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East Finchley Pty. Limited v. Federal Commissioner of Taxation

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 24 November 1989.

Hill J.

The applicant, East Finchley Pty. Limited, appeals from the decision of the Administrative Appeals Tribunal constituted by Deputy President Mr C.J. Bannon Q.C. affirming the decision of the respondent Commissioner of Taxation disallowing the applicant's objection to an income tax assessment for the year ended 30 June 1983 [reported as Case W51 at 89 ATC 479].

The applicant is trustee of a family trust established by deed dated 4 September 1978 and known as the Thomas Family Trust. The trust deed by cl. 4 provided relevantly as follows:

``4.1 Until the distribution date the trustee shall hold the trust fund upon trust as to the income derived therefrom to pay or apply or set aside the whole or any part of such income for an accounting period for or towards the maintenance, advancement, education or benefit of such one or more of the beneficiaries who are then living or existing, exclusive of the other or others of them and/or to such charitable purposes in such proportions and shares as the trustee in its absolute discretion may from time to time throughout any accounting period determine without being bound to assign any reason therefor or to accumulate the whole or any part of such income.

4.2 In the event that the trustee shall fail to make an effective determination in accordance with cl. 4.1 hereof prior to midnight on the last day of any accounting period then any such income not paid or applied or set aside or accumulated (hereinafter called `the undistributed income'), or, where a determination has been made under cl. 4.1 to accumulate income and such accumulation would be void then the trustee shall hold the undistributed income upon trust for the

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persons successively described in para. (a) to (e) of the second schedule as shall then be living and if more than one in any paragraph in equal shares...

4.4 The application or setting aside of any part of the income of the trust fund to or for the benefit of any beneficiary may be effectively made by a resolution of the trustee that a sum out of or a portion of the income of the trust fund for the accounting period be allocated to such beneficiary or that a sum out of or a portion of the net income of the trust fund as defined in sec. 95 of the Income Tax Assessment Act be allocated to such beneficiary...

4.7 Any determination made by the trustee in this clause shall be irrevocable to the intent that any beneficiary in whose favour such determination is made shall be absolutely and permanently entitled to the share of income, allocated to him pursuant to such determination.''

The expression ``the beneficiaries'' was defined in cl. 2.8 of the deed to mean:

``(a) the persons referred to in the first schedule hereto, and;

(b) any such persons as the father or after his death his legal personal representative shall by notice to the trustee before the distribution date nominate and whom the trustee shall appoint to be beneficiaries...''

The father was Dr Thomas, the persons referred to in the first schedule were:

``(a) Any children, grandchildren or great-grandchildren of the father.

(b) Any spouse or future spouse of the father or any person who as at any time being [sic] the spouse of the father.

(c) Any spouse of any child or grandchild of the father.

(d) Kalarickal George, the brother of the father.

(e) Anna Kurian Manikath the sister of the father.

(f) Kalarickal Ulahannan Mathew, the father of the father.''

The second schedule read as follows:

``The default beneficiaries -

  • (a) Any child or children of the father whether born before or after the date of this deed then living and if more than one in equal shares as tenants in common PROVIDED NEVERTHELESS that if any child or children of the father shall have died before that date and shall have a child or children who shall be living at that date, then such child or children shall take by substitution and if more than one equally between them per stirpes the share which his or her parent would have taken if such parent had been living at the date or in the event of there being no such persons,
  • (b) Then for any spouse of the father who shall at that date be living, and be the wife or widow of the father; or in the event of there being no such person living;
  • (c) Then for any great-grandchildren of the father who shall be living at that date whether born before or after the date of this deed provided that if there be no such children living at that date then;
  • (d) Then for such of the widows and widowers (if any) of the children or grandchildren of the father as are living at that date and if more than one in equal shares as tenants in common; or in the event of there being no such widows or widowers;
  • (e) Then for the father.''

By a deed made 12 October 1982 the trustee purported to act in accordance with cl. 2.8 of the trust deed to add within the definition of beneficiaries the following persons:

``KALARICKAL MATHEW THOMAS together with any brother or sister uncle, aunt, cousin, niece, nephew or parent whether such relationship esist [sic] by blood or by the marriage of the said KALARICKAL MATHEW THOMAS.''

There was no dispute as to the effectiveness of this deed.

There was tendered before the Tribunal a minute of a meeting of directors of the applicant held on 23 June 1983 at which the

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following resolution was said to have been passed:

``DISTRIBUTION OF TRUST INCOME:

Resolved that the company, as trustee of the Thomas Family Trust, distribute the net income of the trust for the year ended 30 June 1983 by applying for the benefit of the undermentioned beneficiaries the following amounts, such amounts to be credited to the beneficiaries in the books of the trust and held on their behalf. 

       Name of             Share of
     Beneficiary          net income
                             $
      Mafay Thomas         1,040
      Minoo Thomas         1,040
      Mariamma Thomas     11,008

Any remaining income will be distributed to non residents.''

Evidence given by Dr Thomas, if accepted, was that at the same meeting he and his wife discussed ``people who were close to us and who needed help''. In accordance with that evidence it is said that the directors in addition to the resolution shown in the minute also resolved to distribute a substantial portion of the trust's income for the year ended 30 June 1983 amongst persons who were relatives of himself and his wife in India in equal shares of $585 each. It was said that a list of names was made out at the meeting, there being 121 persons named in it plus another five persons to whom income had been distributed by the trust in the previous year namely the mother, father, brother, sister and mother-in-law of Dr Thomas.

It seems that on 1 July 1983 Dr Thomas left Australia for India. While in India he arranged for a letter which had been devised by his accountant to be left with each of the non-resident beneficiaries which letter was in the following form:

``Please be advised that a distribution from the net income of the Thomas Family Trust of A$... has been exercised in your favour, pending Reserve Bank approval. Subject to your authorisation, this amount will be credited to a loan account at call in your name of the books of account of the abovenamed Family Trust.''

He also arranged for another letter to be signed by the beneficiaries, that letter was addressed to the trustee, the Thomas Family Trust and was in the following terms:

``Authorisation is hereby granted, subject to Reserve Bank approval where required, to credit a loan account in the name of the undersigned in the books of the Family Trust for the amount specified. Furthermore, your previous correspondence dated 24 June 1983 advising my share of the net income of the Trust is acknowledged.''

It was accepted by Dr Thomas in his evidence that not all of the beneficiaries had signed the letter while Dr Thomas was in India. He brought back, he said, all but 15 of the letters signed by the beneficiaries; these had been given to his accountant and had been lost. The remainder that were not brought back were subsequently received by him; these had not been displaced and were tendered in evidence.

As the Tribunal said [at ATC p. 482]:

``Thus no money changed hands. The Norfolk family trust kept the money in its bank account, and no income tax was to be paid, because of the income tax threshold limit for non-residents' income.''

