ZETA FORCE PTY LTD v FC of T

Judges:
Sundberg J

Court:
Federal Court

Judgment date: 29 June 1998

Sundberg J

Introduction

The net income of a trust estate for the purposes of s 95 of the Income Tax Assessment Act 1936 will not necessarily be the same as the amount available for distribution to beneficiaries. For example, gains within the scope of Part IIIA brought into assessable income for tax purposes may be treated as capital accretions for trust purposes. In these cases the trust estate's net income for tax purposes will exceed its net income for trust purposes. On the other hand expenditure written off in the trust accounts in accordance with trust law principles may not be deductible for tax purposes. In these cases the net income for trust purposes may exceed the net income for tax purposes. Except in the discussion under the headings The Accounts and Returns and The Tribunal's Corrections, I will describe a trust estate's net income for tax purposes as its ``taxable income'' and its net income for trust

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purposes as its ``distributable income''. Under the two headings mentioned I will use the language employed in the accounts and returns and by the Tribunal respectively. In cases such as the present where the taxable income exceeds the distributable income, there are two possible approaches for determining the amounts on which the beneficiaries and/or the trustee should be assessed. An example will assist in the description of the competing approaches. A trust estate's distributable income is $60,000. An amount of $30,000, being a gain on the sale of property acquired after 19 September 1985, has been treated as an accretion to corpus and is not included in the distributable income. The $30,000 is however assessable for income tax purposes, so that the taxable income is $90,000. The trustee resolves to distribute 30 per cent of the distributable income to X and 70 per cent to Y.

One method is to assess X on 30 per cent of $90,000 ($27,000) and Y on 70 per cent of $90,000 ($63,000). This is appropriately described as the proportionate method. It treats the words ``that share'' in the phrase ``that share of the net income of the trust estate'' in s 97(1) as meaning a ``fraction'' or ``proportion'' and not an ``amount''. Because X is entitled to 30 per cent of the distributable income, he will be taxed in respect of 30 per cent of the taxable income. This method distributes the tax between X and Y proportionally, and there will be no amount upon which the trustee will be liable to pay tax under s 99 or s 99A. The proportionate method may appear to operate unjustly, in that X and Y are taxed on amounts greater than they have received from or can demand of the trustee.

The alternative method is to assess X on 30 per cent of $60,000 ($18,000) and Y on 70 per cent of $60,000 ($42,000). The $30,000 balance is assessed to the trustee under s 99 or s 99A. This method taxes the beneficiaries on what they receive from or can demand of the trustee. It treats ``that share'' as meaning the share of the net income to which the beneficiary is presently entitled.

The applicant is a beneficiary of a trust estate. In respect of the year ended 30 June 1991 the Commissioner employed the proportionate method in computing the applicant's assessable income for the purposes of s 97(1). The principal question in the present case is whether that method is the method contemplated by s 97(1). Whether it is the correct method has been the subject of much discussion over the years. But I have not found a case in which the merits of the proportionate method and what I have called the alternative method have been the subject of argument in a case where the outcome depended on a choice between them. In some cases the result can be explained only on the basis that the proportionate method has been applied, but the correctness of the method does not appear to have been argued and the matter is not mentioned in the judgments. In other cases where the proportionate method has been expressly preferred to the alternative method, no one contended that the alternative method should have been employed. In yet other cases one or the other of the methods has been preferred in obiter dicta. In one case it has been said, obiter, that one method or the other applies according to the facts. In the present case the outcome will be different according to which method is employed, and the merits of the two views have been fully argued.

The accounts and returns

Until 17 November 1990 Lockwood Valley Pty Ltd as trustee of the Fenwick Family Trust (``the family trust'') held 30 per cent of the units in the Independent Poultry Trust (No 2) (``the unit trust''). On that date its units were redeemed as part of a settlement among the unitholders. The initial profit and loss account of the unit trust for the period to 17 November 1990 showed a net profit of $965,545 and an interim distribution to the family trust of $289,663. A subsequent adjustment for a bad debt recovery increased the unit trust's net profit, and the interim distribution to the family trust was correspondingly increased to $291,484. The accounts of the unit trust for the year ended 30 June 1991 showed a net profit of $908,221, of which $291,484 had been distributed to the family trust. However the income tax return of the unit trust showed a net income of $1,335,554 and the family trust's share of the net income as $421,994. The difference between the unit trust's net income ($1,335,554) and its accounting income ($908,221) was principally attributable to an amount of $435,035 prepaid by the trustee in the 1990 year and deductible in that year for net income purposes but not until the 1991 year for trust accounting purposes. The distribution made by the unit trust to the family trust in

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respect of the 1990 year included an untaxed amount referable to the prepayment. Only the adjustment of $435,035 was attributed by the trustee of the unit trust to the period up to 17 November 1990. The family trust's share of that amount was $130,510.

