Leighton v Commissioner of Taxation

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

1. The Appeal be dismissed.
2. The Applicant pay the Respondent's costs of the proceedings, to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: NORMAN LEIGHTON AS TRUSTEE OF THE LEIGHTON FAMILY TRUST

A. INTRODUCTION 1 An individual non-resident of Australia for income tax purposes, who has not lodged income tax returns in Australia, resides in Monaco. By contract, he is engaged by two non-resident corporations to engage in share trading in Australia using share trading accounts in the names of the two non-resident corporations with moneys funnelled through a custodian arrangement with an Australian bank held in the individual's own name. Any surplus funds from the share trading are remitted from the individual's custodian account to Monaco ultimately for distribution to bank accounts of the two non-resident corporations. The two non-resident corporations did not lodge income tax returns in Australia and paid no tax in relation to the share trading. Was the Commissioner of Taxation (the Commissioner)entitled to assess the non-resident individual as trustee of the net income of a trust estate (being the income derived from the share trading) under the former s 98(3) of the Income Tax Assessment Act 1936 (Cth)? In my view, the answer is yes.

B. AGREED FACTS 2 The parties agreed that the following matters were to be treated as agreed facts for the purposes of these proceedings. 3 Norman Leighton (Mr Leighton)is a non-resident of Australia for income tax purposes. He has not lodged income tax returns in Australia. He lives in, and conducts business from, Monaco. In the 2002, 2003 and 2004 income tax years (the relevant income years), Mr Leighton and his wife were authorised by the Monaco Government to operate an international corporate and trust administration business under the name of "Leighton & Leighton". Leighton & Leighton is an SNC (sociÉtÉ en nom collectif)corporate partnership organised under the law of Monaco. Leighton & Leighton was authorised, pursuant to Monegasque law, to provide services concerning the creation, management, administration or the running, control and monitoring of foreign companies or other similar foreign structures having a legal existence as well as trusts. Pursuant to this authorisation, the objects of Leighton & Leighton relevantly included: Mr Norman Leighton and Mrs Hazel Leighton, to work together within the collective framework of the Company called "Leighton & Leighton" the following activity in Monaco and abroad, the provision of services concerning assistance in setting-up, management, administration, control and surveillance of foreign [non-Monaco] companies or other similarly validly existing non-Monaco legal entities as well as trusts, with the exclusion of specifically regulated activities; such activities to be undertaken in accordance with recommendations and laws applicable to the Principality of Monaco to foreign entities management services. 4 During the relevant income years, Mr Leighton was also a director and the beneficial owner of the shares in CLC Corporation (CLC), which was incorporated as an international business company in the Bahamas on 30 July 1990. Some time after 30 June 2004, CLC was dissolved. 5 Each of Salina Investments Limited (Salina) and Kolton Holdings Limited (Kolton) is a non-resident of Australia for income tax purposes. Salina is a company incorporated in the British Virgin Islands and Kolton is an international business company incorporated in the Commonwealth of the Bahamas on 18 February 1993. Both were liquidated in 2006. During the relevant income years, Mr Leighton was a director of Salina and of Kolton but he was not a beneficial owner of any share in either Salina or Kolton. The beneficial owners of Salina and of Kolton were unidentified third parties who were Mr Leighton's clients. 6 During the relevant income years, each of CLC, Salina and Kolton's registered address for service was: 1. from 29 March 2002, Leighton & Leighton, 4 rue des Orchidees, MC 98000, Monaco; and 2. from 9 January 2000 to 23 March 2002, Leighton & Leighton, c/- Gaskell 7 Boulevard des Moulins, MC 98000 Monaco. (This was also the address for Leighton & Leighton). 7 On 15 September 1993, Mr Leighton wrote to Westpac Custodian Nominees Limited (Westpac Custodian)in relation to "the required information to establish a Westpac Bank account on my behalf ...". On 15 September 1993, Mr Leighton provided Westpac Custodian with details of an account name, his address, residency status and facsimile contact details for the purpose of establishing a bank account. Mr Leighton established a Securities Custodian account with Westpac Custodian and also a Westpac Custodian Bank account 034-954-104471 in his name (the Westpac Bank Account). 