Idlecroft Pty Ltd v Commissioner of Taxation

THE COURT: 1 These are three appeals from a judgment of Spender J, delivered on 23 August 2004, concerning a number of family trusts and the consequences of a taxation scheme known as the "Hendon Scheme".

BACKGROUND 2 Each of the appellants, Idlecroft Pty Ltd ("Idlecroft"), Dimouth Pty Ltd ("Dimouth") and Clurnite Pty Ltd ("Clurnite"), is the trustee of a discretionary trust, namely, the Simon Fleury Family Trust ("the Idlecroft Trust"), the O'Connor Brothers Trust ("the Dimouth Trust") and the Harper Family Trust ("the Clurnite Trust"), which entered into a joint venture agreement ("JVA") with Westside Commerce Centre Pty Ltd ("WCC"), as trustee for the Hendon Unit Trust, to develop a property in South Australia known as Hendon Common. Each appellant was introduced to the scheme by its tax agent. Under each JVA, the appellant promised to fund the development of Hendon Common. The agreed method of funding was for the taxpayers to add WCC as a beneficiary of their trust and to appoint income to WCC. In fact, only 12 per cent of the income appointed to WCC was to be paid immediately. Each appellant represented to the respondent, the Commissioner of Taxation ("the Commissioner"), in its tax returns that WCC was presently entitled as beneficiary to the appointed income. Because it had substantial tax losses, WCC did not pay tax on the appointed income. 3 The general background of the Hendon Scheme is set out in the judgment of Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347 at [56] ff ("BRK"), in relation to another trust, The Wagner Trust. 4 The Commissioner accepted that the appointments of income by the taxpayers were valid but assessed each appellant under s 169 of the Income Tax Assessment Act 1936 (Cth) ("the Tax Act") on the basis that, because of the operation of s 100A of the Tax Act, each appellant had not conferred "a present entitlement" on WCC, with the consequence that s 99 of the Tax Act applied to make the appellants, rather than WCC, liable to pay tax on the appointed income. 5 The appellants objected to the Commissioner's assessment on a number of grounds, including that the income to WCC was validly appointed. In each case, the Commissioner made an objection decision, accepting once again that the income was validly appointed to WCC. 6 Each appellant appealed to the Federal Court under s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the Administration Act"), which provides that a person who is dissatisfied with an objection decision of the Commissioner may appeal to the Federal Court if the decision is an appealable objection decision, other than a reviewable objection decision. The tax years in respect of which the appellants appealed are the years ending 30 June 1993 to 30 June 1995 inclusive. 7 In BRK, the first case concerning the Hendon Scheme to come before the Federal Court, the Commissioner noted that the appointments of income to WCC were not valid at all, due to the nominations of WCC as a beneficiary without proper provision having been made for such appointment in the Wagner Trust Deed. There were important deficiencies in the implementation of the Hendon Scheme in that case. On the evidence, Cooper J decided that the appointments of income to WCC were invalid and then proceeded to deal with the consequences of invalidity. His Honour considered that as there was no beneficiary presently entitled to the income of the trust, which the applicant had unsuccessfully attempted to distribute to WCC in the financial years 1993, 1994 and 1995, the applicant became assessable as trustee on the income pursuant to s 99A(4) of the Tax Act. 8 As a result of the decision in BRK, the Commissioner reviewed the validity of the appointment of income to WCC by a number of other discretionary trusts, including the trusts that are the subject of the present appeals. 9 Idlecroft's 1994 income tax return disclosed a purported distribution to the Hendon Unit Trust of $70,000 and its 1995 income tax return disclosed a purported distribution to the Hendon Unit Trust of $61,738. Notices of assessment for the 1994 and 1995 years were issued on 27 July 1998, notices of objection were lodged by Idlecroft on 21 September 1998 and a notice of disallowance of objections, with attached reasons for the decision, was issued by the Commissioner on 27 January 1999. 10 Dimouth's 1993 income tax return disclosed a distribution of $80,432 to the Hendon Unit Trust, its 1994 income tax return disclosed a distribution of $73,971 to the Hendon Unit Trust and its 1995 income tax return disclosed a distribution of $15,224 to the Hendon Unit Trust. Notices of assessment for each of the 1993, 1994 and 1995 years were issued by the Commissioner on 4 August 1998. Notices of objection to the assessments were lodged on 21 September 1998 and the Commissioner disallowed the objections by letter dated 27 January 1999, giving reasons for the disallowance. 11 Clurnite's 1993 income tax return disclosed a distribution to the Hendon Unit Trust in the sum of $200,000, its 1994 income tax return disclosed a distribution to Hendon Unit Trust of $75,554 and its 1995 income tax return disclosed a distribution to Hendon Unit Trust of $63,056. Notices of assessment for each of the 1993, 1994 and 1995 years were issued on 4 August 1998. Notices of objection to the assessments were lodged on 21 September 1998 and disallowed by the Commissioner by letter dated 27 January 1999. ISSUES BEFORE SPENDER J 12 It was conceded by the appellants in the proceedings before Spender J that the JVAs must be regarded as "reimbursement agreements" within the meaning of that term in s 100A(7) of the Tax Act and that if the appointments of income to WCC were valid, the requirements of s 100A were met. 13 Each of the five appellants in the proceedings before Spender J purported to nominate WCC, as trustee of the Hendon Unit Trust, as a general beneficiary of their respective trusts. Before Spender J, the appellants contended that WCC had not been properly nominated as a beneficiary of the trusts. As a consequence, the default beneficiaries under the Trust Deeds were presently entitled to the income and the income was not assessable under s 99A of the Tax Act. The Commissioner accepted that the appointments were invalid and ineffective with respect to the Idlecroft Trust, the Dimouth Trust and the Vieglais Family Discretionary Trust ("the Acamae Trust"). However, the Commissioner contended that WCC was validly appointed as a beneficiary of the Clurnite Trust and the McGowan Family Trust ("the Downville Trust"). In the latter two appeals, the Commissioner said the appellants had power to appoint income to WCC and exercised this power with an intention to do so. The Commissioner referred to the comments of Mason J (with whom the other members of the High Court agreed) in Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 at 340 and noted that where there is power to appoint a beneficiary, a mere irregularity in the qualification of the person as a beneficiary is not a concern of the Court or the Commissioner. As a consequence, the Commissioner said that the income tax assessments issued to Downville and Clurnite must stand, on the basis that no beneficiaries were presently entitled to the income. 14 It was claimed by the appellants on the hearing before Spender J that, in respect of all the trusts, WCC was never presently entitled to any trust income and that the appointment of WCC as trustee of the Hendon Unit Trust in each case was invalid and ineffective. His Honour noted that there was no argument that each JVA has to be regarded as constituting a "reimbursement agreement" within the meaning of s 100A(7) of the Tax Act. 15 Before Spender J, each of the appellants identified two issues. The first was whether the appellant trustee, as trustee of the relevant trust, was liable to pay tax pursuant to s 99A of the Tax Act in respect of all or any part of the amounts of income which it resolved to appoint to WCC as trustee of the Hendon Unit Trust. The second issue was whether there was any tax shortfall on which the Commissioner could properly impose additional tax and penalties pursuant to Part VII of the Tax Act.

