PEARSON v FC of T

Judges: Dowsett J
Allsop J

Edmonds J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2006] FCAFC 111

Judgment date: 5 July 2006

Edmonds J

Introduction

3. This is an appeal from a judge of this Court (Spender J) in which his Honour held that income of two trust estates, being unit trusts,

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known as the Corplan Financial Group Unit Trust ( " the CFGUT " ) (in respect of the 1992 year of income) and the Corplan Financial Network Unit Trust ( " the CFNUT " ) (in respect of the 1992, 1993 and 1994 years of income) and being income additional to that returned by each trust estate, should be included pursuant to the provisions of Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) ( " the ITAA " ) in the assessable income of the appellant of the years of income ( " relevant years of income " ), albeit through a third trust estate known as the Jancy Trust, being a discretionary trust.

Background

4. The underlying structural background is not in dispute and may be summarised as follows:

5. As a result of audits, the respondent, the Commissioner of Taxation ( " the Commissioner " ), decided that the income tax returns of the CFGUT, for the 1992 year of income, and of the CFNUT, for the relevant years of income, were incorrect, and determined that the taxable income ( " the s 95 net income " ) of each trust estate should be increased with a consequential increase in the s 95 net income of the Jancy Trust for each of the relevant years of income and a consequential increase in the assessable income of the appellant of each of the relevant years of income. The audit also worked upward adjustments of the s 95 net income of the Jancy Trust of each of the relevant years of income independent of the adjustments to the s 95 net income of the CFGUT and the CFNUT, which further increased the adjusted assessable income of the appellant in each of the relevant years of income.

6. The Commissioner subsequently made a downward adjustment of the audit increases to the s 95 net income of the different trust estates with consequential decreases in the assessable income of the appellant. The quantum of these downward adjustments is no more relevant to the ultimate issue than the quantum of the original audit upward adjustments. Relevantly, what is important is that his Honour was satisfied on the evidence, that in each of the relevant years of income, Jancy resolved to distribute a share of the income of the Jancy Trust to the appellant, the resolution for the 1994 tax year being for the whole of the income. There was no challenge to this finding on appeal. While his Honour made no equivalent express finding for the 1992 and 1993 tax years, the evidence is clear and such was not put in issue on appeal, namely, that Jancy resolved to distribute 50 per cent of the net income of the Jancy Trust for the 1992 tax year and the first $ 9,000 and thereafter 50 per cent of the net income of the Jancy Trust for the 1993 tax year, to the appellant.

Issue on appeal

7. The ultimate issue on the appeal is whether Jancy, in its capacity as trustee of the Jancy Trust, is presently entitled to the whole of the net income of the CFNUT for each of the relevant years of income and presently entitled to the whole of the net income of the CFGUT for the 1992 year of income so as to carry the additional income assessed to the CFNUT in the relevant years of income and the additional income assessed to the CFGUT in the 1992 year of income into the s 95 net income of the Jancy Trust of the relevant years of income and from there into the assessable income of the appellant of the relevant years of income in the proportions indicated (1992 - 50 per cent; 1993 - $ 9,000 plus 50 per cent of the balance; 1994 - 100 per cent).

Primary judge

8. The learned primary judge concluded that Jancy was presently entitled to the whole of the net income of the CFNUT for each of the relevant years of income by force of the provisions of the trust deed pursuant to which the CFNUT was established. In this regard, his Honour referred in particular to cll 7(1), 34(1)

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and 35(6) of the trust deed which are in the following terms:
  • " 7(1) The beneficial interest in the trust Fund as originally constituted and as existing from time to time shall be vested in the Unit Holders for the time being.

  • …

  • 34(1) Subject to any special rights or restrictions provided in the Second Schedule in relation to Units of any class the trustee in each Accounting Period until the Vesting Day or the date of the termination of the Trust whichever shall first occur shall pay or apply the net income of the Trust Fund of that Accounting Period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are respectively registered as Holders at the end of each Accounting Period.

  • …

  • 34(6) The Trustee 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 effectively made at or prior to the end of such Accounting Period pursuant to the foregoing provisions of this Paragraph in trust for the Holders of Units in proportion to the number of Units of which they are respectively registered as holders on the last day of such Accounting Period. "

9. The learned primary judge also concluded that Jancy was presently entitled to the whole of the income of the CFGUT for the 1992 year of income. He came to this conclusion by reference to the following matters:

10. His Honour went on to consider the question of whether the appellant had effectively disclaimed her entitlement to the respective discretionary appointments of income to her, which were the result of the resolutions of Jancy in each respective year and concluded that she did not. This particular point was not taken upon appeal and it is unnecessary for me to consider it further.

