Case W36
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
Not many persons would spurn an opportunity to be a beneficiary of a trust or disclosing a distribution of moneys by a trustee, even though in consequence they might become liable to pay some income tax. But the applicant is such an exceptional person. Why she should object to being considered to be such a trust-beneficiary
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should become clear upon a consideration of the circumstances giving rise to her assertion.2. That there should be a tax problem resulting in an application to this Tribunal has its origins in a failed marriage. It arises in particular from the provisions made by the husband to make available financial support for his former wife and their children.
3. Both spouses gave evidence but nothing in the evidence-in-chief presented by either witness for the party calling them and nothing arising from cross-examination resulted in there being any conflict of evidence between them. Rather each gave an account of their personal history from their own perspective - each telling so much of the whole story as he or she knew, but with neither knowing fully the story of the other.
The background
4. By 1980 the husband and wife had been married for some 13 years. They were the parents of three children ranging in age from 6 years to 11 years. They carried on business in partnership as consulting engineers - a course made possible by the professional qualifications of the husband. The wife contributed as she could to the operations of the business, but she was principally occupied with the concerns of managing the home and nurturing her children. As was commonplace in successful households she was provided with ``housekeeping'' moneys ($125 per week) and in addition had resort to the joint bank account to meet less regular expenses, such as provision of shoes and clothing. The husband made provision for mortgage payments, rates, telephone, house and contents insurance, and health insurance.
5. Then in March 1980, for reasons which have no relevance and which were not explained, the husband left his family. In the months immediately following his departure he continued to contribute $125 per week towards ``housekeeping'' and generally bore the expenses which he had previously provided for. For some little time the wife continued to have access to the joint banking account as she had previously.
6. In time the couple consulted their respective solicitors and thereafter had resort to the Family Court of Australia. That resulted in a decree of dissolution of marriage in 1981. That decree was made only after the Court was satisfied that appropriate provision had been made for the financial support and personal welfare of the children. That was achieved by making financial provision for them and by the Court directing that custody of the children should be vested in the wife, but with substantial rights of access to the father. In the course of those proceedings the wife had deposed to particulars of her financial situation. She acknowledged earnings of $5,780 from employment for the year of income ending 30 June 1981; and ``maintenance'' provided for herself and her children by her husband at the rate of $125 per week ($6,500 per annum). The partnership had been dissolved earlier by a notice given in May 1980 by the husband.
7. The account to be given hereafter touching the state of knowledge of the wife is essentially based upon the evidence presented by her in her evidence-in-chief. As it was not challenged in cross-examination and as no evidence to the contrary was sought to be elicited from the husband, I accept it. I find nothing inherently improbable about the account given by the lady.
8. What the applicant did not know at the time of the Family Court settlement was that her former husband had caused a company (Prac-co.) to be incorporated; that Prac-co. had come to become the trustee of $10, received on terms of a deed of settlement executed on 29 April 1981 - some days it seems before the incorporation of Parc-co.!; that the husband alone was ``the controlling mind and will'' of Prac-co., both in its own right and the trustee of the settlement; and that Prac-co. carried on the business of consulting engineers formerly carried on in partnership by the spouses. In particular, I accept that the applicant did not know that she had been named as a beneficiary under the trust deed; and did not know that she was eligible to be an income-beneficiary of the trust should the trustee excrcise discretions vested in it in her favour.
The terms of settlement
9. As negotiations for the financial settlement progressed the parties did not deal directly with each other. Effectively direct communication between them had ceased. Negotiations were carried out by their respective solicitors. The problem the couple then faced was sadly anything but uncommon. The husband's view of the matter no doubt was that he could not
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afford to provide for his family as his wife wished. She no doubt felt that she could not make adequate provision for her children and herself with what he proposed as the maximum he could afford. Despite those difficulties terms of settlement were in fact negotiated and they were implemented in two ways. First there was an order of the Family Court of Australia made by consent which provided for:- (a) maintenance for the children;
- (b) custody of and access to the children;
- (c) approval of a deed of settlement yet to be mentioned.
Secondly, there was the last-mentioned deed. It was one entered into directly between the parties which had the professed object of finalising ``once and for all the financial matters in dispute between them''. It was recorded (inter alia) that ``each of the parties has been independently advised by his or her legal representative of their respective rights under Part VIII of the Family Law Act''.
