CASE 46/96

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: Melbourne, 2 August 1996

---

BH Pascoe (Senior Member)

This matter involved 61 applications to review decisions made by the respondent in relation to objections lodged against assessments of income tax. The applicants were Mr and Mrs M and the trustees for four trusts. In the assessments for the two individuals, the respondent had increased taxable income resulting from the disallowance of motor vehicle expenses in calculating the net income of a partnership between them in each of the years ended 30 June 1977 to 1982 inclusive. The assessments for the trusts were issued under section 98 of the Income Tax Assessment Act 1936 (``the Act'') on the basis that three infant beneficiaries were presently entitled to the income of the trusts. These beneficiaries were the children of Mr and Mrs M. The respondent did not accept that income which was purportedly distributed to certain non-resident beneficiaries in respect of the years ended 30 June 1982 to 1986 inclusive had constituted valid distributions and had disallowed deductions claimed for interest on amounts said to be held by way of loan from the non-resident beneficiaries. By consent all applications were heard together.

2. The applicants were represented at the hearing by Mr T Murphy of counsel and the respondent by Mr P Sest of counsel. Evidence was given by Mr M and the mother of Mr M. Evidence was taken by telephone from D, an uncle of Mr M; and E, a cousin of the father of Mr M. The respondent called an auditor employed by the respondent to give evidence.

3. The major part of the evidence and submissions related to the issue of whether distributions had been validly made to non- resident beneficiaries. There were four discretionary trusts involved. Trust No. 1 was established on 4 April 1981 and derived its income from rented properties plus bank interest. In the year ended 30 June 1983 the trustees resolved to accumulate $10 and distribute balance of the net income, $16,249, equally between 28 beneficiaries resident in Yugoslavia. In each of the years ended 30 June 1984, 1985 and 1986 the trustee claimed a deduction for interest on the distributions which had not been remitted and after accumulation of $10, resolved to distribute the balance of net income in each year to one Yugoslavian beneficiary, an uncle of Mr M. The respondent disallowed as deductions the claimed interest and assessed the trustee on the basis that the three infant children of Mr and Mrs M were presently entitled to the whole of the net income of each year in excess of $10.

4. Trust No. 2 was established on 22 October 1981 and derived its income from an investment in a related unit trust. In the year ended 30 June 1982 the trustee resolved to

---

ATC 455

accumulate $10, to distribute $1,040 to each of the three children and to distribute the balance of $1,999 to a cousin of Mr M's father, resident in Yugoslavia. In the year ended 30 June 1983, the trustee claimed interest on the unremitted distribution to the non-resident and resolved to accumulate $10 and distribute the balance of net income, $909, equally between the three children. In the year ended 30 June 1984, the trustee again claimed interest on the unpaid distribution and resolved to accumulate $10, distribute $416 to each of the three children and distribute the balance, $1,703, to the same non- resident beneficiary. Again the respondent disallowed the interest claimed and assessed the trustee on the basis that the three children were presently entitled to the whole of the net income in excess of $10 in each year.

5. Trust No. 3 was established on 22 February 1982 and derived its income from commission earned from the conduct of a real estate business. In the year ended 30 June 1983, the trustee resolved to accumulate $10 and distribute the balance of net income, $14,710, equally between 26 beneficiaries resident in Yugoslavia. The respondent disallowed $2,034 claimed as a deduction for motor vehicle expenses, apparently disallowed $754 claimed as investment allowance and assessed the resulting $17,498, after the $10 accumulation, as income to which the three infant children were entitled. In the year ended 30 June 1984, the trustee claimed interest on unremitted distributions and resolved to accumulate $10, distribute $13,600 to Mrs M, $19,500 to the resident mother of Mr M and the balance of $29,666 equally between two non-residents. The respondent's adjustment sheet purported to disallow the interest and $1,941 of motor vehicle expenses to produce a net income of $67,153. However, the assessments issued showed the entitlements of $13,600 to Mrs M, $19,500 to the mother of Mr M and $29,667 equally between the three children. After the $10 accumulation, these totalled $62,777, the same net income as returned prior to the disallowances. In the year ended 30 June 1985, the trustee again claimed interest on unpaid distributions to non-residents and resolved, after $10 accumulation, to distribute the remaining net income as to $13,500 to Mr M, $19,500 to the mother of Mrs M and the balance of $101,523 equally between six non-residents. The respondent disallowed the interest and motor vehicle expenses and assessed the balance of net income after the accumulation and distributions to Mrs M and Mr M's mother equally between the three children. In the year ended 30 June 1986, the trustee claimed the similar interest deduction and resolved after $10 accumulation to distribute the whole of the net income, $12,032, to the mother of Mr M. The respondent disallowed the interest, motor vehicle expenses and an amount of private expenditure. The resulting net income of $45,019 was assessed as $10 accumulation and the balance as being the entitlement of the three children equally. The adjustment sheet also included Mrs M's mother as being entitled to $12,032 and appears to have assessed $57,051 of income in total.

