Commissioner of Taxation v Clark

Solicitor for the Respondent: Ernst & Young Law

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 1 of 2010

JUDGES: DOWSETT, EDMONDS AND GORDON JJ DATE OF ORDER: 21 JANUARY 2011 WHERE MADE: BRISBANE

1. The appeal be dismissed;
2. The respondent file and serve any submissions as to costs within seven days;
3. The appellant file and serve any submissions within seven days of receipt of the respondent's submissions; and
4. The respondent file and serve any submissions in reply within seven days of receipt of the appellant's submissions. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 2 of 2010

JUDGES: DOWSETT, EDMONDS AND GORDON JJ DATE OF ORDER: 21 JANUARY 2011 WHERE MADE: BRISBANE

1. The appeal be dismissed;
2. The respondent file and serve any submissions as to costs within seven days;
3. The appellant file and serve any submissions within seven days of receipt of the respondent's submissions; and
4. The respondent file and serve any submissions in reply within seven days of receipt of the appellant's submissions Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 1 of 2010

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 2 of 2010

JUDGES: DOWSETT, EDMONDS AND GORDON JJ DATE: 21 JANUARY 2011 PLACE: BRISBANE

REASONS FOR JUDGMENT DOWSETT J: 1 I have read the draft reasons prepared by Edmonds and Gordon JJ and am in substantial agreement with their Honours' reasons and conclusions concerning the existence of the relevant prior losses. The decision at first instance concerning those matters depended substantially upon the primary Judge's views of the witnesses and available inferences from business records. Such a decision is not easily upset on appeal. As to the question of trust identity, my conclusions differ from those of the primary Judge and those of Edmonds and Gordon JJ. Their Honours have set out the facts of the case, and so it is not necessary that I do so at length.

THE TAXPAYERS AND THE ASSESSMENTS 2 Since 24 June 1993 Clark Enterprises Pty Ltd ("CEPL") has been trustee of the Carringbush Unit Trust (the "Trust"). In the year of income ended 30 June 2001, Mr and Mrs Clark (the "Taxpayers") were, through the mechanisms of interspersed trusts, beneficiaries in respect of income derived by CEPL as trustee. CEPL was effectively controlled by Mr Clark. This case concerns the amount of assessable income derived by each taxpayer from the Trust in the 2001 year of income. In that year CEPL derived capital gains totalling $1,932,006 from the sale of properties in Gladstone, which properties had been acquired in 1997. The Taxpayers assert, however, that in calculating the Trust's net income pursuant to s 95 of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act") such capital gain should be reduced to nil by the application of capital losses allegedly incurred between 1991 and 1993 when the trustee was Carringbush Pty Ltd ("Carringbush"). The appellant (the "Commissioner") does not accept that such losses were incurred or that, if they were, that they may be applied in reduction of the Trust's capital gain. He assessed the Taxpayers accordingly and dismissed their objections. They appealed to this Court against those appealable objection decisions and were successful at first instance. The Commissioner now appeals against those decisions.

THE TRUST 3 The Trust was established by deed executed on 2 July 1984 (the "trust deed"). Mr James Kirby was described as Founder. Carringbush was appointed as trustee. The Founder settled the sum of $10 upon the trusts contained in the trust deed. The relevant beneficiaries were the unit holders. There were, initially, to be ten units, valued at $1 each, with provision for the issue of further units. The trustee might, at its discretion, "pay apply or set aside the whole of the net income of the Trust Fund for [each] accounting period to or for the benefit of each class of unit holders in such proportions as the Trustee in its absolute discretion may determine". In the event of a failure to exercise such discretion, the net income of the fund was to be distributed to the unit holders in proportion to the number of units held. The units were transferable, provided that any transferee was, in the opinion of the trustee, a "respectable, responsible and solvent person". The units were also redeemable. The trust deed could be amended by the trustee with the prior approval of an extraordinary resolution passed at a duly constituted meeting of unit holders. The unit holders could remove the trustee and appoint a new trustee or trustees. 4 The trust deed contemplated applications for units from identified persons, namely John Michael Denoon, Helen Margaret Denoon and William Ross Scott. They were to acquire three, three and four units respectively. Part XII of the trust deed was headed "Trustee's Indemnities and Covenants". However that part dealt with the trustee's liability to unit holders. To the extent that the trust deed dealt with the trustee's indemnity, it did so in cl 15(j) of Pt IX. In any event, the case has been conducted upon the basis that the trustee for the time being was entitled to the indemnity and lien generally allowed to a trustee, either in equity or pursuant to statute. The trust deed also contemplated the possibility that the Trust's fund would be augmented by moneys subscribed for new units or otherwise derived. Immediately prior to events which occurred in June 1993, nine of the units in the Trust were owned by Gemridge Pty Ltd ("Gemridge"), a company controlled by Mr Denoon. He held a tenth unit in his own name.

TRANSACTIONS IN JUNE 1993 5 For present purposes numerous relevant transactions occurred in June 1993. They are set out at [63]-[76] of the primary Judge's reasons. Of particular importance is a deed dated 24 June 1993 (the "joint venture agreement") to which Mr Clark, Mr Denoon, DCE Holdings Pty Ltd ("DCEH") (a company controlled by Mr Clark) and Gemridge were parties. Relevant provisions of the joint venture agreement were that: the parties were to conduct a joint venture undertaking in respect of property development, using the Trust, through its new trustee, CEPL; DCEH was to acquire four Carringbush units from Gemridge and Mr Clark, one such unit, Gemridge retaining four units and Mr Denoon, one unit; the parties were to meet the cash needs of the Trust in order to fund their joint venture activities by equal contributions from DCEH and Gemridge "representing DCEH and Clark on the one part and Gemridge and Denoon on the other"; DCEH was to inject, or cause to be injected into the Trust the sum of $1,800,000 to meet its immediate projected needs, Gemridge contributing an equal amount "when requested"; such request was to be made in writing by CEPL or DCEH, with payment to be made within seven days of receipt of such notice; in the event that Gemridge failed to make such payment within the prescribed time, DCEH was to have the option of acquiring the four units held by Gemridge and the unit held by Mr Denoon for $1 per unit. 6 Other aspects of the June 1993 transactions included: warranties as to the accuracy of Trust accounts prepared as at 24 June 1993; the change of trustee from Carringbush to CEPL; the release of debts owed to or by companies and trusts within Mr Denoon's Carringbush Group, and payment of other debts by CEPL; Carringbush waiving any right of indemnity out of Trust assets; and Mr Denoon's company entering into a consultancy agreement with CEPL for the supply of his services for 2 years for $200,000, reduced to $165,0000 if paid on or before 24 June 1993. 7 I should say something about the release of debts within the Carringbush Group. The release was effected by a deed dated 24 June 1993 between Carringbush, CEPL, 20 companies and 13 trusts identified in Item 1 and said to comprise the "Carringbush Group" or part thereof. By cl 1 each of those companies and trusts released the Trust from any loan, debt, advance, pledge, charge, encumbrance, lien, guarantee (primary or otherwise), security or other liability or obligation whatsoever to any of those companies or trusts. They also indemnified CEPL against any claim, action, suit, demand, proceeding, judgment, order or other obligation or liability made by any company or trust within the Carringbush Group. The total composition of that "Group" is not clear. In recitals A and B it is asserted that the 20 companies and 13 trusts referred to above were members, as was the Trust. The list is not said to be exhaustive. Carringbush is not identified as a member. 8 In cl 5, the Carringbush Group warranted that there were no outstanding guarantees, pledges or liabilities (either primary or other) of the Trust supporting the liabilities of any of the entities identified in Item 1 and indemnified CEPL accordingly. In cl 6 Carringbush, as trustee of the Trust, waived and released the Item 1 companies and trusts from any loan, debt, advance, pledge, charge, encumbrance, lien, security, liability or obligation whatsoever that (the Trust) "heretofore had to any company or trust within the Carringbush Group arising prior to the date hereof". 9 I refer in detail to this document only in the context of a submission by the Taxpayers that the Trust's property relevantly included the right to benefit under some or all of the other Item 1 trusts. Although the wording of cl 6 is a little obscure, it seems that the intention was to terminate any such rights then vested in Carringbush. I shall return to this matter at a later stage.

