CASE 45/96

Tribunal:
Administrative Appeals Tribunal

Decision date: Melbourne, 1 August 1996

GL McDonald (Deputy President)

The Application and Background

1. The applicant, the trustee of the U Family No 2 Trust, is seeking review of a decision of the Commissioner of Taxation for each of the tax years, ending 30 June, from 1985 to 1991 (inclusive) that there had been no bona fide distribution of net incomes of the trust to non- resident beneficiaries by the trustee. Initially the Commissioner claimed that there was no bona fide distribution for the tax years 1982 to 1985 (inclusive), but subsequently it was agreed between the parties that the Tribunal need not address the applications with respect to those years.

2. At the hearing Mr J. de Wijn, of counsel, represented the applicant. Mr and Mrs P.U., the directors of the company which is the trustee of the U Family No. 2 Trust, gave oral evidence in support of the application. Mr T. Murphy, of counsel, represented the respondent. Mr S., Mr P.U.'s accountant as well as the accountant for the applicant, gave oral evidence for the respondent. In addition to the documents filed for the purposes of s. 37 (the ``T'' documents) of the Administrative Appeals Tribunal Act 1975 (``the AAT Act''), a large volume of documentary evidence was tendered and formed part of the evidence before the Tribunal.

The Issues

3. The Commissioner claims that the purported distribution of the net income of the trust to non-resident beneficiaries in each year under review was a sham. The Commissioner claims that there were no enforceable loan agreements between the non-resident beneficiaries and the trustee, and that there was no evidence to suggest that interest, as claimed, was paid on the loans said to have been made by the non-resident beneficiaries of the money allocated to them by the No 2 Trust, to a No 1 Trust. The Commissioner claims that, given that the transactions were a sham, the trustee of the No 2 Trust is correctly identified as the taxpayer and liable to pay tax at the rate pursuant to s. 99A of the Income Tax Assessment Act 1936 (``the Act''). The Commissioner also claims that, given that the statements accompanying the tax returns were false and misleading, the taxpayer is liable to pay the penalties as assessed. The Commissioner in these proceedings is expressly not seeking to raise or rely on the anti- avoidance provisions (s. 100A and Part IVA of the Act). The applicant claims that the distributions were genuine and in accordance with the provisions of the U Family No 2 Trust deed, the beneficiaries were presently entitled and that withholding tax had been paid as required by the provisions of the Act.

Onus

4. Mr de Wijn submitted that, while the taxpayer may have the overall burden of proof in accordance with s. 14ZZK(b) of the Taxation Administration Act 1953, the evidentiary burden in a case where sham is asserted by the respondent rests with the respondent (see Mr Justice Tamberlin's comments in
Richard Walter Pty Ltd v FC of T 95 ATC 4440 at 4451). Mr Murphy submitted that because the Tribunal stands in the shoes of the decision- maker in carrying out its functions (see s. 43(6) of the AAT Act), to proceed on the basis that the Commissioner bears an onus of proof is not apt. He submitted that a distinction should be drawn, in determining whether an onus of proof arises, between cases in which a taxpayer appeals directly to the Federal Court (as in Walter's case), where there is an onus, and when a taxpayer applies to the Administrative Appeals Tribunal (as in the instant case), where no onus arises. Suffice it to say that the matter should be approached on the basis that, while the applicant has the overall burden of proof, if the Commissioner raises and seeks to rely in the primary decision on an allegation of fraud or sham, or if he invites the Administrative Appeals Tribunal (``the AAT'') to do so, then it must be on the basis of evidence which, bearing

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in mind the serious nature of the allegation, clearly supports the conclusion sought to be drawn.

The Evidence

5. Mr P.U. is the only child of Mr Jo.U. and Mrs Ju.U., both of whom are now deceased. They came to Australia with Mr P.U. (then aged 4-5 years) from Vienna in 1950. During the Second World War Mr Jo.U. and Mrs Ju.U., who then lived in Vienna, experienced adversity. Mr P.U. told the Tribunal that Mr Jo.U., because he had avoided conscription into the German army, and Mrs Ju.U., because she was Jewish, were initially hidden by Mr Jo.U.'s sister (referred to in these Reasons as ``Hilda'') in Vienna. Hilda was the only sibling of Mr Jo.U. Mrs Ju.U. was one of eight children and had other relatives living in Vienna. Ultimately, Mr Jo.U. was interned in a concentration camp. Hilda also assisted Mrs Ju.U.'s family during the Second World War by arranging hiding places for them in Vienna and assisting them with food and information. Mr P.U. told the Tribunal that Hilda had assisted his parents to resettle in Vienna after the conclusion of the war.