6. Trust No. 4 was established on 19 February 1982. In the year ended 30 June 1982, it derived an income of $55,074 as a beneficiary of Trust No. 1 and the trustee resolved to distribute that income equally between fourteen residents of Yugoslavia. In each of the years ended 30 June 1983, 1984, 1985 and 1986, the trust derived income from interest but disclosed no net income after claiming a deduction for interest on unremitted distributions. The respondent disallowed a deduction for such interest and in each of the five years assessed the resultant net income as income to which the three infant children were entitled in equal shares.

7. In each of the trust income tax returns in which income was said to have been distributed to non-residents, copies of letters said to have been forwarded to each of the non-residents were attached. For each trust and for each relevant year the letters were identical except for the name and the city of Yugoslavia. An example from the 1983 return of Trust No. 3 was:

``NOTICE

TO: B

BITOLA

YUGOSLAVIA

Re: M Family Trust No. 3

We have taken the opportunity to write this letter to you to advise that you are a member of the beneficial class under the above- mentioned Trust, which was established on the 22nd February, 1982 for the benefit of

---

ATC 456

the beneficiaries of the M Family Trust No. 3.

As such, the Trustee may, from time to time, exercise its discretion as to whether or not you will share in the income and/or capital of the Trust. In the event of the Trustee so determining to distribute income and/or capital to you in any particular financial year, this fact and the amount of income and/or capital so distributed will be notified to you either verbally or in writing.

We have enclosed an Authority, which you may wish to execute and return to us, giving power to the Trustee to invest any such income and/or capital in the event of a distribution being made to you. This is not, however, mandatory in any sense to your receiving or retaining control of any such distribution.

Yours faithfully,........................''

It is noted that the letter contains no reference to an amount of income, a year of income, is not dated or signed and shows no specific address. Produced in evidence were three purported authorities from beneficiaries. They referred to ``any income and/or capital distribution to which I may from time to time become presently entitled under the said Trust''. None was dated, witnessed or referred to any particular sum of money or year of income.

8. Mr M gave evidence that he was born in Macedonia and lived with five families in his grandfather's house. With his father, mother and sister, he migrated to Australia in 1956 at age seven. Prior to migrating, his family moved to Belgrade and lived with an aunt in a small flat. The assistance then received from various relatives in those years prior to migration was said to have influenced Mr M to seek to repay that assistance when his financial circumstances permitted. During the 1960s his family assisted an uncle and his family to migrate to Australia. Trusts were established in 1981 and 1982 on advice from his legal adviser. The Trust No. 4 was established primarily as a vehicle for distribution of income to overseas beneficiaries. The Trust No. 3 was established to operate the real estate business formerly carried on by the partnership between Mr and Mrs M.

9. Although Mr M stated that he had spoken personally to some of the overseas beneficiaries, his evidence was that the principal contacts had been through his parents. They had visited Yugoslavia in 1974 and 1988. His mother had visited again in August/ September 1995. Whilst he accepted that the purported notices to beneficiaries did not show the full address and were in English when most, if not all, of the overseas residents did not speak or read English, he maintained that they had been forwarded by his mother with an accompanying letter. He stated that all of the alleged beneficiaries preferred to have any money due to them retained in Australia because of the difficulties faced by them in their country of residence. He also stated that it had been the hope that some of the overseas residents would migrate to Australia and it was the intention to build up funds for them in Australia for that purpose. Apart from one attempt to remit $1,000 to an uncle, no funds were ever paid to the alleged beneficiaries. The attempt to remit the $1,000 was said to have been unsuccessful as the funds were blocked by the authorities in Yugoslavia and not received by the uncle.