The return of income of the family trust for the year ended 30 June 1991 disclosed income of $289,633 from the unit trust and net income of $191,037. The trustee of the family trust apportioned the distributable income as to $5,000 to a member of the Fenwick family and the balance to the applicant. The applicant's return of income disclosed income from the family trust of $186,037 and net income of $185,892. The Commissioner determined the net income of the family trust for the year ended 30 June 1991 to be $421,915, made up of $291,484 (the amount distributed by the unit trust) and $130,431 (the prepayment share). In consequence he increased the applicant's taxable income by $130,431.

The Tribunal's corrections

The Commissioner had increased the applicant's taxable income by $130,431, which was said to be the difference between the share of accounting profit and the amount returned by the family trust ($291,484) and its share of net income as shown in the unit trust's return of income ($421,915). The Tribunal pointed out that neither figure was correct. In fact the family trust's return showed income of $289,663 (rather than the amended figure of $291,484). The share of net income shown in the unit trust's return was in fact $421,994. The difference between the income returned by the family trust ($289,663) and its share of the net income disclosed in the unit trust's return ($421,994) was $132,331.

The Tribunal computed the family trust's share of the unit trust's net income as follows: 

$291,484
-------- x $1,335,554 = $428,632
$908,221

The net income of the family trust was thus increased by $138,969 ($428,632 less the amount returned of $289,663) to $330,006 ($191,037 as returned plus $138,969). The applicant's share of that amount was calculated as follows: 

$223,053
-------- x $330,006 = $428,632
$228,053

The $228,053 figure was the distributable income of the family trust for the year, and the $223,053 resulted from deducting from the distributable income the $5,000 distributed to the Fenwick beneficiary.

As a result of using some incorrect figures and relying on the allocation of net income in the unit trust's return of income, the Commissioner had included $316,468 in the applicant's amended assessment as the share of net income of the family trust. It was common ground before me that the Tribunal's figure ($322,771) is the correct one.

It will be apparent from the Tribunal's computation of the family trust's share of the net income of the unit trust that it allocated to the family trust that proportion of the net income as $291,484 is of $908,221. As I have said, the main question in the appeal is whether this ``proportionate'' calculation is the method contemplated by s 97.

Division 6

Section 95(1) defines ``net income'' in relation to a trust estate as

``... the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions...''

Except as provided in the Act, a trustee is not liable to pay income tax upon the income of the trust estate: s 96. Section 97(1) provides, so far as material, that

``Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate-

  • (a) the assessable income of the beneficiary shall include-
    • (i)... that share of the net income of the trust estate...''

Section 98(1) provides in part that

``Where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax in respect of-

  • (a)... that share of the net income of the trust estate...
  • ...

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as if it were the income of an individual and were not subject to any deduction.''

In the situations to which it applies s 99 subjects the trustee to tax on the net income of the trust estate, or part of that income, as if it were the income of an individual. It is sufficient to set out sub-s (3):

``Where there is a part of the net income of a resident trust estate-

  • (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
  • (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and
  • (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia,

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.''

Section 99 does not apply where s 99A applies. In the situations to which it applies s 99A subjects the trustee to tax on the net income of the trust estate at the rate declared by Parliament. It is sufficient to set out sub-s (4A):

``Where there is a part of the net income of a resident trust estate:

  • (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;
  • (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and
  • (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia,

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.''

``That share of the net income of the trust estate''

In the ensuing discussion I put earlier authorities aside. I return to them later to determine whether they require me to depart from the conclusion I reach under this heading.

The words ``income of the trust estate'' in the opening part of s 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument. That the words have this meaning is confirmed by the use elsewhere in Div 6 of the contrasting expression ``net income of the trust estate''. The beneficiary's ``share'' is his share of the distributable income.

Having identified the share of the distributable income to which the beneficiary is presently entitled, s 97(1) requires one to ascertain ``that share of the net income of the trust estate''. That share is included in the beneficiary's assessable income. The expression ``net income of the trust estate'' in par (a)(i) has the meaning given it by s 95(1) - taxable income as opposed to distributable income. The words ``that share'' in par (a)(i) refer back to the word ``share'' in the expression ``a share of the income of the trust estate'', and indicate that the same share is to be applied to an income amount calculated according to a different formula (taxable income as opposed to distributable income). Since the income amount may differ according to which formula is applied, the natural meaning to give to ``share'' where it appears for the second time is ``proportion'' rather than ``part'' or ``portion''. When Parliament wanted to convey the latter meaning, as it did in ss 99 and 99A, it used the word ``part''.

