ASSESSABILITY OF THE PRACTICE AMOUNT
18 The appellant contended below that:
(a) the Outlook Trust became presently entitled to a share of the income of the Practice Trust in the sum of $220,398; and
(b) the trustee of the Outlook Trust lent the appellant $185,698.
19 On appeal, the appellant submitted that there was no evidence that the Practice Trust paid any amount directly to him, though he accepted that the sum of $185,698 was ultimately sourced from the earnings of the Practice Trust. In addition it would appear that the appellant received regular payments in the 1997 income year totalling $97,754. These were described by the primary judge at [141] as follows:
The Commissioner relied upon the undisputed fact that Mr Hart received regular payments during the 1997 income year totalling $97,754. The Commissioner asserted, and Mr Hart disputed, that these payments ultimately came from the Practice Trust. The sum of $97,754 was arrived at by adding up the following amounts, and the ultimate source was asserted by reference to the following surrounding circumstances:
(1) $49,415.52 by way of 22 fortnightly deposits of $2,246.16 by Cleary Hoare into a joint account held by Mr Hart and his wife with Suncorp Bank, with accompanying narrations "Cleary Hoare Pay Pay", "Cleary Hoare Pay" or "Cleary Hoare Sol Pay" between at least 5 July 1996 and 23 April 1997;
(2) $6,738.48 by way of three fortnightly payments of $2,246.16 made by the Outlook Trust bank account to the same joint bank account, which given the identical amount for each deposit should be inferred as having been ultimately sourced from the net income of the Practice Trust and paid to the Outlook Trust bank account for on payment to the joint account at the direction of Mr Hart and for his benefit;
(3) $35,200 by way of 22 deposits of $1,600 with accompanying narrations "Cleary Hoare Pay" or "Cleary Hoare Sol Pay" by Cleary Hoare into an account in the name of Oak Arrow Pty Ltd, the directors of whom were Mr Hart and his wife and which was the trustee of the Oak Arrow Trust, supporting the inference that this money was paid by, or at the direction of, the Trustees of the Practice Trust at Mr Hart's direction and for his benefit into the Oak Arrow account; and
(4) $6,400 by way of four fortnightly payments of $1,600 made from the Outlook Trust bank account into the Oak Arrow bank account, supporting the inference that these payments, like the earlier and matching payments from Cleary Hoare, were ultimately sourced from the net income of the Practice Trust and were paid to the Outlook Trust bank account at the direction of Mr Hart and for his benefit.
20 The primary judge was satisfied that the majority of this amount ($84,615.52), formed part of the appellant's assessable income. This was largely because the appellant could give no adequate explanation about the nature of the amounts deposited into bank accounts he either owned or controlled. The exact relationship between the sum assessed ($220,398), the sum admitted to have been received (said to have been a loan ($185,698)), and the sum of $84,615.52 paid into the bank accounts owned or controlled by the appellant, is perhaps, a little unclear. That lack of clarity is probably reflected in the state of the evidence. On appeal, the Commissioner submitted that the sum of $84,615.52 formed part of the amount assessed which also included the sum of $185,698. The aggregate of these two figures exceeded, he submitted, the amount assessed which had been determined by reference to the Outlook Trust's share of the earnings of the Practice Trust as alleged by the appellant. The appellant did not specifically address this issue, other than to contend that he was lent monies by the Outlook Trust, and denied receiving monies from the Practice Trust, although he led no evidence to demonstrate this. Given that many of the payments made into his bank account were described as "Cleary Hoare Pay", it was open to the trial judge to infer that the appellant did receive funds directly from the Practice Trust because this trust owned Cleary Hoare. In any event, other than the loan issue, no serious challenge was mounted by the appellant against the primary judge's conclusion at [147] that he had failed to prove that he did not derive at least $220,398.
21 It is convenient to address the loan issue first. The evidence supporting the existence of a loan was scant. It was undocumented, no payments of principal or interest had ever been made, its terms were never identified, and the appellant's capacity to repay the loan if it existed, appeared from inception to be either non-existent or negligible given his intention never to derive beneficially any income. No evidence addressing a capacity to repay the loan was ever led by the appellant.