10. Mr M maintained that he took out interim figures for each of the trusts in April of each year in order to make decisions as to the distribution of income. He stated that the resolutions of the trustee, the preparation of the financial statements and preparation of income tax returns had been done on an annual basis. When asked why all of the relevant returns of income including personal returns from 1977 onwards and the trust returns for 1982 onwards had been lodged with the respondent on 7 July 1987, Mr M maintained that he had ``sat on them''. No particular reason was advanced for the delay in lodging and Mr M denied that they had not been prepared and the paperwork not done until immediately prior to the date of lodgement. He could not disagree with an alleged statement to an officer of the respondent by his accountant in April 1987 that the 1985 and 1986 returns were not then prepared and available for lodgement.

11. The mother of Mr M gave evidence that she had maintained contact with the relatives resident in Yugoslavia. She stated that she had discussed with them since the early 1980s that her son had a trust in Australia in which they had entitlements and if they needed money her son was ready to help. On her most recent visit she obtained letters from many of the alleged

---

ATC 457

beneficiaries which were tendered in evidence. All were dated August or September 1995, none was in English, although translations were attached, none mentioned a specific sum of money and all were in general terms confirming knowledge of an interest in an Australian trust with a request to invest any entitlements in Australia. They were not witnessed. She accepted that she does not read English and could not confirm the words of a witness statement lodged with the Tribunal but maintained that she knew what she wanted to say and believes that the statement said it. The Tribunal was left in doubt as to whether this witness understood fully the concept of a trust and its operations.

12. Evidence was received by telephone from two witnesses resident in Macedonia. One was an uncle of Mr M and the other a cousin of Mr M's father. The respondent objected to the Tribunal taking such evidence by telephone. The Tribunal ruled that the evidence would be heard but with a warning to the applicants that such evidence may well have little weight. The credit of the witnesses was a significant issue in this case and evidence by telephone where the demeanour of the witness cannot be observed, the identification of the witness cannot be properly established, documents cannot be shown to the witness and cross-examination is less effective, is of little weight in assessing such credit. Here the deficiencies of telephone evidence were amplified by the need for an interpreter as neither witness spoke English. Neither witness was able to state the amount of income they were said to have derived from the trusts. Again the Tribunal was left with the clear understanding that neither witness understood the concept of a trust. Both maintained that they had been aware of the existence of a trust for many years, and that they could obtain money from Mr M if it was needed. Neither spoke or could read English.

13. The respondent called an officer of the respondent who had conducted the audit into the affairs of Mr and Mrs M and the Trusts. He produced file notes of conversations with the accountant and tax agent in which it was recorded that, at 23 March 1987, the accountant advised that the 1985 and 1986 returns were to be completed and would be lodged with the earlier year returns as soon as possible. He could not say whether the earlier returns had been completed at that time. The auditor also provided records of interview with Mr M in relation to each of the four trusts. These records indicate that Mr M stated that the overseas beneficiaries were advised of their entitlements by letters typed by the tax agent and posted by Mr M to each beneficiary soon after the return for each year was prepared.

14. Mrs M did not give evidence at the hearing nor provide a witness statement. A letter from her psychiatrist was tendered which stated that she was under treatment for panic disorder with agoraphobia and associated depression. The opinion was expressed that Mrs M was not fit to give evidence and doing so could adversely affect her condition.

15. The terms of each of the four trust deeds were virtually identical. Clause 3(1) of each deed gave a discretion to the trustee to determine that the net income be paid, applied or set aside for any one or more of the General Beneficiaries or for charitable purposes or to accumulate any part of the income. Clause 3(4) of each deed provided:

``The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectually made in relation to such Accounting Period in trust successively for the same persons and in the same proportions as the Trustees would hold the corpus of the Trust Fund pursuant to sub-clauses (1) (2) (3) and (4) of Clause 4 hereof if the last day of that Accounting Period were the Vesting Day.''