8 On 24 December 1993, Mr Leighton entered into a Custodian Agreement with Westpac Custodian by which Westpac Custodian agreed to hold and administer securities on the terms set out below. Mr Leighton signed the Custodian Agreement in his own name. There were clauses of the Custodian Agreement as follows: 2. Subject to the instructions of Mr Leighton, Nominees [i.e. Westpac Custodian] shall perform, each of the acts stipulated hereunder: (a) To credit and / or debit a designated Cash Account of Mr Leighton, with funds received or paid in connection with Mr Leighton securities transactions; and (b) To deposit and / or withdraw securities and hold the balance of the Securities in the Custodian Accounts of Mr Leighton. 3. Nominees shall perform, unless and until otherwise specifically instructed by Mr Leighton each of the acts specified hereunder: (a) To collect or receive the principal and interest in connection with the bonds and debentures held in the Securities Custodian Accounts, cash dividends on stocks so held, and other monies accruing therefrom, and credit the designated cash account of Mr Leighton with such funds; and (b) To collect or receive stock dividends on securities held in the Securities Custodian Accounts and other securities accruing therefrom, and deposit them with the Securities Custodian Accounts of Mr Leighton. 4. (a) Nominees shall handle, unless and until otherwise specifically instructed by Mr Leighton, registration procedures for transfer of the received securities to the name of Nominees in case such registration is required. (b) Those securities held by Nominees in the Securities Custodian Account which are ordinarily held or deposited with or maintained in any Securities System may be so held, deposited or maintained. 5. Nominees shall subscribe for new shares in accordance with the instruction of Mr Leighton. ... 8. Nominees shall exercise, subject to instructions of Mr Leighton, voting rights of securities held in safekeeping pursuant to this Agreement in its name. … 13. (a) Nominees shall not part with possession of any documents of title or certificates held on behalf of Mr Leighton otherwise than to Mr Leighton or on Mr Leighton's instructions; and (b) In the case of a transaction eligible for settlement through a Securities System, upon receipt of the instructions referred to in clause 13(a), Nominees is authorised to complete settlement of the transaction in accordance with the rules governing that Securities System; and (c) those documents of title or certificates referred to in paragraph 13(a) above shall be held in such manner that it is readily apparent that the custodian or an associate of the custodian is not the beneficial owner of the investments to which they relate. … 20. This Agreement may be terminated by either party by giving to the other party a notice in writing not less than sixty (60) days prior to the termination. In such event all assets held by Nominees on behalf of Mr Leighton shall be delivered to Mr Leighton or the successor custodian which Mr Leighton will designate provided, however that Nominees will not be required to make any such delivery until full payment shall have been made to Nominees of all Nominees fees, costs and expenses arising out of, or in connection with this Agreement. In the event Nominees terminates this Agreement, Nominees shall continue to hold under this Agreement all assets then held by Nominees until Mr Leighton has sufficient time to make other arrangements for the custody and servicing of such assets. 9 On 10 October 1997, Mr Leighton entered into a Directors and Management Services Agreement with Salina which included terms that: 1.2 Leighton will provide the following basic services or any part thereof (together with any ancillary, additional or other services provided by Leighton on behalf of SALINA, "the Services") to SALINA as and when SALINA may reasonably require: 1.2.1 management services, including the opening of bank accounts, and the purchase, sale, settlement and safekeeping of securities and other assets and property; 1.2.2 accounting services; 1.2.3 corporate services; 1.2.4 provision of director(s) and secretary (as applicable); 1.2.5 provision of office facilities; and 1.2.6 provision of Board Room facilities upon notice … … 3.1 Salina shall pay to Leighton fees based on the standard rates charged by Leighton from time to time for the provision of the Services, as adjusted from time to time. In addition SALINA will also reimburse any expenses necessarily incurred by Leighton in providing the Services. 