Case U201
Members:CJ Bannon QC
CJ Stevens M
GR Taylor M
Tribunal:
Administrative Appeals Tribunal
C.J. Bannon Q.C. (Deputy President), C.J. Stevens and G.R. Taylor (Members)
The Tribunal has before it six applications for review relating to income tax assessments in respect of three persons for the years ending 30 June 1980 and 30 June 1981. The persons concerned (the taxpayers) are husband, wife and infant daughter. On 4 June 1979 a family trust was created by deed (exhibit J) ("the family trust"). The trustee, pursuant to the deed, is a private company ("the trust company") of which the sole shareholders and directors are the husband and wife taxpayers. The beneficiaries named in cl. 2 of the deed are the husband and wife taxpayers, "their children, grandchildren, and any other beneficiaries whom the Trustee may from time to time determine". The deed provides in cl. 1 that upon the vesting day mentioned therein, the trustees are to stand possessed of the settled fund in trust:
"(a) as to the capital for such one or more of the Beneficiaries and in such shares as the Trustees shall at any time and from time to time by determination revocable or irrevocable determine prior to the Vesting Day; and
(b) as to the income; as to the income of each year ending on the thirtieth day of June in each year for such one or more of the Beneficiaries and in such shares as the Trustees shall on or before the thirtieth day of June in each year determine and in default of such determination for the Beneficiaries then living in equal shares absolutely PROVIDED ALWAYS that for the purpose of this Clause the term `Income' shall include all amounts (whether realised in cash at the relevant date or not) as shall constitute income derived in the relevant year for the purposes of Sections 25 and 26(a) or otherwise under the Income Tax Assessment Act 1936 (as amended) and any Act repealing or replacing the same AND PROVIDED FURTHER that notwithstanding anything herein contained upon a Beneficiary becoming entitled as hereinbefore provided to any portion of such income shall not be divested from such Beneficiary nor shall divesting be authorised
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by any provision herein and such portion of such income shall be and remain the property to which such Beneficiary is absolutely presently entitled."
Clause 3 provides as follows:
"3. For the purpose of this Deed the `Vesting Day' means the day upon which shall expire the period of fifty years after the date hereof or the period of twenty-one years after the death of the last survivor of the descendants now living of his late Majesty King George VI whichever shall be the shorter or such earlier date as the Trustees may at any time not earlier than one year after the execution hereof in writing or by oral declaration subsequently recorded in writing appoint to be the Vesting Day."
Clause 7 provides as follows:
"7. At any time prior to the Vesting Day the Trustees may from time to time in their absolute discretion notwithstanding anything to the contrary herein contained expressed or implied by Deed or by oral resolution vary the Trusts or any provisions whatsoever hereof in any manner whatsoever PROVIDED HOWEVER that no share of or benefit from or interest in or under the Trust Fund by virtue of such variation be acquired by or passed to the Settlor or the Trustees or either of them at any time and any share or benefit or interest which apart from the provisions of this Clause would have vested in the Settlor or the Trustees or the said beneficiaries shall vest absolutely in the said beneficiaries. The power created by this Clause shall not be construed as Trusts or powers in the nature of Trust or subject to Trust or fiduciary obligations but may be exercised by the said Trustees in their absolute discretion sees (sic) fit subject however and such power shall be exercisable only within the periods and in such manners permissable (sic) from time to time under the law in relation to perpetuities and accumulation of income."
Largely through the exertions of the male taxpayer, the family trust carried on a business in New South Wales, commenced by the male taxpayer in 1973, which generated profits.