The reference to ``Norfolk family trust'' was inserted in the reasons for the Tribunal to protect against the identity of Dr Thomas being revealed, cf. sec. 14ZF of the Taxation Administration Act 1953.

After referring to the unsatisfactory state of the evidence, and in particular conflicting versions of the dates on which Dr Thomas travelled to India (his passport revealed that he had left Australia on 1 July 1983), reference to conflicting accounts of the relationship of the persons on the list to himself and his wife and a reference to the evidence concerning the missing letters, Mr Bannon confessed to having been left in a position of ``disquiet'' as to what really happened. He said [at ATC p. 483]:

``The terms of the company minute, the discrepancies in the lists in Exhibits G, C and 1, and the missing documents, do not leave me in a state of comfortable satisfaction. Furthermore, the terms of the minute Exhibit F are hardly confirmatory.

Mr Norfolk [i.e. Dr Thomas] is a professional man. A finding of prejury about

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the matters related would have serious consequences for his career and family. I am mindful that the accountant really did devise the scheme and that Mr Norfolk appears to have made some attempts to carry it out.''

The Tribunal referred to observations made by Beaumont J. in
Sharrment Pty. Ltd. & Ors v. Official Trustee in Bankruptcy (1988) 82 A.L.R. 530 at p. 552 and to the earnest desire of Dr and Mrs Thomas to carry out the scheme and to do so to avoid paying tax albeit that they had been careless and neglectful. The Tribunal then said [at ATC p. 483]:

``For the purposes of this objection hearing, I am prepared to assume, without deciding, that Wembley and the Norfolks carried out the fundamentals of the scheme.''

``Wembley'' is the pseudonym given to the trustee company by the Tribunal.

It appeared that in August 1988 the applicant had borrowed the funds necessary to permit it to distribute to the non-resident beneficiaries the cash amounts in accordance with what was said to have been the distributions. This however was only done after investigation had been commenced by the Australian Taxation Office and apparently upon the advice of an officer of the Australian Taxation Office that this might assist Dr Thomas' position.

The Tribunal thereafter proceeded to consider whether sec. 100A of the Act applied to the arrangement, with the consequence that the trustee would be liable to be assessed under sec. 99A of the Act upon the basis that in the year of income no person was presently entitled to that part of the income of the trust estate not dealt with for the benefit of the persons specifically named in the resolution of 23 June 1983.

Section 100A provides relevantly 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.

(2) Where -

  • (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability would, by reason that income of the trust estate was paid to, or applied for the benefit of, the beneficiary, be deemed to be presently entitled to income of the trust estate; and
  • (b) that income or a part of that income (which income or part, as the case may be, is in this sub-section referred to as the `relevant trust income') was paid to, or applied for the benefit of, the beneficiary as a result of a reimbursement agreement or as a result of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement,

the relevant trust income shall, for the purposes of this Act, be deemed not to have been paid to, or applied for the benefit of, the beneficiary.

...

(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.

(8) A reference in sub-section (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a

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person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

(9) For the purposes of sub-section (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.

(10) A reference in sub-section (7) to the payment of money to a person or persons shall be read as including a reference to the payment of money to a person or persons by way of loan.

(11) A reference in this section to a person shall be read as including a reference to a person in the capacity of a trustee.

...

(13) In this section -

  • `agreement' means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing;
  • `property' includes a chose in action and also includes an estate, interest, right or power, whether at law or in equity, in or over property.''

The Tribunal's reasons give little indication, if any, of what it regarded as the reimbursement agreement within the meaning of the subsection. It said [at ATC p. 485]:

``In terms of sec. 100A(13) of the Act, I am satisfied that the delivery of letters of entitlement coupled with letters providing for loans back to the trustee of the whole entitlement, and the procuring of signatures to the loan back agreement in each case, sufficiently evidences an agreement or agreements within the meaning of the subsection.''

It may well be that this passage was intended by the Deputy President to be a finding of fact as to what the arrangement was. It is however difficult to be sure having regard to the use of the word ``evidences'' which could suggest that the agreement commenced at a time earlier than the signing of each of the relevant letters and potentially, at least, included matters other than those referred to in the passage quoted.

The Tribunal then found that the relevant agreement or agreements were not entered into in the course of ordinary family or commercial dealing and that the relevant purpose of tax avoidance was present. The Tribunal's reasons continue [at ATC p. 485]:

``In my opinion, the evidence amply establishes that the arrangements under discussion fall within the terms of sec. 100A(1) of the Act. Furthermore, I consider the payments ultimately made to the 126 beneficiaries in 1988 (evidenced by Exhibit M) are to be deemed not to have been paid to, or applied for the benefit of those beneficiaries, because the facts show that the payments were made as the result of circumstances which occurred in connection with, or as a result of, a reimbursement agreement. I have no difficulty in arriving at the inference that such payments were made in connection with such reimbursement agreements in the light of taxation office inquiries evidenced by the correspondence

...

I am satisfied that sec. 100A(7) of the Act (as modified by sec. 100A(10) and (11) of the Act) is applicable, as the reimbursement agreement provides for payment of money to the trustee company Wembley. I am also satisfied that the purpose of all the 126 payment and loan back arrangements was tax avoidance, and that the exclusionary provisions of sec. 100A(8) do not apply.''

The Tribunal then discussed an argument concerning the construction of sec. 100A(1) to which I will later refer and having rejected it, concluded that the respondent's objection decision should be affirmed.

The grounds of appeal as set out in the notice of appeal instituted by the applicant were, so far as argued before me, as follows:

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  • 1. That there had not been in the relevant sense an arrangement providing for the ``payment of money'' within the meaning of sec. 100A(7) and the act of crediting with the beneficiaries' consent in accordance with the letters was not in law a payment of money.
  • 2. That in any event if there were an agreement for the payment of money it provided for the payment of money to the relevant beneficiaries and to the applicant as trustee and was therefore excluded from the definition of reimbursement agreement by the terms of sec. 100A(7).
  • 3. If there were a reimbursement agreement, it was not such as to give rise to the application of sec. 100A of the Act. This ground was not elaborated in the ground of appeal but in argument was expanded to cover an argument that the reimbursement agreement as found by the Tribunal, if any were found, was an agreement entered into too late for sec. 100A to have application in respect of it.
  • 4. That sec. 100A(2) rather than sec. 100A(1) of the Act was the relevant section on the facts of the present case, if any section at all were relevant and the effect of applying sec. 100A(2) to those facts was that the takers in default of appointment were deemed to be presently entitled to the relevant trust income. The result was said to be that the applicant was not liable to be assessed and to pay tax under sec. 99A of the Act.

At the commencement of the appeal before me, counsel for the applicant sought leave to amend his grounds of appeal by adding the following ground:

``4(f) That the Tribunal erred in law in failing to include in its written reasons for decision its findings on questions of fact material to the question whether sec. 100A and sec. 99A of the Act applied to the circumstances of this case.''