22 The existence of the loan was asserted by the appellant in his witness statement, but that assertion was not evidence of its existence. He did not depose to any conversations or meetings or to any other fact which had taken place in 1997 in support of his contention. No other witness was called to corroborate the existence of the loan. The appellant instead pointed to the books of account of the Outlook Trust and resolutions of the trustee of that trust which refer to or acknowledge the existence of a loan. This entity was, of course, under the control of the appellant. The primary judge found that these documents assumed the existence of a loan rather than directly proving its existence.
23 The primary judge decided that the appellant had not discharged his onus of demonstrating that any loan existed in the 1997 year of income. For that purpose, he declined to make any adverse finding about the appellant's credibility although he was invited to do so by the Commissioner. His Honour simply preferred to decide that the appellant had failed to discharge his onus of proof.
24 In support of the primary judge's finding, the Commissioner relied upon the overall lack of evidence supporting the existence of a loan and the objective circumstances such as the failure to make any repayments of principal. He also relied upon contemporaneous bank statements which recorded many of the payments received by the appellant or paid into accounts he controlled as "pay" or "sol[icitor] pay" which were made on a fortnightly basis. These were described in the judgment below at [141].
25 More significantly, the Commissioner relied below upon certain documents arising out of a request made in 1999 to the appellant's bank for loans which were to be used to purchase two investment properties by Rio Villa Pty Ltd as trustee for the Rio Villa Trust, a trust controlled by the appellant. The documents were described by the primary judge at [111] as follows:
(1) an undated "Credit Approval Request" form (CAR form) of eight pages, with handwriting having the appearance of two writers - the application is made in the name of "Rio Villa P/L as Trustee for Rio Villa Trust", with the solicitor being named as Cleary Hoare and the contact person being Mr Hart;
(2) a form of six pages which is printed with the title "Application for a Loan/Limit", above which is handwritten "*PERSONAL DETAILS", undated, in the name of Mr Hart and his wife and apparently signed by them (personal details form) - that form contains certain identical financial information to the CAR form, namely of a net monthly income of $8,333 and appears to have been completed by the same person as one of the authors of the CAR form; and
(3) a typewritten "CREDIT DEPARTMENT, BANKING SERVICES FATE ADVICE", in respect of a CAR received on 29 July 1999, dated 13 August 1999, and approved by a handwritten note by a named bank officer dated 13 August 1999 (approval form).
26 The primary judge inferred in all the circumstances that the appellant was the source of the information contained in the three documents. This included statements that the appellant owned one third of Cleary Hoare, that Cleary Hoare was paying him around $220,000 per annum, that his personal taxable income was $220,000 gross, and that, as identified as "applicant number 1", his net fortnightly income after tax was $3846 or $8333 per month. In particular, one of the forms records under the heading "Income details - Self Employed Applicants" net profit before tax for the 1997 year of income of $220,398, being the precise amount assessed by the Commissioner and said by the appellant to have been distributed to the Outlook Trust by the Practice Trust.
27 The primary judge concluded, based upon the contents of these documents, that the appellant was prepared to have the money that was in fact paid to him in the 1997 income year represented as his income to the bank for loan approval purposes. The primary judge was not prepared to conclude, on the balance of probabilities, that the appellant was seeking to mislead his bank. Rather the better view was that what was represented to the bank was the underlying truth, even if a different characterisation was now being advanced for a fiscal advantage.
28 On appeal, the Commissioner relied upon an additional consideration, namely that if the amounts paid to the appellant were really loan advances, the appellant would have made clear representations to his bank that he was significantly indebted to the Outlook Trust to enable the bank to assess his creditworthiness. There are, however, no such representations contained in the bank forms.
29 On appeal, the appellant submitted that the trial judge erred when he inferred that the information recorded in the bank forms was sourced from the appellant. That finding, it was said, should be set aside as it had no evidentiary basis. In that respect, the appellant emphasised that the forms in question were not the appellant's documents, that the authors of their contents had not been identified, and that the Commissioner's reliance on them was misplaced. His case, it was said, rose no higher than speculation. The appellant submitted that the only form which contained clear representations from him was two pages which were attached to a Suncorp‒Metway Limited "FATE advice" from 1998 which recorded the following:
Outlook Crescent Pty Ltd as trustee of the Outlook Practice Trust owns one third of the practice of Cleary Hoare, Solicitors. It normally derives income in the order of $200,000.00 per year from that source.