6. After arriving in Australia, Mr Jo.U. was employed as a tailor and Mrs Ju.U. worked initially as a seamstress before establishing her own drapery business in 1958. Their financial circumstances were, and remained during their working lives, constrained. At various times they lived in part of a house owned by the Roman Catholic Church, the other part of the house being occupied by Father B., with whom Mr P.U.'s mother subsequently maintained contact (see exhs D and E). From 1958 they lived in what Mr P.U. described as cramped premises above the drapery shop that Mrs Ju.U. leased. Despite their constrained financial circumstances, Mr P.U. told the Tribunal that his mother was a generous person. By way of example he said that she gave clothes away to those in need. Father B. acknowledged receiving assistance from Mrs Ju.U, in the sum of $250, in a letter in 1968 (exh Y). From time to time she remitted money (the amounts of which were unknown to Mr P.U.) to relatives remaining in Vienna, including Hilda. It was not until 1966 when Mr P.U. acquired professional qualifications and the ability to borrow money that, with Mr P.U.'s assistance, Mr Jo.U. and Mrs Ju.U. acquired a modest home.

7. Mr P.U. married Mrs P.U. in 1972. Mr and Mrs P.U.'s professional and business interests prospered and their assets increased from $1.8 million in 1981 to in excess of $4.5 million by 1990 (exh G). Mr P.U. was able to buy his parents a house near that of his and his wife's and assist both his parents and parents-in-law with other purchases (for example, buying cars for them).

8. It was Mr and Mrs P.U.'s evidence that they maintained close contact with Mr P.U.'s parents during their lives and with Mrs P.U.'s parents (the latter being alive and living in the same suburb as Mr and Mrs P.U.). It was Mr P.U.'s evidence that after arriving in Australia his parents, his mother in particular, continued to stay in contact with relatives in Austria, including Hilda. Mr and Mrs P.U. and their then three children, with Mr P.U.'s parents, spent four months in Europe in 1980, during which time Hilda spent three months with them. Mr P.U. told the Tribunal that he was aware that his mother had given money to Hilda and to Mrs Ju.U.'s niece (referred to in these Reasons as ``Poldi'') over the years since their arrival in Australia, although he did not know the amounts given. Mr P.U. described the father of Poldi (and of Poldi's only sibling, Hella) as Mrs Ju.U.'s favourite brother. Poldi and Hella's father, who has since died, had also assisted Mr Jo.U. and Mrs Ju.U. to resettle in Vienna after the war. It was Mr P.U.'s evidence that his mother had maintained contact with both Poldi and Hella and had sent each of them gifts of money in the period prior to the establishment of the No 2 Trust. It was also Mr P.U.'s evidence that Hilda had, prior to her retirement, worked in a government position in Austria and that at the time the No 2 Trust was established she was single (never having married), an aged pensioner and of limited means. Mr P.U. said that Poldi had separated from her husband and bore the responsibility of bringing up her child (Yvonne) and, in order to do this, had maintained a bookshop/cafe in Vienna but that her financial circumstances were not strong. He said that Hella was married and did not suffer (financial) hardship.

9. Mrs P.U. told the Tribunal that her parents kept in contact with Mr E.F., one of her uncles on her father's side. She said that her family regarded Mr E.F. as the patriarch of the family in Israel and that she had not had direct contact with her uncle prior to 1981. She said that

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contact would be difficult because he spoke the Polish and Hebrew languages (in relation to which the Tribunal took it that Mrs P.U. is not fluent) and did not speak much English, but that contact was maintained through her parents.

