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[2005] FCAFC 62
Federal Court of Australia (Full Court)
2005-04-28
Lander JJ
Original judgment source is linked above.
REASONS FOR JUDGMENT THE COURT: 1 In the 1996 tax year Eldersmede Pty Ltd (Eldersmede) in its capacity as trustee of the Eldersmede Distribution Trust (EDT) resolved to make a distribution of $859,806 to Southern Building Supplies Pty Ltd (SBS) in its capacity as trustee of the Citytrak Unit Trust (CUT). CUT had accumulated tax losses of the same amount. The respondent Commissioner of Taxation, relying on the income injection provisions of Div 270 of sch 2F of the Income Tax Assessment Act 1936 (Cth) (the Act), disallowed the losses. 2 The Administrative Appeals Tribunal affirmed the Commissioner's decision: Eldersmede Pty Ltd v Commissioner of Taxation [2004] AATA 710. This appeal against the Tribunal's decision is brought by Corporate Initiatives Pty Ltd, Lucy Altman and Susan Altman who are beneficiaries of family trusts, the trustees of which are unit holders in CUT. The income injection provisions 3 Section 270-15 of sch 2F provides, relevantly for present purposes, that deductions of losses are not allowable if the requirements of s 270-10(1) are satisfied. The latter provision is as follows (those parts in issue in the present proceeding in bold): "(1) The consequences set out in section 270-15 result if: (a) a deduction is allowable to a trust for the income year; and (b) under a scheme, the following happen (in any order): (i) the trust derives an amount of assessable income (the scheme assessable income) in the income year; and (ii) an outsider to the trust (see section 270-25) directly or indirectly provides a benefit (see section 270-20) to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary; and Note: The benefit may constitute all or any of the scheme assessable income. (iii) the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly provides a benefit to the outsider to the trust or to an associateof the outsider (other than an associate covered by any of paragraphs 270-25(1)(a) to (f)); and Note: The benefit may constitute all or any of the deduction. (c) it is reasonable to conclude that: (i) the trust derived the scheme assessable income; or (ii) the outsider provided the benefit as mentioned in subparagraph (b)(ii); or (iii) the trustee, beneficiary or associate provided the benefit as mentioned in subparagraph (b)(iii); wholly or partly, but not merely incidentally, because the deduction would be allowable; and (d) the trust is not an excepted trust under paragraph 272-100(b), (c) or (d)." 4 Definitions of terms used in the Act include the following: "A benefit is: (a) money, a dividend or property (whether tangible or intangible); or (b) a right or entitlement (whether or not property); or (c) services; or (d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or (e) the doing of anything that results in the derivation of assessable income; or (f) anything that, disregarding the preceding paragraphs, is a benefit or advantage." By s 272-140 "scheme" is to have the same meaning as in s 177A(1)(a), that is to say "(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct …" The distributions 5 SBS, as trustee of CUT, conducted a business supplying timber to the building industry. By 6 September 1995 the business was struggling and an administrator was appointed to SBS under a deed of company arrangement. As at 30 June 1996, CUT had accumulated losses, including present year losses, amounting to $859,806 which, if the income injection provisions did not apply, was allowable as a deduction for the 1996 income year. 6 Eldersmede, as well as being trustee of EDT, was trustee of the Eldersmede Unit Trust (EUT). In that latter capacityEldersmede carried on a business known as Fielders Steel Roofing. This was a profitable business which in the 1996 tax year made an accounting profit of $1,314,430.52 and had net taxable income of $1,208,693. 