The only basis for contending that the attached two pages were sourced from the appellant was said to be the footer on each of the two pages which contained the phrase "MJH personal". Based on this, the Court was asked to infer that the appellant was the author of the document. The appellant then submitted that the better inference to be drawn from the documents in the light of that "FATE advice" representation was that the bank employees had misunderstood what the appellant had represented to them, and that the references to the income being that of the appellant was a mistake made on the part of those employees.
30 We are prepared to infer that the 1998 attachment was prepared by or at the direction of the appellant. However, in and of itself, it does not justify the inference that all of the other representations made and recorded on the other bank forms were not accurately sourced from the appellant and were instead misunderstandings on the part of the bank's employees. In our view, the recording of the exact amount said to have been distributed by the Practice Trust to the Outlook Trust, namely the sum of $220,398, gives one considerable confidence from which to infer that the source of all the other financial information recorded in the forms was the appellant and that it was recorded accurately.
31 The primary judge addressed the two-page attachment relied upon by the appellant in these terms (at [124]):
That earlier 1998 document also referred to the net profit for the Practice Trust for the following 1998 income year of $750,000 being "distributed between three partners" and also made references to "Trust income generated by Cleary Hoare" and "net profits of Solicitor firm". The language use suggests that the suggestion of loans to account for money received was taken to be a matter of form rather than substance by the bank, rather than constituting any proof of a loan in fact existing. The language used is consistent with the bank treating that money as being, in substance and reality, income available to be taken into account for credit assessment purposes, rather than as constituting competing financial obligations detracting from creditworthiness.
At par [126], the primary judge said:
The contents of the CAR form significantly undermine Mr Hart's case that, contrary to what he must have represented to the bank as to the reality of his situation, the money he received from the Outlook Trust in the 1997 income year was really the product of a loan arrangement as opposed to ordinary income at his disposal. The nature and content of his representations to the bank must be given due weight, especially in circumstances when he had the opportunity in this Court to disown what was recorded by the unknown bank officer writing on the unsigned CAR form in a manner that is consistent with the bulk of the financial information (as opposed to calculations) being provided by him. While Mr Hart went some way towards this, he did not confront the real burden and substance of the bank record evidence.
32 In our view, it was entirely open to the primary judge to conclude that the appellant, in substance and in reality, told his bank that the money was his. The inferences his Honour drew from the bank documents were rational and were not defeated by the two page attachment. It could not be said, as the appellant contended, that the findings of the primary judge here were not open because there was no evidence to support them. We reject that submission. In our view, the findings were supported by contents of the bank forms. They are also supported by the complete absence of any reference to any suggested liability to the Outlook Trust.
33 It was also proper for the primary judge to have regard to the objective circumstances including the lack of repayment and the lack of documentation. In Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243, very similar objective factors were relied upon in finding that the loan alleged in that case was a sham. They included the following:
(a) the fact that the alleged loan was undocumented apart from book entries made by account staff;
(b) a lack of evidence concerning the terms and conditions upon which monies were said to have been lent or repaid;
(c) the fact that it did not appear that any interest had ever been charged;
(d) the taxpayer's control over the movement of monies within entities it controlled;
(e) an objective incapacity by the purported borrower to repay the amounts said to have been advanced.
It follows that the appellant has failed to demonstrate that he did not receive the funds paid to him beneficially.
34 It should be noted that the appellant also submitted that it was inherently improbable that an experienced tax lawyer, wanting to avoid fiscal liability, would subsequently have subjectively intended not to have created a loan obligation. He was, after all an architect of the NVI Scheme, the fiscal efficacy of which was dependent upon the taxpayer not deriving any income, but instead being lent funds. This submission evokes an observation of the New Zealand Court of Appeal in Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230 at [63], in the context of an allegation of sham:
Whether these transactions are shams depends primarily on the states of minds of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests.
(Cited by Edmonds J in Normandy Finance and Investments Asia Pty Ltd v Federal Commissioner of Taxation [2015] FCA 1420 at [61]).