FINDINGS 10 At [87] the primary Judge made the following findings concerning these transactions: 1. Mr Denoon and Mr Clark either entered into or caused entities associated with them to enter into the documents described at [45] to [76] [of the reasons]. Those documents speak for themselves. 2. Mr Denoon and Mr Clark entered into the arrangements in June 1993 reflected in those documents in order to establish CEPL as trustee of the [Trust] so as to implement a joint venture arrangement to undertake property development projects through the [Trust] and to enable Mr Clark to take advantage of income and capital losses accumulated in the [Trust]. 3. The utility of the accumulated income and capital losses in the [Trust] was sufficiently attractive to Mr Clark that Mr Clark was willing to embark on the joint venture arrangements notwithstanding that Mr Denoon was unable to provide a matching co-contribution to the [Trust] at the outset of the arrangements and simply hoped to be able to realise assets or otherwise raise $1.8m to make a co-contribution to the joint venture (and thus the [Trust] as the vehicle for the property development venture), by approximately 30 June 1995. 4. In the absence of Mr Clark's contribution in June 1993 of $1.8m, the [Trust] could not have undertaken any property development projects having regard firstly to the accumulated losses in the [Trust] and the balance sheet asset of $10.00 representing the settlement sum; and secondly, Mr Denoon's difficulty in raising either capital or debt in June 1993 due to the financial hardship he and his entities had endured as a result of the downturn in the Australia property market. In that sense, the [Trust] was, as the notes to and forming part of the Financial Statements of the [Trust] to 18 June 1993 record, a "dormant" trust, in terms of its "principal activities". 5. In order to ensure that Carringbush would not be able to make any claim upon the assets comprising the trust estate including contributions to the trust estate consequent upon the June 1993 arrangements, for indemnity in respect of liabilities incurred in performing trust obligations, Mr Clark and CEPL required Carringbush to waive and abandon by deed its right of indemnity out of the trust assets. Similarly, Mr Clark required the Carringbush group of companies and related trusts to discharge and abandon all claims against the trust estate and facilitate the release and discharge of third party claims by Westpac/AGC and BDO Nelson Parkhill. 6. Unless and until Mr Denoon made, through Gemridge or otherwise, a contribution to the [Trust] matching the $1.8m contributed by Mr Clark's entity, neither Gemridge nor Mr Denoon were to enjoy any right (whether such a right in a unit holder subsisted under the trust instrument or not) to call for or "get their hands on any part" of Mr Clark's contribution to the [Trust] nor any right to the income of the trust. 7. Mr Clark was prepared to use the [Trust] as the vehicle for property development projects going forward, on the footing that Mr Denoon's interests would have no claim to any of the assets of the [Trust] unless and until Mr Denoon made his contribution of $1.8m. Mr Clark, as the guiding mind of the trustee of the [Trust] (CEPL), did not provide Mr Denoon with the financial accounts for the [Trust] for the income years 1993, 1994 or 1995 as Mr Clark believed it was not relevant to do so "until [Mr Denoon] put his money in". 8. Mr Clark put in place arrangements to discharge claims against the trust estate by Carringbush group companies, extinguish Carringbush's right of indemnity out of trust assets, compromise the claims of external creditors, retain Mr Denoon as a consultant and, in practical effect, secure the agreement of Mr Denoon not to assert any rights attaching to the units held by the Denoon interests, unless and until Mr Denoon made his contribution of $1.8m, as conditions of CEPL participating as trustee; Clark Holdings acquiring 50% of the units in the trust; and Mr Clark making a contribution of $1.8m by way of a distribution to the [Trust] by the Clark Enterprises Trust. 9. Mr Clark and Mr Denoon had in mind undertaking a property development project at Forest Lake at or about the time of Mr Clark's investment of $1.8m and during the period between June 1993 and June 1995, a number of property projects were investigated by Mr Clark and Mr Denoon. 10. Mr Clark entered into the arrangements of June 1993 on the basis of advice from his solicitor and his accountant that the opportunity to take advantage of accumulated income and capital losses in the [Trust] meant that CEPL must continue to preserve and operate the [Trust]. 11. Neither Mr Clark nor Mr Denoon had an express intention in entering into the arrangements in June 1993 to bring the [Trust] to an end. CEPL assumed the administration of the trust on appointment and Mr Lovett received from the former trustee all relevant documents in its possession relating to the administration of the trust. 11 The Taxpayers challenge finding no 8, although there is no cross-appeal or notice of contention. They submit that Mr Denoon had not agreed so to refrain from exercising his rights as a unit holder. That seems to be strictly correct. The proper characterization of Mr Clark's right to acquire the five units from Gemridge and Mr Denoon may have been as security for such payment. See Salt v Marquess of Northampton [1892] 2 AC 1. Alternatively, it may have been a conditional option to purchase. However the point is that it could be exercised so as to ensure that Mr Denoon and Gemridge did not participate in any benefit emerging from the Trust. This position was strengthened by Mr Clark's control of CEPL.

THE EFFECTS OF THE TRANSACTIONS 12 As his Honour observed, the documents generally speak for themselves. However it is necessary that I say something about them, particularly the joint venture agreement. Curiously, the new trustee (CEPL) was not a party to that agreement. By it the parties effectively determined the future business undertaking of the Trust and its future ownership. They also agreed to the injection of further funds. It was for CEPL to decide upon the nature of the Trust's activities. CEPL also had a limited discretion to refuse to register a transfer of ownership of a unit. Further, the proposed injection of funds required CEPL's agreement. Clause 5 of the trust deed provided that the trustee was to act "as trustee of the fund upon the trusts hereby constituted and to hold the fund subject to and upon the terms of this Deed". The term "the fund" was defined to mean: (i) the settled sum; (ii) all further sums that may be paid to the Trustee for the creation and issue of units hereunder; (iii) all assets, moneys, investments and property from time to time representing the settled sum and such further sums; (vi) [sic] all other moneys, investments and property paid or transferred to and accepted by the Trustee as additions to the fund, any accumulations of income thereto, or accretions to the fund and the investments in property from time to time representing the said moneys, investments, property, accumulations and accretions; and (v) the proceeds of sale of such assets, investments and property; 13 Pursuant to para (iv), (described in the deed as (vi)), any augmentation of the fund had to be "accepted" by CEPL if it were to become part of the fund. 14 The parties appear to have assumed CEPL's co-operation in these respects, suggesting that it was seen as being under the control of Mr Clark. His Honour's findings suggest that whatever CEPL's technical obligations may have been as trustee, Gemridge and Mr Denoon were not to be treated as beneficiaries until Gemridge paid its $1.8m. Obviously enough, Mr Denoon and Mr Clark intended, in some sense, that the Trust continue. Such continuity was essential to access to the Trust's accumulated losses. However the transactions which occurred in June 1983 and subsequent events cannot be described as typical of the way in which trusts, including unit trusts, are conducted. Atypical conduct may have unforeseen results. 15 The Trust accounts, as at 18 June 1993, provide the following relevant information, including comparable figures as at 30 June 1992: 1993 1992 $ $

Settlement capital 10 10 Undistributed profits (accumulated losses) - (3,910,880) Cash at bank 10 247,721 Non-current receivables - 8,616,509 Investments in unlisted shares - 10 Total assets 10 8,864,240 Total liabilities - 12,775,110 Net assets $10 ($3,910,870)

16 The financial position of the Trust appears to have improved greatly between 30 June 1992 and 18 June 1993. However such appearance is illusory. Carringbush had forgiven debts in excess of $8 million owed to it by associated companies. In excess of $12 million owed by Carringbush to related companies had also been forgiven. Other debts had been paid. All cash at bank, save for $10, had disappeared. The sum of $10 was presumably retained as the amount of the original settlement. The effect of these, and other minor transactions was that a notional profit was derived by Carringbush in 1992-1993 (because its debts had been greater than debts owed to it). That "profit" was set off against accumulated losses. I should add that debts owed to Westpac and BDO Nelson Parkhill were paid from the amount of $60,000 paid by CEPL as part of the transaction by which it became trustee of the Trust in place of Carringbush. 17 Carringbush claimed other losses in its capacity as trustee. In 1988 it had acquired shares in Rothwells Limited ("Rothwells"), paying $2,492,654.50 for them. Rothwells went into liquidation on 22 September 1989. By that time, Carringbush's shares in that company were being treated as worthless. They were retained until 26 May 1993 when they were sold to another of Mr Denoon's companies for $1.00 resulting, as it is asserted, in a capital loss of $2,492,653.50 in the 1992-1993 year of income. The amounts of two other capital losses were claimed as deductions, a loss of $375,995 incurred in the 1990-1991 year of income and a loss of $72,000 incurred in the following year. Details appear in the primary Judge's reasons and in those of Edmonds and Gordon JJ. It is these accumulated capital losses which, the Taxpayers assert, should go in reduction of the capital gain made in the 2001 year of income.

EVENTS AFTER JUNE 1993 18 It is said that Mr Denoon was active as a consultant to CEPL. However little seems to have occurred as a result of his consultancy. Gemridge did not pay its $1.8 million. As a result its, and Mr Denoon's units were transferred to DCEH on 26 April 1996. The Gladstone properties which yielded the eventual capital gain were acquired thereafter. On 8 September 1998, the trust deed was amended to create a new class of "discretionary units". Other changes were made dealing with the identification of capital and income. On 10 September 1998 16 discretionary units were issued. The Gladstone properties were sold in 2001.

