Cameron v Commissioner of Taxation

Applicants: The three Applicants are beneficiaries of the Family Trust. Adjuvant Pty Ltd is a private proprietary company. Bruce Cameron and Charmaine Cameron are directors of Adjuvant, and are also directors of Acropolis Pty Ltd, which is the corporate trustee of the Family Trust.

Camco Engineering, Camco Trusts: Camco Engineering Pty Ltd was incorporated in 1994. Camco Engineering is the trustee of five trusts (collectively, the “Camco Trusts”), which are titled the “Camco 1 Trust” through “Camco 5 Trust”. Each of these trusts is related to one of the directors and shareholders (or “Principals”) of Camco Engineering, who include Mr Cameron.

The trust relating to Mr Cameron is the Camco 3 Trust. It was established by deed on 9 June 1995, with Camco Engineering as the corporate trustee and Bruce Cameron as the appointed guardian and appointor. Bruce Cameron, Charmaine Cameron and the Family Trust are beneficiaries of the Camco 3 Trust.

1995 and 1997 “partnership agreements”: In 1995, Camco Engineering executed a document titled “Partnership: The Camco Partnership”, acting in its capacities as the trustee of the Camco 1 Trust through Camco 4 Trusts (1995 Deed). In July 1997, Camco Engineering executed a document titled “Partnership Agreement”, which added the “Camco 5 Trust” (of which Camco Engineering was also the trustee) (1997 Deed). (The version of the 1997 Deed in the Court Book is unsigned; however, Mr Cameron’s affidavit states that this document was signed in July 1997 by the Principals and this evidence is not challenged.) The Applicants accept that a partnership was not formed in law by either of these documents (because there was only a single legal person, Camco Engineering), but contend that each of these documents operates as a deed that is binding on Camco Engineering. It is agreed between the parties that the engineering business of Camco Engineering is carried on by the Camco Trusts collectively. It is convenient to call this the “Camco business”.

In the period IY 2013 to IY 2018, the Family Trust’s income consisted entirely of distributions from the Camco 3 Trust. In IY 2019 and IY 2020, distributions from the Camco 3 Trust provided the major proportion of the Family Trust’s income, although the Trust received some other income (those distributions being $3.996 million of $4.108 million in IY 2019; and $5.465 million of $5.560 million in IY 2020).

Sub-trust Loans (2013-2015, 2018-2020): In IY 2013 to IY 2015 and IY 2018 to IY 2020, the unpaid present entitlements of Adjuvant to distributions from the Family Trust were set aside and placed on separate sub-trusts of which Acropolis was trustee (Adjuvant sub-trust). These amounts were converted to interest-only loans (Sub-trust Loans) from the Adjuvant sub-trust to the Family Trust on terms consistent with Option 1 in the Australian Taxation Office’s (ATO’s) (now withdrawn) Law Administration Practice Statement PS LA 2010/4. That is, interest was payable on the Sub-trust Loans by the Family Trust to the Adjuvant sub-trust annually at the relevant benchmark rates (see ITAA 1936 s 109N(2)), and the term of the loans was seven years (see s 109N(3)(b)).

The amount to which the Family Trust was entitled under the sub-trust borrowing for a year was set off against Adjuvant’s unpaid present entitlement from the Family Trust for that year. That is, no money was actually advanced by the Adjuvant sub-trust to the Family Trust. In each of IY 2019 and IY 2020, the Family Trust returned the interest payments made under the Sub-trust Loans (the Interest Payments) as deductible outgoings.

The role of these Sub-trust Loans, in the context of the business of Camco Engineering, and the activities of the Camco Trusts and the Family Trust, is considered in section C.2 below.

Objection process: The Applicants’ income tax returns for IY 2019 and IY 2020 reported the Interest Payments as income. After a review, the Commissioner raised concerns regarding the Interest Payment expenses claimed as a deduction from the Family Trust’s income in each of those years.

On 18 November 2022, the Family Trust self-amended its trust tax returns for IY 2019 and IY 2020 to remove the Interest Payment deductions claimed in relation to the Sub-Trust Loans, and amended its statements of distribution. Consequently, each of the Applicants amended their income tax returns to increase their declared trust income from the Family Trust.

Commissioner amends Applicants’ assessments (Nov 2025): The increased trust income declared by the Applicants was commensurate with the Family Trust disallowed Interest Payment deductions. Accordingly, on 24 and 25 November 2022, the Respondent issued notices of amended assessments to each of the Applicants in respect of IY 2019 and IY 2020.

Applicants’ objections disallowed (Jan, Oct 2023): On 23 January 2023, the Applicants each lodged an objection to the notices of amended assessments for IY 2019 and IY 2020, contending that the Interest Payments made by the Family Trust under the Sub-Trust Loans were deductible outgoings. On 17 October 2023, the Commissioner made separate decisions in relation to each Applicant disallowing their objection.

Appeal under s 14ZZ (Dec 2023): The Applicants filed these appeals against the Commissioner’s decisions under s 14ZZ of the TA Act on 13 December 2023.

Applicants and the Family Trust: The Family Trust is a discretionary trust established on 14 July 1988, and varied by deed dated 17 June 1993. Bruce and Charmaine Cameron are part of the class of “general beneficiaries” of the Family Trust. Bruce Cameron is both the guardian and appointor of the Family Trust during his lifetime.

As noted, Acropolis is the corporate trustee of the Family Trust. Bruce and Charmaine Cameron are directors and the sole shareholders of Acropolis.

Family Trust income tax return IY 1999 (Nov 2000): On 1 November 2000, Acropolis’ registered tax agent, Mr Lawrence Cook, lodged electronically with the Australian Taxation Office an income tax return for IY 1999 for Acropolis as trustee for the Family Trust. This income tax return included a completed schedules headed “1999 Family Trust Election and/or Family Trust Revocation” and “1999 Interposed Entity Election”.