Submissions on appeal

11. The focus of the appellant ' s submissions centred around certain observations from the reasons for judgment of the High Court in
CPT Custodian Pty Limited (previously trading as Sandhurst Nominees (Vic) Ltd) v Commissioner of State Revenue (2005) 221 ALR 196 , a judgment handed down after the learned primary judge had handed down his judgment in the present case. The relevant issue in that case was whether the holder of all the issued units in a particular unit trust was the " owner " of land registered in the name of the trustee for the purposes of the Land Tax Act 1958 (Vic). The High Court answered that question in the negative, but in the course of doing so made the following observations:

12. 

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It was on the back of these observations that the appellant submitted that Jancy was not presently entitled to the net income of the CFNUT for the relevant years of the income or the net income of the CFGUT for the 1992 year of income. In the case of both the CFNUT and CFGUT, it was submitted that the trustee was entitled to be reimbursed for the discharge of liabilities incurred in the administration of the trust. As such, the trust fund was also for the benefit of the trustee prior to any distribution to beneficiaries. The trust was not exclusively for the benefit of the unitholders. Not only did creditors have an identifiable interest in the trust fund but the trustee had entitlement both to exoneration and to be paid. Both the CFNUT and the CFGUT were in the broad category of trusts to which the rule in Saunders v Vautier , as explained by the High Court in CPT Custodian , is inapplicable. Until satisfaction of the rights of reimbursement, until the trustee had been paid all of its fees and charges and until determination of the amount to be accumulated by the trustee, it is not possible to say what was the income of the trust fund to which a beneficiary might be entitled. Under those circumstances the beneficiary was not presently entitled.

13. The Commissioner ' s submissions in relation to the CFNUT were that by force of the provisions of the CFNUT trust deed, Jancy was presently entitled to the net income of the CFNUT of the relevant years of income. His submission in relation to the CFGUT was also that embraced by the learned primary judge namely, his Honour ' s finding referred to at [ 9.2 ] to [ 9.4 ] supra and his Honour ' s conclusion, based on the predication in [ 9.5 ] supra, that Jancy was presently entitled to the 1992 net income of the CFGUT. The Commissioner submitted that the position in the present case is distinguishable from CPT Custodian where the unsatisfied trustee ' s right of indemnity was expressed as an actual liability in each of the relevant accounts. Finally, as if by way of last resort, the Commissioner submitted that the appellant had failed to discharge her burden of proving that the assessment was excessive: She failed to establish that the relevant net income was " not yet distributable " .

Reasoning

14. A beneficiary is " presently entitled " to a share of the income of the trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment:
Harmer & Ors v Commissioner of Taxation (1991) 173 CLR 264 at 271 citing, inter alia, Whiting , supra, at 215 - 216, 219 - 220;
Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 at 450 - 452;
Totledge Pty Ltd v Federal Commissioner of Taxation (1980) 31 ALR 657 at 661, 664;
Federal Commissioner of Taxation v Totledge Pty Ltd (1982) 60 FLR 149 at 159 - 161.

15. Nothing was said in CPT Custodian to cast doubt on the principle as expressed in [ 14 ] supra. That is not surprising because CPT Custodian was not concerned with the question of whether the beneficiary unitholder was " presently entitled " to income of a trust estate for the purpose of Division 6 of Part III of the ITAA.

16. In my view, the learned primary judge was correct in concluding that, having regard to the provisions of the trust deed pursuant to which the CFNUT is constituted, in particular cll 7(1), 34(1) and 34(6), Jancy, in its capacity as trustee of the Jancy Trust, was presently entitled to the whole of the net income of the CFNUT for the relevant years of income. Jancy ' s interest in the net income of the CFNUT was, by virtue of those specified clauses, vested in interest and possession, as Jancy had a present legal right to demand and receive payment of that net income. Arguably that is the effect of cl 34(1) operating alone, but the provisions of cl 34(6) make it clear that if, for some reason, the quantum of the net income which is paid or applied pursuant to cl 34(1) does not extend to the whole of the net income of the relevant accounting period, cl 34(6) makes Jancy absolutely entitled to the difference. None of the observations from CPT Custodian relied on by the appellant for a contrary result affect this conclusion.

17. 

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It follows, in my view, that the s 95 net income of the CFNUT for each of the relevant years of income is to be included in the s 95 net income of the Jancy Trust for each respective relevant year of income and, by virtue and to the extent of the distribution resolutions of Jancy for each of those relevant years of income, in the assessable income of the appellant for those years.