THE TAX REGIME 19 For the 2001 year of income, trust income is taxed pursuant to Pt 3, Div 6 of the 1936 Act, either in the hands of the beneficiaries or in the hands of the trustee. Generally speaking, tax is payable on the net income "of the trust estate" as defined in s 95(1) of the 1936 Act. Section 95(1) provides that: "net income", in relation to a trust estate, means 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 … . 20 The exceptions are not presently relevant. The term "trust estate" may be of some importance in this case. I shall return to that matter. The term "assessable income", pursuant to s 6(1) of the 1936 Act, has the meaning given in Div 6 of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act"). The term "allowable deduction" means "a deduction allowable under this Act". Section 6-5 of the 1997 Act provides that a taxpayer's assessable income includes his or her ordinary income which is income "according to ordinary concepts". Traditionally, that terminology has not included capital gains. Section 6-10 recognizes that other provisions of the 1997 Act provide for the inclusion of other amounts in a taxpayer's assessable income. For present purposes s 102-5 includes a taxpayer's net capital gain in his or her assessable income. Such gain is calculated by reducing the amount of capital gain made in the relevant year of income by the amount of any capital losses incurred in that year and by the amounts of capital losses from earlier years which have not previously been so applied. Thus, in calculating the net income of a trust estate for the purposes of Div 6 of the 1936 Act, one starts with its assessable income, which includes its net capital gain calculated pursuant to the 1997 Act. 21 As I have said, trust income is usually taxed either in the hands of the trustee or in the hands of presently entitled beneficiaries. However there is a complication arising in connection with the concept of present entitlement as used in s 97 and elsewhere in the 1936 Act. A distinction is drawn between the "net income of the trust estate" and the "income of the trust estate". The former term reflects the definition in s 95(1). The latter describes income recognized as such by the relevant trust constitution and trust law. See Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 at [45] and Cajkusic v Federal Commissioner of Taxation (2006) 155 FCR 430 at [21]-[36]. The distinction is probably irrelevant for present purposes. 22 The starting point, then, is to identify the capital gain derived in the 2001 year of income and the taxpayer who derived it. As the primary Judge noted, s 102-5 of the 1997 Act is couched in the imperative mood, addressed to a person described only as "you", clearly meaning the taxpayer. As the exercise is about calculating the assessable income of the relevant trust estate, s 95(1) deems CEPL to be the taxpayer. It is common ground that the reference in s 95(1) to the "trustee" is to the trustee for the time being. This proposition was explained by the Full Court in Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2000) 43 ATR 42 at [48], although in the context of a superannuation fund. Section 95(1) of the 1936 Act speaks of calculating the assessable income of a trust estate "as if the trustee were a taxpayer in respect of that income". As the High Court observed in Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 at [20]-[21], the approach taken in Div 6 of the 1936 Act is to treat the trust as a "mere conduit through which the beneficiaries under the trust receive income". In this case the capital gain was that attributable to the sale by CEPL of the Gladstone properties in 2001. 23 In identifying the taxpayer it is not sufficient simply to identify the trustee by name. A person or corporation may be a trustee of more than one trust. Section 95(1) refers to the assessable income of a trust estate, not that of a trust or of a trustee. It is the trust estate which must be identified. Identification of the trustee will depend upon that identification. It follows that the addressee of the command in s 102-5 is the trustee as notional taxpayer in connection with assessable income of the trust estate. It also follows that the reference to "losses (if any) you made during the income year" is to losses "made" by the trustee as trustee of that trust estate. The reference to "any previously unapplied net capital losses from earlier income years" should be similarly understood, even if the actual identity of the notional trustee has changed. Hence the meaning of the term "trust estate" is of considerable importance for present purposes.

TRUST ESTATE 24 In Bamford (supra) at [27] the High Court noted that the expression "trust estate" was not defined in the 1936 Act. However at [38] the essentiality of a trust estate was stressed. In Howey v Federal Commissioner of Taxation (1930) 44 CLR 289, the High Court considered s 31 of the Income Tax Assessment Act 1922-1928 (Cth) which was the predecessor of the present Div 6 of the 1936 Act. Section 31(1) provided that: A trustee … shall 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 … . 25 The facts of the case were unusual and somewhat complex, but it is sufficient to say that (at 293) Rich and Dixon JJ observed, concerning the meaning of the word "trustee" as defined in s 4 of that Act: But the word is to have its defined meaning only unless the contrary appears, and it is therefore difficult to apply the definition in order to overcome the effect of the references in sec. 31 to "income of the trust estate". These references suggest that the person who answers the description "trustee" must stand in some relation to the proprietary rights in virtue of which the income arises, even although he need not be a trustee in the proper sense. 26 In Stewart Dawson Holdings Pty Ltd v Commissioner of Taxation (1965) 39 ALJR 300, Kitto J (at 301) distinguished between "a person's deriving income as trustee of a trust estate and his deriving from his own property, or by means of his own exertion, income with respect to which a trust arises at the moment of the derivation; for it is only to a trustee of a trust estate that div. 6 refers". In Commissioner of Taxation v Everett (1980) 143 CLR 440 at 452, Barwick CJ, Stephen, Mason and Wilson JJ said of this decision: Kitto J. was making the point that when a person establishes a trust of his future income simpliciter, the income when it is derived is the subject matter or corpus of the trust, not the fruit of it. To use the terminology of s.95, it is because the income is the "trust estate" that it cannot be "the net income of" that trust estate. His Honour's remarks do not touch the case where an immediate trust is established of a proprietary right which yields or earns future income. Then the income is accurately described as income of a trust estate. 27 Although the notion of a trust estate was not directly relevant to the decision in Commercial Nominees, the Full Court addressed the question at [50]-[53] as follows: 50 The approach of the [1936 Act] in relation to trusts is to direct attention to the trust property. "Fund" when used in Part IX must mean a "stock or sum of money, especially if set apart for a particular purpose" (New Shorter Oxford Dictionary) or a "stock of money or pecuniary resources" (Macquarie Dictionary). The use of the term "trust estate", which is not defined in the [1936 Act], is analogous to the use of the expression "fund" as that expression is defined and used in Part IX. 51 Neither refers to a legal person. Both terms must be taken to refer to the conglomeration of property in respect of which trust obligations and corresponding rights exist from time to time. Putting it another way, a trust estate or a superannuation fund will be that property the ownership of which is divided between trustee and beneficiary. The trustee will always be ascertainable. However, the class of beneficiaries, while identifiable, will not necessarily be closed and all beneficiaries may, of course, not be ascertainable. 52 The trust obligations of the trustee and the corresponding rights of the beneficiaries may vary from time to time, in accordance with law. Similarly, the property that is the subject of such obligations and rights will not be static. Parts of the property might be distributed so as to cease to be subject to trust obligations. Further property may accrue as income or by further settlement so as to become subject to obligations where previously that additional property was not. 53 However, at any given time it will be possible to identify the property that is the subject of the trust obligations and in respect of which the rights of beneficiaries exist. It is the income which accrues from that property, less outgoings from that property, that go to make up the taxable income of the trust estate or fund. Thus, the [1936 Act] requires a calculation of taxable income in respect of the trust property, to which it sometimes refers as the trust estate and at other times as the fund (in Part IX). … 28 Thus it seems that the trust estate is the property of the trust, from time to time. 29 In identifying capital losses from earlier years for the purposes of s 102-5, it is necessary to identify the trust estate which incurred the losses in order to determine whether that trust estate was also the trust estate which derived the relevant capital gain. The starting point is the latter rather than the former. That process may be informed by the decision of the High Court on appeal from the Full Court in Commercial Nominees. The High Court's decision is reported as Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (2001) 75 ALJR 1172.