Clause 4 set out entitlements as from the vesting day. Sub-clause (1) gave the trustee a discretion to appoint, prior to the vesting day, part or all of the trust fund for the benefit of charities or any of the beneficiaries. Sub-clause (2) then provided:

``... insofar as any part of the Trust Fund shall not have been disposed of in accordance with sub-clause (1) of this clause if one Specified Beneficiary is named or described in the Schedule then if such Specified Beneficiary shall be living on the Vesting Day in trust for such Specified Beneficiary absolutely and if more than one Specified Beneficiary are so named or described in trust for such of the Specified Beneficiaries as shall be living on the Vesting Day as tenants-in-common in equal shares absolutely provided that any child living on the Vesting Day of any Specified

---

ATC 458

Beneficiary who shall have died before the Vesting Day shall take (and if more than one as tenants-in-common in equal shares) the share which such deceased Specified Beneficiary would have taken if he had been living on the Vesting Day and any child living on the Vesting Day of any child who shall have died before the Vesting Day of any such deceased Specified Beneficiary shall take (and if more than one as tenants- in-common in equal shares) the share which such deceased child would have taken if he had been living on the Vesting Day and the descendants living on the Vesting Day of any of such lastmentioned child or children who shall die before the Vesting Day shall take per stirpes the share which such deceased child or children would have taken if he or they had been living on the Vesting Day;''

16. It was accepted by the applicants that it was possible that 21 out of the 28 alleged beneficiaries of the Trust No. 1 in 1983 may not have been included in the class of General Beneficiary specified in that trust. In addition it was accepted that the alleged non-resident beneficiary of Trust No. 2 in 1982 and 1984 may not have been included in the class of General Beneficiary of that trust. From the complex family tree provided by the applicants it would appear that these alleged beneficiaries did not satisfy the degree of relationship set out in the deeds of Trusts No. 1 and No. 2. The much broader class of General Beneficiary for Trusts No. 3 and No. 4 appear to have encompassed all the non-residents to whom distributions were said to have been made.

17. The applicant submitted that the various non-residents became entitled to the appropriate share of the net income of each trust in each year by virtue of resolutions of the trustees made before 30 June each year. Reliance was placed on the decision in the case of
Commr of Inland Revenue (N.Z.) v Ward 69 ATC 6050 and it was said that resolutions of the trustees as recorded in the relevant minute were sufficient to make the beneficiaries presently entitled. It was submitted that the evidence showed a genuine intention to benefit the overseas relatives of Mr M and the purported distributions were not a sham. It was argued further that if the Tribunal was to make a finding of sham then the assessments were incorrectly issued to the trustees under section 98 of the Act and should have been issued under section 99A. The interest claimed was said to be deductible pursuant to section 51 of the Act on the basis that the distributions to the non-resident beneficiaries constituted funds held on a separate trust which were in turn either lent to the trustee of the relevant trust or to the trustee of another trust for the purpose of producing assessable income.

18. For the respondent it was submitted that the purported distributions to the non-residents, retention of such distributions and the crediting of interest to the non-residents comprised a sham arrangement or arrangements. It was said that the non-residents, if they exist, were never intended to receive a benefit of a purported distribution or interest and that the real beneficiary of the trusts was Mr M and, perhaps, his family.

19. The primary issue in this case is whether any or all of the non-residents were presently entitled to a share of the net income of the trust in the relevant years in which they were said to have been beneficiaries. For the purpose of determining that issue it is appropriate to consider the question of whether the purported creation of entitlements was a sham. The applicable law in cases where sham is argued was set out by Tamberlin J in the decision of the Federal Court in
Richard Walter Pty Ltd v FC of T 95 ATC 4440. His Honour said (at p. 4449 and following):

``There is no dispute between the parties as to the applicable law which is conveniently summarised and set out in
Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454 where Lockhart J said:

`A ``sham'' is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.'

His Honour went on (at 454-455) to set out a number of guidelines, the substance of which is as follows:

---

ATC 459

`1. The fact that the transaction involved a ``round robin'' of cheques does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques.

2. The artificiality of the transaction does not give rise to its characterisation as a sham or to the characterisation of the constituent documents as a sham so long as each document ``had the effect that it purported to have'', and so long as none of the documents purported ``to do something different from what the parties had agreed to do''.