Reference to a family trust election: The Family Trust Election section of the Schedule to the IY 1999 income tax return stated that the trust is the Family Trust; the trustee is Acropolis; the income year specified is 1995; and the “specified individual” (whose family group is to be taken into account in relation to the election) is Mr Bruce Cameron. This part of the Schedule included the following declaration:

The signature block for the trustee (Acropolis) is dated 18 September 2000. Mr Cook (the registered tax agent for the Family Trust) accepted that, if a family trust election had been made, the applicable part was (ii) above (relating to a family trust election before IY 1999).

Reference to an interposed entity election: The Interposed Entity Election section of the Schedule to the Family Trust’s IY 1999 income tax return stated that the entity was the Family Trust; the family trust in respect of which the interposed entity election was made was the Camco 3 Trust; the income year specified in the family trust election was 1995 (with a commencement time of 19 May 1995); and the specified individual was Bruce Cameron.

The issue in WAD184-186/2024 is the legal effect of these statements in the Family Trust’s IY 1999 income tax return, when weighed against the other evidence: see section D.3 below.

Family Trust income tax return FY 2019-2021: On 30 June 2020, Acropolis’ tax agent, Mr Matthew Cook, lodged the Family Trust’s income tax return for the financial year ending 30 June 2019 (FY 2019), recording trust distributions made to members of the Cameron family group.

On 26 and 28 July 2021, Mr Matthew Cook lodged the Family Trust’s income tax return for IY 2020, and an amended income tax return in respect of IY 2019, respectively. The amended 2019 income tax return and the 2020 income tax return disclosed various trust distributions from the Family Trust to the Robot Trust (of $58,000 in IY 2019 and $60,000 in IY 2020) and Lumitex (of $4.99 million in IY 2020). On 4 August 2022, Mr Matthew Cook lodged the Family Trust’s income tax returns for FY 2021. The 2021 income tax return disclosed a trust distribution from the Family Trust to the Robot Trust (of $60,000).

It is common ground that Robot Trust and Lumitex Ltd are outside Mr Cameron’s family group.

Objection process: In December 2021, the Commissioner commenced a review of Bruce Cameron’s and related parties’ tax affairs, including the Family Trust.

FTD tax payment advices (Nov 2022): Around 18 November 2022, Acropolis as trustee for the Family Trust made a voluntary disclosure, and Family Trust Distribution Tax Payment Advices were lodged, in respect of the Family Trust’s trust distributions to the Robot Trust and to Lumitex in each of IY 2019, 2020 and 2021. The Family Trust Distribution Tax Payment Advices:

Amended income tax returns for FY 2019-2021 (Nov 2022, Jan 2023): On 18 November 2022, Acropolis’ tax agent, Mr Lawrence Cook also lodged the Family Trust’s amended income tax return for FY 2019 and 2020. On 19 January 2023, Acropolis’ tax agent, Mr Lawrence Cook, lodged the Family Trust’s amended income tax return for FY 2021.

Notices of liability (Jan 2023): On 25 January 2023, the Respondent issued Notices of Liability – Family Trust Distribution Tax (FTD Tax Notice) pursuant to s 271-90 of Sch 2F of the ITAA 1936, to Bruce Cameron and Charmaine Cameron (as directors of Acropolis) and to Acropolis (as trustee of the Family Trust). These Notices stated that the Applicants were jointly and severally liable to pay FTD tax for IY 2019, 2020 and 2021 (for amounts totalling approximately $2.4 million), and were jointly and severally liable to pay general interest charge on any amounts of FTD tax that remained unpaid after the due date for payment.

Applicants’ objections disallowed (Mar 2023, May 2024): On 23 March 2023, the Applicants each lodged an objection to their FTD Notice. On 16 May 2024, the Commissioner made separate decisions disallowing the Applicants’ objections to the FTD Tax Notices.

Appeal under s 14ZZ (Jul 2024): The Applicants filed these appeals against the Commissioner’s decisions under s 14ZZ of the TA Act on 15 July 2024.

As noted, the issue in proceedings WAD325-327/2023 is whether the Interest Payments made by the Family Trust on the Sub-trust Loans are deductible for IY 2019 and IY 2020.

ITAA 1997 s 8-1(1): By s 8-1(1)(a) of the ITAA 1997, a loss or outgoing may be deducted from a taxpayer’s assessable income “to the extent that … it is incurred in gaining or producing [the taxpayer’s] assessable income”. It is common ground that the further ground of deductibility in s 8-1(1)(b), and the exclusions from deductibility in s 8-1(2), are not relevant.

“In the course of”: In Federal Commissioner of Taxation v Day [2008] HCA 53; (2008) 236 CLR 163, Gummow, Hayne, Heydon and Kiefel JJ made the following points about s 8-1(1)(a):

It is convenient to begin with four general points about the application of s 8-1(1).

“Activities or operations”: First, the Commissioner emphasises a line of cases (beginning with Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner Taxation [1935] HCA 81; (1935) 54 CLR 295 at 309 (Dixon J)) which state that there must be a connection between an outgoing and the “operations or activities” of the taxpayer that gain or produce assessable income: see, for example, Commissioner of Taxation v Roberts [1992] FCA 363; (1992) 37 FCR 246 at 254 (Hill J, with Jenkinson J agreeing), citing Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344 at 351 (the Court) (which referred to “operations”) and Federal Commissioner of Taxation v Smith [1981] HCA 10; (1981) 147 CLR 578 at 585-586 (Gibbs CJ, Stephen, Mason and Wilson JJ); Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd [1979] FCA 53; (1979) 43 FLR 217 at 224 (Lockhart J, with Northrop and Fisher JJ agreeing). The Commissioner contends that there are no relevant “operations or activities” of the Family Trust.

However, these statements have largely if not exclusively been made in the context of a continuing business, which can be expected to have operations and activities. Section 8-1(1)(a) (unlike s 8-1(1)(b)) is not confined to cases where income is derived from carrying on a business: see Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) [1990] FCA 205; (1990) 23 FCR 305 at 312 (the Court); Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1 at [56] (French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ). I would not analyse the reference to “operations and activities” as adding more to the meaning of s 8-1(1)(a) or narrowing its operation. Rather, like the use of the phrase “incidental and relevant”, the expression “operations and activities” describes a part of the relevant circumstances in a particular case, rather than being a test to ascertain the outer limits of the provision: see Day at [29]. The same point is addressed by identifying what it is that is productive of assessable income (the inquiry posed in Day at [31]). In many cases, the thing or matter that is productive of assessable income can be described as an activity or operation.