7 The ultimate beneficiaries of both businesses were members of the Altman, Jantzen and Easling families. Mr Christopher Altman was in effective control. 8 On 22 May 1996, Eldersmede, in its capacity as trustee of EUT and EDT, resolved "to make an interim distribution of income from (EUT) to (EDT)". It was further agreed "to make an interim distribution of income to (SBS) in its capacity as trustee for (CUT) for an amount totalling, but not exceeding, the accumulated losses of the unit trust". Then, on 29 June 1996, Eldersmede, in its capacity as trustee of EDT, resolved to distribute all of the net income of EDT as follows: $859,806 (an amount exactly equalling CUT's accumulated losses) to SBS, as trustee of CUT, and the balance to Linbeck Pty Ltd. 9 On about 29 June 1996, SBS, as trustee of CUT, resolved that the net income of CUT for the year ending 30 June 1996 should be distributed in proportion to units held in the trust. 10 The distributions the subject of the resolutions referred to above were never paid, and Eldersmede was never called upon to pay them. In its findings the Tribunal referred (at [102]) to the passing of these resolutions "to pay income…with the amounts allocated remaining unpaid". However the resolutions themselves make no mention of payment or non-payment. Appropriate journal entries were made in the books of EUT, EDT and CUT. The Tribunal's decision 11 The Tribunal noted as common ground the applicability of all the criteria of s 270-10 except whether, "under a scheme", SBS, as trustee of CUT, "provided" a "benefit" to Eldersmede, as trustee of EDT, or one of its associates. 12 The central finding of the Tribunal, and the issue on which argument on the appeal focussed, was the upholding of the Commissioner's contention that SBS, by not calling for payment of the distributed funds, permitted Eldersmede to retain the use of those funds and thus provided a benefit to Eldersmede. The Tribunal said (at [76]): "We find that this conferred a benefit on Eldersmede, as trustee of EDT, in that it did not have to source the funds necessary to meet the demands of SBS, as trustee of CUT, or pay interest on the amount remaining unpaid. Also as a result of the delay in transferring the amount or balance to CUT, the value of the payment to be made by Eldersmede as trustee of EDT, will be less in real terms than would have been the case had SBS promptly called for payment. Therefore, we find that SBS, as trustee of CUT, directly or indirectly provided a benefit to Eldersmede as trustee of EDT." 13 The Tribunal further found that SBS also indirectly provided a benefit to EUT because if SBS had made a demand on EDT, it in turn would have had to make a corresponding demand on EUT. Thus because of the lack of any demand from EDT, EUT continued to have the use of the funds equivalent to the amount of its 1996 distribution. It was not disputed that EUT was an "associate" of EDT within the meaning of the Act. 14 The Tribunal referred to the obligation of Eldersmede as trustee of EDT to inform SBS that it was entitled to a transfer of the amount of the distribution: Whakatane Paper Mills Ltd v Public Trustee (1939) SR(NSW) 426 at 440 and other authorities cited by the Tribunal at [78]. However, in the circumstances of the present case where the same individuals, Mr Altman and his accounting and legal advisers, were on both sides of the transaction this aspect does not seem relevant. Those circumstances are highly relevant, in our view, to the conclusion by the Tribunal that there was a "scheme", the effect of which was the provision of a benefit by SBS to Eldersmede, the benefit being the continued use of funds by Eldersmede as a result of SBS not calling for the payment of the funds distributed to it. 15 The Tribunal also stated (at [78]) that EDT had a duty to make a prudent investment of the amount of the distribution to CUT: Re Whiteley (1886) 33 Ch D 347 at 355, Trustee Act 1936 (SA), s 7. The latter provision however prescribes the duties attaching to a trustee's power of investment rather than imposing any obligation to invest. Section 6 of the same Act confers on trustees a power (not a duty) to invest unless expressly forbidden by the instrument creating the trust. 