35 Whilst the appellant's determination not to derive income and pay tax may be accepted, it nonetheless is not sufficient to displace the finding of fact made below, based as it was on the contemporaneous banking documents and the objective circumstances including the history of repayments of principal and interest. The primary judge was well aware of the appellant's strongly held fiscal intention, but his Honour nonetheless found that the appellant ultimately treated the money paid to him as his own, and represented this as such to his bank. In other words, he simply failed to implement his fiscal objectives: cf Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 at [58].
36 The primary judge was also criticised for not requiring the Commissioner to plead and prove sham: cf par [133]. That submission is misconceived. First, where sham is an issue in a tax case there is no onus on the Commissioner to prove it, although he is required to identify what he considers to be the real underlying transaction. As Hill J said in Richard Walter Pty Ltd v FCT at [259]:
Even if it had been necessary to determine whether the so called loan transactions were shams, the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise…
37 Secondly, it was entirely proper and open to the Commissioner to put his case based upon a failure on the part of the taxpayer to discharge the onus of proof imposed by s 14ZZO of the Taxation Administration Act 1953 (Cth). As Brennan J, as his Honour then was, observed in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624:
If the Commissioner and the taxpayer agreed to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection.
Earlier, his Honour observed, at 621:
The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
That observation is particularly pertinent to the case put by the taxpayer here.
38 Thirdly, the Commissioner did identify what he considered to be the real transaction. He said it was a distribution of trust income to the appellant by the Practice Trust, or, alternatively by the Outlook Trust. Having done this, it was a matter for the taxpayer to discharge his onus of proving that there was a loan. Even if sham had been alleged, in our view, the task of the taxpayer would have remained almost exactly the same. He needed to prove positively that he either did not derive the amount assessed, or that he did not otherwise receive it beneficially.
39 The next issue for determination was whether the sums paid to the appellant were assessable income. The primary judge held that the amount assessed was income because it was either a distribution to the appellant from the Practice Trust or alternatively from the Outlook Trust, with present entitlement arising pursuant to ss 95A(1) or 101 of the 1936 Act, or pursuant to the terms of the deeds of the Practice Trust or Outlook Trust, or because of a specific resolution of the Practice Trust. In relation to the first basis for present entitlement, his Honour accepted (at [143]) the following submission made by the Commissioner:
The Commissioner contended that, as discussed above, in addition to the terms of the trust deed, and to like effect, the operation of ss 95A and 101 of the ITAA 1936 can be triggered by the fact of payment taking place, such that the payments above were sums that Mr Hart was presently entitled to once the loan characterisation was not accepted.
40 In relation to the second basis for present entitlement, the primary judge referred to cl 14 of the Practice Trust Deed and cl 3 of the Outlook Trust Deed and in relation to that deed concluded at [152]:
The Commissioner's closing written submissions asserted, and I accept, that in accordance with the portions of clause 3 of the Outlook Trust deed reproduced above, Mr Hart acquired a vested and indefeasible interest in the amounts that were actually paid to him or to his benefit by Outlook Crescent Pty Ltd as trustee for the Outlook Trust during the 1997 income year, and was presently entitled to those amounts for the purposes of s 97 of the ITAA 1936.
41 In relation to the third basis for present entitlement, his Honour also accepted the submission put to him by the Commissioner that there existed an express resolution distributing a share of the income of the Practice Trust directly to the appellant in his capacity as a Special Unitholder in that trust. This submission was described at [144] as follows:
The Commissioner's case in the alternative was that a resolution dated 30 June 1997 by the trustees of the Practice Trust provided that income for the year ended 30 June 1997 be applied to special unitholders, including any interim distributions, in the amounts paid or advanced during that income year. As noted earlier, Mr Hart was a special unitholder. It was submitted that therefore he was presently entitled to the amounts paid to him or on his direction for his benefit (being a portion of the income of the Practice Trust) by reason of the resolution.
42 The resolution of the Practice Trust relied upon by the Commissioner provided:
IT WAS RESOLVED that income for the year ended 30 June 1997 be applied to Special Unitholders (including interim distributions to them, if any, during the year) in the amounts paid or advanced to them during the year.