Deductibility of interest: Second, this case concerns the deductibility of interest payments in particular. I adopt the analysis in Roberts at 255-256 on this point (see also Hayden v Commissioner of Taxation [1996] FCA 1690; (1996) 68 FCR 19 at 24-25 (Spender J)).

In that last situation (either no or very little assessable income), the question will be whether the outgoing is to be characterised as genuinely and not colourably incurred in gaining or producing assessable income. The interest will not be deductible if the outgoing is explained by reference to the independent pursuit of some other objective: see Fletcher v Commissioner of Taxation [1991] HCA 42; (1991) 173 CLR 1 at 18-19 (the Court); see also Hayden at 28 (referring to a “purpose quite independent of the [income-producing] property”).

Relevance of purpose: Third, as will be seen, the Applicants’ arguments look particularly to the purpose of incurring expenditure. In Commissioner of Taxation v Hall [2026] FCAFC 43 at [5], Thawley J (with McElwaine and Wheatley JJ agreeing) stated that “[i]t is necessary to look to the essential character of the expenditure, rather than the subjective purpose for which an item of expenditure has been incurred”. It might be thought that there is some tension between this statement (rejecting subjective purpose), and the apparent relevance given to “motivation or subjective purpose”, at least in some cases, in Roberts at 255: see 40 above.

Any tension is resolved by the High Court’s discussion of purpose and related concepts in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36; (2024) 419 ALR 324. That case concerned the A New Tax System (Luxury Car Tax) Act 1999 (Cth) (LCT Act), which provided in s 9-5(1) that a taxpayer was entitled to quote the taxpayer’s Australian Business Number in relation to a supply or importation of a luxury car if, at the time of quoting, the taxpayer “ha[s] the intention of using the car for one of the [specified] purposes, and for no other purpose”. The majority judgment of Edelman, Steward and Gleeson JJ made the following points of principle relevant to this case:

Automotive Invest indicates that, to the extent that purpose is relevant when applying s 8-1(1) of the ITAA 1997, this is an objective purpose. This objective purpose determines the essential character of the outgoing. However, a taxpayer’s subjective purpose is evidence of what the character and scope of the business is in fact, which is relevant to determining the objective purpose or essential character of the expenditure. That analysis is supported by previous cases such as Service v Commissioner of Taxation [2000] FCA 188; (2000) 97 FCR 265 at [55]-[57] (the Court) and Spassked v Commissioner of Taxation [2003] FCAFC 282; (2003) 136 FCR 441 at [75] (Hill and Lander JJ).

Relevance of legal form: Fourth, the Applicants contend that questions of legal form are not determinative of whether an outgoing has a necessary connection to the taxpayer gaining or producing assessable income. They rely on the statement in Roberts at 261 that the characterisation of an outgoing depends on “what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights”, quoting Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648 (Dixon J).

It may be accepted that questions of legal form are not determinative, but they are a relevant part of the background circumstances. To characterise expenditure from a practical and business perspective is not to disregard the legal nature of any liability that is discharged by the making of that expenditure, nor is it to inquire into whether the expenditure is similar or economically equivalent to expenditure that might have been incurred in some other transaction. Rather, it is to have regard to the “whole picture” of the commercial context within which the particular expenditure is made: AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation [2015] HCA 25; (2015) 255 CLR 439 at [74] (Gageler J); see also [22] (French CJ, Kiefel and Bell JJ); Clough Limited v Commissioner of Taxation [2021] FCAFC 197; (2021) 114 ATR 1 at [68]-[69] (Thawley J, with Kenny and Davies JJ agreeing).

The structures at issue (the Camco Trusts, the Family Trust, and the Sub-trust Loans) arise out of the means for distributing profits of the business carried on by the Camco Trusts collectively. The Applicants provided a diagram to represent these structures, which is annexed to these reasons for judgment.

1995 Deed cl 9: The 1995 Deed provides in cl 9 that “net profits of the Partnership … shall belong to the Partners in such shares as are specified in Item 8 of the First Schedule or in such shares as shall from time to time be unanimously agreed in writing by the Partners.” The default position in item 8 of the First Schedule is for net profits to be distributed “in accordance with the capital contributions of the Partners [ie the Principals]”. Clause 9 of the 1997 Deed is to the same effect.

The Applicants observe here that Camco Engineering, as the trustee of each of the Camco Trusts, has broad powers to deal with property of the various trusts in its different capacities as trustee: see Camco 3 Trust deed, cls 6.29-6.31.

Camco Engineering: Mr Cameron states in his WAD325-327 affidavit that he was responsible for the financial modelling for the business carried on by the “Partnership” (in truth, the Camco business carried on by the Camco Trusts collectively: see [8] above). In each year (including between IY 2013 and IY 2020), the Principals of Camco Engineering agreed on a different basis for sharing the net profit between the Camco Trusts. Mr Cameron presented a “profit sharing schedule” to the annual meeting of the “partnership”, and (subject to one disagreement relating to the retirement of Mr Fusco) his proposed distribution was approved by the other Principals without disagreement and that decision was recorded in minutes.

Mr Cameron states that he took the view that all of the surplus funds of the Camco business should remain with the business, and that the Principals should only take from the business sufficient monies to fund their living needs and to pay tax. This was so that the Camco business could retain the maximum funds while minimising external debt. He states that the other Principals agreed with him.

Family Trust was entitled to all of Camco 3 Trust’s net income IY 2013-2020: After the annual meeting of the “partnership”, there was an annual formal meeting of each of the Camco Trusts. At the latter, the relevant Camco Trust would identify the entity or entities that would be entitled to receive the net income of the trust fund (under cl 3 of the Camco 3 Trust deed). From IY 2013 to IY 2020, Camco 3 Trust chose the (Cameron) Family Trust as the entity that was entitled to receive all of the trust income of the Camco 3 Trust.

