(e) Connection between $2,018,000 debt and CGT assets
57 The AAT Decision correctly identified the entity (the Trust), and the two subject matters (the CGT assets of the Trust and the liability of the Trust to the BPHUT), required by s 152-20(1). Those assets and liabilities are listed in the table at [24] above under the heading "Bell Family Trust".
58 As was noted earlier, the Applicant, as a director of the Trustee, resolved to distribute $2,018,000 from the capital of the Trust to himself as beneficiary to enable him to contribute $1,000,000 to his superannuation fund and to pay off the debt on his spouse's principal residence. The Trust did not have sufficient cash resources to pay the distribution. A Macquarie Bank loan facility available to Barry Plant Holdings Pty Ltd (as trustee of the BPHUT) was made available to the Trust to the extent of $2,018,000 with repayment of that amount to be made by the Trust.
59 Before turning to consider the AAT's decision, two important matters should be noted. The Commissioner did not seek to challenge the AAT's findings that there existed a valid resolution to distribute capital of the Trust to the Applicant (as a beneficiary of the Trust) and that the obligation to distribute capital in accordance with the resolution had been discharged. Secondly, the Trust Deed was before the AAT.
60 In my view, the AAT Decision was wrong. It correctly identified the entity and the two subject matters (see [56] above). However, having made the findings of fact that there was a resolution to distribute capital of $2,018,000 by the Trust to the Applicant and that the obligation had been discharged, the AAT (and, it would seem, the parties) ignored or misunderstood the legal effect of those events.
61 It must be recalled that at the time of the resolution, the AAT found that the Trust did not have sufficient cash reserves to make the distribution to the Applicant and the Applicant, in his capacity as a director of the Trustee, considered that the Trust would either need to sell Trust assets (the units in the BPHUT or the PBUT) or borrow to make the distribution.
62 When the resolution to distribute capital was made, the Applicant had an immediate entitlement in respect of a portion of the corpus of the Trust: see cl 12.7(a) of the Trust Deed and Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. The Applicant may have had no right or interest in any particular asset of the Trust. For present purposes, it is unnecessary to resolve that issue because of the AAT's unchallenged findings that the Trust did not have sufficient cash reserves to make the distribution to the Applicant and the Applicant, in his capacity as a director of the Trustee, considered that the Trust would either need to sell units in the BPHUT or the PBUT or borrow to make the distribution. As a result of the resolution, the Applicant was presently entitled to a portion of the corpus of the Trust to the extent of the distribution and entitled to call for it: Saunders v Vautier.
63 At the conclusion of the hearing, the Applicant referred the Court to the Trust Deed. Although the Trust Deed was before the AAT, the AAT did not make findings about the terms of the Trust Deed or their effect. Given the nature of the Deed and its terms, it is appropriate in this appeal to consider it pursuant to s 44(8) of the AAT Act and to make findings in respect of it pursuant to s 44(7): Comcare v Broadhurst (2011) 120 ALD 228 at [80]; Kowalski v Repatriation Commission [2011] FCAFC 43 at [28]; Condell v Commissioner of Taxation (2007) 66 ATR 100 at [14].
64 Under cl 12.7(a) of the Trust Deed, the Trustee (with the consent of the Guardian of the Trust), was entitled out of the capital of the trust fund to raise any sum and pay that sum to any of the beneficiaries in such manner as the Trustee in its absolute discretion considered fit. The manner of its distribution was addressed in cll 4 and 5. Capital was able to be distributed in the same manner as the income of the Trust or by the transfer in specie of any asset of the Trust: cl 5.3. Clause 4.5 (dealing with the distribution of income) stated that upon a resolution being made, the beneficiary had an immediate vested indefeasible interest in and to that part or parts of the trust fund to which the determination or resolution relates. Here, the finding by the AAT was that the Trust resolved to distribution $2,018,000 of capital to the Applicant (as a beneficiary of the Trust). Although that resolution was not reduced to writing, the AAT found that the resolution was passed and was effective: AAT Decision at [15]. As mentioned above, the Commissioner did not seek to challenge these findings.
65 What then was the effect of the resolution? Absent the $2,018,000 debt to the BPHUT, the Trust would have held less CGT assets in an amount equal to the distribution, subject of course to the Trustee's right of indemnity. Indeed, so much was accepted by the Commissioner in his subsequent written submissions when he said:
… if the borrowing from Barry Plant Holdings Pty Ltd had not been distributed by the … Trust just before the CGT event, then those borrowings would have been included as a CGT asset of the Trust in the tables.
But the analysis at that time does not stop there. At the same time there would have been a corresponding liability - the right of the Applicant (as beneficiary) to call for that portion of the corpus (ie, the assets of the Trust) to meet the distribution of capital. The assets would not have been unencumbered: Saunders v Vautier and Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th ed, Butterworths, 2006) at [2308].
66 As is apparent, the $2,018,000 debt did not exist independently. The purpose of the debt was to meet the Trust's obligation to distribute capital, namely a portion of the corpus of the Trust, to the Applicant. The Trust Deed provided for that obligation to be met by the Trust borrowing and that is in fact what did occur. The $2,018,000 debt was necessary to meet the obligation and thereby protect or maintain the CGT assets of the Trust. Absent the $2,018,000 debt, the encumbrance over the assets of the Trust (the CGT assets) had to be met by sale or direct delivery up of those assets of the Trust sufficient to meet the distribution of capital.
67 Given the resolution and the distribution of capital by the Trust and its legal effect, there was and remained a direct relationship or connection between the CGT assets of the Trust and the $2,018,000 debt of the Trust. The Commissioner submitted the connection must be real and substantial, not remote. Here, the relationship between the $2,018,000 debt of the Trust and the CGT assets of the Trust and, in particular, the Units, was real and substantial. It was not remote.
68 As is self evident, the AAT came to a different conclusion. It also concluded at [19] that:
... [T]he Scheme of the [MNAV] test would be readily frustrated by an entity with assets included in the test valued above the threshold and no other assets or liabilities, who could borrow to pursue an objective that does not produce an asset to be included in the test and then claim the borrowings on the basis that assets would need to be realised to pursue that objective.
69 There are a number of answers to that concern. First, there must still be a relationship of a kind which satisfies s 152-20. Second, the steps taken by a trustee of a trust may well be different in nature and legal effect than the steps taken by non-trustee companies and other entities. And third, if there is a concern that the steps taken by a taxpayer are a scheme to "frustrate" the proper operation of the MNAV test, then the appropriate course is to seek to apply Pt IVA of the 1936 Act. There was no suggestion that Pt IVA applied here.