The amendment was intended to comprehend two submissions that were made before me as follows:

  • 1. That the Tribunal was obliged to make a finding as to whether, subject to sec. 100A of the Act the resolution in favour of the overseas beneficiaries not recorded in the actual minute of the meeting of 23 June 1983 and subsequent conduct were effective to create present entitlement in them. If not it was submitted that the assessment was in error because in default of an effective distribution in favour of the overseas beneficiaries, the default beneficiaries became as at the moment before midnight on 30 June 1983, presently entitled to the income not dealt with, with the result that the assessment was misconceived.
  • 2. That the Tribunal was obliged to find as a fact what the arrangement was which the Tribunal held fell within sec. 100A and had failed so to do.

Counsel for the respondent objected to the amendment of the applicant's grounds of appeal notwithstanding a concession that there was no prejudice to his client in allowing the amendment. Counsel however did argue strongly against the amendment being allowed so far as it permitted the applicant to raise the first of the two matters because he submitted:

  • 1. The applicant's grounds of objection did not permit him to argue that the default beneficiaries were presently entitled; and
  • 2. The applicant had not argued in the Tribunal below that there was present entitlement to the whole of the income by virtue of the default beneficiary clause in the event of a finding of sham or ineffective distribution. Rather the applicant's case below had been one in which the applicant had argued that present entitlement to the whole of the income of the trust estate existed by force of the resolution of 23 June with the consequence that the major issues before the Tribunal were concerned with sec. 100A of the Act. This was so notwithstanding that the Commissioner clearly enough argued that the distribution resolution was a sham or otherwise ineffective.

While it is true that the notice of objection deals in great detail with the present entitlement of the non-resident beneficiaries who are named in it, after the naming of these beneficiaries the grounds of objection continue:

``The resolution of the trustees as trustee of the trust created a present entitlement in beneficiaries under the trust in respect of the whole of the income and of the net income

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(calculated in accordance with the provisions of the Act) of the trust in respect of the year of income.

The beneficiaries specified in the resolution of the trustees or alternatively some other beneficiary or beneficiaries under the trust are presently entitled to the whole of the net income (calculated in accordance with the provisions of the Act) of the trust in respect of the year of income and accordingly there is no part of the net income of the trust estate in respect of the year of income in respect of which the trustee is liable to be assessed pursuant to the provisions of sec. 98 and/or sec. 98A and/or sec. 99A(4) and/or sec. 99A(4A) or sec. 100A or any other provision of the Act.''

(emphasis added)

Notwithstanding that it may be that some of the beneficiaries who would take in the event that the default beneficiary clause applied might have been infants, so that the provisions of sec. 98 could have been applied by the Commissioner, the grounds of objection are wide enough to encompass an argument that the default beneficiaries, rather than the persons named in the resolution, were presently entitled to the whole of the income of the trust estate with the consequence that sec. 99A had no application. I should say that on its face it was clear that the assessment did not purport to be made under sec. 98 of the Act.

Thus, the grounds of objection are, to paraphrase the words of Williams J. in
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267 at p. 273: ``sufficiently explicit to direct the attention of the respondent [Commissioner] to the particular respects in which the taxpayer contends that the assessment is erroneous and his reasons for this contention''.

The taxpayer is not some uninformed third person. When he is told in the objection that either the persons named in the resolution or some other persons are presently entitled and being aware that the concept of present entitlement is one dependent upon the trust deed and the application to it of trust law principles, the Commissioner was put on notice that the applicant was prepared to argue that, by virtue of the provisions of the trust deed and applicable trust law principles, persons other than those named in the resolution were presently entitled to the whole of the trust law income with the consequence that the provisions of sec. 99A could have no application.

With respect to counsel for the Commissioner it is also not right to say that counsel for the applicant made no reference to the possibility of the default beneficiaries being presently entitled in the event of the discretion being effectively exercised. At p. 98 of the transcript Mr Carnovale who appeared below for the applicant, said:

``In the event that the trustee failed for whatever reason to make an effective distribution or to accumulate then there is a default beneficiary clause which is clause 4.2.''

I have not seen a full transcript of the argument and it may well be that that is the only mention of the point. Nevertheless the submission is there, albeit not in an elaborated form.

For these reasons I am prepared to allow the applicant to amend his grounds of appeal.

I turn to consider first the matters dealt with in the amended grounds of appeal and then to the remaining original grounds of appeal.

The significance of there being no finding of fact as to the effectiveness of the distribution

It would seem, from the passages to which I have already referred that the Deputy President at least contemplated the possibility of finding that Dr Thomas had not told the truth as to the events in June-July 1983. It was, of course, not necessary for the learned Deputy President to have gone so far. It was possible for him to have held merely that Dr Thomas had not on the balance of probabilities discharged the onus of proof imposed upon him by sec. 190(b) of the Act. Be that however as it may, it is clear that the Tribunal expressly made no finding at all as to whether what was said to have happened did in fact happen.

By virtue of sec. 43 of the Administrative Appeals Tribunal Act 1975 the Tribunal is obliged to give reasons for its decision and by force of subsec. 2B of that section those reasons are to include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based. Where the Tribunal's decision contains no findings on specific

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questions of fact which are material to the issue before it, the conclusion will ordinarily follow that the Tribunal has failed to direct its attention to considerations properly relevant to its determination and the proceedings before it will in such a case have miscarried. The Tribunal will have failed to deal, by reference to the relevant considerations, with a matter which arose for its determination and which it purported to determine. See
Sullivan v. Department of Transport (1978) 20 A.L.R. 323 at p. 349 per Deane J. As his Honour later said in
Minister for Immigration v. Pochi (1980) 31 A.L.R. 666 at p. 686, the Administrative Appeals Tribunal Act 1975 effected a ``quiet revolution'' in regard to the making of administrative decisions in that it afforded an opportunity for an aggrieved person to be supplied with a statement in writing of the decision-maker's findings of material questions of fact and giving the reasons for the decision: sec. 28 and for that decision to be reviewed by the Tribunal: sec. 27. It would have been remarkable against such a background if the Tribunal itself were not bound to state the facts upon which it relied in coming to its conclusions. As his Honour said at p. 689:

``It would be both surprising and illogical if, in proceedings before a statutory tribunal... the rules of natural justice were restricted to the procedural steps leading up to the making of a decision and were completely silent as to the basis upon which the decision itself might be made.''

As his Honour points out at p. 690 it is a well established principle of law that:

``a decision of such a statutory tribunal must ordinarily be based on evidence which is reasonably capable of sustaining it... Implicit both in Diplock L.J.'s conclusion and in that well-established principle are both the requirement that findings of material fact of a statutory tribunal must ordinarily be based on logically probative material and the requirement that the actual decision of such a tribunal must, when relevant questions of fact are in issue, ordinarily be based upon such findings of material fact and not on mere suspicion or speculation.