Distribution of Family Trust’s income: The net income of the Family Trust was in turn distributed by the trustee (Acropolis) under cl 3 of the Family Trust deed. In IY 2013 to IY 2020, Acropolis made Adjuvant one of the beneficiaries entitled to some of the income of the Family Trust for that year; for example, in IY 2013, Adjuvant was entitled to the next $1.2 million, after the distribution of net capital gains and franking credits to Mrs Cameron, and the distribution of the first $270,000 to another family-related trust.

Sub-trust borrowings to deal with Adjuvant’s UPEs: Mr Cameron explains the reasons for the Sub-trust Loans as follows. He states that he understood that where an entity (such as the Family Trust) was made entitled to the income of a Camco Trust, that entitlement would remain wholly or substantially unpaid due to the arrangement agreed between the Principals for the Camco business to retain as much money as possible. Mr Cameron understood further that the unpaid amount would be subject to the published views of the ATO on the application of Pt III Div 7A of the ITAA 1936 (distributions to entities connected with a private company) to “unpaid present entitlements” (UPEs).

Mr Cameron understood that the consequences of the above matters would be as follows:

Mr Cameron states that he caused “sub-trust arrangements” to be entered into for IY 2013 to 2015, and IY 2018 to 2020. Under those arrangements, Adjuvant’s entitlement to income of the Family Trust was set aside on a sub-trust for Adjuvant, and then lent back to the Family Trust for a term of 7 years and bearing interest: see [10]-[11] above.

Purpose of sub-trust arrangements: Mr Cameron’s WAD325-327 affidavit gives the following evidence about the purpose of the Sub-trust Loans. (Again, references in his affidavit to the “Partnership” must be understood as references to the Camco business carried on by the Camco Trusts collectively: see [8] above.)

The question is whether the Interest Payments on the Sub-trust Loans were incurred in the course of the Family Trust gaining or producing assessable income.

Sub-trust Loans are not directly productive of income for the Family Trust: Here, the Sub-trust Loans were not used to produce income for the Family Trust directly. As noted, the amounts lent by Adjuvant under the Sub-Trust Loans were set off against UPEs held by Adjuvant in respect of the Family Trust. It was common ground that the direct effect of these arrangements from the Family Trust’s perspective was to convert one type of liability into another: the Trust’s liability to pay Adjuvant’s UPE (an immediate liability, not bearing interest) was converted into a debt liability (a non-current liability to repay the principal in seven years, and to pay interest in the meantime). In other words, this is not a case where the borrowed moneys were invested in an income-producing asset, where the connection between interest payments and gaining or producing assessable is obvious from the use of the moneys.

Instead, the Applicants contend that the connection between the Interest Payments and the derivation of assessable income by the Family Trust arises out of the connection between the Sub-trust Loans and the derivation of income by the Camco 3 Trust in the Camco business. In oral argument, the Applicants’ senior counsel stated that, in broad terms, the effect of the Sub-trust Loans was to make approximately an extra $7 million available to the Camco 3 Trust over 2013 to 2020 to be used in the Camco business. The Applicants contend that the Interest Payments are deductible, because:

Neither argument can be accepted.

Sub-trust Loans to increase distributions to Family Trust? The Applicants’ first argument proceeds in the following steps: (i) the Family Trust not calling on the Camco 3 Trust increases the amount of money available to the Camco 3 Trust; (ii) increasing the amount of funds available to the Camco 3 Trust would boost the profitability of the Camco business generally; (iii) that would increase the amounts that would be distributed to the Camco 3 Trust; (iv) that, in turn, would increase the amounts to be distributed to the Family Trust: see 57 above. This is said to provide a sufficient connection between the Interest Payments and the gaining or producing of assessable income by the Family Trust.

This first argument relies on Total Holdings.

Total Holdings is distinguishable: I accept the Commissioner’s submission that Total Holdings is distinguishable. In that case, the taxpayer had taken positive steps to invest in TAL: the taxpayer purchased shares (see Total Holdings at 224) and entered into loan arrangements with TAL. Those steps were taken to gain or produce assessable income from TAL in the form of dividends. There is no comparable step here: for example, the Family Trust has not lent money to Camco 3 Trust. Even accepting that “operations and activities” is not a separate requirement to engage s 8-1(1) (see [39] above), in Total Holdings the taxpayer took steps that were productive of assessable income.

The Applicants contend that the comparable step is that the Family Trust has not called on its unpaid present entitlement as against the Camco 3 Trust, and that any difference between Total Holdings and this case is one of legal form only. As noted, legal form is a relevant part of the circumstances (even if it is not determinative), and it is not sufficient for a taxpayer to show that the outgoing is similar or economically equivalent to an expenditure that might have been incurred: Ausnet at [74]; see [46] above. Choosing not to call on a present entitlement under a trust is very different from purchasing shares and entering into loans.

This is not to impose any standard of “busyness” in order for an outgoing to be deductible. It is rather to require there to be a sufficient connection between the outgoing and what is productive of the Family Trust gaining or producing assessable income: see [36] above. As the Commissioner’s submits, it is not open to ignore the different structures in place, and to treat the Camco Trusts (such as the Camco 3 Trust) and the various family trusts (such as the Family Trust) as an aggregate entity with aggregate activities. Here, any connection between the Interest Payments and what is productive of the Family Trust deriving assessable income would have to be provided by the purpose of the Sub-trust Loans, meaning the objective purpose: see [44] above. On the Applicants’ argument, a beneficiary of a trust would have the (objective) purpose of gaining or producing assessable income by not calling on its entitlement to receive money under the trust, simply because the trust now has more resources with which to derive assessable income to make future distributions to the beneficiary. That argument is not supported by Total Holdings (and, as explained below, nor is it supported by Roberts).