The contrast between the expressions ``share of the income of the trust estate'' and ``that share of the net income of the trust estate'' shows that the draftsman has sought to relate the concept of present entitlement to distributable income, and not to taxable income, which is, after all, an artificial tax amount. Once the share of the distributable income to which the beneficiary is presently entitled is worked out, the notion of present entitlement has served its purpose, and the beneficiary is to be taxed on that share (or proportion) of the taxable income of the trust estate.

That construction of s 97(1)(a) seems reasonably clear to me, although it may, as I have indicated, result in unfairness to beneficiaries. Had the legislature intended a beneficiary to be assessed on no more than the amount of the distributable income to which he

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is presently entitled, it could easily have said so. Section 97(1)(a)(i) would have read along the lines: ``Where a beneficiary... is presently entitled to an amount of the income of the trust estate, the assessable income of the beneficiary shall include so much of that amount as does not exceed the net income of the trust estate''.

Pearson's case

In support of the alternative view, substantial reliance was placed by the applicant on
Executor Trustee and Agency Company of South Australia Ltd v FC of T (1932) 2 ATD 35; (1932) 48 CLR 26 (``Pearson's Case''), decided on s 31 of the Income Tax Assessment Act 1922. Section 31(1) was in part as follows:

``A trustee... shall not be liable to pay tax as trustee, except as provided by this Act, but each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate shall be assessed in his individual capacity in respect of-

  • (a) his individual interest in the income of the trust estate, which if the trustee were liable to pay the tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after allowing all the deductions under this Act...''

Sub-section (2) provided in part that

``A trustee shall be separately assessed and liable to pay tax in respect of that part of the income of the trust estate which if the trustee were liable to pay tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after allowing all the deductions under this Act..., and

  • (a) which is proportionate to the interest in the trust estate of any beneficiary who is under a legal disability; or
  • (b) to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof.''

[The opening lines of sub-s (1) are to the same effect as s 96 of the 1936 Act. The bulk of par (a) of sub-s (1) is to the same effect as the definition of ``net income'' in s 95 of the 1936 Act. The concluding lines of sub-s (1) and the opening words of par (a) deal with a beneficiary who is presently entitled to a share of the income of the trust estate and is not under a disability. Cf s 97(1)(a) of the 1936 Act.]

Mrs Pearson died leaving a will by which she left her estate upon trust to pay the income of one sixth part to each of her six daughters for life, and after the death of any daughter to hold the share of that daughter upon trust for the daughter's children. The six daughters survived their mother and all had children who were living at the death of the testatrix and on 1 July 1927. Three of the daughters had died before 1 July 1927. In 1928 the Supreme Court of South Australia authorised the executor to lease an asset of the estate at a weekly rental and at a premium of £3300, and directed that the premium be treated as rent paid in advance and apportioned over the term of the lease. The lease was granted, and the premium was paid to the trustee in March, April and May 1928. In reliance on s 31(2)(b) the Commissioner included the amount of the premium in the trustee's assessable income for the year ended 30 June 1928. The High Court held that the trustee was assessable as to half only of the premium, namely that part in which the three daughters who were alive were interested, and that the trustee was not liable in respect of the half to which the children of the deceased daughters were presently entitled. The surviving life tenants were not in 1928 presently entitled to shares in the premium. The extent to which each would become entitled would depend upon the duration of her life. On the other hand, the remaindermen in whom three shares had become indefeasibly vested in possession were in 1928 presently entitled to share in the premium.

Counsel for the applicant in the present case submitted that the effect of the Supreme Court order was that each of the three surviving daughters was presently entitled to one sixth of the portion of the premium allocated to the first year of the lease. For tax purposes, however, the whole of the premium was income of that year under s 16 of the 1922 Act. Thus it was a case in which the distributable income was less than the taxable income (the income of the trust estate after all deductions, or the net income of the trust estate). It was contended that the High Court had necessarily rejected the proportionate method, for during the year in question the whole of the distributable income was income to which there was a beneficiary who was presently entitled, and on the proportionate view the whole of the taxable income would have been included in the assessable income of

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the beneficiaries in accordance with their respective percentages. None of it would have been taxable in the trustee's hands. Pearson's Case was said to establish that under the 1922 Act the legislative regime for the taxation of trust income was that where taxable income exceeded distributable income, the excess was assessable income of the trustee and not of the beneficiaries who were presently entitled to the income of the trust. It was then said that the redrafting of the trust provisions in 1936 manifested no intention to effect a major alteration to the taxation of trust income where taxable income exceeds distributable income. The Report of the Royal Commission on Taxation which led to the 1936 Act, and the Explanatory Memorandum and the Second Reading Speech relating to that Act, do not suggest that there was any intention on the part of the legislature to depart from the result reached in Pearson's Case.