By that deed provision was made:
- (a) for the division of personal property (including motor vehicles) between them;
- (b) for the right of the wife to occupy the jointly owned home until such time as the youngest child attained the age of 18 years;
- (c) for mortgage instalments, council and water rates, and insurance premiums to be paid wholly by the husband pending any remarriage of the wife and thereafter equally;
- (d) for payment (as provided) by the husband of electricity charges, telephone rental and medical and hospital insurance;
- (e) for the sale of the home and equal division of the net proceeds of sale between husband and wife, after her right of occupation had ceased;
- (f) for completion of incomplete works at the home by the husband;
- (g) for $6,000 to be paid to the wife in satisfaction of her claims in relation to the former partnership; and
- (h) for ongoing financial support for the wife.
10. Two of the provisions from the order of the court and from the deed need to be quoted in full. The first, which relates to the maintenance of the children, is from the order. It provides as follows:
``1. That the husband pay direct to the wife by way of maintenance for each of the three children of the marriage, namely... and..., the sum of nineteen dollars and twenty five cents ($19.25) per week for each child and that the first of such payments be made within seven days from this date and that payments be made each four weeks thereafter and continue until each such child attains 18 years of age or is self-supporting whichever first occurs.''
The relevant clause in the deed was as follows:
``5. The Wife shall receive payment from the Trustee of the... Family Trust by way of further property settlement, the lump sum of thirty nine thousand one hundred and twenty eight dollars ($39,128) by one hundred and thirty four equal calendar monthly instalments of two hundred and ninety two dollars ($292) per month, first of such instalments to be paid on 9 April 1981 and thereafter on the 9th day of each and every succeeding month. The payments by the Trustee shall be by way of allocation of trust income and only in the event that the trustee (sic) at any time or from time to time does not make such payments as prescribed, the Husband shall make the particular payment or payments until such time as the Trustee shall resume making the payments specified PROVIDED HOWEVER that in the event of the death of the Wife during the term of payment of the said instalments, all further instalments shall cease and there shall be no further liability for payment of instalments which would otherwise have fallen due after the date of death.''
The background to the settlement
11. I find that, for the husband, the references to the trust were of particular significance. To what extent he appreciated and understood that significance is unknown, for the question was not canvassed with him. But I am satisfied that at least his advisers foresaw that the trust could be used to generate the amounts required to be paid by him for the maintenance of his children and that for him to be able to satisfy those obligations by payments by way of trust distributions would be a matter
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of financial advantage for him. Similarly, advantage to the husband might be had, if the trust was to come to be the source of payments to be made to the wife for her maintenance. To the extent to which such proposals could be effective, it would be unnecessary for him to make provision for his children and their mother out of his personal after-tax income.12. Whatever may be his understanding of those matters, I am satisfied as the evidence stands before me that the wife had no awareness of, or appreciation of, those matters. I accept that for her part she only understood that she was to continue to receive $125 per week which would be the only financial support which she could expect from her former husband in the years ahead over and above the substantial provision he was to make - but not unreasonably so - to provide for her occupation of the former family home free of obligations in relation to mortgages, insurance, rates and telephone rental charges and free also of obligations in relation to health insurance. I find that she understood that $125 per week would be all that would be available to her from her former husband in order to make provision for routine ``housekeeping'' expenses for the children and herself.
13. I find she attached no significance to the fact that at some time after the incorporation of Prac-co., instead of receiving moneys in cash, she received cheques drawn on the account of Prac-co. I find that not only was she not surprised that cheques came to be so drawn, but that there was no reason for her to be surprised. During the relevant years all of her husband's personal financial transactions were carried out through the account of Prac-co. It was only later that he opened a personal cheque account in order to keep separate from the affairs of Prac-co. his own personal financial operations. I find that the trustee had never discharged its duty to advise her of the trust, or of her status and entitlements as a beneficiary, or of any ``resolution'' on its part to distribute income to her, or to advise her that moneys being paid to her were being paid by way of such an alleged distribution.
Nor in my opinion does any significance attach to the circumstance that the method of payment ($6,500 per 52 weeks) later changed from $125 cash per week to cheques for $500 and $584 in alternate months ($6,504 per annum). Having heard the testimony in the witness box of both parents I am satisfied that at all material times that pattern of payment by monthly amounts was maintained. Since for different purposes it was appropriate to refer to obligations and to payments by reference to differing time periods, it is appropriate to note some of the figures referred to:
Weekly Two- Six- Yearly
monthly monthly
Each child $19.25 $500 $1,000
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3 children $500 $3,000
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Monthly Two- Six- Yearly
monthly monthly
Wife $292 $584 $3,504
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It can then be seen that the sum of $39,128 referred to in cl. 5 of the deed of settlement between the parties represented 134 monthly instalments of $292: 134 representing the number of months to pass between 9 April 1981 - the date of the deed - and the date on which the youngest child was expected to turn 18 years.