16 Further, the Tribunal found (at [79]) that Eldersmede's obligations in relation to the distribution could not be discharged by crediting the amount of the distribution in EDT's books. The making of book entries might also have made Eldersmede liable to SBS as a debtor but this would not have affected Eldersmede's obligations as a trustee. 17 The Tribunal said (at [80]) that, whatever might have been the equitable obligations of Eldersmede as trustee of EDT and EUT, it found "…that the course of conduct constituting the scheme included the failure by SBS, as trustee of CUT, to demand payment of the relevant amount or to require its investment on commercial terms for the benefit of CUT. Therefore, SBS, as trustee of CUT, has under the scheme provided benefits to Eldesmede as trustee of EDT and of EUT, being the benefits we have identified in paragraphs 76 and 77 above." (see [12] and [13] above). 18 As to the requirement that the specified events happened "under a scheme", the Tribunal reviewed case law, and particularly cases concerned with s 177A. The Tribunal noted decisions which have held that the subjective purpose of any person concerned is not relevant; an objective purpose is to be ascertained by having regard to objective facts: Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 542, Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at [81]. 19 In finding that there was a scheme, the Tribunal noted that Mr Altman had effective control over all matters relating to SBS and Fielders. Mr Altman, together with the accountant Mr Hugo, were the "driving forces" behind the decisions that were taken or the conduct that occurred, although the Tribunal was not concerned to ascertain what was in their minds or the minds of anyone else. The Tribunal (at [102]) found that the following course of action or conduct was part of a scheme: "(1) on 20 June, 1995, there was a variation of the Deed of Trust in relation to EDT to facilitate the redirection of assessable income; (2) the directors of Eldersmede and of SBS were standardised as from 27 June, 1996; (3) there was a re-arrangement of Unit Holders in EUT, EDT and CUT so that all units were held by the same parties; (4) a resolution was passed by, as trustee of EUT, to pay income to itself, as trustee of EDT, with the amounts allocated remaining unpaid; (5) a resolution was passed by Eldersmede as trustee of EDT, to pay income to SBS, as trustee of CUT, with the amounts allocated remaining unpaid; (6) the above income allocations remained unpaid but were recorded by journal entry in the books of account of EUT, EDT and CUT; (7) subject to the qualifications referred to in paragraph 19(2)(c) above, SBS, as trustee of CUT, took no steps to recover the above allocations to it (or the balance of that allocation after allowing for the amount of the set off) from Eldersmede as trustee of EDT, or to require Eldersmede in that capacity to invest on commercial terms, for the benefit of CUT, the amount of the allocation (or the balance of it); (8) subject to the qualifications referred to in paragraphs 19(2)(a) and 19(2)(b) above,Eldersmede as trustee of EDT, took no steps to recover the above allocation to it (or the balance of that allocation after allowing for the amount of the set off) from itself as trustee of EUT, or to require the investment of the amount of the allocation (or the balance of it) on commercial terms, for the benefit of EDT; and (9) the passing of a "fail safe" resolution by SBS, as trustee of CUT in favour of its Unit Holders to ensure that if it had net income in the relevant year, it would be distributed to beneficiaries of that trust and would not be taxed in the hands of SBS as trustee."