The structure of the relevant part of s 31(1) of the 1922 Act is different from that of s 97(1)(a) of the 1936 Act. I set out below the comparable verbiage:

``s 31(1) each beneficiary... who is presently entitled to a share of the income of the trust estate shall be assessed in his individual capacity in respect of- (a) his individual interest in the income of the trust estate...''

``s 97(1) Where a beneficiary... is presently entitled to a share of the income of the trust estate- (a) the assessable income of the beneficiary shall include- (i)... that share of the net income of the trust estate...''

While both provisions first speak of ``a share of the income of the trust estate'', they part company thereafter. Section 31(1) directs that the beneficiary is to be assessed in respect of ``his individual interest in the income of the trust estate''. That is not the language of proportion. The position is unchanged if the definitional material in par (a) replaces ``income of the trust estate'', so that the opening part of par (a) reads - ``his individual interest in the income of the trust estate remaining after allowing all the deductions...''. On the other hand s 97(1) does use the language of proportion. Instead of ``his individual interest in the net income of the trust estate'' or ``his individual interest in the income of the trust estate remaining after allowing all deductions'', the draftsman has used the phrase ``that share of the net income of the trust estate''.

In my view the proportionate method is not suggested by the verbiage of s 31(1), and the decision in Pearson's Case cannot be taken as a rejection of that method. Conformably with this there is nothing in the argument of counsel (at CLR 31-33) which raised the proportionate method. I have found Pearson's Case of no assistance in resolving the issue raised by s 97.

The section 97 authorities

In
Tindal v FC of T (1946) 8 ATD 152; (1946) 72 CLR 608 Latham CJ, who dissented in the result, made observations which support the alternative view. At ATD 157; CLR 620 his Honour said:

``... The condition of the operation of s 97 is that the beneficiary should be presently entitled to a share of the income of the trust estate and not be under any legal disability. If this condition is satisfied, the result is that there is to be included in the assessable income `that share of the net income of the trust estate', a phrase which must mean the share of the `net income' to which the beneficiary is presently entitled, although the opening words of the section are `a share of the income', not of `the net income'.''

What is noteworthy about this passage is that the Chief Justice appears to have acknowledged that his view of the operation of s 97(1) did not sit well with the words of the sub-section, namely the contrast between ``a share of the income of the trust estate'' and ``that share of the net income of the trust estate''. To assimilate the two expressions is to disregard what can only be regarded as an intentional contrast.

In
FC of T v Belford (1952) 10 ATD 105; (1952) 88 CLR 589 one of the questions for decision was whether the liability of a beneficiary was to be determined under Div 6 by reference to his right to share in the income of the trust estate during a year or by reference to his actual receipts during the year. All justices were of the view that the beneficiary was assessable by reference to his right to share. At ATD 111; CLR 605-606 Taylor J, with whom Fullagar J agreed, said:

``... In view of the definition which is contained in s 95, it is, pursuant to s 97, incumbent upon a beneficiary who is presently entitled to a share of the income of

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a trust estate to include in his assessable income a proportion of the total assessable income of the trust estate for the relevant year calculated in accordance with s 95. The ascertainment of the total assessable income of the trust estate for any year is, of course, not concerned with payments by way of distribution to beneficiaries and the total assessable income of the trust estate will, in any particular case, be precisely the same whether the whole or some part only, or none of the estate income has, during the relevant year, been distributed to beneficiaries presently entitled to shares thereof. Yet in such cases, s 97 requires that the appropriate share of the total assessable income of the trust estate shall be included in the assessable income of each beneficiary, and this is so whether any beneficiary has actually received the whole or some part only, or none of such income. To my mind this is a clear indication that the Act intends, in such cases, that there shall be included in a beneficiary's assessable income, not the amount of his actual receipts of the estate income, but a proportion of the total assessable income of the trust estate which, for obvious reasons, may be quite a different amount and, generally at least, a greater amount.''

Although the words ``a proportion of the total assessable income'' might suggest support for the proportionate view of s 97, the emphasis of the passage is that s 97 is not concerned to assess a beneficiary on his actual receipts but to include in his assessable income an appropriate share of net income.

Section 98, which deals with the case of a beneficiary who is presently entitled but is under a disability, employs the same contrast as does s 97 between ``a share of the income of the trust estate'' and ``that share of the net income of the trust estate''. In Belford at ATD 111; CLR 606 Taylor J said that s 98 requires the tax payable by the trustee ``to be calculated not by reference to the amount to which the beneficiary is entitled but by reference to a share of the `net income of the trust estate'''. This observation, which is equally applicable to s 97, more clearly supports the proportionate method. It is to be contrasted with Latham CJ's remark in Tindal about ``that share of the net income'' in s 97.

