Di Dio Nominees Pty Ltd v Commissioner of State Revenue [2004] VCAT 1824

cannot read English I am quite satisfied that he has no idea of'what a company

or- a trust is, but though sheer hard work and good business sense he has built

2 After- he arrived in Australia in 1960 he worked in a factory for three years

before travelling to North Queensland to harvest sugar cane., He married his

wife Maria in Melbourne in 1964 and opened a butcher shop in North

Melbourne He then opened other butcher shops in Altona and Footscray in

3 He developed bronchitis., His doctor told him the butcher, shops were too cold

In 1974 he branched out into the bakery business. He opened two shops, one in

Moonee Ponds and the other in Niddrie. He managed both bakeries and two of

the butcher, shops until 1976 when he got out of the butchery business altogether.

4,. In 1977, on advice from his accountant, he established a company which is the applicant in this matter and which was set up as a trustee of 'a discretionary trust in the form common at the time. He has had four children, three daughters and a son, I think.

5 Between 1977 and the year 2000 he opened and closed about twenty bakeries He did all this through the company Prior to 1991 he was at any one time managing six to seven bakeries. He learnt how to bake - on the job. The bakeries were all successful. He put them in the night place at the right time.

6.. In 1991 he had a stroke which paralysed him down one side of his body. He had other health problems. He decided to get out of the bakery business which he found very stressful. He proceeded to sell a number of the shops. All but two had been sold by the beginning of 1998.. One of these was a bakery shop in Keilor that the company leased to someone outside the family. The other, was a bakery shop at Watton Street, Werribee, that the company continued to run until it closed down in about January 2001.. The bakery business at Werribee had run down over a period of time leading up to its sale.. This in turn made it harder to sell

7.. In the 1970s and 1982 Mr. Di Dio had bought land at the corner of Delrimut Road and Sayers Road, Tameit, which was supplemented by the purchase of an adjacent piece of land bought in 1982. Over the following years Mx. Di Dio worked approximately 150 cattle on the farm which covered about 170 acres.

He acquired another property in the area of about 600 acres. It operates through a different entity..

8. Mr'. Di Dio says that from the beginning of 1998 until the end of 2001 he

worked at the farm for about 7 to 8 hours a day, Monday to Friday, and about

4 to 5 hours each weekend. Apart ffom a trip to Italy some years ago, he has

never had a holiday in his life and he works seven days a week The other

property is owned by a related company half a kilometre away and is planted

with lucerne Additionally, Mr. Di Dio took horses on his farm for agistment.

9. Mr,. Di Dio does not really trust lawyers or accountants. One reason is that he

guaranteed his accountant.. When the accountant defaulted, the ANZ Bank sued

and the debt got substantial.. Mr. Di Dio was advised to have himself removed

as a director and shareholder of his company with a view to persuading ANZ

Bank to go away, But those who were put in his place, members of the family,

say they did so just for him. ASIC records reflected the change of shareholders

10. Mr,. Di Dio says that he is involved in every aspect of the business activities of the company and that he made all decisions without input fiom anyone save for his accountant from time to time. He said that even though he had no official role in the companies during the period from 1998 to 2001, he still exerted full control over all its businesses and other, affairs He said that his family gave him no business directions, nor did he ask them, nor would he have welcomed or accepted any such input.. It is clear to me fiom the evidence of those of them who gave evidence that they signed whatever was put in front of them without asking, and because they trusted Mr.. Di Dio as their husband or father as the case may be..

11 I found the evidence of the accountant to be helpful, but the financial evidence

to be less so This is because of the quite artificial nature of the structure. The

books revealed net profits for cattle grazing of about $15,000, $13,000 and

$21,000 for the 1999, 2000 and 2001.. For reasons that neither Mx.. Di Dio nor

his accountant could explain, expenses of fertiliser, chemicals, feed, wages and

rates were not brought into account. It is I think as likely as not that these

expenses would have wiped out most if' not all of what would otherwise have

been the profit for cattle grazing as shown in the books.