Towards the end of the financial year 1980 when the male taxpayer foresaw that the taxpayer's family trust would be in receipt of a substantial income, he approached his accountant for advice as to how to minimise his family's liability to pay income tax. The male taxpayer explained to the Tribunal that he wished to keep money in the family trust for working capital. The accountant showed him a written opinion said to be obtained from Queen's Counsel in Victoria. The accountant said that one way to minimise tax was to distribute the family trust's income to another trust controlled by the accountant. He said the scheme involved a distribution of income from the family trust to the accountant's trust, together with a loan agreement with another party whereby the money distributed would come back to the family trust. The loan would be repayable on demand, but that would not happen in the foreseeable future. The loan would be executed in Canberra, A.C.T. and would carry no interest. According to the male taxpayer the accountant produced a diagram to show him how the scheme would work. He said it was something like the diagram which became exhibit 31, which is a chart headed "Our Trust Strips, 1980" produced by the accountant to the respondent. A similar chart was produced by a man working in the accountant's office in respect of "Trust Strips 1981". This did not become an exhibit, but eventually, without objection, there were tendered in evidence two charts, produced by the respondent, which became exhibit 32, being 1980 year flow chart and 1981 year flow chart. The respondent's charts are much more detailed and appear to be proved by the evidence before us. In order to preserve the anonymity of the taxpayers it will be sufficient if we reproduce hereunder the accountant's chart, exhibit 31, with variations to conceal names:
The male taxpayer on behalf of himself, his wife and his child (aged nine years) agreed to the scheme. According to the evidence, the trust company passed a resolution on 13 June 1980 (exhibit L) purportedly in pursuance of cl. 7 of the family trust deed to vary cl. 2 thereof by deleting the existing clause and inserting a new cl. 2 stating that the beneficiaries are the taxpayer, his wife, his child and the accountant's trust (unnumbered). On the same day a deed of variation of trust (exhibit M) was executed by the trust company to carry out the said resolution. According to the evidence on 18 June 1980 the trust company resolved purportedly in pursuance of cl. 7 of the family trust deed to add cl. 1(c) thereto providing that in the event of any nominated beneficiary disclaiming any income then the trust company was to hold the income equally for certain named charities and for a company as trustee for a certain trust said to be a charity (exhibit N). A deed to give effect to that resolution was executed according to its date some five days earlier (exhibit O). The mechanism of the scheme involved an agreement dated 25 June 1980 (exhibits 1 and 2) whereby the trust company agreed to borrow $90,000 from Alter Ego Pty. Ltd., a resolution of the trust company of the same date (exhibit 3) whereby the trust company agreed to borrow $90,000 from Alter Ego Pty. Ltd. as trustee for the accountant's trust No. 86 and to accept a bill of exchange tendered by Alter Ego Pty. Ltd. in settlement of the loan principal.
According to the evidence, on 25 June 1980 the trust company resolved (exhibit P) that the family trust distribute $90,000 of its income for the year ending 30 June 1980 to the accountant's trust (unnumbered). On the same date, according to the evidence, a bill of exchange (exhibit Q) drawn on the family trust company from John Doe Pty. Ltd. as trustee for the accountant's trust No. 80 in the sum of $90,000 was accepted by the male taxpayer, presumably as the family trust company's agent, but not so stated, and John Doe Pty. Ltd. acknowledged it had received value therefor. The bill of exchange is endorsed on the back through a series of holders back to the family trust company. Needless to say, no money passed hands. According to the evidence on 29 June 1987 the directors of the family trust company resolved (exhibit R) that any profits remaining after distribution of $90,000 to John Doe Pty. Ltd. be distributed as to part to the child taxpayer and the balance equally between the adult taxpayers. On 1 July 1980 a resolution of the family trust company (exhibit S) is noted concerning recoupment from capital in an exigency but this does not appear to have occurred. On 1 July 1980 letters were signed by the taxpayer and his wife addressed to the family trust company purporting to exclude themselves as beneficiaries under the family trust deed with effect from the date of the letter (exhibits U1 and U2).
It is important to observe that the accountant admitted that he had many numbered
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accountant's trusts, some of them bearing numbers up to 117. It was submitted on behalf of the respondent that the resolution of 13 June 1980 (exhibit L) and the deed of variation of the same date (exhibit M) were ineffective for uncertainty because the number of the particular trust to be benefited was not inserted in each case. On the other hand it was submitted that the bill of exchange (exhibit Q) made it plain that it was intended to benefit the accountant's trust No. 80.For the following year of income a similar series of manoeuvres was adopted. A resolution of the family trust company dated 1 July 1980 (exhibit S) was passed purporting to vary cl. 2 of the family trust deed, removing the taxpayer and his wife as beneficiaries and leaving the taxpayers' child and the accountant's trust (unnumbered) as the sole beneficiaries. A deed of variation of the same date was executed to the same effect (exhibit T).
On 14 April 1981, according to exhibit V, a resolution of the family trust company resolved to distribute income in the amount of $150,000 to the accountant's trust (unnumbered) and a bill of exchange dated 17 April 1981 in the sum of $150,000 was executed, this time accepted by the family trust company (exhibit W). The new recipient of $150,000 was the accountant's trust No. 81. The bill was endorsed through various hands back to the family trust company. No money passed hands. It may be observed that references upon the bill to parties and indorsees as trustees, in so far as they are intended to limit their liability to funds held in such a capacity, appear irregular, but no point has been made with respect to this. See sec. 8, Bills of Exchange Act 1909 (Cth).