In
Union Fidelity Trustee Co of Australia Ltd & Anor v FC of T 69 ATC 4084 at 4090; (1969) 119 CLR 177 at 188 Kitto J, speaking of the ``harmonious policy'' reflected in ss 97, 98 and 99, described the situation with which s 97 deals as ``where a beneficiary has a present title in possession to a share of the income of a trust estate - not, be it noticed, to a share of the net income of a trust estate - and is not under any legal disability''. The contrast between this and Latham CJ's assimilation of the two concepts in Tindal is again to be noted.

The issue now before the Court was considered by Hill J in
Davis v FC of T 89 ATC 4377; (1989) 86 ALR 195. Mr and Mrs Davis were the directors of a trustee company and the objects of a power of appointment over income. Except in one of the years in question the power was exercised to appoint the whole of the income to Mrs Davis. In the 1979 year part only of the income was appointed to her. The income accruing to the trustee under a lease and sub- lease arrangement had been assigned to a charity. The assignment was attacked on two presently relevant bases. The first was that it offended s 102B and was therefore ineffective for tax purposes. The second was that it breached s 260. The consequence of either attack being successful would be that the taxable income of the trust estate would exceed the distributable income. In the years other than 1979 the Commissioner assessed Mrs Davis on the whole of the taxable income on the basis that the assignment was ineffective. In the 1979 year he assessed her on part of the taxable income on the same basis.

At ATC 4934; ALR 219 Hill J noted that the assessments issued to Mrs Davis were supported on two independent bases: s 102B and s 260. His Honour recorded the Commissioner's argument as to the consequence of s 102B rendering the assignment ineffective, namely that s 97 would include in Mrs Davis' assessable income the share of the taxable income represented by the ineffective assignment: at ATC 4395; ALR 219-220. At ATC 4399; ALR 225 his Honour upheld the Commissioner's s 102B argument and said that it followed that the Commissioner's assessments were correct. His Honour then examined the case law on s 260, and at ATC 4402; ALR 229 described the consequence of s 260 operating. This was that the assignment would be disregarded, so that

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the taxable income would include the totality of the rents, and Div 6 would then operate so that, to the extent to which Mrs Davis was presently entitled to the distributable income, there would be included in her assessable income the whole of the taxable income (except in the 1979 year). At ATC 4403; ALR 229 his Honour said:

``In every case where the income for trust law purposes differs from the net income as calculated under sec 95 a difficult question arises as to the application of sec 97 of the Act. In a case, such as would be here the case if sec 260 applied, the `net income' calculated under sec 95 of the Act including the income otherwise purported to be assigned might be seen to be greatly in excess of the income for trust law purposes calculated without regard to the provisions of sec 260.''

His Honour then observed that there had never been a court decision in which it was necessary to decide between the proportionate view and the alternative view of s 97. He continued (at ATC 4403-4404; ALR 230-231):

``It is quite clear that neither interpretation of sec 97 produces a desirable result as a matter of tax policy... On the proportionate view a taxpayer may be assessed on amounts he neither did nor could receive; on the alternative view a taxpayer could be taxed on less than he received if the share of trust law income exceeded that part of the net income as is represented by trust law income, and the maximum rate of the tax under sec 99A would be applicable to the balance. However, the proportionate view does seem to me, as a matter of language, to be the better construction of the section and in the absence of any authority compelling me to adopt the alternative method, I propose to accept it. It was not argued by either side that the proportionate method was incorrect.''

His Honour then noted that the effect of s 260 applying would be that in all years except 1979 the whole of the taxable income would be included in Mrs Davis' assessable income, and in the 1979 year there would be included a proportion of taxable income ``being the same proportion to which she was entitled to trust law 

                        $11,708
income, that is to say, -------
                        $21,441''.

His Honour then considered the ``choice doctrine'' cases on s 260, and at ATC 4407; ALR 235 said that but for one final argument on s 260 he would be of the view that, if s 102B were inapplicable, s 260 would apply to render Mrs Davis' assessable to tax as if the assignment of income had not taken effect. He then disposed of the final argument, and at ATC 4409; ALR 238 dismissed Mrs Davis' application.