20 In the course of argument on the appeal, counsel accepted that nothing turned on items (1),(2),(3) and (9); that is to say the existence of a scheme does not turn on the presence or absence of these facts. The qualifications referred to in (7) and (8) can be disregarded for present purposes. "Benefit" 21 There was no evidence of the assets and liabilities of EDT and EUT as at 30 June 1996, or any other time, apart from the entries recording the distributions in question and the corresponding rights and liabilities created. The onus was on the taxpayer to produce any relevant evidence. 22 Accordingly it cannot be said that the resolution by Eldersmede as trustee of EDT to distribute $859,806 to SBS as trustee for CUT conferred on the latter any proprietary right, equitable or otherwise, in any particular asset of EDT. The amount of $859,806 was not an identifiable asset, such as money in a particular bank account, but simply a figure which corresponded to SBS's accumulated losses. Likewise the profit of EUT was a figure arrived at after calculations. This was therefore not the case where a beneficiary presently entitled could call for a transfer of property under the rule in Saunders v Vautier (1841) Cr & Ph 240, 41 ER 482 either because the trustee had admitted to the beneficiary that a certain sum of money was held by the trustee subject to an immediate and unconditional duty to pay it to the beneficiary (Ford and Lee, Principles of the Law of Trusts par 1440 and the cases there cited) or because the beneficiary was solely entitled and thereby entitled to terminate the trust and call for a transfer of all its assets (Ford and Lee par 16090). In Saunders v Vautier itself what was in issue was identifiable property, namely all the East India stock standing in the testator's name at the time of his death. 23 We therefore think the Tribunal was correct in proceeding on the basis that, on demand being made by SBS as trustee for CUT, Eldersmede would have to do something to arrange funds for that payment, whether by selling, or borrowing against, available assets, which would then no longer be available for other trust purposes. Not having to do this was a benefit. Eldersmade was thus in a better or more favourable position than it would have been had it been required to fund the distributions. 24 As already noted, the resolutions for distribution did not confer on SBS as trustee for CUT any proprietary rights in any assets of EDT. Eldersmede was free to deal with those assets for trust purposes including, although not limited to, funding the distribution to CUT. Therefore it cannot be said that Eldersmede anyway could not make use of money it was holding for somebody else and thus was in no better position by reason of SBS's failure to make demand. 25 In her written submissions counsel for the applicants readily accepted that for SBS to "formally provid(e) a loan to Eldersmede of the unpaid distribution" could be seen to be a benefit as the funds could be used by Eldersmede under the terms of the loan. Indeed such a loan back is given in the Explanatory Memorandum (pars 10.26-10.27) as an example of a transaction which would be caught by the income injection provisions. However it is difficult to see the practical difference between a formally recorded loan and what happened here. In effect Eldersmede was the recipient of a loan repayable on demand and, as stated above, could use the amount of the loan for trust purposes. "Under a scheme" 26 We do not accept the argument that failure to do something cannot constitute an element of a "scheme" for the purposes of s 270-10(1). Part of the statutory definition of "scheme" is "any … course of action or course of conduct". This conveys the notion of a series of interrelated acts by a person or persons over a period of time. The non-doing of an act can form part of such a course, as for example where it is said that a student regularly fails to hand in essays. 27 The Tribunal correctly found that the inquiry is an objective one and thus the intention of any of the parties is to be ignored. In addition to the authorities already mentioned, in Commissioner of Taxation v Hart (2004) 206 ALR 207 at [37] Gummow and Hayne JJ pointed out that the statutory definition in s 177A requires "an objective, not subjective, inquiry". In the Explanatory Memorandum (par 10.2) it is said that the income injection test "…operates objectively and does not have a tax avoidance motive as one of its elements." (emphasis in original) 28 The essential elements of the scheme as found by the Tribunal were the distributions by Eldersmede and then SBS allowing Eldersmede to retain use of the amount of those distributions. Once the Tribunal found, correctly in our view, that by reason of this Eldersmede received a "benefit" in the way explained, then it necessarily follows that Eldersmede received the benefit "under" the scheme, in the sense that the scheme operated to produce that effect. "Provides" 29 Contrary to the argument of counsel for the applicants, we think that in not calling on Eldersmede to pay the amount of the distribution SBS "provided" a benefit to EDT. 30 The term "provides" is not defined in the Act. We agree with the Commissioner's submission that dictionary meanings referred to by the Tribunal such as "supply or furnish for use; make available; yield, afford" convey the central concept of causing another to have something. Thus without positive action A can allow B to have or take or retain something which A has the power or right to deny or withdraw. In the present case the inaction of SBS was the only means by which Eldersmede gained the benefit we have identified. Orders 31 The application will be dismissed with costs. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of this Honourable Court.
Counsel for the Respondent: B J Shaw QC with W Harris
Solicitor for the Respondent: Australian Government Solicitor
Corporate Initiatives Pty Ltd
Commissioner Of Taxation
[2004] AATA 710
(1993) 40 FCR 531
(2001) 108 FCR 27
(2004) 206 ALR 207