10. In the early 1980s, Mr P.U. said that he discussed with his parents how he could make financial provision for the support of their relatives in Austria and, in particular, he said he had in mind Hilda, Poldi and Hella. Mr and Mrs P.U. also discussed the proposition and decided that, since Mrs P.U. had herself contributed to the financial security of their family, one third of any sum set aside for the purposes of benefiting relatives should be set aside for Mrs P.U.'s relations living in Israel. In order to implement what was agreed, Mr P.U. discussed the proposal with his accountant, Mr S. Mr and Mrs P.U. had already established a No 1 Trust to provide for their immediate family (which ultimately consisted of Mr and Mrs P.U. and their four children). It was decided to establish a No 2 Trust as the vehicle into which money would be channelled and invested for the benefit of distribution to the overseas relatives. Mr P.U. explained that the reason for the establishment of a second trust was that the No 1 Trust did not have the permission, as was then required under the Banking (Foreign Exchange) Regulations, from the Reserve Bank to distribute money overseas. He also felt it would be desirable for the sake of clarity to distinguish between the financial situation of his immediate family and the money set aside for distribution to overseas relatives. It was the evidence of Mr S., as confirmed in a letter from the Reserve Bank (exh LL), that approval was given for the No 2 Trust to distribute moneys overseas. Further, evidence about the purpose surrounding the establishment of the No 2 Trust was given by Mr S., who said that after he had received a notice pursuant to s. 264 of the Act (``the s. 264 notice'') in relation to the No 2 Trust distributions (T41) he had faxed it to Mr P.U. and had received a hand-written response (exh 3). The s. 264 notice came under cover of letter dated 26 February 1991, but the hand- written note seems to bear the date ``November 1990''. Despite the apparent disparity of dates, the Tribunal accepts that the hand-written note was prepared by Mr P.U. in response to Mr S. forwarding the s. 264 notice to him. The following passage appears in the hand-written note:

``The moneys put aside for beneficiaries is (sic) mainly kept in Australia with beneficiaries verbal approval because

1) hope that they will one day settle in Aust

2) retained with structure to increase overall asset base

3) for capital growth

4) to remit funds in income generating form would mean growth could not be sustained.

Funds only requested by beneficiaries when urgently needed - Nov. 1990.''

11. The No 2 Trust was established on 15 May 1981 as a discretionary trust. Exhibit A is a copy of the trust deed and clause 1.2 and the Schedule define ``beneficiary'' by reference to broad categories of relationship with Mr and Mrs P.U., their parents and their children and incorporate as additional beneficiaries members of the extended family, including uncles, aunts and cousins. The category was broad enough to incorporate Hilda, Poldi and Poldi's daughter (Yvonne) on Mr P.U.'s family's side and Mr E.F., Mrs P.U.'s uncle, as possible beneficiaries. The trustee of the No 2 Trust is a proprietary limited company, of which Mr and Mrs P.U. are the directors. By clause 4, the trustee is empowered as follows:

``4.(1) THE trustees may at any time before the expiration of any Accounting Period determine with respect to all or any part or parts of the net income of the trust Fund for such Accounting Period-

(a) To pay apply or set aside the same for such charitable purposes as the trustees may think fit; or

(b) to pay apply or set aside the same to or for the benefit of any one or more of the beneficiaries;

(c) to accumulate the same.

(2) PROVIDED however that any income which is not made subject to any such determination shall be accumulated and the following provisions shall apply to any determination made pursuant to subclause (1) of this clause:

(a)...

(b)...

(c) a determination to pay apply or set aside any sum to or for the benefit of any

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beneficiary may be effectually made and satisfied by placing such amount to the credit of such beneficiary in the books of the trust or by applying the same or paying the same over to or for the benefit of such beneficiary in such manner as the trustees shall think fit;

(d) in making any determination the trustees may pay apply or set aside any amount to or in favour of one or more of the beneficiaries in such proportions and in such manner as they shall think fit;

(e) the trustees shall have an absolute discretion as to the making of any determination and shall not be required to assign any reason therefor;''

By clause 8.3, the trustees are empowered to ``... lend moneys to and to borrow and raise moneys from and to secure by mortgage or otherwise howsoever the payment of money to any persons, firms, companies, corporations or governmental or municipal bodies and upon such terms with or without security or interest as the trustees shall deem fit...''.