I have set out his Honour's methodology in some detail because the applicant contended that his Honour's observations on s 97 were obiter. I do not think they were. It is true that his discussion of s 97 occurred in the course of his examination of s 260 (at ATC 4403, 4404 and 4407; ALR 229, 231 and 235). But although he does not spell out the s 97 consequences of s 102B applying, or expressly accept the Commissioner's argument (recorded at ATC 4395; ALR 219-220) as to those consequences, it seems to me that they were exactly the same as those that attended the application of s 260. I would therefore treat his Honour as having accepted the argument recorded at ATC 4395; ALR 219-220. And I would treat the statement on ATC 4407; ALR 235 that ``if s 102B were inapplicable, s 260 applied... to render Mrs Davis assessable to tax as if the assignment of income had not taken effect'', as meaning that if he were wrong in holding that s 102B had that effect, then s 260 had that effect. The fact that Hill J had two bases for his decision does not make his observations on either of them obiter:
Jacobs v London County Council [1950] AC 361 at 369. Nor does the fact that neither side argued against the proportionate method have that effect. However the absence of the testing and refining process of argument on a point of law affects the weight to be accorded a judge's rejection of the unrepresented view. ``By good disputing shall the law be well known'':
Cordell v Second Clanfield Properties Ltd [ 1969] 2 Ch 9 at 16-17.

Counsel for the applicant pointed out that Hill J did not refer to Pearson's Case. But for the reasons I have given, that case is of no assistance in the resolution of the issue that arises under the 1936 Act, and on no view could Hill J's failure to refer to it mean that his decision was given per incuriam.

In
Richard Walter Pty Ltd v FC of T 95 ATC 4440 at 4455; (1995) 31 ATR 95 at 113

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Tamberlin J applied the proportionate method. The merits of this method and the alternative method do not appear to have been canvassed in argument, though at ATC 4456; ATR 114-115 there is recorded a submission that a provision of the trust deed rendered the proportionate method inapplicable. The Full Court affirmed the decision on different grounds: 96 ATC 4550.

In
Peabody v FC of T 92 ATC 4585; (1992) 24 ATR 58 the result of applying Pt IVA was that the trust received a capital gain which while not distributable income was taxable income. There was thus more taxable income than distributable income, and Mrs Peabody was held assessable under s 97 on the difference between the two. On the alternative approach the trustee would have been assessable. The conclusion thus necessarily involved the application of the proportionate approach, although the matter does not appear to have been the subject of argument. The Full Court and later the High Court held that Pt IVA did not apply, so that the s 97 issue did not arise.

A similar result was reached in
Grollo Nominees Pty Ltd & Ors v FC of T 97 ATC 4584; (1997) 73 FCR 452. Part IVA determinations were made to increase the taxable income of the Grofam trust estate, and assessments were issued to the beneficiaries (which were themselves trust estates) on the basis that by s 97 amounts were included in their taxable incomes. These assessments were upheld by the Full Court, a conclusion that could be reached only upon the proportionate view of s 97, since on the alternative view the assessments, being in respect of notional s 177C(1)(a) tax benefits not in fact received by the beneficiaries, would necessarily have issued under s 99 or s 99A to the trustee of the trust estates. But as in Peabody it seems to have been assumed rather than decided that the proportionate view was the appropriate one.

In
Richardson v FC of T 97 ATC 5098; (1997) 150 ALR 167 Merkel J held that where distributable income exceeds taxable income, a proportionate approach is to be adopted to determine the distribution of assessable income to beneficiaries presently entitled under s 97, but where taxable income exceeds distributable income a quantum approach is to be adopted. His Honour said that the purpose of the section is ``to provide for the tax assessed on trust income to be borne by the beneficiaries entitled to that income in shares which are commensurate with their entitlement'': at ATC 5111; ALR 181. When the taxable income is less than the distributable income the purpose is satisfied by the proportionate approach. But that approach does not satisfy the statutory purpose when the distributable income is less than the taxable income. That approach will result in a beneficiary having a liability in respect of taxable income to which the beneficiary was not and will not be presently entitled.

Merkel J acknowledged that the problem with his solution is that it gives a different operation to the phrase ``share of the net income of the trust estate'' depending on whether the distributable income is less or more than the taxable income. He referred to s 15AAA of the Acts Interpretation Act 1901 and to the principles of construction considered in cases such as
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1981) 147 CLR 297 which, in his opinion, justified his differential approach. At ATC 5113; ALR 183-184 his Honour said:

``Notwithstanding the anomaly created by the legislative requirement, its purpose is clear. The relevant statutory provisions are not clear and unambiguous. In these circumstances the court will prefer a construction that gives effect to the statutory purpose rather than one which defeats it. However, to give effect to the statutory purpose, different approaches to the operation of s 97(1) and in particular to the meaning of a `share' for the purposes of s 97(1) need to be adopted depending on whether the trust income is less or greater than the trust's assessable income. I am satisfied that the authorities to which I have referred warrant that approach, particularly when it is necessary to avoid capricious, arbitrary and clearly unintended consequences....

The approach I have adopted to the operation of s 97(1) ensures that those entitled to the trust income, including the trustee in respect of `income' to which no beneficiary is presently entitled, bear their commensurate `share' of the tax liability in respect of the trust's income.''