3. The complexity of the transaction does not in itself establish its character as a sham.

4. A purported disposal of property or purported creation of a debt may be a sham where donor and donee or lender and debtor do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property.

5. The fact that a transaction may have been intended to present a shield against creditors does not, absent the transaction being set aside under the Bankruptcy Act 1966 (Cth), for example, characterise it as a sham. Transactions may in themselves be legally effective although intended to achieve an unacceptable purpose. The essential question seems to be whether what has been done has been genuinely done.

6. Circumstances giving rise to suspicion do not establish a transaction as a sham unless it can be shown that the outward and visible form does not coincide with the inward and substantial truth.'

Other relevant guidance is to be found in
Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802;
Allsene Pty Limited v FC of T 89 ATC 5333;
Esanda Ltd v Burgess & Anor [1984] 2 NSWLR 139 at 144, 146 and 153.

In
Cranstoun v FC of T 84 ATC 4876 at 4882; (1984) 75 FLR 220 at 228, Carter J said:

`If two persons sign a document which on its face purports to be a loan agreement evidencing a loan from one to the other for $180,000 but it is agreed either expressly or impliedly that the document is intended to give the appearance only of a loan transaction then it is, in my view, a sham; it is something devised to delude, it is a trick or a hoax, an imposture, it is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit... However one defines it, it is in law nothing, nor, in my view, can it be elevated to be something which the law will recognise and enforce merely because documents which are drawn in legal language appear, a series of book-keeping entries is made and extensive use made of the banking system involving debits and credits of the order of hundreds of thousands of dollars. No amount of professional ingenuity will make the agreement into what in fact it is not if the parties do not so intend.'

The central feature of a loan transaction is that the parties must intend that the whole of the moneys lent should be repaid. In the present proceedings, I do not consider there was ever intended to be, nor was there, any such obligation created. See
Ferguson v O'Neill [1943] VLR 30 at 32.''

In that case His Honour was dealing with an alleged loan and a question of whether money received by the company was a loan or income. Here we are dealing with an alleged creation of a present entitlement to income of a trust estate. It was submitted by Mr Murphy that in all of the decided cases on sham there were two parties involved and here one party created rights which cannot be defeated unilaterally so that a finding of sham is not possible. While this may be true when the transaction involves a specific action by each of two parties, such as the execution of a loan agreement, it is not true when the matter under consideration is the unilateral act of one party which seeks to attribute income to another who is not within the jurisdiction and is not aware of his or her rights. It may well be an adequate defence against a contention of sham if the other party consented or was aware of such attribution and received the income.

---

ATC 460

20. In this case I cannot be satisfied that the non-residents named in the resolution of the trustees were made aware of any purported entitlement at the time when the resolution was said to have been made or at any time thereafter. The purported letters said to have been sent to each beneficiary contained no detail of any amount, were not specific that an entitlement had been created and were not dated. They purport to relate to various years of income between 1982 and 1986. However, the relevant returns of income to which copies were attached were not produced to the respondent until July 1987. Mr M stated that they were prepared each year but he ``sat on'' the returns. He gave no satisfactory explanation for this. The accountant who prepared and lodged the returns was not called. I am left with the conviction that the returns and all of the relevant documentation were not prepared until 1987. The resolutions were a standard form and clearly prepared or, at least, drafted without consideration of whether there was one or more beneficiary to be entitled to a share of the income. The three purported authorities made no reference to any knowledge by the alleged non-resident beneficiaries of an amount or year of entitlement. The letters obtained by Mr M's mother were non specific as to knowledge of any amount or year of entitlement. Further they were obtained in 1995, some 9 to 13 years after the alleged entitlement and were obtained only when a hearing of this matter was imminent. Notwithstanding Mr M's stated desire to assist his relatives he did not provide any basis for the criteria adopted by the trustees in determining who should benefit and no money was ever paid to the alleged beneficiaries. He said that the letters were forwarded by his mother with an accompanying letter. No evidence of this was provided. The majority, if not all, of the non- residents did not speak or read English so that the purported letters of advice and the three acknowledgements in English have to be treated with considerable doubt.