18. The position in relation to the CFGUT in respect of the 1992 tax year is, arguably not as clear. It is true, as the learned primary judge found, that there were no resolutions of the trustee of the CFGUT under cl 22 of the CFGUT deed in respect of the accounting period ending 30 June 1992 which purported to distribute the net income of the CFGUT. There was no challenge to this finding nor could there be for the reason mentioned below. His Honour also took the position, correctly in my view, that cl 22(3) does not operate to effect an automatic distribution to Jancy. Clause 22(3) is, as his Honour held, directed to the manner of distribution and requires a decision by the trustee pursuant to cl 22(1) to distribute an amount to the registered holders.

19. On the other hand, his Honour also found that there was no evidence of a resolution or any document to show that a General Reserve had been established under cl 23. In response to a submission of the appellant that, by reason of the absence of a resolution under cl 22(1), the net income was " income not distributed " which went to a reserve which was automatically created by reason of such non-distribution, his Honour was of the opinion cl 23 does not operate to take the income into a General Reserve, in the absence of the trustee, in the exercise of its discretion, establishing a reserve. His Honour ' s position here was, in my view, also correct. Had a General Reserve already been established by the trustee exercising its discretion pursuant to cl 23(1), then any undistributed net income in respect of the 1992 year of income would have been automatically carried to it by force of cl 22(5). But there was no evidence to support such a finding. Alternatively, a General Reserve could have been established pursuant to cl 23 for the specific purpose of taking any undistributed net income in respect of the 1992 year of income and, in the exercise of its discretion, the trustee set aside such undistributed net income to that General Reserve. But again, the evidence does not support such a finding. And that is not surprising because such evidence as there is leads one to the conclusion that there was no net income of the CFGUT in respect of the 1992 year of income, only a loss. Indeed, this explains why there was no evidence of a resolution of the trustee of the CFGUT under cl 22(1) in respect of the accounting period ending 30 June 1992 which purports to distribute the net income of the CFGUT. There was none to distribute.

20. The conclusion that there was no net income of the CFGUT in respect of the accounting period ending 30 June 1992 is supported by the financial statements in the income tax return for the CFGUT filed for the year ended 30 June 1992. They disclosed a loss of $ 61,682 and while that was returned as a s 95 net loss, there is nothing to suggest that there nevertheless was a net income for trust law purposes which could have been the subject of resolutions pursuant to cll 22 and 23 of the CFGUT trust deed. On the contrary, those financial statements pointed to a net loss for trust law purposes as well.

21. The Commissioner, of course, made adjustments to the s 95 net loss of the CFGUT as returned for the year ending 30 June 1992 resulting in an amount of s 95 net income for that year. These adjustments were ultimately the subject of agreement between experts called by each side. While Senior Counsel for the Commissioner conceded that there was no evidence of reconstructed accounts disclosing an adjusted net income for trust law purposes, that is, for the purposes of cl 22 of the CFGUT trust deed in respect of which trustee resolutions could operate, he submitted that having regard to the way the case was conducted below - the getting together of the experts and the concessions that occurred - the agreement of the experts and the resulting compromise effectively constituted the reconstructed accounts; the case was conducted on the basis that, in truth, there was net income and that it would be unfair to the Commissioner for an appeal court to look at the case otherwise.

22. Putting considerations of fairness to one side, even if such notional reconstructed

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accounts disclosed a net income for the accounting period ended 30 June 1992, there was no resolution of the trustee of the CFGUT prior to, or even after, 30 June 1992 resolving to distribute that net income to the unitholders. In my view, having regard to the terms of cl 22 of the CFGUT trust deed, that is fatal to a conclusion that Jancy was presently entitled to the net income of the CFGUT for the year ending 30 June 1992, for the reasons referred to below.

23. First, " present entitlement " in terms of Division 6 of Part III of the ITAA has to be determined by the end of the year of income to which the income relates, in the sense of its year of derivation. That explains the introductory words of cl 22(1) of the CFGUT trust deed: " During the month of June in the year 1985 and in the month of June in every following year … " . Absent a decision of the trustee prior to or at the end of June in any year pursuant to cl 22(1) of the CFGUT trust deed, there does not appear to be any other provision of the CFGUT trust deed which would, in terms of the principles articulated in [ 14 ] supra, make Jancy " presently entitled " to the net income of the CFGUT for the year ended 30 June 1992. The comparison with the self-executing provisions of cll 34(1) and 34(5) of the CFNUT trust deed are self-evident.