The trust deeds with respect to various accountant's trusts were tendered in evidence. No. 80 became exhibit AB; No. 81 exhibit AF; No. 82 exhibit AD; No. 83 exhibit AH; No. 84 exhibit 24; No. 85 exhibit 11; No. 86 exhibit 28; No. 88 exhibit 16; while No. 91 appeared in two guises as exhibits 18 and 19. The date of execution appearing on the face of each deed is given as 12 June 1980 with the exceptions that Nos. 82 and 83 are stated to be 10 June 1980 while No. 91 appears to be variously executed on 10 or 12 June 1980 with different settlors. The accountant in evidence said that he preferred the version given in exhibit 19, which was the copy produced by his office to the respondent. Both documents bear the seal of a nominee trustee company. In exhibit 19 the signature of the settlor is not witnessed. Each of the accountant's trust deeds has the same vesting date clause as the family trust deed.
Perpetuities
As Mr Hill Q.C. for the respondent submitted, the apparent similarity in vesting date, masks a problem. Because the vesting date of the family trust deed depends in part upon the date of death of the last survivor of the descendants of his late Majesty King George VI living at 4 June 1979, similarity of terminology together with a different date of execution leads to the view that any appointment in favour of the accountant's trusts and in particular his trust No. 80, if that be the correct one, is for an excess period, which offends the rule against perpetuities. We take the same view with respect to the appointment (exhibit S) and the deed of variation (exhibit T) in relation to the year of income ending 30 June 1981. Of course that rule has since been amended in New South Wales pursuant to the Perpetuities Act 1984 but it does not appear to operate to validate prior invalid appointments, Mr Hill cited Viscount Radcliffe's speech in
Re Pilkington's Will Trusts (1964) A.C. 612 at pp. 641-642 on this question. With this submission we agree and hence consider that each of the appointments in favour of the accountant's trust (unnumbered) failed for remoteness. That being so, the income of the trust remained effectively vested in the three taxpayers and hence their objections to the assessments for the year ending 30 June 1980 fail as regards the sum of $90,000. The provisions of the minute (exhibit R) make some minuscule difference on this basis which we understand can be ignored.
This consideration leads to a different result as regards the year of income ending 30 June 1981 in so far as the minute, exhibit S and the deed, exhibit T, provide for new beneficiaries being the taxpayer child and the accountant's trust. If the power of variation was validly exercised, it would seem to follow that for the second year the variation appointing an unnumbered accountant's trust as a beneficiary breached the rule against perpetuities, but the exclusion of the parents would cause the whole income to be assessed as that of the taxpayer child. However, it remains to consider whether or not the power of variation pursuant to cl. 7 of the family trust deed is valid or was validly exercised.
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Uncertainty with respect to accountant's trusts
Learned senior counsel also submitted that because of the number of numbered accountant's trusts and the uncertainty as to which of them was intended to benefit pursuant to the minute, exhibit L and the deed of variation, exhibit M, in respect to the year of income ending 30 June 1980 and the minute, exhibit S and the deed of variation, exhibit T, in respect to the year of income ending 30 June 1981, the minute and deed for each year were uncertain and failed on that ground. However, we do not accept that submission. It appears to us to be a case of a latent ambiguity which can be clarified by the use of extrinsic evidence. Odgers, The Construction of Deeds and Statutes, 2nd ed., pp. 53-55. In each case we consider the ambiguity is resolved by reference to the bills of exchange, the first one, exhibit Q in the sum of $90,000 referring to the accountant's trust No. 80, and the second one, exhibit W, in the sum of $150,000 referring to the accountant's trust No. 81.