The Legislation 16 The relevant provisions of the Tax Actfor the purposes of these appeals are as follows: 'Special provisions relating to present entitlement 95A(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. (2) For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate. … Trustees 96 Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.' (Emphasis added) Beneficiary not under any legal disability 97(1) Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a)the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; …' (Emphasis added) 17 In each appeal, the contention for the appellant is that WCC was not a beneficiary and that no trust income was appointed to it as trustee. The Commissioner contends that WCC was a beneficiary of the Downville and Clurnite Trusts, but was not presently entitled. 18 Subsections 99A(4) and 99A(4A) of the Tax Act deal with the situation where there is trust income that has not been brought to tax under either s 97 or s 98. In each appeal, the relevant provision is subsection 99A(4A), which provides: '(4A) Where there is a part of the net income of a resident trust estate: (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.' (Emphasis added) 19 It is common ground that neither 99A(4A)(b) nor 99A(4A)(c) has application in the present appeals. Therefore, the question in each case is whether there is part of the net income of a resident trust estate that is not included in the assessable income of a beneficiary of the trust estate in pursuance of s 97. In that event, the consequence of s 99A(4A) is that the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate. 20 Section 100A of the Tax Act deals with what might be broadly described as trust stripping. It is headed "Present entitlement arising from Reimbursement Agreement". It relevantly provides: '100A(1) Where: (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the "relevant trust income") arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement; the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income. (2) Where: (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability would, by reason that income of the trust estate was paid to, or applied for the benefit of, the beneficiary, be deemed to be presently entitled to income of the trust estate; and (b) that income or a part of that income (which income or part, as the case may be, is in this subsection referred to as the "relevant trust income") was paid to, or applied for the benefit of, the beneficiary as a result of a reimbursement agreement or as a result of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement; the relevant trust income shall, for the purposes of this Act, be deemed not to have been paid to, or applied for the benefit of, the beneficiary. … (5) For the purposes of subsection (1), but without limiting the generality of that subsection, where: (a) a reimbursement agreement was entered into at or after the time when a person became a beneficiary of a trust estate (whether the person became a beneficiary of the trust estate before or after the commencement of this section); and (b) the amount (in this subsection referred to as the "increased amount") of the share of the income of the trust estate to which the beneficiary is presently entitled exceeds the amount (in this subsection referred to as the "original amount") of the income of the trust estate to which the beneficiary would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into or if an act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement had not occurred; the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount shall be taken to have arisen out of the reimbursement agreement. … (7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons. (8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. … (13) In this section: "agreement" means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing; "property" includes a chose in action and also includes an estate, interest, right or power, whether at law or in equity, in or over property.' 21 The statutory scheme and the background to this legislation, including the Explanatory Memorandum, are set out in Commissioner of Taxation v Prestige Motors Pty Ltd (1998)82 FCR 195 at 198-202 (Prestige). 22 The operation of s 100A(2) of the Tax Act is that the amount paid to, or applied for, the benefit of a beneficiary as the result of a reimbursement agreement, to which a beneficiary would otherwise be deemed to be presently entitled as income of a trust estate, is deemed not to have been paid to or applied for the benefit of the beneficiary. As a result, s 101 does not apply to that income, with the consequence that s 97 does not apply. A further consequence is that s 99A(4A) does apply to that income to make tax payable upon it. Section 100A is attracted only if there is a purpose to the agreement, the nature of which purpose is defined in ss 100A(8) and 100A(9). That requirement is satisfied in this case. 23 The Explanatory Memorandum describes the intended use of s 100A as follows: 'The arrangements generally turn on the operation of section 97 which, as described