As already mentioned, the appellant denies, notwithstanding that he was a Special Unitholder, that the Practice Trust paid him anything, but led no evidence as to whether an amount, and if so what amount, had been paid or advanced to the Special Unitholders pursuant to this resolution. He submitted that there was no evidence before the primary judge which demonstrated that money had in fact been advanced or paid to the appellant by the Practice Trust. However, the onus was on the appellant to demonstrate on the balance of probabilities that this was so. It was for the appellant to explain the presence and meaning of the resolution. He did not do so. Absent an explanation, inferentially, amounts were paid or advanced by the Practice Trust to the Special Unitholders, thus explaining the making of the resolution. In our view, it was open to the primary judge to find that the appellant received the full amount assessed, as a distribution in fact made by the Practice Trust. It was entirely open for his Honour to make such findings given the contents of the bank statements tendered into evidence described at [141] in the judgment below, and the appellant's positive contention that he was paid $185,698 by the Outlook Trust. The appellant's contention that there was no or insufficient evidence to support this finding is rejected.
43 On appeal, the appellant also submitted that the foregoing conclusion was inconsistent with the express resolutions to distribute income made by the Practice Trust and the Outlook Trust. Those resolutions, it was said, were to make distributions to beneficiaries other than the appellant. Absent a finding of sham, which was not contended for, the resolutions took effect in accordance with their tenor.
44 That submission faced an immediate difficulty, namely, that the appellant was unable to identify or produce to the Court any other resolution of the Practice Trust save for the one concerning the Special Unitholders described at [42] above. He was unable to identify any resolution of the Practice Trust distributing income to the Outlook Trust.
45 The resolution of the Outlook Trust, which the appellant contended was inconsistent with the receipt by him of any distribution, is dated 27 June 1997 and is in these terms:
IT WAS RESOLVED to appoint all the income of the Trust for the year ended 30th June 1997 to and for the benefit of the Trust known as Annesley No. 3 Trust, noting that that Trust is a beneficiary of the Outlook Practice Trust.
It will be recalled that the Anneley No 3 Trust was the first new trust in the NVI Scheme. The presence of the resolution does not address, in our view, the findings made by the primary judge that the appellant had not shown that he had not derived, beneficially, the amount assessed. It may evidence an attempt to implement the NVI Scheme. We say "attempt to implement" because, as already mentioned, a resolution from the Practice Trust to distribute income to the Outlook Trust, which might have been the first step in the NVI Scheme, was never produced, and the evidence set out above, which appears to show that monies were paid by the Practice Trust directly into bank accounts owned or controlled by the appellant, was expressly contrary to the design of the NVI Scheme.
46 It follows that the primary judge did not err in concluding that the amount beneficially derived by the appellant was probably a distribution by the Practice Trust to him as a Special Unitholder, and assessable as such.
47 As an alternative, the Commissioner relied upon s 95A or, alternatively, s 101 of the 1936 Act. In essence, this submission was that the appellant, having being paid the sum assessed, was thereby deemed to have become presently entitled to a share of the income of either trust pursuant to either of those provisions. Section 95A(1) at the time provided:
95A. Special provisions relating to present entitlement
(1) For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary.
Section 101 at the time provided:
101. Discretionary trusts
For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion.
48 The submission found favour below. If it matters, and with great respect to the primary judge, if what his Honour accepted was that the mere act of payment legally creates present entitlement, then we are unable to agree with it.
49 Below, and after considering a number of authorities, including the decision of Hill J in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457, the primary judge said at [86]:
The burden of the above passages is that if the trustee of a discretionary trust exercises a discretion to pay or apply the income of the trust estate to or for the benefit of a beneficiary prior to the end of a given income year, the beneficiary will be presently entitled to that share of the income under s 97. If instead only a mere payment is made to the beneficiary prior to the end of the income year, s 95A(1) operates to deem the beneficiary to continue to be presently entitled to the income, so that s 97 continues to apply. In this way, in certain circumstances s 95A(1) overcomes the problem posed by the concepts of vested in interest and vested in possession operating to deny the necessary present entitlement. It helps to ensure, at least in some situations, that there is no advantage for tax purposes in merely making payments or advances rather than formal distributions.