Commercial Nominees 30 The Taxpayers rely heavily upon the High Court's decision. The trust under consideration in that case was a superannuation fund, regulated by the Superannuation Industry (Supervision) Act 1993 (Cth) (the "SIS Act") the terms of which were, to some extent, reflected in Pt IX of the 1936 Act. The facts relevant to the High Court's decision appear at [15]-[28]. In summary they were as follows: the fund was originally established for the benefit of the employees of a group of associated companies known as the Miden Group; it was established in 1988 as a defined benefit fund, the benefits being calculated chiefly by reference to salary and years of service; by 1993 the companies in the Miden Group were experiencing financial difficulties, subsequently going into receivership, and then liquidation; in 1989 and 1990 an actuary certified that amounts held by the fund were surplus to its requirements; the surplus was returned to the employers, resulting in the creation of deductible losses in the fund; in 1993 substantial changes were made to the trust deed, which amendments were made pursuant to the power of amendment conferred by the original deed; by the amendments a new category of employee was added to the two existing categories, the new category being the employees of new employers, and contributions in respect of the earlier categories ceased; and The benefits payable pursuant to the fund were changed from defined benefits to accumulation benefits. 31 At [30] the High Court observed: Whatever may be the position in relation to the continuity of trusts generally, in applying Part IX of the Assessment Act, the legal and commercial incidents of superannuation funds, and the inter-relationship between the Assessment Act and the SIS Act, must be taken into account. 32 This statement highlights two significant distinctions between that case and the present case. First, in Commercial Nominees the trust was a superannuation fund which was regulated pursuant to the SIS Act. Secondly, the relevant tax regime was contained in Pt IX of the 1936 Act, which related specifically to superannuation funds, rather than Div 6 of the 1936 Act, dealing with trusts. Nonetheless, at [8], the Court observed that Pt IX operated in a manner similar to Div 6 by imposing tax liability "upon a person, or persons, or a corporation, in a representative capacity". It is clear, however, that the provisions of the SIS Act, and their interaction with Pt IX, were of considerable importance in their Honours' reasoning. See, for example, [31]-[33]. The Court emphasized the likelihood of "changes in the incidents of the trust relationship" in the context of the regulatory scheme established by the SIS Act. Further, such an entity was "indefinitely continuing". See [32] and s 10 of the SIS Act. Such changes might include changes of trustee, changes in the property of the trust, changes of persons entitled to benefits, changes in the nature of benefits, and changes in the employers whose employees were eligible to participate in the scheme. It is not clear to me that such inevitable and on-going change will necessarily be a characteristic of the operation of a unit trust with a small number of unit holders and a finite life expectancy. However, in this case, the trust deed certainly contemplated the possibility of change. 33 Their Honours continued at [33]: The [Commissioner], compelled to acknowledge the possibility, indeed, likelihood, of such changes in the incidents of a trust relationship involving a complying superannuation fund, argued, nevertheless, that there are degrees of change, and that, in the present case, the extent of the changes meant that, either the original eligible entity came to an end, or, alternatively, in the year ended 30 June 1995, there were two eligible entities, and only one of them was entitled to carry the earlier losses forward. On that approach, the termination of a former eligible entity, or the creation of the new eligible entity, occurred when the Deed of Amendment took effect. At that time, however, some of the former members of the fund remained, some of the trust property remained, and the regulatory authority continued to treat the fund as a single entity. 34 The Full Court had concluded that a comparison of the old and new arrangements indicated that they were not "essentially" different. At [35] the High Court pointed out that "… a judgment as to what is 'essential', in this context, largely turns upon the level of generality or particularity at which the changes are considered" and that there was "nothing in Part IX of the Assessment Act which provides a criterion by reference to which it is possible to decide whether such changes are essential or inessential, fundamental or immaterial". At [36] the High Court concluded that in the absence of statutory criteria: … the question is one of continuity, to be considered in the context of a superannuation fund which, of its nature, may be expected to undergo change. The question is whether the eligible entity which derived the taxable income … is a different entity from the eligible entity that incurred losses in the earlier years. If, as the appellant contends, it is a different entity, there is a question as to what happened to the original entity. The three main indicia of continuity for the purposes of Pt IX are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity. The trusts under which the fund operated … were constituted by the original trust deed in 1988 as varied by the exercise, in 1993, of a power of amendment. The property the subject of the trusts did not alter at the time the amendments took effect. Persons who were members of the fund before the amendments remained members of the fund after the amendments. The fund, both before and after the amendments, was administered as a single fund, and treated in that way by the regulatory authority. (Emphasis is added.) 35 Neither the statutory regime relating to superannuation funds nor the question of recognition by a regulatory authority arises in the present case. It may also be significant that Commercial Nominees came to this Court by way of appeal from the Administrative Appeals Tribunal. Section 44 of the Administrative Appeals Tribunal Act 1975 (Cth) limits the ambit of such an appeal to questions of law. This is the significance of the reference in the first sentence at [34] in the High Court's reasons to findings of fact which were potentially fatal to the Commissioner's case. This Court's jurisdiction is not, in the present case, subject to the same limitation. The primary Judge had to determine whether the assessment was excessive. We must determine whether there was operative error in his Honour's decision. 36 The High Court placed much greater emphasis upon the regulatory and tax regimes which were specific to superannuation funds than did the Full Court. The Full Court's approach rather stressed the operation of the general law of trusts. In any event, the general approach of both Courts to the ultimate question was to assess the extent of continuity of constitution, property and membership. However the term "continuity" must be understood in context. The High Court seems not to have been describing the continued existence of the bare husk of a trust, in the sense of there being a trustee, beneficiaries, a constitution and property of a nominal value. Fairly clearly, the relevant property was the property which incurred the relevant loss and derived the relevant income. The fundamental significance of the judgment, in my view, lies in the sentence at [36]: Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question … . 37 That requirement will not necessarily be satisfied merely by demonstrating substantial change in one or more of those "matters" - constitution of the trust, trust property and membership. However, contrary to the Taxpayers' submissions, it is not sufficient, in order to demonstrate continuity, that the Taxpayers show that the trust structure which incurred the losses continued to exist as at the time at which the capital gain was derived. It is necessary that the Taxpayers show that the trust estate which derived the relevant capital gain was the trust estate which incurred the losses.

THE TRUST ESTATE WHICH DERIVED THE CAPITAL GAIN 38 The trust estate which derived the capital gain had as its trustee CEPL which became trustee in June 1993. Between June 1993 and 30 June 2001 the constitution of the Trust was varied in numerous respects, particularly by making provision for discretionary units and issuing nine such units to DCEH, Moreton Bay Holdings Pty Ltd and Mr Clark. From 1996 all of the ten units issued as at June 1993 were owned by DCEH and Mr Clark. The constitution of the trust was changed in other ways, although the significance of the changes is not immediately obvious. I accept that those changes were effected in accordance with the constitution of the Trust. I accept, for present purposes, that none of those events was such as to bring the Trust to an end. 39 I turn to the question of the trust estate. Keeping in mind that the term "trust estate" describes the property of the Trust, I should examine the trust property from the time when the losses were incurred until the 2000-2001 year of income. For present purposes it is not necessary that I say much about events prior to 18 June 1993. The outcome appears from the accounts prepared as at that date. As at 30 June 1992 Carringbush had slightly less than $250,000 in cash and "non-current receivables", namely debts owing to it, in excess of $8 million. Its liabilities totalled in excess of $12 million. In other words, all of the assets were gone, or at least would have been gone if the debts were paid, even assuming that the debts owed to Carringbush were recoverable. By 18 June 1993, the Trust had, in effect, been wound up. Carringbush's debts had been forgiven, it had forgiven the debts owed to it, and it had discharged other obligations. The cash at bank had disappeared, save for the amount of $10, the amount of the original settlement. That sum ought also to have gone in payment of debts. If, as at 18 June 1993, it continued to exist as a deposit in a bank account, it was only because it was a nominal amount, not worthy of recovery by a creditor. The books of account may have been assets, but they were also of only nominal value. Thus, as at 18 June 1993 the relevant trust estate was of only nominal value. 40 I should make two further points. First, the Commissioner suggests that the primary Judge, at [114], treated the accumulated losses as assets. I doubt whether that criticism is valid. His Honour was merely describing the state of the trust fund. Secondly, the Taxpayers place some emphasis upon the fact that Carringbush as trustee was a discretionary beneficiary under various trusts within the Carringbush Group, and that its rights as such were, relevantly, property. The submission seems to be made in addressing the Commissioner's submission that there were no net assets after notional payment of debts, the Commissioner's reliance upon the trustee's right of indemnity out of Trust assets and Carringbush's waiver of such right. 41 I do not consider the question of waiver to be of significance in this case. I see no reason why a former trustee may not waive its right of indemnity, at least in the absence of a statutory prohibition. Of course, it will remain liable to the Trust creditors unless they waive their rights. For present purposes, it is not necessary that I decide whether the creditors would retain their rights of subrogation after waiver by the trustee. I cannot see that such a waiver could, in any way, vary the terms of an ongoing trust with a new trustee. Carringbush's position as a discretionary beneficiary seems not to have been treated as significant at first instance. Such interest as it had was not treated as an asset in the accounts as at 18 June 1993. That is hardly surprising. In any event, such rights were presumably extinguished by the deed of release dated 24 June 1993. Further, it is clear that no part of the funds available to CEPL after June 1993 was derived from that source. Nor is there any suggestion that such rights, if they continued, otherwise assisted CEPL in deriving its capital gain. 42 One submission made on behalf of the Taxpayers seems to me to be doubtful. At para 52 they submit that a trustee may not "pocket the money" derived from the trust estate pursuant to the right of exoneration or indemnity. If the submission implies that the trustee must first pay the debt or arrange for direct payment of it without the money passing through the trustee's hands, then the submission may be incorrect. See Jacobs' Law of Trusts in Australia (7th ed) at para 2104 and the authorities there cited. However the matter is of no present importance. 43 Two other matters arise out of the Taxpayers' submissions. At para 61 they suggest that the Trust received $1.8 million from the Carringbush Family Trust. There is no suggestion to that effect in the first instance judgment or otherwise in the evidence, at least as far as I can see. I suspect that it is a typographical error, and that the reference should be to the Clark Family Trust. Secondly, at para 65, it is said that the Trust's receipt of the same sum was as a beneficiary of the Clark Family Trust, and that such receipt and subsequent application of the funds were pursuant to the trust deed. All of that may be so, but, pursuant to the joint venture agreement, such payment was the responsibility of DCEH. The mechanism by which such payment was made was a matter for it and Mr Clark. There is no suggestion that the Trust was a beneficiary of the Clark Family Trust prior to the events of June 2003. Thus any rights as such a beneficiary were not part of the trust estate prior to June 1993. Those rights were clearly not part of the trust estate which incurred the relevant losses. 44 Notwithstanding the absence of the statutory and tax regimes identified in Commercial Nominees, the High Court's decision offers a guide to the proper approach for present purposes. As at 18 June 1993 the Trust had only nominal assets. The trust estate which incurred the relevant losses was gone. Very shortly after 18 June 1993, and in accordance with the terms of the arrangements between Mr Clark and Mr Denoon, Mr Clark caused $1.8 million to be injected into the Trust. Such sum, perhaps with other sums similarly contributed, became the trust estate which eventually yielded the capital gain in the 2000-2001 year of tax. It cannot seriously be suggested that such gain was the product of any part of the trust estate held prior to, or at 18 June 1993, nor can it sensibly be argued that any part of that capital gain was produced by the $10 settlement amount. It cannot be said that there was continuity of the trust estate from any time prior to 18 June 1993 until the date of acquisition of the Gladstone properties or the date of their sale in the 2001 year of income. 45 Continuity of the trust estate is not demonstrated by showing that property was held upon certain trusts in 1990-1993, and that other property was held upon the same trusts in 1997 or 2001. Property held at an earlier time may have been dealt with in such a way as to produce other property held at a later time, demonstrating continuity of the trust estate. Where, as here, the trust deed contemplates augmentation of the trust estate, there may be circumstances in which additional moneys can be seen as comprising, with the original fund, the trust estate and, together, incurring losses or deriving income. Where the affairs of a trust have been effectively wound up by disposing of all assets and resolving all outstanding liabilities, the position is quite different. The only available inference from the facts of this case is that Mr Denoon, Mr Clark and their companies intended that the Trust start again with a new trustee, new beneficiaries (subject to the possibility that Mr Denoon might be able to participate in re-funding the Trust), but upon substantially the same terms, and that such intention was carried into effect. No doubt they hoped that the Trust would continue to the extent necessary in order that the accumulated losses be available for Mr Clark's purpose. Such expectation or hope says nothing about the identity of the trust estate. Changes in the ownership of units were clearly contemplated by the trust deed. Changes in the terms of the trust were also contemplated, as was augmentation of the fund. But where a trust has been effectively deprived of all assets and re-endowed, I see no way in which it can be said that the original trust estate has continued.