14. I find that these matters were without significance for the wife. It was not suggested otherwise in the course of the hearing. But the husband had a different view of the matter. As he understood it the trust had an obligation to pay $292 per month to his former wife. It was also his wish that the trust should pay $1,000 each year for each boy. In his mind, by arranging for the trust to effect such distributions, he thereby discharged his personal obligations to pay maintenance. He arranged for payment to the wife for each child at $19.25 per week by having the trust pay from a bank account in the name of the company $500 in each half year for each child with such payments being effected successively for the children and at two-monthly intervals. Similarly, as a matter of convenience, he arranged for the trust to draw on the account of the company, in favour of the wife, $584 in each month in which no payment was being paid in relation to the boys.
The tax dimension
15. The wife worked from time to time. At other times she relied on Social Services for support to maintain the income of the household. She lodged her income returns
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making no reference to the derivation of income as beneficiary of any trust. I find that was so for the very simple reason that she had no knowledge that anyone perceived her to be a beneficiary and to be deriving income from any trust.16. The years of income under reference before me are those ending on 30 June 1982 to 1984. In July in each of those years she lodged her returns of income. Those returns disclosed the following:
Year ended
30 June 1982 1983 1984
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$ $ $
Salary 8,799.00 6,664.00 2,382.00
Social Services -- -- 3,029.00
Other 360.83 7.84 --
-------- -------- --------
9,159.00 6,671.00 5,411.00
Deductions 102.00 10.00 12.00
--------- --------- ---------
$9,057.00 $6,661.00 $5,399.00
17. In those circumstances it might have been expected that her returns would have been promptly assessed and, if assessed as returned, refunds of tax instalment deductions which have been remitted to the Commissioner might have been expected. But for reasons not explained, it was not to be. None of the returns were assessed until 20 June 1985. On that date assessments issued, made up as follows:
Year ended
30 June 1982 1983 1984
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$ $ $
Taxable income
returned 9,057 6,661 5,399
Trust income 4,042 4,004 3,504
----- ----- -----
Income as
assessed $13,099 $10,665 $8,903
18. Instead of the refunds that she had been expecting, nearly three years after the first refund might have been expected she received a demand requiring her to pay to the Commissioner $4,346.08 and to do so within one month.
19. On 12 August 1985 she objected to the assessments protesting her ignorance of the trust and of any assertion that she was a beneficiary of any trust and denying that she had derived any income from the trust. Her objection to the assessment was promptly disallowed in October 1985. Her subsequent requests for reference for independent review were quite promptly transmitted for review in April 1986. Fortunately for her she did not have to raise $720 within 60 days as the price of seeking justice. Regrettably it is only now that her matter has come to a hearing.
The acts of the trustee
20. The evidence that there had been distributions of income by the trust was presented through the testimony of the husband. He produced a deed of settlement by way of discretionary trust which identified as an ``income beneficiary'' (inter alia) ``any person who is, has been or becomes the spouse of'' the husband and any child of the husband. The deed provided inter alia:
``2. The Trustee shall stand possessed of the income of the Trust Fund upon Trust:
- (a) from time to time during the financial year to pay or apply the same or any part thereof;
- (b) to or for the benefit of the income beneficiaries or any one or more of them exclusive of the other or others... in such shares or proportions as the Trust Deed in its absolute discretion may from financial year to financial year determine.''
The husband's evidence alone established the fact of the taxable income being derived by the trust. There was no contention on behalf of the Commissioner that it was not open to the husband to have the income generated by his personal assertion derived by a body corporate as trustee of a trust.
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21. Extracts of resolutions for the years ended 30 June 1982 to 1984 were produced from the return of income of the family trust. They were in the form:
``In terms of Clause 2(a) of the Trust Deed relating to... Family Trust it was resolved to distribute the following amounts to:
- (The Husband) for the benefit, maintenance, schooling and general well being of -
- (Child 1)
- (Child 2)
- (Child 3)
and for each of the following -
- (the Wife)
- (the Husband) for their own benefit
Distribution is in relation to income of the financial year ended 30 June 19...''