21. The evidence received by telephone carried little if any weight. The best that could be gleaned from the evidence was that the two non-resident relatives had some understanding that there could be money available from Mr M if they needed it. It was clear that they had no real understanding of being beneficiaries of a trust, had no knowledge of any specific amount of entitlement and were unable to say that they had received any specific advice of an entitlement contemporaneously with the alleged granting of an entitlement.

22. After full consideration of the evidence, I find that there was no intention by the trustee in the relevant years to benefit the named non- residents by giving them a present entitlement to income of any of the four trusts. I do not accept the evidence of Mr M that there was any genuine desire to benefit those non-residents. There was no contemporaneous or later evidence that the alleged beneficiaries were aware of their alleged entitlements, no attempt was ever made to remit any money to the purported beneficiaries and Mr M was vague and contradictory on the reasons for purporting to benefit those non-residents named in the resolutions. There was undoubted carelessness in the trustee giving effect to the trust provisions when resolutions were recorded purporting to give some non-residents an entitlement to income in Trust No. 1 and Trust No. 2 when they could not be included in the class of beneficiary of the trust. I am left with the conclusion that the error arose as a result of a lack of concern about legal entitlements because there was never an intention of creating genuine legal entitlements to interests in those trusts for the benefit of the non-residents. I am satisfied that the attempt to create present entitlement to income of the trusts by the non- residents was a sham and not intended to have the legal effect which it purported to have. The resolutions were designed, in my view, to retain the maximum funds within the trust for the ultimate benefit of Mr M and his immediate family with a minimum reduction by the impact of income tax. It is, perhaps, appropriate to say that the evidence of Mr M was the most significant. Notwithstanding that the trustee of each trust was a corporation, there is no doubt that Mr M was the guiding hand and mind and the decisions and intentions of the trustees were the decisions and intentions of Mr M. With some diffidence and disclaiming any relationship it is appropriate to use the words of Fullagar J in
Pascoe v FC of T (1956) 11 ATD 108 where he said (at p. 111):

``Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the `best' evidence, but, for obvious reasons, they must, as Cussen, J., observed

---

ATC 461

in
Cox v. Smail, (1912) V.L.R. 274, at p. 283., `be tested most closely, and received with the greatest caution.'''

Here, the evidence of Mr M did not satisfy me and the evidence of his mother was clearly given with the desire to assist her son but with a limited understanding of the actual facts and issues.

23. Mr Murphy, for the applicant, sought to rely on section 253 of the Companies (Victoria) Code which provides that any company minute which is properly entered and purports to be signed by the chairman is prima facie evidence of the proceedings to which it relates. However, in this case, I find that the contrary has been proved; that the purported resolutions were never intended to have legal effect in relation to the non-residents and were themselves shams. I cannot be satisfied that they were a record of resolutions passed at any meeting on the dates on which they were purported to have been held. The evidence leads to the conclusion that the alleged minutes were drawn up by the accountant at some date much later than the date recorded on the alleged minutes.

24. Having reached a finding that no valid entitlement to income was created in the hands of the various non-resident beneficiaries it follows that no amounts were payable and on which interest could be due. Even if the alleged distributions had been valid, the unremitted amounts would not be loans but amounts held under a separate trust for each of the non- resident individuals. There is no evidence of the manner, if any, in which such funds were invested or any entitlement to income on such separate trust funds.

25. Having made those findings it is then necessary to consider whether the respondent has correctly identified the taxpayers who were liable to be assessed on the net income of the trust in each year. In relation to Trust No. 1 the claim for interest was correctly disallowed in each of the years ended 30 June 1983, 1984, 1985 and 1986. Given that the purported distributions and purported interest were a sham there is no difference between the trust income and the taxable income. The purported distributions were not a valid exercise of a discretion pursuant to Clause 3(1) of the deed so that the default provisions of Clause 3(4) apply. The three children of Mr and Mrs M were the specified beneficiaries and were, therefore, entitled to the net income of the trust in equal proportions. As they were infants, the trustee was properly assessed pursuant to section 98 of the Act and the decisions under review in relation to those assessments are affirmed.

26. For Trust No. 2 a similar position arose so that the income in excess of that declared as income distributed to the three children also forms part of their present entitlement and was properly assessed pursuant to section 98. It follows that these decisions are affirmed. Trust No. 4 produces another similar result so that the decisions under review in relation to the assessment of income of this trust are also affirmed.