24. Second, the fact that the undistributed income is not carried to some General Reserve pursuant to cl 22(5) because there is no such reserve or because none is created for this purpose, is not adverse to this conclusion because even if the undistributed net income does not become " part of the Fund " pursuant to cl 22(5), irrespective of how it is treated in the financial accounts of the CFGUT, either as undistributed income or as corpus of the fund, the unitholders of the CFGUT have no present, i.e. as at 30 June 1992, legal right to demand and receive payment of such undistributed net income. Indeed, having regard to the terms of the CFGUT trust deed, nor do they have any future legal right to demand and receive payment of such undistributed net income, although, even if there was such a future right, that would not seem to be relevant to the issue of " present entitlement " in the present case, save perhaps for the operation of s 95A(2) of the ITAA which, correctly in my view, was not relied upon by the Commissioner.

25. Third, the learned judge ' s analysis of the authorities he referred to and relied upon for his conclusion that the appellant was presently entitled to the net income of the CFGUT for the year ended 30 June 1992 does not, with respect, pay sufficient regard to the differences between the terms of the instruments under consideration in those cases and the relevant terms of the CFGUT trust deed. In my view, if the unitholders in the CFGUT were not presently entitled to the net income of the CFGUT of a year of income pursuant to a decision of the trustee under cl 22(1) of the CFGUT trust deed, they were not otherwise presently entitled to such net income.

26. Fourth, insofar as the respondent relies upon Jancy ' s 100 per cent ownership of the units in the CFGUT to assert that Jancy was presently entitled to the net income of the CFGUT for the year ended 30 June 1992 because Jancy could bring the trust to an end in reliance on the rule in Saunders v Vautier , in the face of what was said in CPT Custodian , that proposition, in respect of modern day unit trusts, cannot be accepted as a proposition of general application. Ultimately it will depend upon the terms of the constituent document and the circumstances of the particular case.

27. For the foregoing reasons, I am of the view that Jancy, in its capacity as trustee of the Jancy Trust, was not presently entitled to the net income of the CFGUT for the year ended 30 June 1992 with the result that the s 95 net income of the CFGUT for the year ended 30 June 1992 was not included in the s 95 net income of the Jancy Trust for the year ended 30 June 1992 nor, as to 50 per cent, in the assessable income of the appellant for the year ended 30 June 1992.

Additional tax

28. Ground 10 of the appellant ' s notice of appeal asserts that the learned primary judge erred in holding there was no dispute as to the Commissioner ' s approach to the quantification of the additional tax payable. It further asserts that his Honour failed to determine that issue.

29. At [ 22 ] of his reasons, his Honour said:

" There is no dispute in these proceedings as to the Commissioner ' s power to issue

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amended assessments and his approach to the quantification of additional tax payable by the appellant, should his contentions concerning the income and the asserted disclaimers be accepted. "

30. At [ 92 ] , his Honour said:

" The parties are agreed that if I should find for the Commissioner in respect of the issues concerning the trust income of CFNUT and CFGUT in the relevant years and find against the appellant on the question of disclaimers, the monetary amounts should be as in the table annexed to these reasons. "

31. The table annexed as Appendix 1 read:

Appendix 1


Janette Ann Pearson v Commissioner of Taxation Q 264/266 of 1999
Janette Ann Pearson v Commissioner of Taxation Q 264/266 of 1999
Item Original Taxable Income Original tax Payable (incl Medicare Levy) Amended taxable Income Amended Primary Tax Payable (incl Medicare Levy) Additional tax for false and misleading statement Total Adjusted Tax Payable Interest (as at 9 November 2004) Total Adjusted Tax Payable and Interest
1992 Tax Year $ 16,314 $ 2,023 $ 539,050 $ 251,542.62 $ 223,116.37 $ 474,658.99 $ 754,961.40 $ 1,229,620.39
1993 Tax Year $ 9,071 $ 734 $ 219,489 $ 97,516.44 $ 93,269.01 $ 190,785.45 $ 308,069.30 $ 498,854.75
1994 Tax Year $ 9,426 - $ 224.00 $ 211,077 $ 92,338.76 $ 84,619.18 $ 176,957.94 $ 285,741.42 $ 462,699.36
Totals $ 34,811 $ 2,533 $ 969,616 $ 441,397.82 $ 401,004.56 $ 842,402.38 $ 1,348,772.12 $ 2,191,174.50

32. At the commencement of the hearing of the appeal, Senior Counsel for the appellant indicated that the appellant sought to challenge the factual basis of the imposition of additional tax, namely recklessness on the part of the appellant in the preparation of her returns. He said that the issue was simply not determined by the Court and that the appropriate course was for the matter to be remitted to his Honour.