His Honour then acknowledged that his conclusion differed from that adopted by Hill J, but noted that in Davis no submission had been made against the proportionate view. Nor had

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the differential approach been put to or considered by Hill J. Merkel J did not refer to Richard Walter.

Merkel J's remarks were obiter, since he held the Administrative Appeals Tribunal had erred in law in failing to give real and genuine consideration to the effect of s 97, in that it had arrived at its conclusion that the distributable income and the taxable income were the same without any evidence to support it: at ATC 5108 and 5110; ALR 177 and 180. His Honour remitted the matter to the Tribunal for it to determine the distributable income. The observations his Honour made about the proportionate and quantum approaches to s 97 were made since, in his view, it would almost certainly be necessary for the Tribunal to consider the application of s 97, and it might be assisted in that task if his Honour set out his views on the operation of the section.


FC of T v Prestige Motors Pty Ltd 98 ATC 4241 was concerned with s 100A which applies where, amongst other things, apart from the section ``a beneficiary of a trust estate... is presently entitled to a share of the net income of the trust estate''. At 4257 Hill and Sackville JJ, with whom Beaumont J agreed, said that it was not necessary to consider the difficulties which arise when taxable income and distributable income do not coincide, since there was no such discrepancy in that case. They added that those difficulties had recently been considered in Richardson where Merkel J had declined to follow part of the reasoning in Davis, notwithstanding that Davis had been followed in Richard Walter. Their Honours said that the usual position is that when a beneficiary of a trust estate is presently entitled to a percentage of the distributable income, there is to be included in his assessable income the same percentage of the taxable income, pursuant to s 97.

Effect of authorities

Thus the decision of Hill J in Davis, which was followed by Tamberlin J in Richard Walter, and dicta in Belford and Prestige Motors, adopt the proportionate method, the dictum of Latham CJ in Tindal favours the alternative method, and the dictum in Richardson prefers the differential approach. The weight of authority thus supports the opinion I have expressed under the heading ``that share of the net income of the trust estate'', that the proportionate method is that contemplated by s 97. The Commissioner and the Tribunal thus applied the correct approach in the present case.

The alternative argument

Clause 40 of the unit trust deed requires the trustee to collect the income from the investments of the trust fund, and pay out of the gross income all costs and disbursements and other proper outgoings. Clause 41(a) requires the trustee in each accounting period to pay, apply or set aside the net income of the trust for the benefit of unitholders in proportion to the number of units held at the end of the accounting period. The expression ``net income'' is not defined, but is clearly what is left after costs and disbursements and other outgoings have been paid out of the gross income. Sub-clause (b) empowers the trustee to accumulate income, and sub-clause (c) empowers it to make interim distributions. Sub- clause (e) provides:

``If at the end of any Accounting Period the amounts in respect of which determinations have been made pursuant to sub-Clause 41(a) exceed the net income of the Trust Fund for the Accounting Period the amount of the excess shall in the first place be deducted from the amounts which the Trustees have determined to accumulate and in the second place should any deficiency remain the Trustee shall be deemed to have applied the capital of the Trust Fund the value of which shall thereupon [be] adjusted accordingly.''

Sub-clause (f) is as follows:

``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 sub-clause 41 in trust for the Unit Holders in proportion to the number of Units of which they are respectively registered as holders on the last day of such Accounting Period.''

It was contended for the applicant that in the 1990 year the trustee spent $435,035 on the purchase of stock to be delivered in the 1991 year. That was a disbursement under clause 40. In making the distribution for that year the trustee did not record the disbursement as an expense. It treated it as an asset. It thus distributed an amount which was $435,035 in excess of what was available for distribution. Clause 41(e) deems the deficiency to have been paid out of corpus. In the 1991 year the accounts record the $435,035 as an expense. Since it had in fact been paid out in the previous year, the accounts reflected a distributable income that was in fact less for that year than it should have been. Under clause 41(f) the unit- holders at the end of the accounting period were entitled to the difference. The trustee of the family trust was not a unit holder at 30 June 1991.

The Commissioner took issue with this characterisation of what had occurred, in my view correctly. The basis of the applicant's argument was that the $435,035 was properly an expense of the 1990 year and not the 1991 year. A trustee which carries on a business must use generally accepted accounting principles,

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including accrual accounting. It would have been inappropriate for the trustee to have treated the 1990 payment for goods to be delivered in 1991 as an expense of 1990. It was proper to treat it as an expense of the period to which it related. That is what the trustee did. In its profit and loss account for the 1990 year the payment was treated as an asset. It was treated as an expense in the following year. The alternative argument thus fails.