The figures appearing in those resolutions were as follows:
Year ended
30 June 1982 1983 1984
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$ $ $
First child 1,040 1,040 1,000
Second child 1,040 1,040 1,000
Third child 1,040 1,040 1,000
Wife 4,042 4,004 3,504
Husband 7,863
It is noteworthy that it was only in the latter year that the amounts referred to in the resolution are the same as the amounts received by the wife for her children ($1,000 p.a. each) and for herself ($3,504 per annum).
Issues
22. Before making findings of fact relevant to those matters it is appropriate to record that resolution of the income tax questions before me requires that the Tribunal should make decisions as to the correct interpretation of the deed of settlement entered into between the husband and the wife which came to be registered with the Family Court of Australia as a result of an order of the Court; and also that one should make some findings of fact as to the moneys which moved from the corporate trustee to interested parties. That gives rise to two problems. The first is that only one of the two persons who were most concerned with that deed is a party to these proceedings: the husband has not been heard to argue in these proceedings in person, or by counsel, or by any advocate. In consequence, arguments and evidence such as might have been presented on his behalf have not necessarily been advanced. He has appeared only as a witness for the Commissioner.
23. The second difficulty follows from the first. The interpretation adopted by the Tribunal, subject to appeal, will be binding as between the Commissioner and the wife, but, should it favour her, it will not entitle the Commissioner to the benefit of any such interpretation, or the advantage of any findings of fact which may be made on these proceedings against either the husband or the trust. But having recognised those difficulties that does not mean that the nature of the issue to be determined has changed. It can be argued that the deed must be given effect to according to its terms and that by those terms the wife accepted that her husband's obligation to provide for her maintenance would be discharged upon him procuring a distribution of trust income to her from the trust; and that it is not relevant to take into account the circumstance that she, or her advisers, and possibly the Family Court, had erroneously overlooked the fact that, on a correct interpretation of the deed, she would derive income benefits as a trust beneficiary and thereby become subject to liability to income tax, thus leaving her with a net result substantially less advantageous than would have been the case had she received maintenance directly from her husband. Although recognising that the husband has not been represented in these proceedings and that, had he been represented, one might have come to other conclusions, I now proceed to make such further findings as I consider appropriate on the evidence which was presented before me. In doing so I am concerned to reach a conclusion on the facts on the balance of probabilities.
Conclusions
24. In these proceedings the applicant has persuaded me that she did not derive assessable income as a trust beneficiary as alleged by the Commissioner. In reaching that conclusion I have taken into account the following matters which I find as findings of fact:
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- (a) the wife was not at any material time aware of the existence of any trust, or of her status as a named beneficiary of any trust, eligible to benefit at the discretion of the trustee;
- (b) the wife did not at any time consent to being a beneficiary of any trust or to being a person deriving an assessable income from any trustee;
- (c) that the wife did not receive or derive amounts of $4,042 and $4,004 as moneys passing to her from the company in the years of income ended 30 June 1982 and 1983; rather only $3,504 in each of those years as in the year following;
- (d) that at all material times the amounts she received were $500 (for the children) and $584 (for herself) in alternate months;
- (e) that I am not persuaded that distributions were made either to the husband for the benefit of his sons or to the wife in accordance with the terms of the resolutions;
- (f) that the recorded resolutions were nothing more than an attempt to give efficacy as trust distributions to the payments which had actually been made.
25. In addition I find that there is nothing in cl. 5 of the deed of settlement registered with the Family Court whereby the wife agreed to accept the status as a beneficiary (discretionary or otherwise) of the trust or to accept that the payments to be made to her ``by way of further settlement'' and which were to come to her ``by way of allocation of trust income'' would come to her as an allocation of trust income to which she would be beneficially entitled.
26. Over and above that I find, adapting to the purpose words used in Case V22,
88 ATC 224 at p. 231, that following upon the declaration of trust, the trustee immediately assumed the responsibilities of a trustee to the wife. Those were responsibilities it could not shed. Those responsibilities were no less because she had no knowledge of them. Upon any effective determination of the trustee to distribute income to the wife, she became entitled to the benefits of the distribution, but only if she chose to accept them. No such choice could be made until such time as she learned of the existence of the trust and the passing of the resolution. That knowledge did not come to her until the assessment came to her notice and her enquiries led to the discovery of her entitlement. In my view the amounts in question could not become her ``income'' until she consented to the status of being a beneficiary and she determined to accept the distributions. As she did not assent to either proposition, there was no derivation of income whether in the amounts assessed or in any lesser amounts.
27. The order of the Tribunal will be that the determinations of the Commissioner under review shall be varied and the objections of the applicant wholly allowed.
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