inter alia any reasonable, express or implicit, indication by the taxpayer as to where the material facts may be found; but subject to the doctrine of Foster's case (above) no construction faithful to the language can be advanced which saves a taxpayer who has simply told the Commissioner nothing about the facts necessary for assessment.

It was argued, also, that the amendment was beyond power because the appellant did not know the necessary facts, nor could she have found them out. I am not satisfied of her inability to do so. For reasons which do not require detailed explanation, the relationship between the parties was such that in my opinion the facts could have been ascertained by the appellant, had she had any interest in them at the relevant time. The real reason for non-disclosure was that no one thought the scheme had anything to do with the appellant's tax position; nor, in my opinion, did it.

In my opinion, then, the appellant's point under sec. 170 fails.

Section 97

Mr Harrison raised a question of construction of sec. 97 of the Act, which he asserted led to the conclusion that the appellant was not, during the relevant year, deemed to be presently entitled to a share of the income of the trust estate, within the meaning of that section. Section 97(1) reads, so far as relevant, as follows:

``Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate -

• (a) the assessable income of the beneficiary shall include -
  • (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and
  • (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

  ...''

The appellant's argument amounted to this, that the beneficiary's assessable income could not include a share of the trust estate's net income unless there were a present entitlement in the sense of entitlement to the income as and when earned. It would follow that if, under the deed, the entitlement were made to arise at some time after the earning of the income, it would not be a present entitlement.

The other view is that a beneficiary is presently entitled at a particular time if he then has a right to be paid a share of the income, even if that right arises after the earning of the income, e.g. in a subsequent year.

Here, the appellant beneficiary could not have had a vested interest in any of the income during the year in question. That interest would have arisen, had there been no distribution, at the very conclusion of the year. Williams J. put his understanding of the section in this way:

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ATC 4811

``The section would require a life tenant presently entitled to income of a trust estate in specie to include in his assessable income the whole of the net income of the trust estate... less any sums which the trustees were entitled to retain out of this income under the trust instrument''

(
Tindal v. F.C. of T. (1946) 72 C.L.R. 608 at p. 632).

Although some may cavil at the use of the expression ``in specie'' as describing the nature of the beneficiary's right, the notion conveyed is clear enough.

It was contended on behalf of the Commissioner that inability to include the sum in question within the scope of sec. 97 would not be fatal to his case, because it could still be included (as I understood the argument) under sec. 25. In my opinion, that is incorrect; the income in question is, if not caught by sec. 97, then brought to tax under sec. 99 or 99A - i.e. taxed in the hands of the trustee. There is no question of application of sec. 101, in the circumstances of this case.

I have not found it necessary to express a conclusion as to the correctness of Mr Harrison's submission concerning sec. 97, but have thought it right to explain the point made.

Reimbursement agreement

The Commissioner's essentially technical argument based on sec. 260 was sought to be met by an equally technical rejoinder, based on sec. 100A(1). The general effect of sec. 100A is to exclude certain entitlements to income from the category of present entitlement. Section 100A(1) and (7) respectively read as follows:

``(1) Where -

• (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
• (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this sub-section referred to as the `relevant trust income') arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement, the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.

...

(7) Subject to sub-section (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.''

To take subsec. (7) first, Mr Harrison argued that here there was an agreement within that subsection and that appears to me to be so, if for no other reason than that under the arrangements which were implemented, no doubt pursuant to prior agreement, the promoters obtain some money. The next step in the argument is that the alleged present entitlement grows out of that agreement or ``by reason of any... circumstance that occurred in connection with...'' that agreement. Mr Harrison said that there was a close enough connection because the present entitlement arose from the failure of the reimbursement agreement to achieve what was intended.

In my opinion the argument should not succeed. Assuming all else in favour of the Commissioner, as one must for the purpose of considering the point, sec. 260 operates to avoid the reimbursement agreement entirely, as against the Commissioner. His rights are to be determined as if there had never been such an agreement. The present entitlement of which sec. 100A(1)(b) speaks cannot, as against the Commissioner, be taken to arise by reason of anything connected with the reimbursement agreement.

The appellant's point under sec. 100A therefore fails.

Additional tax

It was contended on behalf of the appellant that the Commissioner had no right to charge additional tax or, to put the point another way, that it was unlawful not to remit such tax.

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ATC 4812

The figures are as follows. The original assessment to which I have referred related to tax of $6,958.52. The amendment increased that to $85,377.30. Under sec. 226(2), the appellant was prima facie liable to pay double the difference between the tax properly payable and the tax that would have been payable if she were assessed upon the basis of the return furnished. The maximum additional tax possible was $156,837.56.

In fact, the Commissioner remitted all but about two-thirds of that, leaving due for additional tax the sum of $53,561.09.

As Mr Muir Q.C. (with whom Mr Hack appeared) pointed out on behalf of the Commissioner, there was very little information placed before the Court on this issue. Mr Muir argued that the appeal relating to additional tax should fail because there was not sufficient in the evidence to discharge the appellant's onus of proof. He said, in effect, that the Commissioner might have relied upon circumstances other than those in the evidence the parties placed before the Court, which circumstances might have justified the Commissioner's action.

Section 226(2) applies, inter alia, to; ``Any taxpayer who omits from his return any assessable income...'' It appears to me to be correct that, assuming all else in favour of the Commissioner, assessable income was omitted. The operation of the section is not conditioned upon the taxpayer's knowing of the income omitted.

Nevertheless, the failure to remit seems to have been a mistake. If (contrary to the view I have expressed above) assessable income was omitted, that was so only in the sense that on a certain interpretation of sec. 260 there was deemed to be assessable income. In fact, there was no such income. Accepting, for the purpose of disposition of this point, that having received not a cent of the income in question ($133,333) and having no right to receive any of it, the appellant must be treated for tax purposes as having had the money, still it appears extraordinary to seek to exact additional tax. In defence of the course taken, it may be said that the Commissioner did not perhaps then fully appreciate that the appellant had no connection with the scheme, but that is mere speculation. There is nothing, so far as the material before me shows, to support it. Since the so-called omitted income had no real existence, it was prima facie an indefensible course to seek to exact additional tax. If I may be permitted to say so, it was a little surprising that while not disputing the evidence that the appellant was entirely unconnected with the scheme, the Commissioner sought before me to defend the exaction of additional tax. The only proper course was to remit the whole of the additional tax; the Commissioner's discretion was wrongly exercised, as being unreasonable in the relevant sense, even if the amended assessment was otherwise correct.

Conclusion

I am of opinion that sec. 260 does not assist the Commissioner and therefore the appellant may not be treated as having received the relevant trust income or having become entitled thereto.

The appeal must be allowed, and the amended assessment dated 13 June 1984 set aside. The respondent must pay the costs.