33. In my view, it is important to understand why his Honour said what he said at [ 22 ] and [ 92 ] because it explains why the issue was not determined below.

34. On the hearing of the appeal, Senior Counsel for the appellant accepted that [ 22 ] and [ 92 ] accurately reflect what his Honour was asked to do. He also accepted, although as it subsequently transpired he should not have, that no submission, written or oral, was put below as to the absence of a basis for recklessness and moreover, that he did not even draw his Honour ' s attention to the allegedly live question of additional tax. He said that the matter was raised as an issue in the initiating application to the Court, although it seems it was not raised as an issue in the statements of facts, issues and contentions filed by the parties as part of the interlocutory processes.

35. If these were the only facts then, in my opinion, by the time the case came on for hearing before his Honour below, the issue of additional tax was no longer a live discrete issue; it may have remained an issue in name, but only on the basis that it stood or fell by reference to the outcome of the substantive issue.

36. While, on the hearing of the appeal, Senior Counsel for the appellant did not accept this view of the matter, he did accept that it would be more appropriately framed as an application for leave to agitate the issue rather than as a challenge to his Honour ' s disposition of the matter. I tend to agree and on those facts and concessions, I would not be prepared to grant leave.

37. However, following the hearing of the appeal, papers, including transcript below, were filed with the Court which indicate that the factual basis of the imposition of additional tax, namely recklessness, was still an issue so far as the appellant was concerned, even if the respondent and the Court thought otherwise.

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The appellant ' s Senior Counsel raised it in the context outlined in [ 38 ] and [ 39 ] infra:

38. At the conclusion of his submissions, Senior Counsel for the respondent said:

" … Your Honour, the consequences in terms of additional tax and so forth we have addressed in 35 to 49. There is no separate contention about those matters and subject to dealing with the possible outcomes, the possible permutations and combinations, and to which your Honour is referred - and unless your Honour has something further for us, those are our submissions. "

39. Senior Counsel for the appellant responded as follows:

" Would your Honour bear with us for just a moment. We ' re just checking whether what our learned friend said was correct about a separate contention concerning penalties and additional tax. We had understood that that was premised in the statement of facts, issues and contentions, but nonetheless, may we suffer to say something very briefly about that. As your Honour appreciates, the appellant ' s position is not that of the Corplan entities, and what has allegedly come to her in the way of a tax bill comes via the net of trusts as your Honour has seen, and an audit not of her or any suggestion of irregularity in her tax affairs, but that of the [ Corplan ] entities.

That founds the submission, of course, your Honour, that there has been neither recklessness on her part nor hindrance of the Commissioner on her part, and the respondent ' s contentions, paragraph 41, coupled with what our learned friend has submitted here, does attract a brief response. It is suggested, at least implicitly, by paragraph 41 of the respondent ' s submissions, that in some fashion Mrs Pearson has been party to a process of hindrance or some recklessness. Now, the relevant provisions to which our learned friend ' s outline refers - and those are 226G, H, J and X, as your Honour may know, focus on the affairs of the taxpayer in question.

The short facts here, and I ' m conscious of not dwelling on this unduly in reply, are that Mrs Pearson, if we put disclaimer to one side, and of the course the predicate of this is that disclaimer fails - Mrs Pearson has acted on the basis of what she is told is to be distributed to her, and with someone doing the tax returns for her who was qualified. She has no knowledge whatsoever of anything amiss or anything further to be inquired into, and indeed, she is not party to the administration of the trusts from which and out of whose affairs it is now said that this additional liability comes. And that, no matter how you put it, in terms of hindrance, which is what the Commissioner [ relies ] on under 226X or recklessness, which is what the Commissioner asserts under 226H, is simply not made out. There ' s no foundation for it. That, in our submission, is a matter of central principle on undisputed evidence.

Beyond that, to the extent that there are any questions of discretion intruding, we leave those to your Honour and don ' t think we can assist your Honour by dwelling on those matters. "

40. In the face of this submission, I have reached the conclusion that the factual issues which underlay the agreement, at least on the appellant ' s part, referred to in [ 22 ] and [ 92 ] of his Honour ' s reasons, as to the imposition of additional tax, warrant it being dealt with by his Honour as an issue independent and discrete from the substantive issue, and therefore think it should go back to his Honour to be dealt with appropriately.

41. The appellant ' s appeal has been successful in part and any order as to costs should properly reflect this success.

 

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