27. The position with Trust No. 3 is more complex in that the respondent appears to have erred in relation to the assessment of income of the years ended 30 June 1984 and 1986. In relation to the year ended 30 June 1983 the trustee purported to distribute the whole of the net income to 26 non-residents. In the trust return lodged the profit and loss statement showed a net profit of $15,474. On a separate schedule an amount of $754 was deducted as a claim for investment allowance to produce an amount of $14,720. On the adjustment sheet prepared by the respondent the amount shown as ``net income as returned'' was $15,474 to which was then added $2,034 motor vehicle expenses disallowed to produce an adjusted net income of $17,508. It is not clear whether there was a deliberate intention to disallow the investment allowance claim. Whilst the trustee included in its objection a claim that the amount of $754 was an allowable deduction, no reference to this amount was made at the hearing and no evidence provided in relation to that claim. Given the limitation imposed by section 14ZZK of the Taxation Administration Act 1953 and its predecessor, section 190 of the Income Tax Assessment Act 1936, it is not appropriate for the Tribunal to make any finding that the deduction was allowable. In relation to the disallowance of part of the claim for motor vehicle expenses no details were provided of either the amount claimed $11,226 or the basis of the proportion disallowed. Whilst it may relate to the disallowance of a similar deduction in the earlier years' returns of the partnership of Mr and Mrs M, the Tribunal was not provided with any details or specific evidence on this question. The applicant has, therefore, not discharged the onus of proving

---

ATC 462

that the assessments were excessive required by the section quoted above in relation to the motor vehicle expense claim. Again the provisions of Clause 3 of the trust deed result in the three infant children of Mr and Mrs M being presently entitled to the net income of the trust in equal shares and the decisions of the respondent under review is affirmed in relation to the year ended 30 June 1983.

28. In relation to the year ended 30 June 1984, the return lodged showed an income of $62,777. In the adjustment sheet issued, the respondent disallowed as deductions $2,435 interest purportedly paid to non-residents and $1,941 motor vehicle expenses producing an adjusted net income of $67,153. The trustee had purported to have distributed $13,600 to Mrs M, $19,500 to the mother of Mr M and the balance equally between two non-residents. Given my findings, that balance was income to which the three infant children were presently entitled. After the accumulation of $10 this balance was a total of $34,043. The respondent assessed each of the three children as being entitled to $9,889, a total of $29,667. The effect of this was that the $4,376 disallowed was not assessed as income of any beneficiary or the trustee. Accordingly the decisions under review in relation to the 1984 year are varied by adding thereto a decision that the taxable income assessable to the trustee under section 98 was $11,348 in respect of each of the three children. The matter is remitted to the respondent with a direction that he amend the assessments accordingly. The decision in
Stevenson v FC of T 91 ATC 4476 is authority for this course of action.

29. In relation to the year ended 30 June 1985, the balance of net income after the $10 accumulation, $13,500 distributed to Mrs M and $19,500 to Mr M's mother was properly assessed as income of the three children in equal shares. The decisions under review for that year of income are affirmed. However, the respondent did make a clear error in relation to the year ended 30 June 1986. The adjusted net income of the trust for that year was $45,019. The resolution of the trustee was that $10 be accumulated and that the balance of the net income be paid or applied for the benefit of the mother of Mr M. As a result there was no part of the net income which was not the subject of a determination pursuant to Clause 3(1) and Clause 3(4) was not relevant. Consequently, no part of the net income could represent income to which the default provisions of Clause 3(4) applied so as to make the three children presently entitled. The balance of net income, $45,009 was income to which the mother of Mrs M was entitled. It follows that the decisions under review in relation to the year ended 30 June 1986 are set aside and the objections allowed in full. Any assessment of income tax in relation to the income of the mother is not before the Tribunal and no finding can be made in relation to it.