... In particular, there is nothing to suggest that it was the legislative intent that the Tribunal should, in a case such as the present, be free either of the requirement that its decision must, when relevant questions of fact are in issue, be based upon findings of material fact or the requirement that such findings of material fact be based on logically probative material. To the contrary, s. 43(2) of the Act which requires the Tribunal to give its reasons in writing expressly provides that `those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based'.''

In
Ansett Transport Industries (Operations) Pty. Ltd. v. Wraith (1983) 48 A.L.R. 500 Woodward J., speaking of sec. 13 of the Administrative Decisions (Judicial Review) Act 1977 which permits a person in certain circumstances to obtain a statement in writing setting out, inter alia, the findings of the decision-maker on material questions of fact, said that that section required the decision-maker to explain his decision in a way which would enable a person aggrieved to say in effect:

``Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.''

His Honour continued:

``This requires that the decision-maker should set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute), and the reasoning processes which led him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation.''

With respect, in my view those words are as apt to the reasons required to be given by the Administrative Appeals Tribunal under sec. 43(2) as they are to the reasons of a decision-maker required to be given under sec. 13 of the Administrative Decisions (Judicial Review) Act.

In so saying, I do not dissent from what was said by Lockhart J. in
Bisley v. Broadcasting Tribunal (1982) 40 A.L.R. 233 at p. 251 that

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whether or not the Tribunal has complied with its obligation to find the relevant matter of facts is to be determined by a reading of the reasons of the Tribunal as a whole. As Sheppard J. said in the same case at p. 255:

``The section does not impose upon the Tribunal, which is often composed of members who are not trained in the law, any standard of perfection. I consider the provisions of the section to be directory rather than mandatory. Substantial compliance is what is required and clearly that is here present.''

The approach that this Court will adopt in reviewing decisions of the Administrative Appeals Tribunal is ``a restrained approach'': see
Blackwood Hodge (Australia) Pty. Ltd. v. Collector of Customs (N.S.W.) (1980) 47 F.L.R. 131 at p. 145.

However, the approach which the Tribunal adopted in the present case was quite unsatisfactory. The Tribunal appears to have proceeded on the basis that a finding that there was no present entitlement, apart from sec. 100A, would result in the confirmation of the assessment and that, in making the assumption which the Tribunal made that the resolutions and other matters contained in the acknowledgement were legally effective, the Tribunal was proceeding in a way favourable to the applicant. This was not so. Should it have turned out that the resolution was either legally ineffective to constitute present entitlement in the overseas beneficiaries or if it should have been the case that the discussion as to the overseas beneficiaries never happened or indeed if it had been the case that the resolution was a sham intended as a disguise to deceive the Commissioner or that the acts done by Dr Thomas overseas were a sham, then the consequence would be that the default beneficiary clause would have come into operation and the beneficiaries entitled under it would have been presently entitled to the whole of the income of the estate not otherwise disposed of by the resolution to the immediate family of Dr Thomas. This being the case there would have been no part of the net income of the trust estate that had not been dealt with either under sec. 97 or 98 with the consequence that sec. 99A of the Act could not have applied and the assessment would have been shown to have been excessive.

The matter having been dealt with in the notice of assessment and having been referred to in the submissions of counsel for the applicant, the Tribunal had a duty to deal with it and failure so to do involved an error of law. It follows for this reason alone that the matter must be remitted to the Administrative Appeals Tribunal to make the necessary findings of fact and conclusions required of it under sec. 43 of the Administrative Appeals Tribunal Act.

That this is so in the present case also follows from the wording of sec. 100A itself. That section only applies if there exists present entitlement in persons who are beneficiaries of the trust estate: in the present case the non-resident beneficiaries. If there were no present entitlement in the trust estate of the overseas beneficiaries then clearly enough the section could have no application. Thus the logical first step in any case involving the potential application of sec. 100A will be a finding that the persons, whose present entitlement is to be deemed not to have arisen, be in fact persons who, apart from the application of the section, would be, or be deemed to be, presently entitled to income of the trust estate.

It is not quite so clear whether the Tribunal has refrained from finding the facts necessary to determine whether there has been a reimbursement agreement within the meaning of that expression in sec. 100A. On one view of the matter, the Tribunal may have found that the ``agreement'' was that entered into in July 1983 when Dr Thomas went to India and arranged with the beneficiaries that they would lend back the moneys to which they were otherwise presently entitled, to the trustee. However, counsel for the respondent in submissions before me did not, as I understand his submissions, seek to rely at least primarily upon such an arrangement as being or comprehending the whole of the reimbursement arrangement to which sec. 100A referred in the present case. According to counsel for the respondent the reimbursement agreement was the whole arrangement which commenced with the decision of Dr Thomas and his wife acting as directors of the applicant to make the distribution in favour of the non-residents. This resolution, it was said, was passed in expectation that Dr Thomas would be able to arrive at an arrangement with the non-resident

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beneficiaries for the payment of the moneys back to the trustee.

If the Tribunal saw the making of the resolution as itself part of the arrangement it certainly did not say so. In a case which involves the finding of an arrangement it is essential, in my opinion, that the Tribunal find with some particularity the steps which are said to constitute the arrangement. There are now many sections indeed, generally sections dealing with tax avoidance, that are predicated upon the existence of some arrangement to which the taxpayer or some other person may be a party. These sections are generally difficult to construe and apply, but failure to define the terms of the arrangement will merely, as this present case illustrates, exacerbate the difficulties. In the present case, the failure to define precisely what the arrangement was and who the parties to it were, constituted an error of law requiring the matter to be returned to the Tribunal for further findings.

Since I am of the view that the matter should be remitted to the Tribunal for findings of fact I have felt some concern as to the propriety of expressing any view as to the other submissions put by the applicant in the present case. On the one hand, there could be embarrassment should I now express a view and the Tribunal having decided consistently or otherwise with that view, the matter might come on appeal again to this Court to determine the same issues. On the other hand I am conscious of the fact that to deal with the submissions now might ultimately spare the parties further expense. The matters were fully argued before me and accordingly I propose to deal shortly with the submissions originally contained in the applicant's grounds of appeal, which submissions involve generally questions of construction of the legislation.

Submission 1 - Whether there was a payment

Counsel for the applicant pointed out that the Tribunal had found that each of the non-resident beneficiaries had paid moneys when he had delivered to Dr Thomas on behalf of the trustee letters authorising the trustee to credit the beneficiaries' account by way of loan. Of course, no actual money changed hands.

Prima facie one would have thought that the rule in Spargo's case (In
re Harmony & Montague Tin & Copper Mining Co.) (1873) L.R. 8 Ch. App. 407 at p. 412 would have applied, that case deciding that when the liability upon shares and the liability upon a cross-demand against the company of a sum certain immediately payable were mutually extinguished by an agreed set-off, this amounted to payment for the shares ``in cash'' for the purposes of company legislation. See too
Whim Creek Consolidated N.L. v. F.C. of T. 77 ATC 4503 in the joint judgment of Bowen C.J., Franki and Deane JJ. where the relevant cases are set out at p. 4507 and also the decision of the Full Court of this Court in
F.C. of T. v. P. Iori & Sons Pty. Ltd. 87 ATC 4775 at p. 4789.