50 In relation to s 101, the primary judge said at [89]:
Thus the operation of s 101 is that, when a trustee of a discretionary trust has exercised a discretion to pay or apply the income of the trust estate to or for the benefit of a beneficiary, that beneficiary is deemed to be presently entitled to the amount so paid, including for the purposes of s 97(1).
51 The passage from East Finchley, relied upon by the primary judge for the conclusion he expressed at [86] concerning s 95A, is as follows (at 477):
A discretionary trust deed may provide a discretion in the trustee to determine, in respect of the income of a particular year, who among a class of beneficiaries is to be entitled. If that determination were made prior to 30 June in a year of income and was irrevocable the consequence would be under s 98 that there would be as at the end of the year of income (that being the relevant time to determine the issue) present entitlement under s 97. There would be no need to have any deemed present entitlement in such a class of case assuming, for present purposes, that there had been no payment of any amount to the beneficiary. In the class of case where there had been a payment, then s 95A(1) would deem the beneficiary to continue to be presently entitled to the income and thus keep s 97 of the Act applicable: cf per Barwick CJ in Union-Fidelity Trustee Co of Australia Ltd v FCT [1969] HCA 36; (1969) 119 CLR 177 at 182.
Where on the other hand a discretionary trust deed provides that the trustee has a discretion to pay or apply income of the trust estate to or for the benefit of beneficiaries at his discretion and where there has been a payment there would not (at least in the absence of s 95A(1) which was introduced in 1979) be present entitlement at the end of the year of income, nor in the event that income had been applied in favour of a beneficiary would there have been such present entitlement because, looking at the matter as at the end of the year of income, there would have been no right in the beneficiary to sue the trustee for his share of income, that right having been satisfied by the payment or application already made under s 101. Thus it is doubtful that s 101 was intended to cover the entire field. For almost all purposes (and perhaps indeed for all purposes) it will be irrelevant whether a beneficiary is presently entitled under s 97 or 98 or merely deemed to be presently entitled by force of s 101.
52 With respect, in our view, this passage does not support the proposition that where a trustee makes a payment to a beneficiary before the expiration of a year of income, the beneficiary is thereby taken thereafter, by reason of s 95A, to be presently entitled to that income for the purposes of s 97(1). Rather, in our view, s 95A exists to ensure that a beneficiary, who is already presently entitled to a share of the income of a trust estate, does not cease to be so presently entitled, because at some point thereafter, but before the expiration of the year of income, he or she is paid their entitlement.
53 Section 95A was introduced by the Income Tax Assessment Amendment Act 1979 No.12, 1979. The explanatory memorandum which accompanied the introduction of that Act relevantly states:
Proposed section 95A is intended to remove any doubts that may exist that trust income to which a beneficiary is otherwise presently entitled in respect of a year of income does not, for the purposes of those provisions of the income tax law that turn on whether a beneficiary is presently entitled to income of a trust estate, cease to be income of that kind because the income concerned has been paid to or applied for the benefit of the beneficiary.
(Our emphasis)
The "doubts" referred to in the sentence above, presumably arose from the following statement of Barwick CJ in Union-Fidelity Trustee Co of Australia Limited v Federal Commissioner of Taxation (1969) 119 CLR 177 where his Honour said at 182:
In applying the provisions of Div. 6 a clear distinction must be maintained between the position of a person who is entitled to receive a share of the estate and one who has been paid the amount of it. When a beneficiary has been paid his share of the income of the estate in respect of a tax year he no longer satisfies the description of a beneficiary who is entitled to a share of the net income of the estate for that year. Thus, if at the close of the taxation year the appropriate share of the income of the trust estate has been already paid to the beneficiary who before the payment was merely entitled to it, the amount so paid to the beneficiary as his share of that income will form part of his assessable income by virtue of s. 26 (b) and not, in my opinion, by reason of s. 97.
54 Former s 26(b) of the 1936 Act included in the assessable income of a taxpayer a beneficial interest in income derived under, amongst other things, an instrument of trust.