Indeed, the Applicants’ argument, if correct, would mean that interest on a borrowing would be deductible, even if the Family Trust’s borrowings were used for a purpose entirely unconnected with the Camco business. That is because, even then, the Family Trust would be preserving the amount of money that was available to the Camco 3 Trust to be used to derive assessable income (from which it could make increased future distributions to the Family Trust). But that result is contrary to Federal Commissioner of Taxation v Munro [1926] HCA 58; (1926) 38 CLR 153, applied in Hayden at 28 and Riverside Road at 314. That analysis reveals that the asserted connection between the Sub-trust Loans and the gaining or producing of assessable income by the Family Trust is too remote.

Is greater distributions to the Family Trust a purpose in fact? It might be noted that Mr Cameron’s evidence, taken as a whole, shows that he was very concerned about the size of distributions to the various Camco Trusts, and wanted to maximise the funds that were available to the Camco business to fund growth: see 57 and (d) above; cf 57. This might have raised questions about whether steps (iii) and (iv) in the Applicants’ argument (set out in [62] above) were correct as a matter of fact. However, the Commissioner did not make any argument along these lines, and I do not consider this issue any further. The Applicants’ first argument should be rejected, for the reasons given above.

Sub-trust Loans preserve the capital available to the Camco 3 Trust? The Applicants’ second argument is that the Family Trust entering into the Sub-trust Loans preserves the capital available to the Camco 3 Trust (and the Camco business), similar to the loan considered in Roberts.

In Roberts, a partnership (a law firm) sought to reduce the value of the partnership, to enable a new partner to join, by paying the existing partners $25,000 each. The partnership borrowed $125,000 to make these payments: Roberts at 248. The issue was whether the interest on this loan was deductible. Hill J (with Jenkinson J agreeing) held that the interest may be deductible, depending on the facts, and that the matter should be remitted to the Tribunal to make the necessary findings of fact: Roberts at 260.

The Applicants rely on the following statement of Hill J in Roberts at 257, considering the position if a partnership had taken out a loan to fund the repayment to a partner of undrawn partnership distributions:

The Applicants contend that the borrowing entered into by the Family Trust ensures that the funds of the Camco 3 Trust are not diminished, and that taking steps not to diminish funds is the same in substance as “replacing” those funds (which, it is said, Roberts holds is deductible).

Roberts is not applicable: However, it is clear from the remainder of Roberts that Hill J did not mean to suggest that the interest on a loan used to replace any funds used by a partnership would be deductible. His Honour later distinguished between a repayment that reduced a partner’s equity in the partnership (that is, including the partner’s share of profits), and a repayment of a capital contribution made by the partner constituting their share of the “partnership capital”: see Roberts at 259-260. Hill J expressly held in Roberts at 260 that interest on a loan used to return a partner’s equity in the partnership would not be deductible:

That is, the reasoning set out in [71] above applies to the replacement of capital contributions, and the reference to “undrawn partnership distributions” has to be understood in that light.

So understood, Roberts does not assist the Applicants, for two separate reasons. First, in no sense has the Family Trust invested in the Camco 3 Trust, let alone in a manner comparable to partnership capital contributions. Second, on the evidence, the Sub-trust Loans are not entered into to preserve the capital contributions made by the Principals: rather, Mr Cameron refers to the Sub-trust Loans ensuring that the Camco business “retained as much as possible of the funds representing its profits” (emphasis added): see 57 above.

Again, it is not sufficient that paying interest on a loan is necessary in a general sense to preserve income-producing assets: see [67] above.

Other arguments: It is not necessary to rule on the Commissioner’s other arguments as to why the Interest Payments are not deductible; for example, the Commissioner contended a separate basis for refusing deductibility was that the Family Trust, as the beneficiary of a discretionary trust, never had an entitlement to receive any money from the Camco 3 Trust, and its receipt of income from the Camco 3 Trust was passive and did not involve any “activities or operations”.

Conclusions in WAD325-327/2023: For these reasons, the appeals under s 14ZZ of the TA Act in WAD325-327/2023 are dismissed.

As noted, the issue in proceedings WAD184-186/2024 is whether a valid family trust election was made in respect of the Family Trust.

Div 271: Division 271 of Sch 2F to the ITAA 1936 (added in 1998) deals with family trust distribution tax. The key provisions for present purposes are as follows.

Circumstances attracting tax liability (ss 271-15, 271-20): By s 271-15, there is a tax liability if a family trust makes distributions outside the family group, in the circumstances specified in s 271-15(1). One of those circumstances is that a trustee “makes a family trust election in relation to a trust” (s 271-15(1)(a)). A trust is a “family trust” at any time when a family trust election is in force (s 272-75).

By s 271-20, there is a tax liability if an interposed trust makes a distribution outside the family group. The section applies if the trustee of a trust has made an interposed entity election for the trust “to be included in the family group of the individual specified in a family trust election”; and the trust confers a present entitlement on a person outside that family group (s 271-20(1)). That is, any interposed entity election presupposes that a family trust election has been made.

Family trust election (s 272-80): The requirements for a family trust election are set out in s 272-80. Generally, the requirements include that the election is in writing and in the approved form (s 272-80(2)), and that the trust passes the family control test in s 272-87 at all times in the specified income year (see s 272-80(1) and (4)). However, this general position is affected by transitional provisions, discussed next.

By s 272-80(5), a family trust election generally cannot be varied or revoked, except in the circumstances set out in s 272-80(5A)-(5C), (6) and (6A).

Interposed entity election (s 272-85): The requirements for an interposed entity election are set out in s 272-85. An essential precondition is that a trustee has made a family trust election, because the effect of an interposed entity election is to include (at all times after a specified day in a specified year) a partnership or trust in the family group of an individual specified in a family trust election (see s 272-85(1)). Generally, an interposed entity election cannot be revoked (see s 272-85(5), (5A) and (5B)).

Transitional provisions: Schedule 2F (including Div 271) was added to the 1936 ITAA by the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998 (Cth) (1998 Amendment Act), Sch item 1.