The rule in Spargo's case is not a principle confined merely to the company law context in which it was decided. At its heart is the undeniable futility of two parties, each obligated to the other, passing cheques backwards and forwards to accomplish a transaction.

It was however submitted for the applicant that the rule in Spargo's case had no application to the present case because there was no pre-existing liability of the trustee to pay moneys to any of the beneficiaries. Such an obligation was said to arise only when the beneficiaries in fact demanded payment. It was then said that when the beneficiaries signed the letter addressed to the trustee the bare trust in their favour was extinguished and the trustee became, for the first time, indebted to the non-resident beneficiaries in a separate sum. The prior entitlement of the beneficiaries that was said to have been surrendered or extinguished, was said to be constituted by a fractional entitlement to the interests comprising the trust estate rather than an entitlement to payment of a sum of money.

No authority was cited by the applicant for so revolutionary a proposition. Indeed, the submission amounted to saying that no beneficiary became entitled to be paid by a trustee of a trust estate, moneys to which that beneficiary was absolutely entitled, notwithstanding the existence of moneys in the estate to permit such a payment to be made unless and until a beneficiary had demanded payment of the amount.

It is true, of course, that in a case where the trustee had no cash assets because the income of the trust estate was represented by debtors or trading stock, for example, that a beneficiary

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might not be able to sue a trustee for the monetary value of his entitlement in equity. A beneficiary however will be entitled to immediate payment, without the necessity of demand, of income where the income is held in a form ready for immediate payment:
F.C. of T. v. Totledge Pty. Ltd. 82 ATC 4168; (1982) 12 A.T.R. 830.

In the present case it would seem from the material before the Tribunal that as at 30 June 1983 immediately following the passing of the resolution, the whole of the assets of the trust estate other than an item of fixed assets referred to as ``Wandeen Hospital'' of $20,000, that seems to have been balanced by a liability in the same amount, was in the form either of cash or loans with the largest amount being a loan back to Dr Thomas of $107,095.

It may be thought that that loan, which appeared to be interest free, was not an investment authorised by the trust deed:
Khoo Tek Keong v. Ch'ng Joo Yuan Neoh (1934) A.C. 529 but it is unnecessary to go so far in the present case for it was repayable, it would seem, on demand. I can see no reason why as at 30 June 1983 the non-resident beneficiaries, assuming otherwise that they were legally entitled to the distributions said to have been made at the directors' meeting on 23 June 1983 could not have sued the trustee in equity for the amount which was resolved to be paid or applied for their benefit.

Further I can see no reason why the combination of the two letters should not in any event have constituted a sufficient demand for payment to bring about a situation that there was an obligation in equity by force of the trust deed to pay to the beneficiaries and an obligation by virtue of the loan agreement between the trustee and beneficiaries in law to pay by way of loan the moneys to the trustee by the beneficiaries so that the principle in Spargo's case brought about the result that there was in law a payment.

In my view there is no substance at all in the submission.

Submission 2 - Whether the payment in question was a payment to the beneficiary and another person and thereby excluded from the terms of sec. 100A(7)

The argument here raised was that sec. 100A(7), was ambiguous, and should be read as if the word ``to'' were inserted before the words ``the beneficiary'' in that section, so that the section reads as follows:

``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... that provides for the payment of money... to... a person or persons other than the beneficiary or to the beneficiary and another person or other persons.''

Counsel for the applicant referred me to the Treasurer's explanatory memorandum to which, at least in the event of ambiguity, I am directed to have regard under sec. 15AB of the Interpretation Act 1901. That memorandum when explaining the expression ``reimbursement agreement'' says at p. 32:

``It should be explained here that the expression `reimbursement agreement' as used throughout section 100A is defined in sub-section (7) as being an agreement (`agreement' is defined in proposed sub-section (13)) that provides for money to be paid, property transferred, or services or other benefits provided to someone other than the beneficiary or to the beneficiary and some other person or persons.''

(emphasis to ``to'' added)

There seems little doubt that there is an ambiguity in the section. On one view of the matter if the relevant payment is to the beneficiary together with some other person the section will have operation; on the other interpretation it will be excluded. It is the latter interpretation for which the applicant contends.

In my view it is not necessary to resolve the issue of ambiguity in the present case. Section 100A directs attention to the question whether there has been a reimbursement agreement. The expression ``agreement'' is defined so as to include arrangements or understandings whether formal or informal and whether express or implied. For present purposes it is important to note that the reimbursement agreement has to be one that provides for the payment of money to some person other than the beneficiary, there being no question in the present case of the provision of services or other benefits. Presumably, if there were a reimbursement agreement of the relevant kind in the present case, that agreement provided that the beneficiaries pay moneys to the trustee.

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The fact that under the reimbursement agreement there is as well to be a payment by the trustee to the beneficiaries arising out of the present entitlement of the beneficiaries is not to the point. That may or may not have been a term of the reimbursement agreement. However, the reimbursement agreement if there be one and if it had provided both for the payment of money by the trustee to the beneficiary and the payment of money by the beneficiary to the trustee would still have fallen within the meaning of reimbursement agreement under sec. 100A(7) under either view of the true construction of the subsection because it would have been an agreement that provided for the payment of money solely to a person other than the beneficiary or the beneficiary and another person, namely a payment of money by the beneficiary to the trustee. The fact that it also provided for the payment of money by the trustee to the beneficiary is not to the point.

There may be a case where the agreement said to be a reimbursement agreement provides for the payment of money by a person to both the beneficiary and the trustee, i.e. that both the beneficiary and the trustee are joint payees. In such a case no doubt the issue of construction to which the applicant refers will arise. However in my view it does not arise in the present circumstances.

Submission 3 - Can section 100A apply where the reimbursement agreement was entered into subsequent to the beneficiary becoming presently entitled?

The applicant submitted that it was a necessary ingredient for there to be a reimbursement agreement as defined in the section that that ``agreement'' precede the beneficiary becoming presently entitled to a particular share of income. It was said that the Tribunal if it made a finding at all had found that the reimbursement ``agreement'' was constituted by the entering into of arrangements with the beneficiary after July 1983, that is to say after present entitlement had arisen and as a consequence there could be no finding of a reimbursement agreement in the relevant sense.

In considering this submission it is necessary to keep in mind the purpose of the enactment of sec. 100A.

As appears from the explanatory memorandum circulated with the Income Tax Assessment Amendment Bill (No. 5) 1978, sec. 100A was designed to overcome tax avoidance arrangements referred to as ``trust stripping''. The memorandum at p. 5 said:

``The particular tax avoidance arrangements rely on a nominal `beneficiary' being introduced into the trust and being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another, e.g., as a tax-exempt body or organisation. This `beneficiary' retains only a minor portion of the trust income, while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted to form the corpus of a further trust for the group's benefit.