earlier in this memorandum, provides for a beneficiary to be subject to tax where the beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability. In those circumstances, the beneficiary's share of the trust net income is included in his assessable income and the trustee is not required to pay tax on the income. Where the trustee has a discretion to pay or apply income for the benefit of one or more specified beneficiaries and the trustee exercises the discretion in favour of a beneficiary, section 101 deems the beneficiary to be presently entitled to the amount paid or applied. Such an amount thus also falls to be taxed to the beneficiary under section 97. A common feature of the tax avoidance arrangements at which the proposed section is directed is for a specially introduced beneficiary to be made presently entitled to income of the trust estate, so that the trustee is relieved of any tax liability on the income. Under the arrangements, the beneficiary also does not pay tax, eg, because of a peculiar tax status. For example, the beneficiary may be a body or organisation that qualifies for exemption of its income under specific provisions, or it may be another trust that has sufficient deductible losses to absorb its share of income as a beneficiary of the first trust estate. Invariably, the arrangements require this introduced beneficiary to retain only a minor portion of the trust income and to ensure that some other person - the one actually intended to take the benefit - effectively secures enjoyment of the major portion of the trust income but in tax-free form (eg, by the settlement of a capital sum in another trust estate for the benefit of that person). The proposed section 100A will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under, or as a result of which, present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of valuable benefits to some other person, company or trust. In those circumstances, the section will require the income of the trust that is dealt with under the 'reimbursement agreement' to be treated as having been accumulated by the trustee as income to which no beneficiary is presently entitled. This will result in the trustee being liable to pay tax on the income under section 99A at the prescribed tax rate, 61.5 per cent for 1978-79. The new section is to apply to reimbursement arrangements giving present entitlement to an introduced beneficiary where the relevant trust income is paid to or applied for the benefit of the beneficiary after 11 June 1978, the day on which the Government announced its intention to introduce legislation to overcome these arrangements.' 24 Each of the appellants in the three appeals which are presently before this Court made the following formal concessions for the purpose of these proceedings only: '(a) That the material filed does not discharge the onus of proof which the Applicants bear of establishing that the agreements entered into by them, which are the subject of the aforementioned proceedings, were not entered into by one or more of the parties thereto for purposes which included the purpose of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of the year of income, would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into; (b) That the material filed does not discharge the onus of proof which, by reason of the foregoing concession, the Applicants bear, of establishing that the agreements in question were entered into in the course of ordinary family or commercial dealings; (c) That the material filed does not discharge the onus of proof which the Applicants bear of establishing that any tax shortfall was not caused by the recklessness of a registered tax agent with regard to the correct operation of the Income Tax Assessment Act 1936 ("the ITAA 36 Act") or the regulations made thereunder; (d) That by reason of the foregoing concessions the only issue in relation to the penalty imposed by the Commissioner of Taxation on the assessment issued to the Applicants is whether or not there was any tax shortfall upon which the penalties could have been properly imposed.' 25 The effect of the concessions concerning penalty is that if each appellant fails in relation to its contentions concerning primary tax, the penalty will stand and that, conversely, if the appellants win on the question of primary tax, they also win on the question of penalty. 26 The appellants concede that if WCC was presently entitled to the net income within the meaning of s 97(1), s 100A will operate, on the evidence in this case, to extinguish that present entitlement, with the consequence that s 99A will apply and the trustee will be liable for the tax at the special rate. The appellants and the Commissioner are in dispute, however, as to the consequences that follow if the appointments are invalid and ineffective as the appellants submit. The appellants say that if the appointments are invalid and ineffective, s 100A ceases to have any relevance or application, whereas the Commissioner asserts that s 100A still operates in these circumstances. This argument will be elaborated in greater detail below.