12,, For the financial years ending .30 June 1999 and 2000, the gross income for the

baking side of the business was $356,000 and $189,000. It was nothing in 2001

because of the sale. It had traded at a loss at material times until then.. It had an

annual wage bill of the order of $100,000. Apart fiom the time Mx. Di Dio put

in there (half an hour, to an hour a day), there were two bakers, one or more

1.3 In addition small sums were received for- agistment. In the year 2000, $162,000

was received from a related trust on the other farm.. The applicant has units in

that trust and obviously from time to time received income as a consequence.

14 The value of the farm was in the books at $228,000 until the year 2000 when it

was increased to $6.25 million In late 1995 Mr. Di Dio received an Outline

The detailed ODP is intended to satisfy the statutory requirements .,,,,

and is a prelude to subdivision proposals for the subject land which will

be submitted to Council for formal planning approval in the, future.

The proposals provided for in this detailed ODP are seriously

entertained and capable of'practical implementation,, Subject to its

formal approval by the Council, the report will be used as a basis for all

future subdivision proposals which are to be submitted for planning

permits, and for subsequent approval pursuant to the Subdivision Act.

15 The books of the applicant showed $140,000 as having been spent on

development subdivision by 1998.. That is well over twice what the applicant

earned by way of cattle grazing for the period 1999 to 2001. A plan of

subdivision was approved in July 2001 and cattle production ceased in July

2003,. There are more than 600 lots in the subdivision.

16. The company of Mr. Di Dio was assessed for land tax in respect of the 170 acre property for both 2000 and 2001, for $84,999 and $124,999.. The effect of section 9(1)(ha) and section 9(1C) is that in order to make out its claim for exemption, and establish that the decision to disallow its objection was wrong, the applicant company must show:

(1) The land is used solely or primarily for the business of primary production;

(2) The principal business of the company is primary production of a type carried on on the land;

(3) The main undertaking of the company is primary production of that type; and

(4) 60% of the shares of the company have been owned for the previous three years by persons normally engaged in a substantially full time capacity in the business of primary production.

17. The submissions on the various issues will I think become clear from my discussion of them, Counsel referred to only a couple of cases that were said not to be decisive and, in the result, I think I have to decide this case without the help of authority, even though the legal issue has been potentially there since 198.3.

18., Since I find that the land is used primarily for the business of primary

production, the case does I think resolve into four issues.

(1) Is the applicant as the owner of the land normally engaged in a substantially full time capacity in the business of 'primary production?

(2) Is the main undertaking of the applicant company primary production of the type carried on on the land?

(.3) Is Mx,, Di Dio (if'he is found to be the shareholder) normally engaged in a substantially full time capacity in the business of'primary production?

(4) Does the existence of'the trust preclude the company from claiming the benefit of the exemption?

19. It is not a simple matter to define the precise basis upon which the

Commissioner contends that the trust on which the applicant holds the property precludes the applicant fiom having the benefit of the exemption, but since the Commissioner does contend that the trust precludes the Tribunal from finding that the main undertaking of the company is primary production, I need to say something about this issue now.

20. In the decision under review it was said that:

the main undertaking of'Di Dio Nominees i's riot primary production of the type carried on on the Land The main undertaking of Di Dio

Nominees is to act as trustee for the Di Dio Trust, The business of primary production conducted on the Land cannot be said to belong to Di Dio Nominees since it is only acting as a fiduciary, subject to the terms and conditions of the trust deed ,,..

21, In the submissions of the Commissioner it is said:

If 'there is any business of primary production, it is the Trust's business and not Di Dio Nominees in its own right. Di Dio Nominees is acting in a representative capacity as trustee of the Trust, and acting as trustee is its principal role and its principal or main undertaking,

22. People who come together to conduct business as a company enter into a relationship which is contractual and which is set out in the constitution of'the company. The shareholders supply the capital and the directors manage the business. But the law says that the company is a distinct legal entity, a distinct legal person, even where, as here, there is in truth only one director and one shareholder .