Uncertainty with respect to variation of trusts
A further consideration is whether or not the power of appointment given under cl. 7 of the family trust deed (exhibit J) was valid, or was validly exercised. Counsel for the respondent did not seek a ruling that the power was invalid upon the ground of uncertainty. However, we adopt Lord Wilberforce's view expressed in
McPhail v. Doulton (1971) A.C. 424 at p. 457 that the objects of a trust power should form a class which is not so large or arbitrary that it cannot be said for certain that a particular person was within the settlor's contemplation as an object of his bounty. This is discussed in Jacobs' Law of Trusts 5th ed., para. 252 to 259 and in Hardingham and Baxt, Discretionary Trusts 2nd ed., para. 306 and 307. In spite of the learned authors' criticism in the last-mentioned work and the construction placed by Templeman J. as he then was in
Re Manisty's Settlement (1974) Ch. 17 at p. 24 on the views of Brightman J., as he then was, in Re Baden's Deed Trusts No. 2 (1972) Ch. 607 at p. 620, and whether the power be considered as a trust power, a hybrid power or simply a power of appointment, we consider there should be some certainty as to the class of appointees going beyond exclusion of the settlor and the trustee. (See
Horan v. James (1982) 2 N.S.W.L.R. 376 at p. 384; Vol. 36, Halsbury, 4th ed., para. 815.) With respect, we prefer Lord Wilberforce's view to that expressed by Megarry V.-C. in
Re Hay's Settlement Trusts (1982) 1 W.L.R. 202 at p. 211. Clearly there is no general power of appointment, because the settlor and the trustee are excluded. The trust is primarily for the benefit of a class being the taxpayer family; it is doubtful that the words "any other beneficiaries" in cl. 2 can be read "ejusdem generis" with those people. In so far as cl. 7 purports to extend to any person it appears to create the greatest uncertainty and to achieve by the use of trusts and powers, what is impossible to achieve by means of a testamentary disposition. Tatham v. Huxtable (1950) 81 C.L.R. 639 per Fullagar J. at pp. 648 and 649. Reference is also made to the dissenting judgment of Dixon C.J. and McTiernan J. in
A.-G. (N.S.W.) v. Donnelly (1957-1958) 98 C.L.R. 538 at p. 557
sub. nom. Leahy v. A.-G. (N.S.W.) (1959) A.C. 457 at p. 484. The fact that cl. 7 of exhibit J contains the recital in the last paragraph disclaiming anything fiduciary in the power, cannot of course control the exercise by courts exercising equitable powers of some supervisory jurisdiction whether over a trustee, or a donee of a hybrid power. (See Re Hay's Settlement Trusts (supra).) In our view cl. 7 is ineffective but cl. 2 of the family trust remains effective and the income upon this view remained presently payable to the three taxpayers as assessed.
Fraud on power and breach of fiduciary duty
Looked at from another viewpoint there would appear to be a fraud on a power for the family trust company to exercise the power not for any discernible purpose of the settlement but for the purpose of minimising the tax of beneficiaries under the settlement by diverting income to an accountant's trust. These considerations apply to both the 1980 and 1981 income tax years. Learned senior counsel also submitted that the trust deed did not envisage corporations or discretionary trusts as beneficiaries. We agree.
To exercise the power to vary the trusts given by cl. 7, so as to appoint, not different beneficiaries, but a different trust, is not only to appoint a new trustee of part of the income, but to provide for the money to be held expressly upon the trusts of a different settlor which trust is not subject to the same exclusions from benefit as the family trust. We do not consider the decisions in
Totledge Pty. Ltd. v. F.C. of T. 80 ATC 4432
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and, on appeal, 82 ATC 4168 at p. 4173 give any sanction to such a variation. It would be entirely possible for the trustee of the accountant's trust to direct the income so received from the family trust by means of a variation of trust to the very persons excluded from benefit under the family trust namely the settlor and the trustee, the trust company. In our opinion the variations purporting to make the accountant's trusts Nos. 80 and 81 beneficiaries under the family trust are invalid, and the three taxpayers remained presently entitled to the income as assessed.Constructive trusts
A further submission was made that the appointments of funds under the family trust to the accountant's trusts was in breach of fiduciary obligation and should be disregarded so that the accountant's trusts should be regarded as constructive trustees for the family trust company. It is of course a very strange situation in which a trusted confidential adviser arranges his client's affairs so as to divert the income of a family trust to trusts controlled by himself or his nominees. Whether his motives be to assist his clients or otherwise, such actions on the part of a practising solicitor would, in the absence of independent legal advice to the client, rightly merit the strongest condemnation by the courts. Providing a sheaf of barristers' opinions in general terms given to the accountant, to the client is no substitute for proper advice. In our opinion once an accountant, who is not qualified to practise as a solicitor, takes it upon himself to advise upon and settle documents dealing in property, in which his clients have an interest, he incurs the fiduciary obligations which apply to those persons who are authorised to deal with property under the Legal Practitioners Act 1898 (N.S.W.). See
Haywood v. Roadknight (1927) V.L.R. 512,
Daly v. Sydney Stock Exchange Ltd. (1987) Australian Securities Law Cases ¶76-106; (1985-1986) 160 C.L.R. 371 at p. 377. However it appears to us that the transactions are voidable but not necessarily void upon the ground of breach of this duty. The only proper place to determine that issue is in proceedings before a court exercising equitable jurisdiction.