Section 100A(5) 27 The primary Judge noted the submission for the Commissioner that s 100A(5) deems there to be a requisite connection between the reimbursement agreement and the present entitlement of default beneficiaries. The Commissioner contended that the question under s 100A(5) is what would be the present entitlement of the takers in default if the reimbursement agreement had not been entered into. The Commissioner submits that the determination of this question requires each appellant to prove that the identified beneficiaries would probably have received, or could reasonably be expected to have received, the trust income in the event there was no reimbursement agreement. This required the appellants to prove that they would have appointed the income to the same beneficiaries, or that they would have defaulted in appointing the income to anyone at all, thereby allowing those beneficiaries to take by default. The primary Judge pointed out that there was no evidence led by the appellants on this matter and therefore they could not satisfy the onus of proof that they bore. His Honour observed that s 100A(5)(b) involved a "but for" test and that the appellants had not discharged the onus on them to prove the requirement of this subsection, namely, to demonstrate that the amount of entitlement of the default beneficiaries did not arise out of a reimbursement agreement: cf Commissioner of Taxation v Consolidated Press Holdings Ltd (1999) 91 FCR 524 at 548-550. The subsection deems the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount to have arisen out of the reimbursement agreement. 28 On this appeal to the Full Court, the appellants contended that the primary Judge had erred in law and in fact in concluding that s 100A(5) of the Tax Act applied a "but for" nexus test and that the appellants had not discharged the onus on them of proving the requirements of s 100A(5). The appellants said that his Honour's approach was wrong in law because this is not a case in which there is any dispute as to factual issues and, as such, they contend that onus plays no part in the matter. They say that the issue is a purely legal one as to the nature of the connection which must exist between the reimbursement agreement and the present entitlement of the beneficiaries, such that the Commissioner's contention that s 100A(5) deems there to be the requisite connection between a reimbursement agreement and the present entitlement of the default beneficiaries proceeds on a number of false assumptions. One of the false assumptions of the Commissioner, according to the appellants, was that s 100A(5) meant that the primary emphasis should be placed on WCC, as trustee of the Hendon Unit Trust, rather than on the default beneficiaries. 29 The appellants say that s 100A(5) does not operate to create a new basis of liability. Instead, it sets out how the requirements of s 100A(1) are to be met in the context of a beneficiary who is already presently entitled and quantifies the part of the income to which the beneficiary is presently entitled and to which s 100A(1) applies. The appellants say that s 100A(5) supplies only part of the information that, in some circumstances, s 100A(1) requires and that the critical question concerns the terms of s 100A(1). The argument by the appellants is that his Honour appears to have treated s 100A(5) as a deeming provision that satisfies the requirements of subsection 100A(1). 30 The appellants say that all that s 100A(5) achieves is simply to supply the amount for the purposes of the operation of s 100A(1), if it otherwise applies, but that it has no independent operation beyond this quantification, so that it then becomes necessary to establish whether the present entitlement arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement. 31 The Commissioner contends that the onus placed on the taxpayer is to demonstrate that in the absence of any arrangement the trustee would have done something else that, when compared with what was done, did not give rise to a tax benefit. 32 In our view, his Honour was correct in concluding that on the evidence the appellants had failed to show that they were entitled to rely on s 100A(5).