12. Once the No 2 Trust was formed Mr and Mrs P.U. told their respective parents, so that the potential beneficiaries could be informed. At the time of its establishment no formal notification was sent to potential beneficiaries by the trustees. It was Mr P.U.'s evidence that his parents had visited Vienna and Israel in 1981 to discuss, inter alia, the establishment of the trust for the benefit of the relatives (exh H is a copy of the itinerary for that trip) and that he and his wife had also visited Israel during the same year.

13. It was Mr P.U.'s evidence that his family had hoped that Hilda may, after her retirement, come to Australia to live. Father B., who also corresponded with Hilda, mentioned as a possibility that Hilda may visit Australia in a letter he wrote to her dated December 1981 (exh Y). There is no suggestion from Father B.'s letter that Hilda was contemplating living permanently in Australia. However, Mr J.S., who lived in Vienna and was a friend of Hilda's, attested in a letter (exh Z) apparently prepared with these proceedings in mind that Hilda had discussed with him the possibility of her coming to live in Australia. While it was Mr P.U.'s evidence that it was his parents who had kept in contact with the Austrian relatives, there was evidence that Mr P.U. wrote to his aunt (Hilda) during the time he was at school and while undertaking his professional studies (exh J). It was Mr P.U.'s evidence that he and his family visited Hilda when they went to Europe and that Hilda had appointed Mr P.U. as the executor of her estate (exh X). All of these things confirm that, although the main contact was maintained with Hilda during her life through Mr P.U.'s parents, Hilda and Mr P.U. remained close. He said that he had discussed the possibility of Hilda coming to live in Australia with his parents and told the Tribunal that his family had offered to look after Hilda should she come to live here. It was Mrs P.U.'s evidence that her family hoped that Mr E.F. and his family would also come to Australia. It was thought that this was more likely during the 1970s and the 1980s, when life in Israel was described as being difficult. In particular, Mrs P.U. said that Mr E.F. was concerned about his two sons having to undergo conscription into the armed forces at a time when Israel was at war and experiencing internal security problems.

14. It was the evidence of Mr and Mrs P.U., confirmed by their accountant Mr S., that a decision was made by Mr and Mrs P.U. in their capacity as directors of the No 2 Trust during the last three months of each financial year about the amounts of trust money to be allocated, and the beneficiaries to whom the amounts would be given, and that Mr S. was notified of the decision. The meetings were held in the informal setting of Mr and Mrs P.U.'s house (which, in any event, is the registered office of the trustee company). Mr S. would implement the decision and minutes would be documented at the time that the annual financial returns for the No 2 Trust were prepared during August/September (see, for example, exhs DD and FF, being minutes of meetings). The minutes list the beneficiaries by name, record the proportion of income to be distributed to each beneficiary and note the implementation of the decision by the crediting of the sum to each beneficiary's loan account in the books of the trust. The minutes are in unexceptional form and, perhaps with the reservation that the informal meetings held at Mr and Mrs P.U.'s house may not in reality have included confirmation of the minutes of the previous meeting, there is nothing exceptional in the way in which either the decision of the trustee was reached or the way in which it was recorded. It was Mr S.'s evidence that income which came

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by way of interest to the No 1 Trust was paid into the No 2 Trust and that this was done because the source was readily distinguishable from other income sources. Mr S. also said that interest was paid by the No 1 Trust for money lent by the No 2 Trust to the No 1 Trust and that the No 1 Trust claimed the interest as being tax deductible.

15. Mr P.U. said, and this was confirmed by Mrs P.U.'s evidence, that when distribution was made he would tell his parents and his wife would tell her parents and that the respective parents would pass the information on to the beneficiaries and obtain their consent for the sums to be reinvested in Australia. The information concerning the benefits was conveyed by telephone to the relatives abroad. There is no evidence that the arrangements were ever confirmed in correspondence at or about the time they were put into place. Mr P.U. said that in 1987 his accountant told him that the Australian Taxation Office wanted acknowledgements signed by the beneficiaries. He said that his mother visited Vienna and Israel in 1987 and acknowledgements as to distributions were obtained from Hilda for the years 1982 to 1986 (exh L - with her original signature covering the years 1985 and 1986 and a photocopy of an acknowledgement covering the years 1982-1984 (inclusive)), Mr E.F. for the years 1985 and 1986 (exh M) and Poldi for the years 1985 and 1986 (exh N).