CONCLUSION AND ORDERS 46 It follows that CEPL was not entitled to set off against its capital gain in 2001, the Trust's capital losses incurred prior to 18 June 1993. They were incurred by the trustee in connection with a different trust estate from that which derived the capital gain in the 2001 year of income. For those reasons I would allow the Commissioner's appeals and set aside the decisions below. I would dismiss the original appeals and order that the Taxpayers pay the Commissioner's costs below and on appeal. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate: Dated: 21 January 2011 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 1 of 2010

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 2 of 2010

JUDGES: DOWSETT, EDMONDS AND GORDON JJ DATE: 21 JANUARY 2011 PLACE: BRISBANE

Introduction 47 These are appeals from orders of a judge of this Court setting aside objection decisions of the appellant ('the Commissioner') and allowing the objections of the respondents against amended assessments of income tax for the year of income ended 30 June 2001.

Background 48 Pursuant to a Deed of Trust made 2 July 1984 between James Stewart Kirby as founder and Carringbush Pty Limited ('Carringbush') as trustee ('the Deed of Trust'), a trust fund was established in the sum of ten dollars ($10.00) as a unit trust with the beneficial interest in the fund divided into 10 units ('the CU Trust'). The original unit holders were Mr and Mrs Denoon (three units each) and Mr Scott (four units). Those units were redeemed and Gemridge Pty Limited ('Gemridge') (a company associated with Mr Denoon) made an application for the issue of nine units and Mr Denoon applied for the issue of one unit. Those units were issued on 18 March 1987. 49 In the year of income ended 30 June 2001, the trustee of the CU Trust sold two properties in Gladstone, Queensland ('the Gladstone properties'), realising a net capital gain of $1,932,006. At all relevant times, up to and including the appeal to this Court, the respondents have maintained that the CU Trust incurred net capital losses in each of the years of income ended 30 June 1991, 1992 and 1993 which could be applied to reduce to nil the net capital gain arising on the disposal of the Gladstone properties. 50 The principal capital loss was said to arise on the disposal of two parcels of shares in Rothwells Limited ('Rothwells'). The respondents contended that the Rothwells shares were purchased by Carringbush as trustee of the CU Trust during the 1988 income year for $2,492,654.50 and sold on 26 May 1993 for $1.00 resulting in a capital loss of $2,492,653.50 in the 1993 income year. The respondents also contended that the CU Trust suffered a capital loss of $375,995 in the 1991 income year as a result of the trustee writing off a loan to a company called Relsun Pty Limited ('Relsun'). A third capital loss of $72,000 was said to have been suffered in the 1992 income year as a result of the liquidation of a company called Carringbush Kumagai Limited ('CKL') and the write down of the CU Trust's investment in shares in CKL as irrecoverable. 51 Before the primary judge, the Commissioner put in issue whether the CU Trust had incurred these losses. In relation to the Rothwells transaction, the Commissioner pointed out that the respondents had not been able to identify the date of the acquisition, the entity that acquired the shares or the method by which the trustee of the CU Trust financed the acquisition if it acquired the shares, nor had the respondents been able to produce any of the primary documents evidencing the transaction. As to the other two capital losses, the Commissioner contended that there was no evidence to support either transaction and thus the respondents had failed to discharge the onus of proof required by s 14ZZO of the Taxation Administration Act 1953 (Cth) ('the TAA'). 52 Before the primary judge, the Commissioner further contended that, even if the respondents discharged the onus of establishing that the trustee of the CU Trust had incurred these three capital losses, the trust estate which incurred the losses was not the same trust estate which had made the capital gain in the 2001 year of income. The Commissioner pointed to a series of events that occurred in June 1993: changing the trustee of the CU Trust; altering the ownership of the units of that trust; extinguishing liabilities of the trust; extinguishing the former trustee's right of indemnity out of trust assets; altering the corpus of the trust; and changing the activity of the trust from being dormant to a vehicle used by Mr David Clark to take advantage of accumulated losses in the CU Trust by causing David Clark Enterprises Pty Ltd ('Clark Enterprises') as trustee of the David Clark Enterprises Trust ('the Enterprises Trust') to distribute $1,965,000.00 to the trustee of the CU Trust as a beneficiary of the Enterprise Trust. The Commissioner contended that all those events established a lack of continuity required by the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') and the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') in the trust estate that made the capital gain in the 2001 income year and the trust estate that incurred the unapplied capital losses in the 1991, 1992 and 1993 income years. It followed, according to the Commissioner, that the net capital losses could not be applied so as to reduce the net capital gain made in the 2001 income year and in consequence, reduce the net income of the CU Trust as configured in the 2001 income year. 53 Significantly, in our view, the Commissioner never contended, either before the primary judge or on the appeals, that there was a cessation in the continuum of trust property such as to leave it open to find that the trust estate as originally constituted had come to an end. At most it was put that only a money amount of $10, being the amount of the original settlement, remained, but it was never in dispute, nor could it be on the evidence, that that amount of money ceased to exist.