Section 100A - reimbursement agreement 33 The appellants submit that the purported appointment of income to WCC in each case was invalid and ineffective. They submit that, as a consequence, the default beneficiaries under each of the trusts were presently entitled to the income. 34 The appellants say that s 100A does not apply, so that the income has been appointed to the default beneficiaries and is therefore not subject to s 99A. 35 The appellants first submit that s 100A does not apply in respect of the default beneficiaries because the definition of "reimbursement agreement" in s 100A(7) requires that the agreement (in this case, each of the relevant Joint Venture Agreements) must exist "in relation to a beneficiary of a trust estate". It is said the expression "in relation to a beneficiary" requires that the beneficiary be a party to the relevant agreement, arrangement or understanding. In the present case, the beneficiary is not a party. Therefore, the definition does not apply and s 100A is not enlivened. The appellants say that the only agreement relied on by the Commissioner relates to WCC as trustee of the Hendon Unit Trust, which was not a beneficiary. They also say that the present entitlement of the default beneficiaries arose by operation of the provisions of the Trust Deed. In other words, it is said that the circumstances do not satisfy the requirement that it was the entry by the appellants into a reimbursement agreement of the type alleged by the Commissioner that gave rise to the present entitlement. 36 In support of the submission that a beneficiary must be a party to the arrangement in order for there to be a reimbursement agreement, the appellants refer to the following observations of Hill J in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 at 474: "It will be recalled that s 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into. Since the relevant agreement requires the payment of moneys to be made by some person, generally the beneficiary (in this case the payment clearly relied upon was a payment by the beneficiary to the trustee), it seems to me to be a matter of necessity that the relevant reimbursement agreement could only have been entered into where the beneficiary is in fact a party. It was not in dispute that for there to be an arrangement there had to be at least two parties to it …" 37 However, his Honour added, at 475: "I have great difficulty in conceiving in the context of s 100A of the Act, how an arrangement to which that section applies could be constituted by the directors of a trustee company alone or for that matter by them and the trustee without the beneficiary being also a party. This will certainly be the case where the so-called 'reimbursement agreement' is one requiring payment by the beneficiary to the trustee. … the question who are parties or necessary parties to an arrangement must depend upon the circumstances of each particular case and the legislative context under consideration. In a case such as the present for there to be a reimbursement agreement, the necessary parties must be at the very least the trustee and each non-resident beneficiary …" (Emphasis added) 38 These remarks indicate that his Honour was addressing his observations to the particular circumstances and documentation before him and was not expressing any general principle of universal application as to the implementation of the s 100A. 39 The appellants also seek to rely on the remarks of his Honour at 476: "Of course it would be a different case if the tribunal had concluded on the evidence before it that there was some arrangement reached between the trustee and the beneficiaries … prior to the resolution of 23 June 1983. However, in the absence of any such specific finding … I think it must follow that the provisions of s 100A could have no application." 40 The above comments are said by the appellants to support two propositions, namely, that the agreement must include the relevant beneficiary as a party and that the agreement must be made before the creation of the present entitlement. The difficulty with this approach is that in the later Full Court decision of Prestige at 216, Hill and Sackville JJ, in a joint judgment, expressed the view in relation to the definition of a reimbursement agreement, that: "The word 'agreement' is given the widest definition in s 100A(13). It includes arrangements and understandings. These can be informal, express or implied, and need not be enforceable or even intended to be enforceable. The only exclusion from the definition is 'an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.'" 41 The statutory language of the definition does not require a beneficiary to be a party to any arrangement or understanding. In Prestige, a reimbursement agreement was found to exist in relation to a trust that had not yet been formed. The words "in relation to" are of the widest import. They are used in a section that the Full Court observed in Prestige at 219 should be given its ordinary and natural meaning unconstrained by any narrow limits derived from the fact that it is an anti-avoidance provision. Their Honours did not consider that such a literal interpretation would have irrational or absurd consequences in the case of a trust not yet in existence. Indeed, the Court considered the section should be construed in accordance with its obvious legislative purpose. There is nothing in the context of s 100A that calls for such a constraint on the definition of reimbursement agreement so as to require the beneficiary to be a party to the agreement, arrangement or understanding. In our view, the words "in relation to a beneficiary" in s 100A(7) serve to designate the subject of the definition and are not intended to impose a requirement that the beneficiary be a party to the agreement. To read the provision in such a way as to impose a substantive requirement involves unwarranted alteration of the statutory language.