16. By letter dated 26 February 1991 (T41), the respondent issued a s. 264 notice to the trustee requesting, inter alia, documentary evidence as to-

(a) advices sent to non-resident beneficiaries informing them of their entitlements;
(b) authorisations from non-resident beneficiaries in relation to distributions or interest not remitted to them but retained in the trust as loans or otherwise;
(c) copies of bank statements showing debit entries in cases where remittances had been made to non-resident beneficiaries;
(d) documentation evidencing the transfer of funds overseas by bank draft, etcetera;
(e) loan agreements in respect of funds borrowed by the trust from persons or entities who are non-residents;
(f) loan account ledgers for each non- resident beneficiary in the accounting records of the trust;
(g) any written assignment or waiver by non-resident beneficiaries in relation to their rights to receive payments of distributions or interest;
(h) correspondence between the trustee of the trust and the non-resident beneficiaries.

The request was answered by letter from Mr S. dated 15 April 1991 (T42) and a further acknowledgement, covering the years 1985 to 1990, which expressly acknowledged the amount then standing to her credit of $147,000 and which amount is confirmed in the No 2 Trust trial balance for that year (exh P), was obtained from Poldi (exh O).

17. Mr P.U. said Poldi was a very determined woman and would not draw upon the money set aside for her in the No 2 Trust on the basis that she wanted to prove she could make good by her own efforts. Mr P.U. said that he could recall on one occasion in the 1970s his mother sending Poldi a cheque which she did not cash. Mr P.U. said that prior to his mother's death she had expressed a strong wish that some money be sent to Poldi. In order to arrange this, Mr P.U. contacted the First Austrian Bank seeking information as to the opening of an account in Austria which Poldi could access (exh Q). Exhibit Q contains a letter from the First Austrian Bank and it refers to the account being for Mr P.U.'s ``niece''. The Tribunal accepts Mr P.U.'s evidence that this was an error and that the account was with respect to his cousin Poldi. An account was opened at the First Austrian Bank at the branch nearest Poldi's residence (exhs R and R1). It was Mr P.U.'s evidence that his mother had contacted Poldi by telephone to inform her of the existence of the account and that she could access it. Mr P.U. said that he had also informed her as to how she might access the money (see exh KK, p. 11). In order to draw on the account, Poldi needed to produce identification to the Bank. This did not occur and it was Mr P.U.'s evidence that after 12 to 18 months he arranged for the return of the money deposited in the First Austrian Bank account to Australia, where he considered he could achieve a better return on investment. Following this Mr P.U. said that it was decided that Poldi's share should be set aside for her daughter, Yvonne. It is anticipated that Yvonne, who is currently undertaking tertiary studies in Austria, may continue those studies in Melbourne (see letter from Poldi to Mr P.U. dated July 1991 (exh U)). Mr P.U. said that the

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money previously standing to the account of Poldi had been transferred to Yvonne, in trust, and a separate tax file number applied for. The income from the trust had been returned as assessable income for Yvonne and a separate tax return lodged, and tax paid, with respect to the income earned by that trust. With respect to the last sentence of the first page of Mr P.U.'s notes to Mr S. (exh 3), viz ``funds only requested by beneficiaries when urgently needed'', Mr P.U. said that the ``urgency'', in as far as sending funds to Poldi was concerned, arose as the result of his mother's anxiety to ensure Poldi received funds and not from any urgency expressed on the part of Poldi. There is no mention in the notes (exh 3) prepared by Mr P.U. and sent to his accountant in response to the issuance of the s. 264 notice of any amount deposited in the First Austrian Bank on behalf of Poldi. Mr P.U. also said that there had been an offer made to assist Poldi's sister, Hella. That offer had resulted in Hella letting his parents know, during 1986, that she did not require any financial assistance and that her share should be added to Poldi's share.