The Primary Judge's Findings on the Capital Loss Transactions 54 In relation to the Rothwells transaction, the primary judge said at [31] of his reasons that he accepted the evidence given on behalf of the respondents by Mr Denoon, Mr Roxburgh and Mr Scott and that he was satisfied: 1. That the financial statements for the years ending 30 June 1988 and 1989 prepared by BDO Nelson Parkhill based upon access to all of the primary documents relating to the activities of the Carringbush group of companies and more particularly Carringbush and the CU Trust, evidence a transaction by which Carringbush as trustee of the CU Trust acquired the Rothwells shares; 2. That the acquisition is consistent with the entries recorded in the Rothwells share register; 3. That Carringbush as trustee of the CU Trust paid for those shares in an amount of $2,492,655 and that those funds were available to Carringbush as trustee of the CU Trust, on the balance of probabilities, by means of an inter-company loan. The primary judge accepted that the financial statements for the 1988 and 1989 financial years do not expressly reflect such a loan. However, his Honour did not regard that matter as a proper basis upon which the financial statements for those years ought to be called into question and displaced as evidence of the acquisition. His Honour observed that the funds may have been available to Carringbush from companies within the group of companies on the basis, as Mr Scott thought possible, that loan funds were provided or drawn down from a company within the group and repaid within the financial year, in which event, the transaction would not be recorded as a loan transaction in the financial statements at 30 June 1988. At [32] of his reasons, the primary judge concluded: 'In any event, the oral evidence of best recollection of a transaction that occurred 21 years ago, taken in conjunction with the entries in the financial statements and the entries in the share register, establish, on the balance of probabilities, that the Rothwells shares were acquired by Carringbush as trustee of the CU Trust in or about January or February 1988 or at least at a date within the second six months of the financial year ending 30 June 1988. The shares were sold in the 1993 income year giving rise to a net capital loss of $2,492,653.50.' 55 In relation to the Relsun transaction, the primary judge made the following findings at [141] of his reasons: (1) The financial accounts for the trust estate for the income year ending 30 June 1989 show an investment by the trust estate in Relsun of $2.00. (2) The trust estate owned the whole of the issued shares in Relsun. (3) The financial accounts for the year ending 30 June 1990 show a loan by the trust to Relsun of $375,995.00. (4) The financial accounts of the trust for the year ending 30 June 1991 show as a reconciling item the write-off of the loan treated as a capital loss in an amount of $375,995.00. (5) The 1992 income tax return completed by the trustee of the trust shows a carry-forward loss from 1991 of $375,995.00. 56 The primary judge noted that the evidence as to the date of acquisition of the shares was unclear, but in the absence of any evidence in contradiction accepted that the financial accounts reflect an acquisition of the shares in Relsun, the making of the loan and the writing off of that loan. His Honour observed that the Commissioner did not contest that the write-off of the loan constituted a capital loss and went on to say: 'The contest is as to whether the taxpayer is in a position to prove on the balance of probabilities the acquisition of the shares by the trustee in its trust capacity. Since the financial accounts have been prepared by BDO Nelson Parkhill on the basis of access to the underlying documents, I accept that the entries in the financial accounts reflect an acquisition of the Relsun shares and a write off of a loan to Relsun.' 57 In relation to the CKL transaction, his Honour found at [142] of his reasons that: (1) The company CKL was incorporated on 16 August 1985. (2) In the financial accounts for the trust for the year ending 30 June 1988, note 4 to the accounts describes an investment in CKL of $72,000.00 and describes that investment as having had a market value at 30 June 1987 of $144,000.00. (3) The financial accounts for the trust for the year ending 30 June 1989 also show the trust estate's investment in shares in CKL at a cost of $72,000.00. (4) CKL was placed in liquidation on 2 October 1991 and deregistered in 1994. (5) In the 1992 income year the trust estate's investment in the CKL shares was treated as irrecoverable giving rise to the claim for a carry forward capital loss. 58 His Honour concluded at [143] of his reasons: 'In the absence of any evidence in contradiction, I accept that the entries in the financial accounts prepared by BDO Nelson Parkhill on the basis of access to the primary documents, reflect a true and fair view of the trust estate's investment in the CKL shares and that the investment became irrecoverable by reason of the liquidation of CKL on 2 October 1991.'

Challenges on Appeal to Findings on Capital Loss Transactions 59 The Commissioner's notice of appeal challenged the primary judge's findings that Carringbush as trustee of the CU Trust: (1) paid $2,492,655 for shares in Rothwells in the financial year ended 30 June 1988 giving rise to a net capital loss of $2,492,653.50 in the income year ended 30 June 1993; (2) wrote off a loan to Relsun in the income year ended 30 June 1991 giving rise to a capital loss of $375,995.00; (3) wrote down an investment in shares in CKL in the income year ended 30 June 1992 giving rise to a capital loss of $72,000 on the grounds that the Court: (4) made inferences that were not reasonably open on the facts; and (5) failed to give effect to s 14ZZO of the TAA. 60 In our view, these grounds of appeal were misconceived and certainly not made good. On the hearing of the appeal, it soon became apparent that the Commissioner's real complaint was one of credibility; that the primary judge had accepted the evidence of Mr Denoon, Mr Roxburgh and Mr Scott as well as the evidence contained in the financial statements of the CU Trust for the years ended 30 June 1988, 1989, 1990, 1991, 1992 and 1993 prepared by BDO Nelson Parkhill based upon access to all of the primary documents relating to the activities of Carringbush and the CU Trust even though those primary documents were not themselves available to be put in evidence. Dealing with each of the transactions in turn:

The Rothwells Transaction 61 The complaint here was that the primary judge had accepted, as evidence that Carringbush, as trustee of the CU Trust, paid $2,492,665 for the Rothwells shares in the year ended 30 June 1988, financial statements which did not actually evidence the payment (although recording it) and which themselves did not expressly reflect oral evidence, accepted by the primary judge, as to the source of the funds to enable Carringbush, as trustee of the CU Trust, to pay for the Rothwells shares. 62 According to the respondents, there was ample probative evidence to support the primary judge's finding that Carringbush, as trustee of the CU Trust, acquired the Rothwells shares for a consideration of $2,492,665. They referred to the following: (1) The Rothwells share register shows the shares were held by Carringbush; (2) the 1988 accounts of Carringbush (as trustee) show it owning the shares (and also show the first provision for the partial diminution of the value of those shares from their cost); (3) the 1989 accounts also show it owning the shares (and also show the balance of the provision for the diminution of the value of those shares from their cost); (4) Mr Denoon swears that he caused Carringbush to pay $2.5m for the shares; (5) both Mr Denoon and Mr Scott swear that the funds would have been provided by loan from another company in the group (and it is clear the group had the funds available to do so); (6) Rothwells was in fact paid. This conclusion is to be drawn not only from the share register but also Mr Roxburgh's evidence that all funds were received; (7) eventually Mr Denoon caused Carringbush as trustee to sell the shares to another of his companies (and thus crystallise the amount of the loss), which is consistent with his knowledge that the trustee owned the shares; (8) importantly, no positive case was led that another entity acquired the Rothwell shares (and, indeed, in light of the Rothwells share register, that would seem a fanciful case); 63 More importantly, no positive case was led that another entity paid for the Rothwells shares that Carringbush acquired. 64 The lack of contemporaneous primary documentation is a function of the fact that the transaction took place over twenty years ago; that fact, and the fact of Mr Clark 'taking over' control and ownership of the CU Trust from Mr Denoon in 1993, makes explicable the lack of contemporaneous primary documentation evidencing payment by Carringbush, as trustee of the CU Trust, of the consideration for the Rothwells shares. 65 In the absence of any positive case that some entity other than Carringbush paid for the Rothwells shares, the primary judge was entitled to rely on the evidence he did - the financial statements of the CU Trust for the years ended 30 June 1988 and 1989 - for his finding that Carringbush (as trustee) paid for the shares an amount equal to their cost as recorded in those financial statements: see also s 1305 of the Corporations Act 2001 (Cth) and Australian Securities Investments Commission v Rich (2009) 75 ACSR 1 at [396]. 66 The fact that the same accounts do not identify and record any particular source of funding for that payment, by way of loan or otherwise, does not mitigate against that conclusion, not only for the reasons given by the primary judge, but also because the source of funding could be contained in, but hidden by, movements in liability accounts, disclosed in the balance sheets at year end.

The Relsun Transaction 67 The notice of appeal puts in issue the primary judge's finding that Carringbush, as trustee of the CU Trust, wrote off the loan to Relsun in the 1991 income year giving rise to a capital loss of $375,955. Presumably this goes to the capacity in which Carringbush made, and wrote off, the loan rather than whether the loan was actually written off because the latter does not appear to be an issue before the primary judge. Moreover, as noted in [9] above, the primary judge observed at [141] of his reasons that the Commissioner did not contest that the write off of the loan constituted a capital loss. On the assumption that this ground of appeal only goes to the capacity in which Carringbush made, and wrote off, the loan, it is difficult to comprehend what is put in the Commissioner's written submissions as to the recoverability of the loan. This would not seem to have been an issue before the primary judge; his Honour certainly did not refer to it in his reasons, and if it was not raised below when evidence might have been adduced on the issue, it is too late to raise it now. 68 Here again, the primary judge accepted the financial accounts of the CU Trust prepared by BDO Nelson Parkhill as evidence that the loan to Relsun had been made and written off by Carringbush in its capacity as trustee of that trust on the basis that those accounts had been prepared after access to all the relevant primary documents relating to the transaction. That, coupled with the absence of any evidence in contradiction, led the primary judge to the finding which he made, and we can see no error in the process by which his Honour arrived at that conclusion.

The CKL Transaction 69 The notice of appeal puts in issue the primary judge's finding that Carringbush as trustee of the CU Trust wrote down the investment in shares in CKL in the 1991 income year giving rise to a capital loss of $72,000. Like the Relsun transaction, presumably this goes to the capacity in which Carringbush made and wrote down the investment, rather than whether the investment ceased to exist and, in consequence, was actually written down, because the latter does not appear to be an issue before the primary judge. Once again, the Commissioner's written submissions seem to raise an issue that was not raised below, and is not covered by the grounds in the notice of appeal, namely, that the primary judge failed to address the threshold question as to whether the CU Trust's investment in the shares in CKL was a CGT asset, that is, acquired on or after 20 September 1985. There was no evidence to suggest that the investment was made before that date. The fact that CKL was incorporated in August 1985 as a 'shelf company' for future use by clients of the incorporators certainly does not provide any probative support for such a conclusion. 70 Once again, the primary judge relied on the financial accounts of the CU Trust prepared by BDO Nelson Parkhill for the findings he made and the absence of any evidence in contradiction. In our view, this did not disclose or manifest any error on his Honour's part.