Section 100A - nexus 42 The second matter raised by the appellants concerns the nature of the connection that must exist under s 100A(1) between any present entitlement of the default beneficiaries and the reimbursement agreement. 43 In considering this issue, the question is whether the present entitlement of the beneficiary arose out of a reimbursement agreement or arose by reason of any circumstance, act or transaction that occurred in connection with, or as a result of, the reimbursement agreement. 44 The words used in the section demonstrate an intention to give an extensive application to s 100A(1)(b). This is shown in several ways. The provision is a deeming provision and such provisions normally operate to extend the reach of language used in relation to a requirement. There is an additional extension incorporated by the use of the expression "arose out of", which reaches beyond the narrower notions of being "provided for" or "regulated by" an agreement and, as Spender J points out, provides for a broad "but for" test of causation. That is to say, if one of the consequences of the act, transaction or circumstance were to result in any way from the designated criteria then it would be within the language of the section. Furthermore, it is not only the agreement that must be considered but also any circumstance or act that occurred "in connection with" or "as a result of" the reimbursement agreement. The broad extensive language in the subsection coupled with the requirement to interpret the subsection according to its ordinary and natural meaning, having regard to its purpose, mandates an application of the provision unlimited by implied constraints having no foundation in the context. 45 In the present appeals, the connecting circumstances between the entitlements of the default beneficiaries came about because the appointments of income designed to give effect to the reimbursement agreement were invalid. The appointments came into effect because of the existence of the reimbursement agreement. The act of appointment and the purpose of the appointments were driven by the attempt to exploit and implement the scheme using the reimbursement agreement. But for the existence of that agreement, the appointments would not have been made. It is not necessary in order to reach this conclusion to give any strained meaning to the language used. The appointment fits squarely within the ordinary and natural meaning of the language. 46 The fact that another operative factor in the entitlement of the default beneficiaries was the existence of the Trust Deed is not to the point. Section 101A(1) is satisfied if an act or circumstance, in this case the invalid appointment, is connected with the reimbursement agreement. In our view, the requirement of nexus under s 100A(1) has been established in the present appeals. The primary Judge did not make an error in the construction or application of the provision in this case. Accordingly, s 100A applies in respect of the entitlement of the default beneficiaries. 47 We turn now to other matters.