The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. In those circumstances, the amendment will treat trust income dealt with under the `reimbursement agreement' as not being income to which any beneficiary is presently entitled but as having been accumulated by the trustee, who will then be liable to pay tax on the income under section 99A at the prescribed tax rate (61.5 per cent for 1978-1979).''

The simplest form of trust stripping to which the legislation clearly was intended to apply was that involving a unit trust where, for example, a beneficiary whose income was exempt from tax might subscribe for units in the unit trust carrying the right to all of the income of the year of income, that beneficiary paying therefor a capital amount somewhat less than the total of the income and receiving thereby a distribution of the year's income. On such an arrangement the units would be such as not to entitle the exempt body beneficiary to any further distribution once the year's distribution had been made. In this form the

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beneficiaries of the unit trust would become entitled to the corpus of the trust (the capital sum), the obligations of the trustee to distribute would have been satisfied and the exempt body not being liable to tax would have made a small profit being the difference between the amounts subscribed and the income distributed.

Where it was sought to strip family discretionary trusts, the trust stripping scheme by its very nature had to become more complicated. It was necessary, for example, in such a case, to introduce the stripper, assuming for the moment that it was a body whose income was exempt from tax, as a beneficiary of the trust and to ensure that the distribution was made to the stripper. The stripper in turn had to agree to give back either to the trustee or the beneficiaries some form of capital distribution. That was sometimes made, as the explanatory memorandum points out, in the form of a gift to a new trust which then lent the moneys back to the trustee or sometimes by way of subscription to shares in a company which shares, upon the distribution being made to the exempt body, ceased to carry any substantial rights to participate in income or capital. The moneys were then advanced by the company to the trustee of the trust or dealt with as the parties desired. I refrain from expressing any view as to the effectiveness for trust law purposes, or for tax purposes, of such schemes in the absence of sec. 100A.

With the enactment of sec. 100A(3A) (introduced by Act No. 118 of 1981) the kinds of arrangements which were thought to be possible became even more complicated as may be illustrated by the facts of the cases determined by the Administrative Appeals Tribunal in Case U201,
87 ATC 1122 and Case V160,
88 ATC 1058.

In any of these schemes there will have been an arrangement to which the stripper beneficiary and the trustee were parties (other people such as the beneficiaries may also have been parties) entered into prior to the time at which the beneficiary (in the examples the exempt body) became presently entitled. In the case of the unit trust, the stripper beneficiary would become presently entitled by reason of holding units rather than by reason of holding units rather than by reason of the arrangement itself, though no doubt the acquisition of the units was a necessary part of the arrangement. In the cases involving discretionary or family trusts the present entitlement would arise ordinarily out of some amendment to the trust deed where by the stripper was inserted as a beneficiary and a resolution by the trustee in favour of that beneficiary.

It is not therefore surprising that sec. 100A deals separately in subsec. (1) and (2) with each of the two classes of case. The first class of case will involve a beneficiary who is presently entitled in the relevant sense to a share of the income of the trust estate. Subsection (2) deals with the class of case where the beneficiary is by force of the operation of sec. 101, that is to say by virtue of the exercise of a discretion of the kind referred to in that section, deemed to be presently entitled to income of the trust estate.

In each case however it is a requirement of the section's operation that the present entitlement, or the application, payment etc. of income arises out of a reimbursement agreement or arises by reason of some act, transaction or circumstance that occurred in connection with or as a result of a reimbursement agreement.

Dealing with the words of sec. 100A(1) (the same comments can mutatis mutandis be made with respect to sec. 100A(2)) it is clear that if the present entitlement is to arise out of a reimbursement agreement the reimbursement agreement must have occurred first before the present entitlement arose. Likewise if the present entitlement was a result of the reimbursement agreement it is clear that the reimbursement agreement must have occurred first. The question is whether this temporal sequence is necessary where the present entitlement is said to arise ``by reason of an act, transaction or circumstance'' that occurred in connection with the reimbursement agreement. An occasion might be imagined where the reimbursement agreement and the present entitlement occur, as it were, simultaneously but as a matter of language it is difficult to see how present entitlement can arise by reason of some act, transaction or circumstance in connection with a reimbursement agreement unless that reimbursement agreement has occurred prior to the act, transaction or circumstance. That is to say, there must be some nexus, some link joining the relevant act, transaction or circumstance from which the

ATC 5294

present entitlement itself arose and the reimbursement agreement.

While I have no difficulty in accepting that a reimbursement agreement can be a non-legally binding arrangement, for sec. 100A(13) so says, I have some difficulty in accepting the possibility that there could be a reimbursement arrangement in the relevant sense where present entitlement arose in circumstances where the trustee hoped that he might be able to enter into an arrangement in the future with the beneficiary, that the beneficiary pay money to the trustee. In such a case it would be difficult to see how the necessary purpose in sec. 100A(8) would be present.

It will be recalled that sec. 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into. Since the relevant agreement requires the payment of moneys to be made by some person, generally the beneficiary (in this case the payment clearly relied upon was a payment by the beneficiary to the trustee) it seems to me to be a matter of necessity that the relevant reimbursement agreement could only have been entered into where the beneficiary is in fact a party. It was not in dispute that for there to be an arrangement there had to be at least two parties to it:
F.C. of T. v. Lutovi Investments Pty. Ltd. 78 ATC 4708; (1978) 140 C.L.R. 434 at ATC p. 4712; C.L.R. p. 443 per Gibbs and Mason JJ., with whom Murphy J. agreed, and at ATC p. 4717; C.L.R. p. 451 per Stephen J.

Before me counsel for the respondent submitted that the relevant arrangement entered into prior to 30 June 1989, that is to say, prior to the present entitlement arising, was an arrangement between Dr Thomas and his wife and perhaps the applicant trustee company. There was no suggestion that any arrangement had been entered into by the applicant or Dr and Mrs Thomas on its behalf with the beneficiaries prior to the end of the year of income. The case for the Commissioner was put alternatively in the following ways:

  • (i) That Dr Thomas and his wife, with or without the trustee, made an arrangement to distribute in favour of the beneficiaries and made a loan to them forthwith or certainly before 30 June 1983 without the knowledge of the beneficiaries and later went to the beneficiaries to have the loan confirmed. It was suggested that they were agents for the beneficiaries and that the confirmation was a confirmation of the agency operating retrospectively.
  • (ii) Alternatively there was a decision to resolve in favour of the overseas beneficiaries and there was a sufficient nexus between this resolution and the subsequent arrangement for reimbursement, having regard to the expectations of Dr and Mrs Thomas that the non-resident beneficiaries would sign the documents in question, for it to be said that the present entitlement of the beneficiaries occurred in connection with the giving of those letters being an act, transaction or circumstance that occurred in connection with the reimbursement.
  • (iii) Alternatively, the arrangement made, being an arrangement between Dr and Mrs Thomas and the trustee, was an arrangement to make the distribution and for there to be a loan back to the trustee with an authorisation to follow. Thus the parties were the trustees and the beneficiary with the necessary consensus arising only when there was authorisation to lend back.
  • (iv) Finally, as a fall back position, the Commissioner submitted that if the reimbursement agreement was the arrangement between the trustee and the beneficiary under which the beneficiary lent moneys to the trustee that arrangement, albeit after present entitlement arose, had a sufficient nexus with the present entitlement that the words of sec. 100A(1) and (2) were satisfied.