Sham
It was further submitted that the transactions between the taxpayers, the trustee of the family trust and the accountant's trusts were shams. We were reminded that for a transaction to be a sham, as Diplock L.J. (as he then was) said in
Snook v. London and West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802:
"it means acts done or documents executed by the parties to the `sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."
See also
Scott v. F.C. of T. (No. 2) (1966) 40 A.L.J.R. 265 at p. 279.
In these matters the accountant maintains and so does the male taxpayer that they both really intended that the family trust incurred the debts of $90,000 and $150,000 payable on demand, to one or other of the accountant's trusts, but they were not to be repaid in the immediately foreseeable future. The male taxpayer is a graduate in economics and his entry into these schemes was done not only to minimise tax but to leave large sums of money in the hands of the family trust as working capital. As his counsel properly admitted, at least the primary reason for the distributions being made to the accountant's trusts was to avoid taxes which would otherwise be assessable in respect to the amounts of income distributed. The highly artificial arrangements in our view should have left any reasonable man suspicious as to their propriety or legal effect. This observation applies to all parties to those arrangements. The artificiality of the arrangements leaves us in doubt as to whether or not any party to the transactions intended them to have any legal effect other than the effect of tax minimisation. Following those transactions the trustee reappointed the taxpayers as beneficiaries under the family trust. The fee charged by the accountant of $5,000 is perhaps indicative that his reward lay in the field of professional services and not trust income acquisition. Applying the decision in
McCormack v. F.C. of T. 79 ATC 4111; (1978-1979) 143 C.L.R. 284, we are of the opinion that the taxpayers have failed upon the onus of proof to upset the assessments, in so far as it is necessary for them to prove the transactions were genuine in order in the absence of independent legal advice to the client to do so.
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Disclaimer
The disclaimers of income of 1 July 1980, exhibits U1 and U2, in our opinion were not effective to exclude the male taxpayer and his wife from their income entitlement in respect to the year ended 30 June 1980. The said taxpayers had been entitled to income ever since the inception of the family trust. They remained so entitled even after the resolution of 13 June 1980 (exhibit L) and the deed of variation of the same date (exhibit M). Disclaimers to be effective should occur within a reasonable time. We do not consider that to be the case here. The situation is different from that in
F.C. of T. v. Cornell (1946) 73 C.L.R. 394 where the wife never assented to the trust in her favour which was disclaimed. The same view is taken of the disclaimers of 2 August 1984 and June 1986 (exhibits X and Y) in regard to the income for the year ending 30 June 1980.
Section 260
Section 260 of the Act was in operation with respect to the tax years under review. Mr Conti Q.C. on behalf of the taxpayers, pressed us cogently with the view that these cases fall to be governed by the "choice" principle enunciated in
Cridland v. F.C. of T. 77 ATC 4538 at p. 4542; (1977) 140 C.L.R. 330 at p. 340 per Mason J, as he then was. Mr Conti submitted that this was the result of the application of sec. 100A of the Act, and in particular sec. 100A(3A).
Having regard to the admission made and the documentary and oral evidence before the Tribunal, the "round-robin" bills of exchange for which no money passed hands, the introduction into what was essentially a family trust of new beneficiaries being trusts (set up in a numbered series) involving the accountant, his son and his business associate, the alleged meetings of company directors and trustees on journeys from a country town to Canberra which resemble puppet shows more than ordinary commercial transactions, and the complex scheme shown in the diagram previously set out, we have come to the conclusion that for each of the financial years ending 30 June 1980 and 30 June 1981 the purported distributions of income in the family trust, the variations of trust, the resolutions therefor, the bills of exchange and other mechanisms of the schemes, are void as against the Commissioner of Taxation pursuant to sec. 260 of the Act. We believe the observations of a Full Court of the Federal Court in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 at p. 4730 are apt to describe each of these transactions:
"Given its complexity, its artificiality, its circular operation and its sole purpose of avoiding liability to tax, the arrangement in this case goes well beyond mere entry into a transaction such as a university student buying units in a trust."
We conclude that sec. 260(1)(c) is applicable to each such arrangement. Therefore we decide that the objections of each of the taxpayers to the assessments for 1980 and amended assessments for 1981 be dismissed.
On the question of penalties it was submitted that the penalties imposed by the Commissioner should be reduced. We see no reason for this and decide that the penalties should stand.
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