18. Mrs P.U.'s parents are now elderly and suffer ill-health. Neither were able to give oral evidence. Both, however, signed a statement dated 23 November 1995 (exh CC) confirming, inter alia, that since they arrived in Australia in 1937 they have maintained constant communication with Mr E.F. and his family. They attest that since the early 1980s they have been advising Mr E.F. of the existence of the trust for his benefit and of the amounts owing to him from time to time. They say that, until 1990, Mr E.F. always asked for the money to be invested for him in Australia. In 1991, however, he requested it be sent to him. Mr P.U. said that he arranged for the money standing to Mr E.F.'s credit to be given to him. Exhibit BB shows a telegraphic transfer of $150,000 to Mr E.F.'s bank in Israel on 19 November 1991 and a further and final payment of $58,641 to him by cheque on 7 December 1992. Exhibit AA is a letter from Mr E.F. thanking Mr and Mrs P.U., inter alia, for their monetary gift.

19. Hilda died on 7 July 1990 (exh X) and Mr P.U., as well as being the executor, was the beneficiary of her estate. Prior to her death she apparently suffered some delusions, as illustrated in the comments made in her letters to Mr P.U.'s parents at about that time (exh V1 to 3). However, even given her mental state, there appears to be some reference to her signing an acknowledgement to Mr P.U. concerning payments to her. Mr J.S., Hilda's friend who visited her in her nursing home and whilst she was in hospital and who is no relation to the family, attested in a document prepared for the purposes of these proceedings (exh Z) as follows:

``During the period that I have known [Hilda], she mentioned to me several times that she had received money from her nephew [Mr P.U.]. However, she had asked for these amounts to be invested on her behalf in Australia, as she had contemplated living in Australia.''

An asset of the estate would include the amount set aside for her in the No 2 Trust. However, the Tribunal notes that there is no mention in the inventory of Hilda's estate prepared for Austrian probate purposes (exh X) of any amount held on her behalf in the No 2 Trust.

Consideration

20. Section 95 of the Act requires the net income of a trust to be treated as if the trustee was a resident taxpayer. However, where the beneficiary of the trust has a present entitlement to the income and the source of that income is interest, Division 11A of Part III of the Act applies. Section 128B(2) of the Act imposes liability to pay withholding tax on interest income paid to a non-resident. The rate of withholding tax is, by virtue of s. 128B(5) of the Act, to be determined by Parliament and is currently 10 per cent. Section 128D of the Act relevantly provides:

``Income... upon which withholding tax is payable,... shall not be included in the assessable income of a person.''

It follows that a trustee will not need to include income in the trust tax return on which withholding tax has been paid. By virtue of what Mr de Wijn called the ``see through'' provision of s. 128A(3), viz ``... a beneficiary who is presently entitled to... interest... included in the income of a trust estate shall be deemed to have derived income consisting of that... interest... at the time when he became so entitled'', interest earned by the No 1 Trust and paid to the number No 2 in which a genuine present entitlement is created in favour of a non-resident beneficiary is subject only to a 10 per cent withholding tax. The question then becomes whether or not a present entitlement

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was created in favour of Hilda, Poldi and Mr E.F. by virtue of the resolutions passed by the trustee of the No 2 Trust.

21. While previously there may have been room for argument (because of differing views expressed in
Montgomerie v Commissioner of Inland Revenue (NZ) (1965) 14 ATD 102; (1965) NZLR 951 and
Re Vestey's Settlement; Lloyds Bank Ltd v O'Meara [1950] 2 All ER 891) concerning when income from a trust could be said to be ``applied'' to the beneficiary, it is now generally accepted, as a result of the decision of the Court of Appeal in
Commr of Inland Revenue (NZ) v Ward 69 ATC 6050, that a resolution of the trustee which has the effect of determining the sums allotted to the beneficiaries to whom payment will be made, amounts to a vesting of a specific portion of that trust income. That position is reflected in s. 101 of the Act, which is the following terms:

``101 For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.''

That share can arise without the beneficiary knowing of its existence. The beneficiary, upon learning of his or her participation in a distribution however, may disclaim it. No such situation arises in the instant case.