Original transitional provisions: Item 22 of the Schedule to the 1998 Amendment Act, as enacted, made provision for family trust elections to be made for income years before IY 1998. Relevantly, item 22(3) provided (emphasis added):

Item 23 of the Schedule to the 1998 Amendment Act, as enacted, made similar provision for interposed entity elections to be made for the income years before IY 1998. In particular, any interposed entity election had to be in writing in an approved form (item 23(3)(b)).

These original transitional provisions permitted a family trust election to be made for the 1995 income year (the income year referred to in the IY 1999 income tax returns).

Amended transitional provisions: The transitional provisions in item 22 of the Schedule to the 1998 Amendment Act were themselves amended by the Taxation Laws Amendment Act (No 2) 2000 (Cth) (2000 Amendment Act), Sch 11 (which also added a new item 22A). However, item 11 of Sch 11 to the 2000 Amendment Act preserved the operation of the enacted version of item 22 of the Schedule to the 1998 Amendment Act. It is common ground that the relevant transitional provision is item 22 of the Schedule to the 1998 Amendment Act, as enacted.

Income tax returns for IY 1999: The Commissioner relies on information included in income tax returns for IY 1999 for the Family Trust, Camco 3 Trust and Adjuvant; and also information included in income tax returns for the Camco 5 Trust, the Wilson Family Trust and Cresslane Pty Ltd (entities associated with another principal of the Camco business, Mr Wilson).

Family Trust IY 1999 income tax return (FTE and IEE): As noted, the Family Trust’s IY 1999 income tax return refers to a family trust election being made in respect of the Family Trust, and also to an interposed entity election: see [21]-[23] above. As noted, the making of an interposed entity election presupposes that a valid family trust election has been made.

Camco 3 Trust income tax return IY 1999 (FTE and IEE): The Camco 3 Trust’s IY 1999 income tax return also refers to a family trust election and an interposed entity election. This return was lodged around 1 November 2000 by Mr Lawrence Cook on behalf of Camco Engineering as the trustee of the Camco 3 Trust.

Adjuvant income tax return IY 1999 (IEEs): The IY 1999 income tax return for Adjuvant (a beneficiary of the Family Trust) refers to two interposed entity elections.

Camco 5 Trust income tax return IY 1999 (FTE and IEE): The Camco 5 Trust’s IY 1999 income tax return provides information about a family trust election in respect of that trust, specifying the 1997 income year and identifying Mr Wilson as the specified individual whose family group is to be taken into account in respect of that trust. The Camco 5 Trust’s 1999 return also refers to an interposed entity election made by the Camco 5 Trust in relation to the Wilson Family Trust, again specifying the 1997 income year and Mr Wilson as the specified individual. The family trust election and interposed entity election in respect of the Camco 5 Trust (made by Camco Engineering) are both dated 18 September 2000.

Wilson Family Trust income tax return IY 1999 (FTE and IEE): The Wilson Family Trust’s IY 1999 income tax return refers to a family trust election being made in respect of that Trust, and also to an interposed entity election made in respect of the Camco 5 Trust.

Cresslane income tax return IY 1999 (IEEs): Cresslane’s IY 1999 income tax return refers to two interposed entity elections.

Applicants’ evidence: The Applicants rely on the evidence of Lawrence Cook, the accountant for the Family Trust and Camco 3 Trust at the time, and of Mr Cameron. The Applicants also refer to the Family Trust’s tax returns from IY 2000 onwards.

Mr Cook’s affidavit evidence: The key points in Mr Cook’s first affidavit are as follows:

Mr Cook’s second affidavit adds the following points:

Mr Cook’s oral evidence: Mr Cook made the following new points during cross examination.

Mr Cameron’s evidence: Mr Cameron states in his WAD184-186 affidavit that, to the best of his recollection, he has never discussed the concept of making a “family trust election” or an “interposed entity election” for the Family Trust or for any other entity, and had heard of neither concept before this dispute. He states that, to the best of his recollection, he has never been aware that he signed a document that purported to make either of these kinds of election for the Family Trust or any other entity. He states that he would generally follow any recommendation of Mr Cook, if Mr Cameron found the explanation of the reason for that recommendation sensible.

Mr Cameron’s oral evidence was largely to the same effect. He stated that he would sometimes take a tax issue to Mr Cook. Mr Cameron stated that, although he could not remember every form he had signed over the last 20 years, he could remember every type of form he had signed. His practice was to read any new type of document “front to back” before signing it.

Contemporary returns: As stated by Mr Cook in cross-examination, the tax returns for the Family Trust for IY 2000 to IY 2022 do not refer to a family trust election having been made.

Mr Cook also stated in cross-examination that the Family Trust made distributions to the Let 3 Trust in IY 2006 (which is shown by the Family Trust’s tax return). Mr Cook stated that he was of the view that there was no family trust election at that point, because in his view a distribution to the Let 3 Trust would have attracted FTD Tax (because at that time there was no retrospective election available under s 99 of the ITAA 1936).

The sole question in dispute in these appeals is whether a valid family trust election was made in respect of the Family Trust.

Approach to fact-finding: The Applicants accept that they bear the onus of proof in these proceedings (TA Act s 14ZZO). However, they draw attention to the five propositions made by Steward J (with Greenwood J agreeing) in Commissioner of Taxation v Cassaniti [2018] FCAFC 212; (2018) 266 FCR 385 at [88], derived from Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1. Those propositions include that the ordinary civil standard applies in these proceedings, and an applicant need only succeed in weighing the metaphorical scales “ever so slightly in his favour” to discharge the burden of proof. On the other hand, the Commissioner observes, correctly, that he does not have any burden to show that an assessment was correctly made: see for example McCormack v Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284 at 303 (Gibbs J), 306 (Stephen J), 323 (Murphy J). Further, any gap in the documentary records cannot work in the taxpayer’s favour: Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at 87 (Latham CJ).