The Continuity of the Trust Estate Issue 71 The principal issue agitated before the primary judge and before this Court on appeal, was the Commissioner's contention that the trust estate, the trustee of which made a capital gain in respect of the disposal of the Gladstone properties, was not the same trust estate, the trustee of which incurred the net capital losses in the 1991, 1992 and 1993 years of income. It was common ground, both before the primary judge and on appeal to this Court, that if the Commissioner's contention was correct, the net capital losses in the 1991, 1992 and 1993 years of income could not be applied against the capital gain on the sale of the Gladstone properties so as to reduce the net capital gain of the CU Trust for the 2001 year of income to nil. 72 Underlying the Commissioner's contention that the trust estate, the trustee of which made a capital gain on the sale of the Gladstone properties, was not the same trust estate, as the trustee which incurred the net capital losses in the 1991, 1992 and 1993 years of income, were certain arrangements which were put in place in June 1993 in relation to the implementation of a joint venture arrangement between entities associated with Mr Denoon and entities associated with Mr Clark to undertake property development projects through the CU Trust and thus take advantage of income and capital losses accumulated in that trust. 73 The primary judge dealt with the arrangements at some length in his reasons for judgment both by reference to the various instruments that were entered into and by reference to comprehensive findings of fact based on the evidence of Mr Clark and Mr Denoon which his Honour accepted. It is unnecessary to detail the arrangements to the same extent as his Honour save in so far as they are relied on by the Commissioner for his contention that the trust estate, the trustee of which sold the Gladstone properties, was not the same trust estate, the trustee of which incurred the net capital losses in the 1991, 1992 and 1993 years of income. 74 On 24 June 1993, various instruments were entered into providing for: (1) The acquisition by DCE Holdings Pty Ltd ('Clark Holdings') (as trustee of the Clark Family Trust) and Mr Clark of four units and one unit respectively in the CU Trust from Gemridge for $1.00 per unit. Gemridge and Mr Denoon were to retain four units and one unit respectively. (2) The appointment of Clark Enterprises Pty Ltd ('CEPL') (a company associated with Mr Clark) as trustee of the CU Trust in place of Carringbush. (3) The injection of $1.8m into the CU Trust by Clark Holdings, otherwise than by way of loan, to meet the immediate requirements of the joint venture with Gemridge to do likewise when required. If Gemridge failed to do this after Clark Holdings made its contribution, Clark Holdings could require the transfer to it of the unit holding of Gemridge and Mr Denoon in the CU Trust in consideration of the payment of $1.00 per unit. By 30 June 1993 Mr Clark had caused a contribution to be made to the CU Trust of $1,965,000 by an income distribution from Clark Enterprises as trustee of the Enterprises Trust to the CU Trust as a beneficiary of that trust. Of that sum, $1.8m represented the contribution to the CU Trust and the remaining $165,000 represented discounted consulting fees payable to Mr Denoon's company, Arthur G Leevers Pty Limited. Mr Denoon was never able to raise the funds for Gemridge to make its contribution of $1.8m and Clark Holdings acquired the four units of Gemridge and the one unit of Mr Denoon with effect from 30 June 1995 although the transfer of units did not occur until 26 April 1996. (4) Carringbush and Mr and Mrs Denoon jointly and severally indemnifying the CU Trust and CEPL against any claim, action or other liability that might arise in the future from any act or omission undertaken by Carringbush during its term as trustee of the CU Trust. (5) Carringbush waiving its right to be indemnified out of the assets of the CU Trust in respect of liabilities incurred by it in properly discharging its powers and duties as trustee. (6) The release and discharge of the CU Trust from any liabilities owed to any of 20 companies comprising the Carringbush group of companies whether in their own right or as trustee and the indemnification of CEPL by each of those Carringbush companies in respect of any claim that might be made by any one of them against CEPL as trustee of the CU Trust. 75 The deeds providing for the transfer of the units by Gemridge to Clark Holdings and David Clark and the deed providing for the retirement of Carringbush and the appointment of CEPL as trustee, each contained a warranty as to the accuracy of the balance sheet for the CU Trust annexed to each deed. The annexure was not simply the balance sheet but a set of financial accounts for the CU Trust struck at 18 June 1993. The balance sheet shows, as at 30 June 1992, total liabilities exceeding total assets by $3,910,870.00. When the release and discharge is taken into account, those liabilities are extinguished leaving net balance sheet assets of $10.00 representing the settlement sum. 76 It is, in our view, not without significance to the issue of trust estate continuity, that all of these arrangements were effected without making any alteration to the terms of the constituent document pursuant to which the CU Trust was established, namely, the Deed of Trust. In other words, there was no alteration to the terms of the trusts embodied in that document even if a beneficial interest in the trust fund was affected, even extinguished, by virtue of the arrangements, for example, by the erstwhile trustee, Carringbush, waiving its right to be indemnified out of the assets of the trust fund in respect of liabilities incurred by it in properly discharging its power and duties as trustee.