Notwithstanding the decision of the High Court in Lutovi Investments Pty. Ltd., where in the circumstances of that case it was held that there was an arrangement between the directors constituted by the passage of a resolution at a directors' meeting approving a proposal for the consolidation and reduction of a company's capital and for a bonus issue and for an extraordinary general meeting to be convened to pass the necessary resolutions of a kind referred to in sec. 44(2D) of the Act, I have great difficulty in conceiving in the context of sec. 100A of the Act, how an arrangement to

ATC 5295

which that section applies could be constituted by the directors of a trustee company alone or for that matter by them and the trustee without the beneficiary being also a party. This will certainly be the case where the so called ``reimbursement agreement'' is one requiring payment by the beneficiary to the trustee. Indeed there is much to be said for the view that Dr Thomas and his wife were not as such participating in an arrangement as acting as organs of the trustee in passing the necessary resolution which created, at least it was submitted, present entitlement on the part of the non-resident beneficiaries. While a similar argument which found favour with Aickin J. was rejected by the Full High Court in Lutovi, it seems to me that the question who are parties or necessary parties to an arrangement must depend upon the circumstances of each particular case and the legislative context under consideration. In a case such as the present for there to be a reimbursement agreement, the necessary parties must be at the very least the trustee and each non-resident beneficiary, the trustee being represented for the purposes of the arrangement by some one or more individuals.

In my opinion the words ``arose by reason of any act, transaction or circumstance that occurred in connection with or as a result of a reimbursement agreement'', are directed at the class of case where the parties might deliberately have avoided an arrangement to make the stripper presently entitled but where the only arrangement that was made was that if there were present entitlement then certain shares for example subscribed for by the stripper in a company would become valueless and other shares more valuable, for in such a class of case it could not be said that the present entitlement arose out of the arrangement to pay the money to the company but rather arose by reason of an act, transaction or circumstance that occurred in connection with the reimbursement agreement or as a result of it, the act, transaction or circumstance being either the actual subscription for shares or some other act triggered by the arrangement itself.

It would be unwise to attempt to formulate a general principle which would seek to delineate when each of the possible alternatives in sec. 100A(1) and (2) would apply. It is sufficient for present circumstances to say that in a case where all that has happened is that a trustee has resolved to distribute to a beneficiary in circumstances where that beneficiary becomes presently entitled and thereafter enters into an arrangement with the beneficiary for a payment to be made by the beneficiary those facts alone will not bring the arrangement within the meaning of sec. 100A of the Act. And in my view it matters not that the trustee has some expectation that he could reach an arrangement with the beneficiary for reimbursement in the future.

Of course it would be a different case if the Tribunal had concluded on the evidence before it that there was some arrangement reached between the trustee and the beneficiaries through the agency of Dr Thomas or his wife prior to the resolution of 23 June 1983. However, in the absence of any such specific finding and on the assumption that what the Tribunal really meant to do was to find that the arrangement was the agreement for loan entered into after 30 June 1983, I think it must follow that the provisions of sec. 100A could have no application.

Submission 4 - That the consequence of section 100A(2) applying was to bring the default beneficiary clause into operation

It would seem from the reasons of the Tribunal that the case was argued before the Tribunal on the basis that sec. 100A(1) was applicable. Before me, counsel for the applicant sought to argue that the relevant subsection was sec. 100A(2). It was said that the present entitlement of the non-resident beneficiaries arose by reason that income of the trust estate was ``paid to or applied for the benefit of'' those beneficiaries with the consequence that sec. 101 operated to deem there to be present entitlement.

The significance of sec. 100A(2) applying rather than sec. 100A(1) lay in the consequences said to flow from the application of each respective subsection. Where sec. 100A(1) applies the consequence is that the beneficiary is not deemed to be presently entitled to the relevant trust income. Since present entitlement is a concept of income tax law and not a concept of trust law it was said that the consequences of sec. 100A(1) applying inevitably were that sec. 99A of the Act came into operation. However, this was said not to be the case if sec. 100A(2) applied.

The consequence of sec. 100A(2) applying is, so the Act stipulates, that for the purposes of

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the Act the relevant trust income is deemed not to have been paid to or applied for the benefit of the beneficiaries. It was submitted that once, for the purposes of the Act, the relevant trust law income is deemed not to have been paid to or applied for the benefit of the beneficiaries one must then look to the trust deed to see what would then happen. That entails, so it is said, in the present case looking at the default distribution clause. Thus the consequences of sec. 100A(2) applying, it was said, was that the default beneficiaries became automatically presently entitled with the consequence that sec. 100A had no application.

Why such a perverse interpretation would have been intended by the legislature was not explained. Indeed such an interpretation would have been quite inconsistent with the purpose of the legislation which, as the explanatory memorandum indicated, was to bring about the result that trust income dealt with under reimbursement agreements would be taxed under sec. 99A as being income to which no beneficiary was presently entitled. The consequence of the applicant's submission was that if sec. 100A(2) applied the income tax was to be levied upon persons who never became entitled as a matter of trust law to the income. While that may be a result which can arise under the provisions of Div. 6 in cases where there is a discrepancy between trust law income and ``net income'', it is not a result which readily leaps to mind when sec. 100A is considered.

In my opinion the argument even if it be reached on the facts of the present case is misconceived. I doubt if it is reached in the present case.

The dichotomy between cases involving sec. 100A(1) and those involving sec. 100A(2) reflects the dichotomy in Div. 6 between present entitlement arising under sec. 97 or 98 on the one hand and deemed present entitlement arising under sec. 101 on the other. It was said that sec. 101 covered the field of all cases involving discretionary trusts. I doubt that conclusion.

A discretionary trust deed may provide a discretion in the trustee to determine, in respect of the income of a particular year, who among a class of beneficiaries is to be entitled. If that determination were made prior to 30 June in a year of income and was irrevocable the consequence would be under sec. 98 that there would be as at the end of the year of income (that being the relevant time to determine the issue) present entitlement under sec. 97. There would be no need to have any deemed present entitlement in such a class of case assuming, for present purposes, that there had been no payment of any amount to the beneficiary. In the class of case where there had been a payment, then sec. 95A(1) would deem the beneficiary to continue to be presently entitled to the income and thus keep sec. 97 of the Act applicable: cf. per Barwick C.J. in
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of T. 69 ATC 4084; (1969) 119 C.L.R. 177 at ATC p. 4087; C.L.R. p. 182.