Here, the affidavit evidence of Mr Cameron and Mr Cook is given many years after any election would have taken place. The Commissioner relies particularly on the contemporary documentary evidence, consisting of income tax returns filed for IY 1999. As well as their affidavit evidence, the Applicants refer to different documentary evidence, including the Family Trust’s tax returns from IY 2000 onwards.

Many cases have stated that ordinary human experience is that human memory is fallible, and the degree of fallibility increases over time. That is particularly so where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said: see Watson v Foxman (1995) 49 NSWLR 315 at 319 (McLelland CJ in Eq); Martin v Norton Rose Fulbright Australia [2021] FCAFC 216; (2021) 289 FCR 369 at [147] (the Court). Similarly, in Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at [31], Gleeson CJ, Gummow and Kirby JJ stated that scientific research has cast doubt on the ability of judges (or anyone else) to tell truth from falsehood accurately on the basis of a witness’s demeanour. These considerations have encouraged judges “to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events” (emphasis added).

That is not to say that no use can be made of oral evidence and affidavit evidence based on current recollection. In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560 at [22], Legatt J stated:

The Applicants’ reply submissions appear to contend that these principles are confined to legal issues where the precise form of words is important (such as cases about misleading or deceptive conduct). However, the reasoning in Fox v Percy and Gestmin is not so confined.

Applicant’s key propositions: In oral argument, the Applicants contended that there were seven factors that favoured them, as against two that favoured the Commissioner. Rather than addressing each of these points sequentially, I would instead distil the Applicants’ case down to two key propositions:

Although it is ultimately necessary to weigh all the evidence together, it is convenient to consider these propositions (and the evidence in support of each) separately, at least initially.

Mr Cook never completed a 1998 FTE form? The first proposition (that Mr Cook never completed a 1998 FTE form at all) rests on Mr Cook’s recollection of events. To the extent the proposition is that Mr Cook never completed a 1998 FTE form for the Family Trust, this proposition rests also on Mr Cameron’s evidence that he has no recollection of ever hearing about the concept of a family trust election (whereas, if a family trust election had been made for the Family Trust, Mr Cameron would have needed to have signed the 1998 FTE form). The latter proposition is also supported by contemporary tax returns that are inconsistent with a family trust election having been made in respect of the Family Trust.

Mr Cook’s evidence: Starting with Mr Cook, his statements about his recollection of events from 1998 to 2000 must be treated with caution, in line with Gestmin and Fox v Percy. I note his own evidence is to the effect that he correctly understood in 1998 that it was necessary to complete an ATO form to make a family trust election, but he thought (incorrectly) in 2000 that the effect of amendments around 2000 (which I take to be the 2000 Amendment Act) was that a family trust election had to be made in a family trust’s income tax return, rather than in a separate form: see 99 and (d) above.

It is common ground that the 2000 Amendment Act did not have that effect. The amended transitional provisions relating to family trust elections and interposed entity elections still required that the election be made in writing in a form and manner approved by the Commissioner: see item 22(3)(a) (as amended by Sch 11 item 3 of the 2000 Amendment Act), item 22A(3)(a) (as inserted by Sch 11 item 6), item 23(3)(a) (as amended by Sch 11 item 8), and item 23A(2)(a) (as inserted by Sch 11 item 10).

It would be surprising if a registered tax agent, particularly an agent who correctly understood the effect of the 1998 Amendment Act in this respect, misunderstood how to make a family trust election in 2000. That is particularly the case when 14 of his other clients wished to make such an election: this would not be an isolated error.

On the other hand, the Applicants pointed out in oral argument that several statements in the Commissioner’s own appeal statements in these matters indicate that the Commissioner also thought until recently that the filing of the income tax return containing information about a family trust election was itself the making of an election. For example, the Commissioner’s appeal statement in WAD184/2024 states that Acropolis (as trustee of the Family Trust) lodged a family trust election dated 18 September 2000 (that being the date of the information about the family trust election in the Family Trust’s income tax return for IY 1999: see [21]-[22] above). Although that is true, this error is made in 2024, whereas Mr Cook’s error was made around the time of the relevant amendments. At that time, Mr Cook’s role was to advise clients on how to make family trust elections effectively, such as the 14 clients who intended to make a family trust election. The correct position (that completing a return did not constitute making a family trust election) was set out in the 1999 ATO notes.

The Applicants contend it would be surprising if Mr Cook could not remember having 14 clients (or 15, if Mr Cameron is included) sign the 1998 ATO form. However, it would have been necessary for Mr Cook to obtain instructions from his (14) clients on the family trust election: the precise manner in which this election was made is not a matter of such obvious significance that it can be expected Mr Cook would retain that information after 25 years. As explained below, Mr Cook’s evidence about how certain information came to be included in the 1999 returns is very obviously a reconstruction (albeit an honest one). In my view, the same is true of his evidence about whether he ever filled out a 1998 FTE form.

Mr Cameron’s evidence: Turning to Mr Cameron, I would not accept his very definite statement that he never signed a 1998 FTE form and indeed had never even heard of the concept of a family trust election before this dispute. That is so, even though (as the Applicants submit) the 1999 returns indicate that Mr Cameron would have had to make family elections for both the Family Trust and the Camco 3 Trust, and would also have had to make several interposed entity elections. The caution in Gestmin and Fox v Percy applies, particularly that a witness’s confidence is no reliable guide to whether their evidence is accurate. If anything, it is surprising that a businessman with such awareness of tax issues as Mr Cameron professes would not have had any discussions at all with his tax agent about legislative amendments to the treatment of family trusts, when family trusts were and are used to distribute income from the Camco business.

Family Trust tax returns (IY 2000-2022): However, some contemporary tax returns are inconsistent with a family trust election having been made in respect of the Family Trust. Most significantly, the Family Trust’s tax returns from IY 2000 to IY 2022 do not refer to a family trust election having been made: see [104] above. In addition, the Family Trust made a distribution in 2006 to the Let 3 Trust that Mr Cook states was made on the understanding that a family trust election had not been made: see [105] above. In my view, these 2006 distributions do not add significantly to the relevant evidence: the key part of this evidence is not so much the distributions themselves, but Mr Cook’s statement about their significance. I would assess Mr Cook’s statements in cross-examination as giving his view now of the reasons for these distributions, rather than an actual recollection of his views at the time: see further [127] below.