30. In each of the years of income in question for the Trust No. 3 the question arises as to the correct treatment of any amount representing the difference between net income for income tax purposes and net income for trust law purposes. This arises here as a result of the disallowance as a deduction of expenses which may have been properly incurred by the trustee pursuant to the terms of the trust but which did not constitute allowable deductions for tax purposes. This issue was discussed in some detail in my decision reported as Case 24/96,
96 ATC 296 and in which the views of Hill J in
Davis & Anor v FC of T 89 ATC 4377 were referred to. His Honour had canvassed what he described as the competing views, namely the proportionate view and the view that any difference falls to be assessed under section 99 or 99A of the Act. However, there he was considering the position where the net income was to be distributed in specific amounts to two beneficiaries. In this case the distribution was on the basis of specific amounts to some beneficiaries with the balance to others or 100% to another or others. Further, each resolution included the statement:

``That for the avoidance of doubt this company as trustee HEREBY DECLARES that where used herein the term `income of the said trust estate' shall include both the `net income' of the said trust estate as that term is defined in Division 6 of the Income Tax Assessment Act 1936 and all income receipts and profits of the said trust estate in the said year of income whether forming part of the `net income' so defined or not.''

Consequently, I am of the view that the residuary beneficiaries in each year are properly assessable on the balance of the net income as arrived at for income tax purposes after any specific distributions.

---

ATC 463

31. As indicated earlier, very little of the hearing or evidence was devoted to the applications by Mr and Mrs M and which relate to the disallowance of motor vehicle expenses in the calculation of the net income of a partnership in which they were partners in the years ended 30 June 1977 to 1982 inclusive. The disallowance appeared to be a proportion of the expenses claimed in relation to a vehicle used by Mr M. No details were provided as to the basis of the claim although Mr M thought that it represented 90-95% of the total expenditure. No details were provided by either party as to the basis of the amount disallowed. Mr M stated that he had one car until 1980 when a second car was purchased and he thought that 90-95% of the expenses relating to the first car continued to be claimed with no claim relative to the costs of the second car. He maintained that he worked seven days per week in those days and the car was predominantly used in the real estate business. With the absence of any details of the claim or the amount disallowed and any evidence other than Mr M's somewhat vague recollections, I find that the applicants have not satisfied the onus of proof required to show that the assessments are excessive.

32. The final issue in these matters was the question of additional tax or penalties imposed by the respondent in the amended assessments in dispute. It is difficult to identify the quantum of additional tax imposed from the documents provided to the Tribunal. It would appear that the additional tax had been assessed on the basis of a culpability component of 45% of the additional income tax due under the amended assessments plus the appropriate per annum rates for the period of time before the amended assessments were payable. Mr Murphy submitted that penalties were not appropriate. It was said that returns were lodged in the full belief that resolutions made by the trustee were effective and there was no intention to deceive. It was said that the applicants had been cooperative and the applicants should not bear a penalty where the law was complex and the long delay by the respondent in forwarding the applications to the Tribunal caused difficulties in presenting evidence of circumstances of many years ago. It was further argued also that substantial sums had been paid by way of withholding tax and income tax on income said to have been derived by the non-residents in the relevant years. Whilst I have some sympathy with the concern at the apparent lack of recognition of tax already paid by, and on behalf of, taxpayers where the respondent is now seeking payment of tax on the same amount from other taxpayers, it is difficult to find that an amount of tax paid by one person should be taken into consideration in ascertaining the liability of another. I can make findings in relation to those applicants who are before me. I would urge the respondent to ensure that an appropriate amount of tax and additional tax is recovered in relation to the actual net income of the two trusts in each year and give due recognition to the collection of tax from taxpayers where these findings demonstrate that no actual liability existed. However, I would assume that this can be accomplished within the per annum or time component of the additional tax over which, in any event, I have no jurisdiction. Given my findings of a deliberate attempt to move liability to tax away from the real beneficiaries of the trust to non-genuine alleged beneficiaries, I affirm the decision to impose a culpability penalty at the rate of 45% on the relevant income tax payable.

33. Of the sixty-one applications involved in this matter, fifty-five of the decisions under review are affirmed, three, being the decisions relating to objections of the trustee of the Trust No. 3 in relation to the year ended 30 June 1984 are varied and remitted to the respondent with directions and three, being the decisions relating to objections of the trustee of Trust No. 3 in relation to the year ended 30 June 1986 are set aside and the objections allowed in full.