22. The Commissioner does not take issue with the above but rather, asserts that the purported distributions in this case to the non- resident beneficiaries are a sham. In
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 the Full Court of the Federal Court considered what is meant by the term ``sham''. Mr Justice Lockhart said, at 537:

``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.''

Mr Justice Beaumont stated, at 550, that it was ``necessary to ascertain what were the genuine intentions of the parties to the transactions'' in order to see whether a sham existed. Mr Justice Foster agreed with the analyses of Lockhart and Beaumont JJ (at 556). In Walter's case (supra), Tamberlin J determined that in deciding whether or not certain loan transactions were a sham, the intention of the parties as to whether or not the moneys lent should be repaid was of central importance (at 4450). He reviewed the guidelines applied by Lockhart J in the context of the facts in Sharrment's case (supra), summarising them as follows (at 4449-4450):

``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.''

It is clear from these authorities that an allegation of ``sham'' is to be determined having regard to the intentions of the parties

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involved in a transaction and that, in considering those intentions, reference to what was sought to be achieved by the transaction will be of no assistance or, at most, of very limited assistance (for example, in the instant case the fact that there was only a 10 per cent withholding tax would be of very limited value in ascertaining the parties' intentions). For the purposes of the instant case, the Tribunal is to decide whether it was ever intended that the beneficiaries would benefit from distributions made by the No 2 Trust.

23. In his summary, Mr Murphy pointed to the following factors:

• prior to the establishment of the No 2 Trust, Mr P.U.'s mother had made small gifts to Hilda, Poldi and Hella. On the other hand, large amounts were set aside in the No 2 Trust after it was established to achieve the same purpose. There was no reason to increase the sum as a result of circumstances changing for any of the overseas beneficiaries. The disparity between the amounts given to the same relatives prior to 1982, compared with the amounts set aside post that time, raises a suspicion that the sums post the setting up of the No 2 Trust were not intended in fact for distribution;
• the trust deed defines beneficiaries by reference to their relationship to Mr and Mrs P.U. and their immediate family, rather than by name. This is unusual, given the size of the gifts determined in favour of the beneficiaries;
• the money was distributed on the basis of a formula (2/3 to Mr P.U.'s relatives, 1/3 to Mrs P.U.'s relatives) and seems to have been determined without any reference to the particular needs that a beneficiary may have in any particular year;
• there was no formal contact with the relatives (the beneficiaries) for whom the money had been set aside which, given the amounts involved, must be considered unusual;
• whilst in their evidence Mr and Mrs P.U. spoke of Hilda, Mr E.F. and his family and possibly Poldi's daughter, Yvonne, as perhaps coming to Australia, there was no evidence that any inquiries were made by them, for example, of the Immigration Department as to Australian immigration requirements should the expressed desire come to be implemented;
• the payments made to Mr E.F. should be regarded with some scepticism, as the first payment occurred six months after the issue of the section 264 notice and no funds had been remitted to him at any earlier stage. In relation to Hilda, despite her age and status as a pensioner, no money was ever sent to her and, indeed, in the documents concerned with her estate, no reference was made to the trust money set aside for her benefit. In relation to Poldi, whilst it appears $100,000 was sent to the First Austrian Bank before the issue of the section 264 notice, there is no substantiation of any contact with Poldi to let her know that the sum was available to her;
• the interest source of the trust income of No 2 Trust only attracted a 10 per cent withholding tax but (with the exception of the $100,000 sent to Poldi for a 12 to 18 month period and the amounts sent to Mr E.F.) remained available to the No 1 Trust as a source of funds, which situation should be contrasted to that of the funds had they been distributed to the beneficiaries of the No 1 Trust, where a much higher rate of tax would have applied.