Mr Cook retained draft information in the 1999 returns in error? The second key proposition is the Applicant’s explanation for how the information about a family trust election and interposed entity elections appeared in the 1999 returns of the Family Trust, the Camco 3 Trust, and Adjuvant (see [20]-[23], [93]-[94] above); and in the 1999 returns of the Wilson Family Trust, the Camco 5 Trust, and Cresslane (see [95]-[97] above). This information, on its face, would otherwise strongly suggest that a family trust election had been made in respect of the Family Trust.

Detailed and specific information included: This information is detailed and specific: the information referring to a family trust election refers to an income year for which the family trust election was made (1995 for the Family Trust and Camco 3 Trust; 1997 for the Camco 5 Trust, and 1995 for the Wilson Family Trust), and refers to the specified individuals (Mr Cameron and Mr Wilson). The information referring to interposed entity elections in Adjuvant’s and Cresslane’s returns refers to the trust for which a family trust election was made and the year of the election (being the Family Trust and the Camco 3 Trust, with Adjuvant’s return; and the Wilson Family Trust and the Camco 5 Trust, with Cresslane’s return: see [94], [97] above).

Mr Cook’s explanations: Mr Cook accepted in cross-examination that the information referred to in the 1999 returns would not have been completed inadvertently, or automatically. He stated that this information was included in draft form so that he could review it at a later stage, and that he had overlooked this information when the returns were lodged. That evidence is different from Mr Cook’s second affidavit, where he referred to using a “template”. This evidence in cross-examination was not of recollection, but Mr Cook’s attempt now to give an explanation for what happened, as can be seen from the following statements:

I do not accept either of Mr Cook’s explanations for how the information about family trust elections and interposed entity elections appeared in the 1999 returns for the Cameron-associated and Wilson-associated entities. Mr Cook’s explanation in his second affidavit (after stating that he did not have a specific recollection of lodging the 1999 return for the Cameron Family Trust, and that he could not be sure) was that “I think” the error was either accidentally to include, or accidentally to fail to remove, a “template form” of family trust data that Mr Cook had created to test his new HandiTax software. Mr Cook gave a different explanation in cross-examination: that the information was deliberately included in draft form, but that he forgot to remove it before lodging the return. This second explanation is inconsistent with the first, because it accepts that the information was included deliberately and not as a means of testing new software. (I would not attach any significance to the common date of 18 September 2000 in the different forms: that feature is equally consistent with the forms being completed on the same day, as it is with this common date indicating error.)

I do not accept that the explanation given in cross-examination is credible. Mr Cook lodged three returns for the Cameron-associated entities, and another three returns for the Wilson-associated entities. He accepted that the returns for the Wilson-associated entities were not lodged under the same time pressure as those for the Cameron-associated entities. It is improbable that a registered tax agent and two different clients would fail to appreciate that three different returns (for each client) contained detailed information over multiple pages that, on this explanation, should not have been included at all.

No reason for the Family Trust to make an election? Mr Cook states that he would not have advised that a family trust election be made in respect of the Family Trust (or the Wilson Family Trust), because the usual reasons for making that election (to carry forward losses, and dealing with franking credits) were not present, and an election could be made as and when required. That is Mr Cook’s view now, but I find that he does not have any specific recollection of what occurred in 1998 and 2000. And the Commissioner points out that the definition of “family trust” in s 272-75 (which requires that a family trust election be made) applies generally to Sch 2F of the ITAA 1936, including provisions dealing with “cash injections” into a trust by an outsider (which have a more favourable definition of “outsider to the trust” in the case of family trusts: see s 272-25(1)). Accordingly, this matter is neutral.

Weighing the evidence as a whole: Considering the evidence as a whole, I would not accept the recollections of Mr Cook and Mr Cameron as to whether or not the 1998 ATO form was ever signed. The events occurred more than 25 years ago. This is exactly the situation to which the comments in Fox v Percy and Gestmin are directed. It is clear that Mr Cook’s evidence as to how information was included in the 1999 returns was a reconstruction, and was an attempt to think of an explanation for what he admitted in cross-examination was a disturbing result for a loyal client.

A safer guide is to have regard to the contemporary objective documentary evidence and the apparent logic of events. However, each of those matters pulls in opposing directions:

As noted, the Applicants bear the onus of proof, at the civil standard. The “more probable” civil standard means that it is not sufficient that the circumstances give rise to conflicting inferences of an equal degree of probability or plausibility, or that the choice between them can only be made by conjecture: Australian Competition and Consumer Commission v Olex Australia Pty Ltd [2017] FCA 222 at [479] (Beach J); Australian Securities and Investments Commission v Whitebox Trading Pty Ltd (No 7) [2019] FCA 849; (2019) 137 ACSR 61 at [51] (Yates J); Australian Competition and Consumer Commission v Bluescope Steel Ltd (No 5) [2022] FCA 1475 at [180] (O’Bryan J). In civil proceedings, any inference must be “reasonable and definite”: Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 at 358 (Dixon, Fullagar and Kitto JJ); Trustees of the Property of Cummins (a bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278 at [34] (the Court); J Hutchinson Pty Ltd v Australian Competition and Consumer Commission [2024] FCAFC 18; (2024) 302 FCR 79 at [173] (Bromwich and Anderson JJ).

Here, the evidence before the Court does not allow me to be satisfied that it is more probable than not that a family trust election was not made in respect of the Family Trust. Putting the matter most favourably to the Applicants, the evidence gives rise to competing inferences of equal probability.

Conclusions in WAD184-186/2024: The Applicants bear the burden of establishing that a family trust election was not made in respect of the Family Trust. They have not done so. It follows that the appeals under s 14ZZ of the TA Act in proceedings WAD184-186/2024 must be dismissed.

In each proceeding, the order is that the appeal is dismissed with costs.