Where on the other hand a discretionary trust deed provides that the trustee has a discretion to pay or apply income of the trust estate to or for the benefit of beneficiaries at his discretion and where there has been a payment there would not (at least in the absence of sec. 95A(1) which was introduced in 1979) be present entitlement at the end of the year of income, nor in the event that income had been applied in favour of a beneficiary would there have been such present entitlement because, looking at the matter as at the end of the year of income, there would have been no right in the beneficiary to sue the trustee for his share of income, that right having been satisfied by the payment or application already made under sec. 101. Thus it is doubtful that sec. 101 was intended to cover the entire field. For almost all purposes (and perhaps indeed for all purposes) it will be irrelevant whether a beneficiary is presently entitled under sec. 97 or 98 or merely deemed to be presently entitled by force of sec. 101. For reasons which will become apparent I do not think it matters for the purposes of sec. 100A either.

The resolution passed by the directors on 23 June 1983 is in its written form incomplete because it fails to deal with the non-resident beneficiaries. There would be a question of interpretation involved in determining whether or not the case was one where, as at 30 June 1983 as a result of the resolution, there was present entitlement under sec. 97 or whether the case was one which fell within sec. 101. While it is not necessary to resolve the issue, as presently advised I think that the better view is that the case would have fallen within sec. 97 rather than sec. 101. If one extrapolates what

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the resolution might have been in relation to the non-resident beneficiaries there would be a resolution to distribute the income by ``applying for the benefit of the (non-resident) beneficiaries the amount of $585, such amount to be credited to the beneficiaries in the books of the trust and held on their behalf''. Certainly a resolution to hold the amounts on behalf of the non-resident beneficiaries would satisfy present entitlement under sec. 97. I concede however that it might also constitute an application under sec. 101 having regard to the decision of the New Zealand Court of Appeal in
Commr of I.R. (N.Z.) v. Ward 69 ATC 6050 which was adopted by Taxation Board of Review No. 2 in Case E47,
73 ATC 385.

But whether the case falls within sec. 100A(1) or 100A(2) in my opinion the same result will follow. Section 100A(2) does not deem the beneficiaries of the default clause to be presently entitled, their present entitlement if it exists, must arise by force of the fact that they are entitled to demand payment of the income of the trust estate for trust law purposes. Irrespective of sec. 100A(2) they cannot do that. They are clearly not presently entitled. The deeming under sec. 100A(2), which is a deeming for the purposes of the Act, is merely a deeming that the persons who in fact are deemed presently entitled by force of sec. 101 are not so presently entitled. The consequence of that deeming is that sec. 99A applies. The consequence is not that one examines whether some other person would be presently entitled. The deeming provision of sec. 100A(2) is inadequate for that purpose.

Nothing in the decisions quoted to me as to the function of a deeming caluse and in particular
Hunter Douglas Australia Pty. Ltd. v. Perma Blinds (1969) 122 C.L.R. 49 or
East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952) A.C. 109 at pp. 132-133 compels a contrary conclusion. These cases of course decided, by reference to the construction of a particular statue, that the effect of a deeming clause will operate for all purposes of that statute. In particular such a deeming clause may often deem a state of affairs to exist which does not. But deeming clauses do not, unless the context requires otherwise, permit reconstruction. What is involved, if the applicant's submission is accepted, is to construe sec. 100A(2) as creating in the default beneficiaries a present entitlement which does not exist when so to do would be quite contrary to the evident policy of the legislation.

As Fisher J. said in
F.C. of T. v. Comber 86 ATC 4171 at p. 4177; (1986) 10 F.C.R. 88 at p. 96:

``In my opinion deeming provisions are required by their nature to be construed strictly and only for the purpose for which they are resorted to (
Ex parte Walton (1881) 17 Ch. D. 746 per James L.J. at p. 756). It is improper in my view to extend by implication the express application of such a statutory fiction.''

See too
Muller v. Dalgety & Co. Ltd. (1909) 9 C.L.R. 693 at p. 696 and
Wiest v. Director of Public Prosecutions (1988) 86 A.L.R. 464 at pp. 485-486 per Burchett J.

Accordingly I reject the applicant's submission.

It follows that the applicant's appeal must be allowed and the matter remitted to the Tribunal to enable the necessary findings of fact to be made to determine the ultimate outcome of the objection decision.

Counsel for the applicant submitted that I should direct that there be a rehearing of the application before another member of the Administrative Appeals Tribunal. I decline to accede to that request. There is no reason why there should be a rehearing of the matter. Evidence has already been given and it would be a considerable inconvenience to both parties and involve much expense if that evidence were to be adduced again. Counsel for the respondent submitted that I should direct that the matter be determined by the Tribunal without the hearing of further evidence. There is much to be said for this view, particularly as the applicant has elected to call the evidence it has to meet the case it expected it had to meet. However, on the whole I think it is preferable that I not seek to bind the Tribunal on this question. In particular I note that in
Fletcher & Ors v. F.C. of T. 88 ATC 4834 the Full Court this Court, in a case where it was held that the Tribunal had determined a matter not the subject of submission by either party, decided to remit the matter to the Tribunal giving to the Tribunal a discretion to be exercised after hearing the submissions of the parties as to whether any useful further evidence should be accepted. It seems to me that that is a

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convenient course, particularly where, and the circumstances may perhaps be not usual, either evidence has, as a result of the issues becoming clearer, become available to representatives of the applicant or in circumstances where the Tribunal itself accepts the position that it might be assisted in arriving at a correct result on the facts by further evidence being adduced.

Accordingly the orders which I would propose are that the appeal be allowed, that the decision of the Tribunal be set aside and the case be remitted to the Tribunal for further hearing, the question of whether fresh evidence should be given at that hearing being left to the discretion of the Tribunal.

As to costs the applicant has been successful in persuading me to set aside the decision of the Tribunal. However, it has done so largely on the basis of an argument that the Tribunal has not ultimately found the facts necessary to determine the matter, a basis not dealt with in the original notice of appeal. In addition it has been unsuccessful in putting a number of the submissions which it had dealt with in the original ground of appeal. Its success in the matter involving the temporal application of sec. 100A ultimately will depend upon the findings of fact that are made by the Tribunal.

It was put for the Commissioner that I should not order that costs follow the event because had the Commissioner been presented with the grounds of appeal earlier he might perhaps have agreed to the appeal being allowed. The problem with that argument is that it was open to the Commissioner, had he so desired, to seek an adjournment to consider the fresh grounds of appeal and thereby to have the applicant pay his costs of such an adjournment but he chose to litigate the issue fully. In those circumstances it seems to me that there is no reason why the ordinary order as to costs should not be made and as a result I would order that the respondent pay the applicant's costs of the appeal.


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