The Commissioner's Case on Lack of Continuity 77 The Commissioner's case that there was a lack of continuity, indeed 'substantial discontinuity', between the trust estate, the trustee of which made the capital gain in the 2001 year of income from the sale of the Gladstone properties, and the trust estate, the trustee of which incurred the capital losses in the 1991, 1992 and 1993 years of income, insofar as it relied on the reasons for judgment of the High Court in Federal Commissioner of Taxation v Commercial Nominees of Australia Limited (2001) 75 ALJR 1172, in particular at [36], where a similar issue arose, albeit in respect of revenue losses, in the case of a superannuation fund in the context of the provisions of Pt IX of the 1936 Act, was a misconstruction of those reasons. The case came up to the High Court via the Administrative Appeals Tribunal and a Full Court of this Court, and after considering the resettlement analysis considered and rejected by the Full Court as 'not to the point' ((1999) 167 ALR 147 at [47]), Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ said at [36]: 'As the Full Court, and the Administrative Appeals Tribunal held, the question is one of continuity, to be considered in the context of a superannuation fund which, of its nature, may be expected to undergo change. The question is whether the eligible entity which derived the taxable income in the year ended 30 June 1995 is a different entity from the eligible entity that incurred losses in the earlier years. If, as the appellant contends, it is a different entity, there is a question as to what happened to the original entity. The three main indicia of continuity for the purposes of Pt IX are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity. The trusts under which the fund operated in 1994-95 were constituted by the original trust deed in 1988 as varied by the exercise, in 1993, of a power of amendment. The property the subject of the trusts did not alter at the time the amendments took effect. Persons who were members of the fund before the amendments remained members of the fund after the amendments. The fund, both before and after the amendments, was administered as a single fund, and treated in that way by the regulatory authority.' (Emphasis added.) 78 In doing so, their Honours cited, with apparent approval (although the Commissioner disputes this), the following passage from the reasons of the Full Court: '[48] In their application to a trust established as part of a superannuation scheme, ss 79E and 80 cannot be construed literally. The "taxpayer" referred to in the sections, when applied to a trust, must be taken to refer to the trustee for the time being of the trust. Thus, in so far as s 272 has the effect that taxable income of a superannuation fund is to be calculated as if the trustee were a taxpayer, there must be an underlying assumption that the reference is to the person that from time to time acts in the capacity as trustee of the superannuation fund. In a sense, there is a notional person treated as continuing to exist, being the trustee for the time being. Accordingly, the fact that the identity of a trustee, whether individual or corporate, changes from year of income to year of income, would not exclude the availability as a deduction of losses under s 79E or s 80. [49] While the propositions just articulated were accepted by the Commissioner, the Commissioner's contentions do not adequately deal with the consequences of those propositions. Thus, the fact that lack of continuity in the identity of the trustee from income year to income year would not prevent losses in an earlier year being available as deductions from assessable income of a later year, means that criteria must be established for determining when there is sufficient identity of the trusts involved to warrant such deductions being allowable. The Commissioner was not able to refer to any express statutory requirement of continuity, or to any relevant statement of applicable criteria in the legislation. [50] The approach of the Assessment Act in relation to trusts is to direct attention to the trust property. "Fund" when used in Pt IX must mean a "stock or sum of money, especially if set apart for a particular purpose" (New Shorter Oxford Dictionary) or a "stock of money or pecuniary resources": Macquarie Dictionary. The use of the term "trust estate", which is not defined in the Assessment Act, is analogous to the use of the expression "fund"' as that expression is defined and used in Pt IX. [51] Neither refers to a legal person. Both terms must be taken to refer to the conglomeration of property in respect of which trust obligations and corresponding rights exist from time to time. Putting it another way, a trust estate or a superannuation fund will be that property the ownership of which is divided between trustee and beneficiary. The trustee will always be ascertainable. However, the class of beneficiaries, while identifiable, will not necessarily be closed and all beneficiaries may, of course, not be ascertainable. [52] The trust obligations of the trustee and the corresponding rights of the beneficiaries may vary from time to time, in accordance with law. Similarly, the property that is the subject of such obligations and rights will not be static. Parts of the property might be distributed so as to cease to be subject to trust obligations. Further property may accrue as income or by further settlement so as to become subject to obligations where previously that additional property was not. [53] However, at any given time it will be possible to identify the property that is the subject of the trust obligations and in respect of which the rights of beneficiaries exist. It is the income which accrues from that property, less outgoings from that property, that go to make up the taxable income of the trust estate or fund. Thus, the Assessment Act requires a calculation of taxable income in respect of the trust property, to which it sometimes refers as the trust estate and at other times as the fund (in Pt IX). [54] The Assessment Act then imposes a liability either on the beneficiaries or, in some cases, on the trustee in a representative capacity. "Superannuation fund", as that term is defined in the SIS Act and the Assessment Act, contemplates a continuing regime regulating the manner in which a fund may be added to and the manner in which payments may be made from it. So long as one can identify a continuity of that regime, that will be sufficient. [55] Thus, in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust. [56] So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the "taxpayer" for the purposes of s 278 and ss 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself. [57] In the present case, there has been continuity of the regime regulating the fund. The amendment that took place in 1993 was in accordance with the provisions of the original trust deed. Further, it is a straightforward matter to trace the continuity of the property that has been the subject of that regime since the 1989 and 1990 income years. Accordingly, there has been sufficient continuity of the fund from the 1989 and 1990 income years to the 1995 income year. The change of name in 1990 and the change of rules from time to time did not interfere with the continuity of the fund that was established in 1988. It is relevant to note that the Act expressly recognises the legislative regime governing superannuation, and takes that as it finds it. If any concept of continuity is implicit in the relevant provisions of the Act, it more naturally relates to continuity under the separate provisions. If that be the test, it is satisfied here. It follows that there is available, in calculating the taxable income of the fund for the 1995 income year, the losses incurred in the 1989 and 1990 income years.' (Italics in original; bold emphasis added.) 79 As indicated above, the Commissioner disputed that the High Court at [36] of its reasons endorsed this passage from the reasons of the Full Court but, in our view, it is clear that it did. First, the High Court referred to the fact that the original trust deed as constituted in 1988 was varied by the exercise in 1993 of a power of amendment. That was, in our view, an express endorsement of what the Full Court said in [56] of its reasons. The Commissioner referred to the High Court's references to no alterations in trust property at the time the amendments took effect and to common identity of some membership before and after the amendments as indicating such changes could break the continuum necessary to maintain the existence of the eligible entity or trust estate. But in our view it was no more than the High Court illustrating that there could be no doubt as to the continuity of the trust property and membership indicia in the case before it because the identity of the trust property had not even altered at the time of the amendments and there was even common identity of some membership either side of the amendments. 80 The Commissioner articulated his case on appeal that there was a 'substantial discontinuity' with respect to each of the three main indicia identified by the High Court in Commercial Nominees in the following way: (1) So far as the constitution of the trusts was concerned, there were two significant changes: (i) First, the trustee waived its right of indemnity - the effect of this waiver was the creation of a new trust. (ii) Second, by reason of a deed between the Clark and Denoon interests, the rights to income of the trust ceased to be completely governed by the terms of the trust deed. (2) So far as trust property was concerned, there was a substantial change. Prior to the relevant transactions the trustee's liabilities exceeded the trust assets by $3,910,880. In that sense, there was no trust property because there were no assets to which beneficiaries could be entitled once the trustee's liabilities had been discharged and its indemnity satisfied. After the relevant transactions, the trust had the settlement sum of $10 and $1.8m in cash provided by the Clark interests, both of which were free of the former trustee's right of indemnity. There was now trust property. (3) So far as membership was concerned, immediately after the relevant transactions, the Denoon interests effectively ceased to have any enforceable rights as unit holders in the trust. That position was put beyond doubt when the Denoon interests transferred their units to the Clark interests for the nominal sum of $5.00 in 1996. In short, there was a completely different set of unit holders in place in the 2001 year when the capital losses were said to be set-off against the capital gain from the sale of the Gladstone properties in 2001, from that which was in place just before the events of June 1993. 81 Dealing with each of these in turn.

Constitution of the Trusts 82 Carringbush's waiver of its right to be indemnified out of the CU Trust in respect of liabilities incurred by it in properly discharging its powers and duties as trustee, no more created a new trust estate than it terminated an existing one. At the very most, it may have extinguished a 'beneficial interest' in the trust assets which Carringbush had by virtue of that right: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 per Stephen, Mason, Aickin and Wilson JJ, but even that is not clear. As noted in [30] above, there was no alteration to the terms of the trusts embodied in the Deed of Trust and no exclusion of the right of indemnity under that document by way of amendment. Even if Carringbush's beneficial interest in the trust assets was extinguished by the waiver it did no more than extinguish an interest which ranked in priority to those of the beneficiaries; the beneficiaries' interests are not '"encumbered" by the trustee's right': Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 247, and in some way altered by the extinguishment. 83 The contention that, by reason of a deed between the Clark and Denoon interests, the rights to income of the CU Trust ceased to be completely governed by the terms of the Deed of Trust is also misconceived. The rights under the Deed of Trust were not affected. It was the exercise of those rights which were the subject of the arrangements between the Clark and Denoon interests pending the matching contribution of $1.8 million by Denoon interests. These arrangements did not vary the trusts of the CU Trust let alone terminate them or bring a new trust estate into existence.

Trust Property and Membership 84 At [32] of its reasons in Commercial Nominees, the High Court observed that the nature of an eligible entity was such that changes in the incidents of the trust relationship established on its creation are not only possible, but in some respects probable. The Court went on to say: 'In the case of an indefinitely continuing superannuation fund, operating under the regulatory scheme in the SIS Act, the trustee might change from time to time. The trust property would almost certainly be in a constant state of change, as contributions were received and employee benefits were paid. The identity of the persons entitled to benefit under the trust would be likely to change over time, as new members came into the scheme and others left. The nature of the benefits provided by the scheme might alter over the years, in response to industrial or market pressures, or regulatory requirements. In the case of a public offer superannuation fund, there would be likely to be substantial changes of membership over time, as new participating employers brought their employees in.' 85 The same applies to a unit trust of the kind here under consideration. The trust property will constantly change as subscriptions for units are made and redemption of units occur and Parts III and IV of the Deed of Trust pursuant to which the CU Trust was established expressly provide for the creation and application for units and the redemption of units respectively. 86 The identity of the persons entitled to benefit under the CU Trust would be likely to change over time as new units are issued and existing units are transferred or redeemed. Clauses 3 and 14(a) of the Deed of Trust contemplate changes in the beneficial ownership of the fund, indeed for greater changes than those that might be encountered in a superannuation fund: 'CREATION OF TRUST 3. The Founder hereby settles upon the Trustee the settled sum and the Trustee hereby declares that it will henceforth stand possessed of the settled sum and the fund and the income thereof for the unit holders specified in the Schedule hereto and subsequently the unit holders for the time being upon the trusts and powers and subject to the terms covenants and conditions herein contained. … PART VIII - TRANSFER OF UNITS 14. (a) Every unit holder shall be entitled to transfer to any other person the units or any of the units for the time being held by him by an instrument in writing in such form as the Trustee may from time to time approve. Such form shall contain a provision to the effect that the transferee shall agree to be bound by the provisions of this Deed. The Trustee may not refuse to register the transfer of any units unless the transferee is a person who is not, in the reasonable opinion of the Trustee, a respectable, responsible and solvent person.' (Emphasis added.) And yet it is changes in the trust property itself and changes in the ownership of units of beneficial entitlement to the trust property upon which the Commissioner relies for two of the three changes which he contends either terminates the existence of the trust estate, the trustee of which incurred the capital losses in the 1991, 1992 and 1993 years of income or brings into existence a new trust estate, the trustee of which made the net capital gain arising on the disposal of the Gladstone properties. 87 We cannot accept the Commissioner's contention. When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question. In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum. 88 Such an approach is consistent with the position at general law in relation to the four essential indicia of the existence of a trust: the trustee, trust property, the beneficiary and an equitable obligation annexed to the trust property: JD Heydon & MJ Leeming: Jacobs' Law of Trusts in Australia (2006) 7th ed, at [104] - [110]. In Commercial Nominees both the Full Court, at [49] of its reasons, and the High Court, at [35] of its reasons, pointed out that there was nothing in Pt IX, nor in the 1936 Act generally, which imposed some statutory requirement of continuity for determining when there is a sufficient identity of the trusts involved. With respect, the same applies in the case of Div 6 of Pt III of the 1936 Act.

Conclusion 89 The appeal must be dismissed with costs. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Edmonds and Gordon.