The Clurnite Trust 48 Clurnite submits on its appeal that Spender J erred in concluding that the income of that trust had been validly appointed to WCC and as a consequence attracted the operation of s 100A. Justice Spender reached this conclusion because Clurnite had not satisfied the onus of showing that its nomination of WCC was ineffective and that it did not validly appoint the income of the Harper Family Trust to WCC as trustee of the Hendon Unit Trust. 49 On the view we have formed as to the application of s 100A, it is not necessary to decide this question. However, we are not persuaded that any error has been shown in his Honour's reasons or conclusions on this question. We do not accept the submission for Clurnite that there was any procedural unfairness in the way his Honour dealt with this matter.

idlecroft trust - Notice of Contention 50 Spender J found that no beneficiary was presently entitled to the income of the Simon Fleury Family Trust of which Idlecroft was the trustee for the relevant years. 51 On the hearing of the appeal, leave was sought by the respondent to file a Notice of Contention. In the Notice of Contention, the respondent submitted that the judgment below should be affirmed on two additional grounds. The Commissioner contended that the taker in default provision in clause 3(i) of the Trust Deed was void for conceptual uncertainty for the reason that the class of eligible beneficiaries referred to in clause 1(v) of the Second Schedule cannot be ascertained as a matter of law. Counsel for the Commissioner seeks to raise the issue that there was no evidence to support the conclusion that the eligible beneficiaries, being the takers in default, were sufficiently identified and certain and hence presently entitled to the income invalidly appointed to the trustee of the Hendon Unit Trust for the purposes of ss 97 and 99A. As the trusts in default of the valid yearly appointment of income were void for conceptual uncertainty, no beneficiary was presently entitled to the income as at 30 June of the relevant years in default of the valid appointment to the trustee of the Hendon Unit Trust. Therefore, the appellant had failed to prove that subsection 99A(4) did not apply to make the appellant liable to tax in the relevant years. 52 The Notice of Contention was only received by the Federal Court Registry on 21 February 2005 and no satisfactory explanation was given by the respondent for the delay. In view of this delay and the protracted nature of this litigation, together with the fact that the conclusions we have reached on the other issues mean that it is not necessary to deal with this question, leave should not be granted for the Notice of Contention to be filed. 53 For the above reasons, the appeals are dismissed with costs.

I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan, Tamberlin and Kiefel.

Associate: Dated: 5 August 2005 Counsel for the Appellants: D Russell QC and P Bickford

Solicitor for the Appellants: Hawthorn Cuppaidge & Badgery

Counsel for the Respondent: D Boddice SC and M Robertson

Solicitor for the Respondent: Australian Government Solicitor