2:3. This is not so in the case of a trust, While lawyers and accountants may loosely refer to a trust as if it were a person, it is note Putting to one side the settlor, a trust is a relationship between a trustee and the beneficiaries, or beneficial purposes if the trust is charitable The shareholders and directors of 'a corporate trustee may be regarded as a distinct legal entity, but the relationship between the trustee and the beneficiaries is not a distinct legal entity, at least where the class of beneficiaries is, like this one, within a very wide discretion of the trustee and apt to include any public company or charity

24. It is therefore not correct to talk about a business as being owned by a trust or, "the Trust's business". Nor is it correct to say that the business which is the subject of 'a trust is not owned by the trustee, or does not belong to the trustee.. If' a farmer operates a farm through a company and distributes the income of the farm to members of the family as shareholders and then alters the mode of distribution so that the company holds the farm and business on trust for members of the family as beneficiaries, the company remains as before the owner of the farm and business, and the manager, of the business, but the directors of the company are now subject to different obligations about how the income is to be distributed. It would be silly to say that when the farming company entered into the trust deed, it ceased to be a farming company, and became a trustee company, or that its main undertaking ceased to be the farm and became the trust..

25. Similarly, if'BHP decides to declare a trust over one of its foundries so that the income from that foundry will be applied to the victims of asbestos, the nature of the holding of the business of the foundry does not change - all that is changed is the obligations on the owner, BHP, as to how it is to apply the income

26. In each case it would in my view not be correct to say that the main undertaking of the owner of the business had ceased to be the carrying on of the business and become the execution of the obligations under the trust. BHP does not cease to be a steelmaker - it,just becomes a trustee of that part of its business.. The owner of the business may enter, into a relationship with a creditor and secure the borrowing in a way that gives rights against the land on which the

business is run, but that does not affect the issue of who owns the land and the business on it. The same may or may not apply if the owner leases the land.

27.. In tgusts, the dualism of legal and equitable estates has provoked as much discussion as the dualism of Descartes In Story's Commentaries on Equity Jurisprudence (15´ English edition, 1884, para 964) it is said:

A trust, in the most enlarged sense in which that term is used in English jurisprudence, may be defined to be an equitable right, title, or interest in property, real or personal, distinct from the legal ownership thereof' In other words, the legal owner holds the direct and absolute dominion over, the property in the view of the law; but the income, profits or benefits thereof in his hands belong wholly, or in part, to others.. The legal estate in the property is thus made subservient to certain uses, benefits or charges in favour of others,- and these uses, benefits or charges constitute the trust which courts of equity will compel the legal owner, as trustee, to perform in favour of a cestui que trust or beneficiary.

Maitland (Lectures on Equity, Bxunyate edition, 1936) said:

Equity did not say that the cestui que trust was the owner of the land, it said that the trustee was the owner, of the land, but added that it was bound to hold the land for the benefit of 'the cestui que trust. (17)

The statement that T is owner but as trustee for E is not self

contradictory It is no more self-contradictory than the statement thatA

is the owner of goods but owes more debts that he can pay. (149)

Sir Frederick Jordan (Chapters on Equity, 6a' edition, 1947, 48) had a different

perspective in respect of the entitlement of those who are regarded as being in

equity the owners of the property, but that observation need not concern us here

28In my view, the appropriate way to look at the business or undertaking of the

applicant company is to say that it holds them on trust for the class of

beneficiaries set out in the trust deed and that, whatever may be the difference

between "a business" and "an undertaking", the inquiry is what the company

does to generate wealth for the beneficiaries of the trust - it is a farmer or baker

or landholder, or an investor, but it is not a professional trustee

29. It follows in my view that it is not correct to say that the main undertaking of

the applicant company is to act as trustee for the trust.. That is not however the

end of the issue of what is the main undertaking of the company, or whether the

trust in some other way precludes the company fiom getting the benefit of this

30.. It was conceded on behalf' of'the Commissioner that if the applicant got that far, I could find that Mr.. Di Dio was normally engaged in a substantially full-time capacity in the business of'primary production. However, the Commissioner said that the taxpayer fails on the other three issues,.