55 The mischief which s 95A addresses, as explained by the Explanatory Memorandum, is the loss of present entitlement following payment to a beneficiary by the trustee of that entitlement. It is not directed at creating present entitlement. In our view the ordinary and natural meaning of the language used by s 95A aptly addresses that mischief. The operation of the provision is conditional upon the following state of affairs: ‒ "where a beneficiary of a trust estate is presently entitled to any income of the trust estate". It then provides that the beneficiary "shall be taken to continue to be presently entitled" to the income notwithstanding that it has already been paid or applied for the benefit of that beneficiary. The act of payment or advancement does not make a beneficiary, who is not otherwise presently entitled to a share of the income of the trust estate, so presently entitled. Rather, the act of payment creates a fiction whereby a beneficiary, who was already presently entitled, does not cease to be so for the purposes of s 97 because they are paid out their entitlement prior to the expiration of the year of income.
56 Similarly, in our view s 101 does not deem present entitlement by reason of an act of payment absent some resolution or determination of the trustee of a trust to make that distribution or payment. It operates, not upon the act of payment, but upon the exercise of a discretion by a trustee. Practically, it probably is only operative where distributions are made to those who have a legal disability. That is why Gummow J made the following observation in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 552:
Section 101 of the Act has the result, with regard to discretionary trusts, that where the power in question is vested in the trustee and the trustee exercises the discretion in favour of an object of the power, then that person is deemed to be presently entitled to the amount paid to him or applied for his benefit. In the case of objects of the power who were sui juris, s 101 would, in such cases, add little to what would already be the work done by s 97 of the Act.
In other words, where a discretionary beneficiary is not under legal disability, and a trustee exercises a power to pay or advance funds to that beneficiary, s 101 adds little to s 97.
57 The language of s 101 supports the conclusion that a mere act of payment by a trustee to a beneficiary is not sufficient to make that beneficiary entitled to that income. First, the provision is conditioned upon the existence of a discretion to pay or apply income of the trust for the benefit of specified beneficiaries. It then provides that where there is a beneficiary "in whose favour the trustee exercises the trustee's discretion", the beneficiary thereafter shall be deemed to be presently entitled to the amount paid to them or applied for their benefit. In our view, the provision is not engaged unless and until it can be shown that the trustee has in fact exercised its discretion to make a payment to a specified beneficiary. Normally that would occur by written resolution, although we accept that the exercise of discretion could be evidenced in other ways.
58 The third alternative basis for present entitlement arose out of clauses of the Practice Trust Deed which the Commissioner contended made the appellant presently entitled to a share of the income of that Trust in the sum assessed. Clause 14 of the deed addressed the power to make of the trustee distributions of income in each year and cl 14.7 provided:
It is declared that each of the unit holders whose favour the trustee shall pay, apply or set aside the whole or a part of the net income all the whole or a part of the additional tax income of the trust fund for that year or failing and effective community accumulation who shall be entitled to share in the amount of such accumulation for that year as his hearing provided shall have an immediate infeasible vested interest in that part of the net income or additional tax income all the amount of such accumulation for that year twitch that unit holder is entitled hereunder, it being the express intention of the set law (as the trustee acknowledges) the such of the unit holders in whose favour the trustee shall pay, apply or set aside the said net income for the said additional tax income or failing and effective community accumulation who shall be entitled to share in the amount of such accumulation as hearing provided shall be presently entitled to his or her share of such net income additional tax income or the amount of such accumulation.
59 If it be necessary to do so, we would agree with the Commissioner's submission that cl 14.7 caused the appellant to become presently entitled to a share of the income of the Practice Trust upon payment being made to him by that trust.
60 Below, the Commissioner had also submitted that some, or all, of the amount assessed was a distribution from the Outlook Trust. He did so, we infer, because it was not clear to what extent payments were made to the appellant by either the Practice Trust or the Outlook Trust. For that purpose he relied upon cl 3.8 of the Outlook Trust Deed which is very similar to cl 14.7 of the Practice Trust Deed above. It renders a beneficiary presently entitled to the share of income paid by a trustee to her or him. The primary judge found (at [154]), that the appellant was probably assessable on this basis, at least in the sum of $185,698. On appeal, as at first instance, the focus of the appellant was not on the source of distribution - Practice or Outlook Trust - but on whether he had been lent monies.
