Balgra Shopping Centre Management Pty Ltd in its Capacity as Trustee of the Balgra Shopping Centre Management Trust v Commissioner of Taxation

REASONS FOR JUDGMENT 1 This action was resolved by agreement between the parties shortly before the hearing, by orders made on 4 August 2010. At the same time, factually related proceedings in matter SAD 46 of 2009 in which Balgra Pty Ltd (Balgra) as trustee of the Con Makris Family Trust (Makris Family Trust) also brought proceedings against the Commissioner of Taxation. The two actions were to be heard together, and evidence in one to be evidence also in the other. They involved appeals from decisions of the Commissioner of Taxation, disallowing objections to three assessments. 2 Although the parties agreed on final orders as to the outcome of the issues, they did not agree on appropriate costs orders. They have made written submissions on that topic.

The Nature of the Proceedings 3 As noted, Balgra is trustee of the Makris Family Trust. Balgra Shopping Centre Management Pty Ltd (BSCM) is the trustee of the Balgra Shopping Centre Management Trust (the Balgra Trust). The Balgra Trust is a unit trust. All the units in the Balgra Trust are held by Balgra as trustee for the Makris Family Trust. 4 The complex interests include the Oakden Trust, North Adelaide Le Village Royale No 1 Trust (Royale 1 Trust), North Adelaide Le Village Royale No 2 Trust (Royale 2 Trust) and the Makris Trust. Each of the Oakden Trust, Royale 1 Trust and Royale 2 Trust are beneficiaries of the Makris Trust, and the Oakden Trust and the Balgra Trust are each beneficiaries of the Makris Family Trust. Shopping Centre Management Pty Ltd (SCM) is trustee of the Makris Trust. 5 The principal issues in the two proceedings flow from deductions totalling $3,064,106 claimed by or on behalf of the Makris Trust in the financial years ended 30 June 1999, 2000, 2001, 2002 and 2003. It is not necessary to discuss the correctness of those claims. They arise following the acquisition of a yacht, the Lady Carol. These concern the expenses incurred in relation to the Lady Carol during those years. 6 On 30 June 2003, SCM as trustee of the Makris Trust resolved that its net income for the year ending 30 June 2003 be applied for the benefit of its beneficiaries as follows: Oakden Trust - 55% of net income; Royale 1 Trust - an amount of income to offset any residual losses in that related entity after taking into account distributions from other related entities; and Royale 2 Trust - balance of trust income. 7 On 30 June 2003 each of the trustees of those beneficiaries resolved that 100% of the net income of each trust be applied to the Balgra Trust. BSCM as trustee of the Balgra Trust also on that date resolved "that the net income for the year ending 30 June 2003 be accumulated". 8 On 30 June 2003, Balgra as the trustee of the Makris Family Trust resolved that its income for the year ending 30 June 2003 be applied for the benefit of the beneficiaries as follows: Oakden Trust - an amount of income to offset any residual losses in that related entity after taking into account distributions from other related entities; and Balgra Trust - balance of trust income. 9 On 30 June 2004, BSCM as trustee of the Balgra Trust resolved that its net income of the year ending 30 June 2004 be accumulated. 10 On 26 May 2008 the respondent disallowed the deductions claimed by the Makris Trust referred to in [5] above. This reduced the carried forward losses claimed as a deduction by the Makris Trust in the 2003 and 2004 years of income. It also resulted in a very significant increase of the net income of the Makris Trust in 2003, and so an increase on the applications of income by the Makris Trust to the Oakden Trust and the Royale 1 and Royale 2 Trusts, and in turn an increase in the net income of the Balgra Trust. It also resulted in there being no application of income by the Makris Family Trust to the Oakden Trust as it did not have any residual losses in light of its increased entitlement to income from the Makris Trust, and so all its income was received by the Balgra Trust. 11 In the 2004 year of income the disallowance of the deductions in respect of the Lady Carol resulted again in a very significant increase in the net income of the Makris Trust, and consequently a more significant appointment of income by the Makris Trust to the Balgra Trust. 12 On 26 May 2008 and 30 May 2008, the Commissioner issued notices of assessment to BSCM as trustee of the Balgra Trust for the 2003 and 2004 years of income respectively. Both assessments were issued pursuant to s 99A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) on the basis that there was no beneficiary presently entitled because the trustee of the Balgra Trust had determined to accumulate the net income of the trust in each of those years. 13 On 26 May 2008, the Commissioner issued a notice of assessment to the trustee of the Balgra Trust and to the trustee of the Makris Family Trust for the 2003 year of income pursuant to s 102UM of the 1936 Act. This was in the alternative to the assessment under s 99A, in the event that the resolution of the trustee of the Balgra Trustee to accumulate the net income of the trust was ineffective. 14 On 24 July 2008, BSCM as trustee of the Balgra Trust objected to each of those three notices of assessment and Balgra as trustee of the Makris Family Trust objected to the assessment under s 102UM concerning it. On 30 January 2009, the Commissioner disallowed each of those objections. 15 That led to the current proceedings. The two proceedings appeal from the three decisions of the Commissioner of 30 January 2009. This proceeding does so on behalf of the Balgra Trust in relation to the three decisions. Proceeding SAD 46 of 2009 does so on behalf of the Makris Family Trust, confined to the decision relating to the assessment notice under s 102UM of the 1936 Act. 16 On 4 August 2010, by consent, the Court ordered in this proceeding that: 1. the appeal be allowed in part; 2. the objection decision of the respondent dated 30 January 2009 disallowing the applicant's objection to the respondent's assessment for the 2003 year of income the subject of paragraph B of the application filed on 30 March 2009 is confirmed; 3. the objection decision of the respondent dated 30 January 2009 disallowing the applicant's objection to the respondent's assessment for the 2003 year of income the subject of paragraph A of the application filed on 30 March 2009 be set aside and in substitution for that decision allowing the applicant's objection in full; and 4. the objection decision of the respondent dated 30 January 2009 disallowing the applicant's objection to the respondent's assessment for the 2004 year of income the subject of paragraph D of the application filed on 30 March 2009 be set aside and in substitution for that decision allowing the applicant's objection in full and in proceeding SAD 46 of 2009 that: 1. the appeal be allowed; and 2. the objection decision of the respondent dated 30 January 2009 is set aside and in substitution for that decision a decision allowing the applicant's objection in full. 17 Orders were also made for the exchange of submissions as to costs. 18 The immediate effect of those orders, as is apparent from the application in each matter, is that in this matter: · the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 26 May 2008 under s 99A of the 1936 Act in respect of the year ending 30 June 2003 stood; · the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 30 June 2003 under s 99A of the 1936 Act in respect of the year ending 30 June 2004 was set aside, and the objection of BSCM as trustee of the Balgra Trust was allowed in full; and · the notice of assessment issued to BSCM as the trustee of the Balgra Trust by the Commissioner on 5 June 2008 under s 102UM of the 1936 Act in respect of the year ending 30 June 2003 was set aside, and the objection of BSCM as trustee of the Balgra Trust was allowed in full; and (in proceeding SAD 46 of 2009): · the notice of assessment issued to Balgra as the trustee of the Makris Family Trust by the Commissioner on 5 June 2008 under s 102UM of the 1936 Act in respect of the year ending 30 June 2003 was set aside, and the objection of Balgra as trustee of the Makris Family Trust was allowed in full. It is also accepted that the consequence of the first-mentioned of those decisions is that the yacht deductions were not allowable or deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).