31. It is apparent from the Act that a private company must show not only that its principal business is primary production but that its main undertaking is primary production Just what kind of difference might be entailed by that change of wording may not be always easy, but this case does I think show that the notion of "undertaking" may be wider than the notion of "business"..

32. As I have remarked, Mr.. Di Dio derived his wealth historically from his conduct of the baking businesses which he sold and from astute investments in land. I find it quite impossible to say that for the relevant time the main undertaking of the applicant company was cattle grazing when:

(1) The substantial part of the gross income of the company derived from the conduct of the business was derived by the baking business for the first year of the two years with which we are concerned.

(2) Most of the labour employed by the company was employed in respect of the baking business for that year.

(3) In the scheme of the affairs of the company, such income earned from

cattle grazing, if any, was negligible and is nothing beside the capital

gain that the company stood to make, and beside the amounts it was

(4) The capital of the company consisted almost entirely of the land which was in substance by then being held as an investment property to be developed and sold, which investment the company was in the process of realising.

It would in my view be absurd to say that the company was holding more than $6 million worth of property in the year 2000 or 2001 as the major asset of 'a cattle grazing business which was earning nothing or next to nothing.

33.. Mr.. Di Dio might say that he originally purchased some of 'the grazing property to graze cattle on more than twenty years ago - although perhaps the Bank was told something else - but at least by the mid-1990s there is no doubt in my mind that the primary object for which the property was being held was for re-sale.

As I have remarked, $140,000 had been spent on the development by 1998.. As I recall it, Mr.. Di Dio said that the Council did not go along with the 1995 proposal. Mr. Di Dio distrusts all consultants and he would not have spent $140,000 on them unless he meant business. Indeed, in the end, I would not be surprised if' he had not spent more on advice on development than he did on the acquisition of the land.

34.. In truth, Mr.. Di Dio amassed a substantial fortune by developing and selling bakeries and investing the proceeds in acquiring substantial areas of land on the urban fringe; he was winding down the last of his bakeries and preparing to realise on his investments by selling one of his property investments; during that interim period, he worked that property for little or no return until it was sold for a very substantial capital gain; to say that during that period primary production became the principal business or, main undertaking of'Mr. Di Dio is in my opinion is to defy language, truth and logic.

35.. The next question is whether Mr. Di Dio was normally engaged in a substantially full time capacity in the business of primary production. As I mentioned, this was conceded by the Commissioner, but he did submit that Mr,. Di Dio was not the shareholder because of the transaction entered into to deceive - which is about the most neutral word I can use - the ANZ Bank. I find that every part of that exercise was a sham and that the extent to which any legal title in the share passed from Mr. Di Dio to another, member of his family, he retained the beneficial ownership of it. I would have thought, in the absence of further argument, that that was sufficient to qualify the shareholding of the relevant company under the provision if it had otherwise been entitled to its

benefit, If it matters, I find that Mf. Di Dio was the only director of the company at all times..

36. The remaining legal argument was along the lines that as a matter of interpretation I should interpret the statutory provision so as to say that it does not apply to a private company holding property under a discretionary trust. I have to apply the words of the Act so as to achieve its purpose.. There are two purposes here. One is to give protection to primary production That has been common in taxing statutes in this country for many generations. The second purpose is to try to stop people getting the benefit of this kind of exemption when they should not be entitled to it.

37. The means chosen, in broad terms, is to say that if' a private company holds the land, then the farmers must hold he shares. So you have an exemption for primary production You then say companies can have the exemption, for primary production, but only if the artificial person is in substance owned by natural persons who are primary producers.