61 In our view, there is yet another basis upon which it may properly be concluded that the amounts received by the appellant were impressed with the character of income for the purposes of s 25(1) of the 1936 Act (now s 6-5 of the Income Tax Assessment Act 1997 (the "1997 Act")). That is because, the objective circumstances of their receipt show that the amount derived was likely to have been the product of the appellant's work as a solicitor and was also relied upon by him for his ordinary expenditure. In that respect, we emphasise that, other than contending that there was a loan, no other evidence was led by the appellant concerning the true character of the amounts he received, and no explanation was given concerning the other amounts found to have been paid to him and described at [141] below. The objective circumstances here are:
(a) the fact of receipt of monies by the appellant (the $185,698 and the $84,615.52), which included the making of regular payments described in the court below at [141]. Some of these were described in the bank statements of the appellant as "pay" or "sol pay";
(b) the money was sourced from the earnings of the Practice Trust or possibly the Outlook Trust. That is conceded in relation to the $185,698 and may, in our view, be inferred for the sum of $84,615 from the descriptions which appeared in the bank accounts;
(c) the appellant worked to secure the earnings of the Practice Trust by acquiring and then selling legal services to clients of Cleary Hoare. The sum assessed of $220,398 is equal to what was said by him to be the share of the income of the Practice Trust payable to his family discretionary trust, namely the Outlook Trust;
(d) the appellant did not identify the receipt by him of any other income which might have been used by him to fund his daily expenditure. When pressed on this issue on appeal, the appellant said that there was no evidence that he had or did not have other sources of income, although it was admitted that his tax return for the 1997 year of income disclosed only $100 of income. Counsel for the appellant said, quite properly, that one could assume that the appellant spent the money said to have been advanced to him on "everyday expenses" or for the purpose of investment.
62 Given these circumstances, we are satisfied that the appellant has not discharged his burden of showing that what was paid to him was not income according to ordinary concepts. We infer that what was received was his reward for the provision by him of legal services and was provided to him to fund his daily living expenses. For reasons which follow, the latter finding is sufficient to render what was received as assessable income.
63 In Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540, the taxpayer had been an employee of a firm of shipping agents. In 1940 he voluntarily enlisted for service in the Australian Imperial Forces and served both in Australia and overseas. During that time his former employer voluntarily paid him the difference between his old salary and the lower salary which he received as a soldier. The payments were regularly relied upon to fund his ordinary living expenditure. The payments were not made in return for any service provided to the employer or in exchange for a promise that he would return to his employer after the war. Dixon CJ and Williams J held that the payments made by the former employer were assessable income of the taxpayer for the purposes of s 25 of the 1936 Act. At 557, their Honours said:
Because the £104 was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer because it formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependents and was paid to him for that purpose, it appears to us to have the character of income, and therefore to form part of the gross income within the meaning of s. 25 of the Income Tax Assessment Act 1936-1943.
64 Fullagar J agreed with this conclusion. At 567-8, his Honour said:
It seems to me that the appellant's receipts from Macdonald, Hamilton & Co. must be regarded as having the character of income. They were regular periodical payments ‒ a matter which has been regarded in the cases as having some importance in determining whether particular receipts possess the character of income or capital in the hands of the recipient …. This consideration, while not unimportant, is not decisive. What is, to my mind, decisive is that the expressed object and the actual effect of the payments made was to make an addition to the earnings, the undoubted income, of the respondent. What the employing firm decided to do, and what it really did, in relation to the respondent and others in the same position was "to make up the difference between their present rate of wages and the amount they will receive". What is paid is not salary or remuneration, and it is not paid in respect of or in relation to any employment of the recipient. But it is intended to be, and is in fact, a substitute for ‒ the equivalent pro tonto of ‒ the salary or wages which would have been earned and paid if the enlistment had not taken place. As such, it must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments.
See also Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443; cf Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 at [65] and [66].
65 We would therefore have, in any event, and absent the trust resolutions and the terms of the Practice Trust deed upon which the Commissioner relies, been satisfied that the amounts received by the appellant were assessable as income in ordinary concepts. The reason for their assessability is that they were received, at least in part, regularly, but more importantly, were relied upon by the appellant to fund his daily expenditure. As counsel for the appellant said, "he had to live". In other words, he had the use of and enjoyment of what was paid to him. Consistently with the reasoning in Dixon, income regularly received and relied upon "to live", in the particular circumstances here, is income in ordinary concepts.