24. The Tribunal finds that the circumstances of this case are most unusual. For example:

(i) the lengths to which Mr P.U. went to try and persuade Poldi to accept what amounts to a substantial sum of money which had been set aside for her benefit in the No 2 Trust and importantly that, while this occurred prior to the issuance by the respondent of the s. 264 notice, there was no formal, or indeed informal, written communication from either Mr P.U. or his accountant to Poldi, nor any written acknowledgement from Poldi to Mr P.U. concerning the arrangement. Ordinary human experience would suggest that for one cousin to offer another cousin living in another country and experiencing financial hardship $100,000 would prompt some written acknowledgement, even if the sum was not accepted. There was no suggestion of any such acknowledgement in this case. Further, in his notes to his accountant (exh 3) at the end of 1990 or early 1991, curiously, Mr P.U. did not mention the amount deposited in the First Austrian Bank

ATC 452
on behalf of Poldi. These events strike the Tribunal as being curious, given the size of the sum deposited and the ``urgency'' that Mr P.U.'s mother was expressing in her requests for Poldi to be given assistance;
(ii) the way in which information concerning the distributions to the beneficiaries was conveyed, that is, through Mr P.U.'s parents (when they were alive) to Hilda and Poldi and through Mr and Mrs P.U.'s parents to Mr E.F., is again, given the sums of money involved and given the formality of records otherwise kept, curious in that there appears to be no written acknowledgement except that prepared at the request of the Taxation Department in the mid-1980s, and the rather oblique reference in Mr E.F.'s letter to Mr P.U. after he accepted his distribution;
(iii) the request for a distribution to be effected to Mr E.F. and the fact that it was effected provides, given again the substantial sum involved, evidence of the parties' intentions being put into effect. However, as Mr Murphy points out, the fact that this did not occur until after the issuance of the s. 264 notice by the respondent may tend to diminish the impact and significance of this evidence;
(iv) despite Hilda's financial and health circumstances being insecure, no distribution actually occurred to make her life more enjoyable. Further, there is no mention of any of the sum set aside for her benefit in the No 2 Trust in the inventory prepared for Austrian probate purposes. This indicates to the Tribunal a lack of any real intention to see that the purpose for which the No 2 Trust was established was actually implemented. The Tribunal is not influenced in this conclusion by the fact that Mr P.U. is the beneficiary of Hilda's estate;
(v) the expressed intentions of Mr P.U. with respect to the beneficiaries of the trust in his minute to the accountant of November 1990 (exh 3), lacks credit. By that time, despite circumstances indicating needs, not any of the Austrian beneficiaries had been sent money. Further, it would seem unlikely that any of the beneficiaries were then evincing an intention to come to Australia. Certainly in the case of Hilda there would seem no point in achieving capital growth in her share, given her age and circumstances.

The Tribunal is rather less influenced by the fact that the beneficiaries' allotments were calculated by reference to a mathematical formula. There is nothing in the evidence to suggest that any one of the beneficiaries was better or worse off than the others and in those circumstances, if there was a genuine intention to distribute, the Tribunal finds nothing peculiar in the application of a formula which seeks to benefit each of the beneficiaries equally. The Tribunal is also not influenced in reaching its conclusion by the fact that there was a large disparity between the amount of tax payable if the sum had been distributed under the No 1 Trust and that payable under the No 2 Trust.

25. The Tribunal listened very carefully to the evidence given, in particular to that of Mr and Mrs P.U. in their capacity as directors of the trust company. Because of the matters set out in paragraph 24(i)-(v) herein, the Tribunal is satisfied that there is substantial and justifiable evidence open to it, taking into account the seriousness of the allegation made, to satisfy it that the transactions were never intended by the trustee to benefit the named non-residents by giving them a present entitlement to the income of the second trust. The Tribunal is satisfied that the transactions are a sham within the meaning of that term set out earlier in this Decision. The transactions being a sham, the Tribunal is also of the view that the trustee of the No 2 Trust is the correct taxpayer (see s. 99A of the Act). Given that finding, the Tribunal does not believe it is appropriate for it to interfere with the culpability penalty imposed. The Tribunal, as in the case of Case 24/95,
96 ATC 296, is concerned that the withholding tax already paid on behalf of different taxpayers may not be credited to the tax which the Tribunal has found is payable by the trustees of the No 2 Trust (being different taxpayers from those who paid the withholding tax). However, as pointed out by Senior Member Pascoe, the Tribunal is restricted to dealing with the applicant the subject of this application. That may be a matter which the respondent can consider when assessing the time over which additional tax should be payable.

26. Accordingly, the decisions under review should be affirmed.

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