38.. But the only artificial person to whom the test is applied is a company. The law says nothing about, and puts up no test for, a trust,. I have set out above the elementary differences between a company and a trust. This law has a simple enough scheme which could be applied simply enough to trusts as well as companies.. It is clear as a matter, of practice that the test applied to a company may do nothing to protect the revenue where a trust is invoked (and, if it matters, the evidence from the accountant was, and it is my experience, that people adopting a corporate structure like this will almost invariably do it in the context of a trust, usually a discretionary trust)..

39 Can I say that the intention of Parliament to avoid certain kinds of avoidance

can be used so as to produce an interpretation of the relevant law so that the

exemption does not apply to companies that hold property on trust? We are

dealing with the provisions of a tax statute.. The only organ under our

constitutional dispensation that can make a law imposing a tax is the

Parliament.. This law is, for a tax statute, in remarkably clear terms.. I do not

think it is my function, as a part time bureaucrat, to go around second guessing

Parliament.. The object of this exercise of construction is the same as the

construction of any document. The inquiry is not into the subjective intention

of the maker, but the objective effect of the words. Accordingly, I do not

accept the legal contention of the Commissioner that the law as it stands

precludes a company fiom having the benefit of this exemption simply because

40. For the reasons given, I think that the assessments under reference should be affirmed, Although I find in favour of Mr. Di Dio on the issue of his capacity as shareholder and being substantially full time involved in primary production, as well as the legal contentions put forward by the Commissioner on the trust issue, I am against Mx. Di Dio on the substantive issue in this case, which is whether the business or undertaking at the relevant time was primarily or mainly that of primary production.

41. Before leaving this case I want to add one thing. There was an element of farce in many aspects of it. I have explained the background of Mx . Di Dio and his limited grasp of English and legal concepts For reasons that are no doubt good, neither side submitted that I should find that the various arrangements

entered into were a sham, although it is impossible to avoid this finding in respect of'the scheme to deceive the ANZ Bank. In truth I doubt whether any company ever operated at all, ox whether any trust ever came into existence. I am quite sure that there was never any real meeting of directors or any understanding of the distinction between shareholders, directors, a trust, or beneficiaries.. Mr.. Di Dio, in all honesty, did what he did and derived the wealth he did and left it up to his advisers to orchestrate the financial results in a way that they regarded as appropriate

42. Companies were invented by lawyers and are serviced by accountants to meet the needs of business. While as a matter of law the directors of a private company may be seen to be its agents, as a matter of business the reverse is often the case, and the company is seen as the agent, or the conduit, or the vehicle - the precise epithet does not matter - of'the directors. English judges, including Law Lords, have no difficulty in accommodating their legal discourse to the facts of life,. They customarily refer to a company in the plural as showing that they are talking about those running the company as the real parties before them..

4.3. I have commented elsewhere on the idiosyncratic legacy that Mr Aron Salomon left when he incorporated his leather merchant business with his wife and children By the standards of today he subscribed a massive amount of capital but unsecured creditors missed out One judge said that to legalise the transaction would be a scandal. Another said the relevant advisers of Mr. Salomon were "evidently very shrewd people ".. Four of Her Majesty's judges were unanimous in putting Mr-. Salomon down with gusto on the basis that he

was the real owner of the business.. Six Law Lords were equally unanimous in finding in his favour. But by the time Mr. Salomon got to the Lords, he had been reduced to a pauper and one Law Lord was moved to say that he could not help thinking that Mr, Salomon "had been dealt with somewhat hardly in this case

44.. Some sixty eight years after this decision, in 1968, when the Barwick High Court was beginning to decide a series of tax cases on what many thought were unnecessarily artificial grounds, Sir Victor Windeyer said, prophetically enough from the point of view of his Court, that the finding in the case of'MI. Salomon showed up "the unreality and formalism" that the law had reached,. ('The references may be found in Law for Directors, Federation Press, 2003, 125126.)