Penalty

The Commissioner imposed on the applicant a penalty under s 223 representing 30 per cent of the additional tax levied by the amended assessment. The Tribunal remitted the penalty to 25 per cent. On the appeal the applicant's sole contention in relation to penalty was that a beneficiary is not liable to additional tax under s 223 where the trustee omits to return income of the trust estate. It was said that additional tax is to be imposed on the trustee under s 223(4) and not on the beneficiary under sub-s (1). If this were not so, additional tax would be imposed more than once by reason of what was in substance the same omission. Reliance was placed on a passage in the judgment of the Full Court in Grollo 97 ATC at 4643-4644; (1997) 73 FCR at 524-526 in which a submission to the same effect as that put here was described as ``attractive''. However the Court did not decide the point.

Section 223 has been repealed, but it applied in the relevant year. Sub-section (1) provided in part

``Where-

  • (a) a taxpayer-
    • (i) makes a statement to a taxation officer... that is false or misleading in a material particular; or
    • (ii) omits from a statement made to a taxation officer... any matter or thing without which the statement is misleading in a material particular; and
  • (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be,

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''

Sub-section (2) contained a somewhat similar provision in relation to partners. Sub-section (3) provided:

``Where, but for this subsection, a person is liable to pay both-

  • (a) an amount of additional tax under subsection (1) in respect of a statement relating to a matter; and
  • (b) an amount of additional tax under subsection (2) in respect of a statement (whether or not the same statement) relating to the same matter,

the person is liable to pay only whichever of those amounts the Commissioner determines.''

Sub-section (4) provided in part that

``Where-

  • (a) a trustee of a trust estate-
    • (i) makes a statement to a taxation officer... that is false or misleading in a material particular; or
    • (ii) omits from a statement made to a taxation officer... any matter or thing without which the statement is misleading in a material particular,

    being a statement relating to, or to the affairs of, the trust estate; and

  • (b) the tax properly payable by a person who is or has been a beneficiary of the trust estate exceeds the tax that would have been payable by the last-mentioned person if it were assessed on the basis that the statement were not false or misleading, as the case may be,

the trustee is personally liable to pay, by way of penalty, additional tax equal to double the amount of the excess.''

Sub-section (5) provided that sub-s (4) was not to be taken to imply that a reference in any other provision of Pt VII to a taxpayer did not include a taxpayer in the capacity of a trustee. Sub-section (7) provided:

``Where a person omits from a return... being a return of income derived by the person, a partnership or a trust estate during a period, any assessable income derived by the person, the partnership or the trust estate, as the case may be, during the period, the

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person shall, for the purposes of this section, be taken to have made a statement in the return to the effect that the person, the partnership or the trust estate, as the case requires, did not derive the assessable income during the period.''

If a tax return is wrong, it is ``false'' for the purposes of s 223:
FC of T v Turner 84 ATC 4161 at 4163-4164;
Reliance Finance Corporation Pty Ltd v FC of T 87 ATC 4146 at 4149.

Section 223 adverts to trust estates and beneficiaries of trust estates: sub-ss (4) and (7). The reference to a beneficiary in sub-s (4)(b) is to a beneficiary who by reason of the trustee's false statement has paid a smaller amount of tax than would have been payable but for the falsity. Sub-section (3) deals with the case of a potential double penalty being imposed on a person arising out of the one matter. In those circumstances it is inappropriate to read into the Act another qualification upon sub-s (1) so as to protect a beneficiary who makes a false return from a penalty under sub-s (1) on the ground that the trustee may be liable to a penalty under sub-s (4). Parliament has dealt with the case where the one person might be liable to penalties under different sub-sections arising out of the one matter. It would, in my view, be a legislative exercise for me to imply an analogous protection for one person (a beneficiary) against liability under one sub- section on the ground that another person (the trustee) might be liable to a penalty in respect of the same matter under another sub-section. Rather than imply that a beneficiary who makes a false return cannot be liable to a penalty because the trustee may be liable, it is appropriate to recognise that where a beneficiary's false return is wholly consequential on the falsity of the trustee's return, that will be reflected in the penalty imposed. See the power to remit penalty in s 227(3). In the present case, having considered the relevant circumstances, the Tribunal remitted the penalty from 200 per cent to 25 per cent. The applicant's submission was that no penalty was payable. It did not submit that, if a penalty could be imposed under sub-s (1), the Tribunal had erred in determining the quantum thereof. Were the Commissioner to impose a substantial penalty on both beneficiary and trustee when the error of the beneficiary is consequent on the error of the trustee, review on the merits, or perhaps on unreasonableness grounds, may be available. That is not what happened here. A penalty was imposed on the beneficiary alone.

Conclusion

The application must be dismissed with costs.

THE COURT ORDERS THAT:

1. The application be dismissed.

2. The applicant pay the respondent's taxed costs of the application.

 

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