45. 1 am not being at all critical of the accountant involved who seemed to me to be a very responsible and proper professional person, but there must come a time when professional people have to examine their consciences when they put people into transactions and a series of transactions like this where it is clear that the people do not have the faintest idea of what is going on.. I have great sympathy for the position of the Commissioner that when people go out of their way to file documents with one manifestation of the Crown, that related to companies, showing one state of affairs, then I should at least be very slow to find that another state of affairs prevails ,just because we are now talking about tax.

46. We are all familiar with what happens in the sales of businesses where one state of affairs is put forward for one purpose, and another state of affairs is put

forward for the tax man. I have sympathy with the notion that if'people want to play with matches, they should not complain too much if they get burnt. The issue arose here because of the cavalier way in which directorships were said to have been put aside and shareholdings put aside with a view to achieving what would in some quarters called the defrauding of a creditor, and in the course of conduct which in another state is leading to the pillorying of directors of a public company.

47. 1 have no reason to doubt the honesty of Mr Di Dio, but from time to time I recalled what happened when a former Federal Court ,judge gave character evidence fbr a Queen's Counsel who had got into trouble with the tax man.. When cross-examined, he was asked whether what he had heard in the course of the proceedings changed his evidence about the reputation of counsel, and His Honour replied that he had been talking about the professional reputation of counsel, not tax matters,. Only a former Federal Court,judge could have got away with that sort of thing - the rest of us are not allowed to say, and it is not the case, that there is one rule for the tax man and another, one for- the rest..

48. The problem with artificiality is that it involves by its nature a departure from reality and that puts you well on the way to departing from the truth, which in turn puts you well on the way to bare-faced lying. It would not, however, be fair to reserve to the taxpayers all of the cause of artificiality. It is a cyclical process between the revenue and taxpayers, between the pursuer and the pursued. The problem has been a serious one for the law at large for at least seven hundred years.. The noted historian T F T Plucknett (Statutes and Their Interpretation in the Fiyst Half of the 14´h Centuty, 166) said:

At first, perhaps, it was thought that precise, written, legislation would remove the evil, but the event proved the contrary, No sooner was a statute made, than we find reported in the Year Books numerous ingenious attempts to evade or circumvent the Act Originally, perhaps, the result of legal chicanery, the new written and published statutes themselves rapidly became the cause of further artifice, and the battle of wits between the legislature and the smart litigant has continued until our own day.

After the madness that went into the ´80s, the smart litigant has been getting bounced but there is, in all of these things, the need to find a balance and, as at least Carlyle once remarked, every dog has his day..

49.. Nor of course is the problem confined to tax law. Corporate law is drenched in black letter law that very experienced business people and commercial lawyers find intimidating. The result is that directors in a takeover are likely to sit down to a meeting with minutes prepared for them in advance by highly specialised lawyers with a view to reducing the risk of accidents.. That is a case of a script being prepared before the event.

50. The problem here is highlighted in witness statements. People who could not speak English properly and had no idea of'legal concepts were embracing them with clarity and devotion. The result is that the statements were worse than useless. There were only a couple of issues of fact in this case.. It is simply unhelpful for advisers to be getting their clients and witnesses to sign documents saying things like they only ever held a share as a bare trustee when some of the advisers would have some difficulty in articulating what is entailed

in the notion of "a bare trustee" It is one thing to me to have to operate in

Fantasyland; it is another thing for lawyers and accountants to introduce their

clients to the whole concept of'Disneyland before the process starts.. One of'the

misgivings I have about witness statements is that it helps to foster a sense of

artificiality.. We should not have them in these cases. If a proposition is

uncontroversial, the statement is not needed; if'the proposition is controversial,

51 For the reasons given, the decision is that the assessments under reference are

affirmed. Mr. Di Dio may I suppose not get much satisfaction from the fact

that the imposition of tax is one possible consequence in this country of success

in business and the accumulation of wealth. Otherwise I can only offer to him

52For the Revenue, I would say that it needs to look carefully at this old provision

as I think that there is a hole in it and it cannot be assumed that the Supreme