3.2 Leighton shall be entitled to deduct from any accounts it is managing on behalf of Salina for the Services rendered or to be rendered from time to time. 3.3 Salina undertakes to ensure that there are sufficient funds in accounts managed by Leighton to enable the payments referred to in Clause 3.2 to be made when due and Salina authorizes (sic) Leighton to sell any of the securities referred to in Clause 1.2.1 to enable it to make such payments. … 7.1 Leighton shall at all times perform the services referred to in Clause 1.2 from Monaco and shall maintain and retain all documents concerning the same in Monaco. 7.2 Leighton will hereafter act as an independent contractor of Salina and nothing in this Agreement may be interpreted or construed to create any employment, partnership, agency, joint venture or other relationship between Leighton and Salina. … 10 On 10 November 1997, Mr Leighton as Administrator entered into a Guarantee with a person whose identity is undisclosed (the Guarantor),by which the Guarantor guaranteed to Mr Leighton the due and punctual payment of all moneys owing to the Administrator by Salina and any other companies formed, administered or operated on the Guarantor's behalf or on behalf of the Guarantor's family. 11 On 20 December 2001, Mr Leighton entered into a Directors and Management Services Agreement with Kolton. It contained similar terms to the Salina Agreement. 12 During the relevant income years, Mr Leighton provided administrative and management services for, inter alia, Kolton and Salina. Leighton & Leighton charged fees to Salina and Kolton respectively based on a percentage of sales proceeds (from the sale of shares) received by Salina and Kolton. 13 During the relevant income years, Salina had accounts with the following brokers: 1. Southern Cross Equities, 88 Phillip Street, Sydney, account number 151051877; 2. Bell Potter Securities Limited, 225 George Street, Sydney, account number 6462981; 3. Credit Suisse First Boston, 1 Macquarie Place, Sydney, account number 462981; and 4. Challenger First Pacific, 88 Philip Street, Sydney, account number 462981. 14 During the relevant income years, Kolton had accounts with the following brokers: 1. Southern Cross Equities, 88 Phillip Street, Sydney, account number 151022577; 2. Bell Potter Securities Limited, 225 George Street, Sydney, account number 6642036; 3. E.L. & C. Baillieu, 360 Collins Street, Melbourne, account number 188928; and 4. Saloman Smith Barney/Citigroup, 2 Park Street, Sydney, account number 10079. 15 During the relevant income years, there were approximately 676 share buy and sell transactions in Australian shares that are the subject of dispute in these proceedings. In respect of these share transactions, it is common ground that: 1. Mr Leighton had authority to provide instructions on behalf of Salina and Kolton to the relevant stockbrokers. 2. Mr Leighton was one of the individuals who gave buy and sell instructions to the stockbrokers listed above, signed by Mr Leighton as a director of Kolton or Salina respectively. 3. Funds for share purchases were provided by or on behalf of Salina and by or on behalf of Kolton. Usually, Salina and / or Kolton transferred funds to CLC's HSBC Monaco bank account number 677800, and CLC then deposited those moneys into the Westpac Bank Account for settling share purchases. CLC was used as a custodian in Monaco of funds flowing to and from Salina and Kolton in relation to transactions for the purchase and sale of shares. The Westpac Bank Account was used for settlement of share sales and purchases with stockbrokers. 4. Occasionally, moneys were transferred directly by Salina or Kolton respectively into the Westpac Bank Account or to the relevant stockbroker. Also occasionally, money remained in the Westpac Bank Account (or the CLC bank account) if Mr Leighton or Salina or Kolton knew or anticipated that a stock was expected to be purchased soon, and, where necessary, Salina or Kolton (as the case might be) would send money over to "top up" the difference between the money in the Westpac Bank Account and the purchase price payable for the relevant securities. 5. Shares purchased with Salina and Kolton's funds were registered in the name of Westpac Custodian. 6. When instructed by Mr Leighton to do so, Westpac Custodian released the shares to the stockbrokers to enable sales to be settled. 7. Instructions were provided to Westpac Custodian, on CLC letterhead signed by Mr Leighton as director of CLC, as to delivery of stock and remittances of share sale proceeds from the Westpac Bank Account. 8. The proceeds of the share sales were deposited into the Westpac Bank Account. The proceeds were then in general remitted from the Westpac Bank Account by Westpac Nominees to CLC's Monaco bank account no 677800 with HSBC Bank, Monaco. On some occasions, however, proceeds of the share sales were retained in the Westpac Bank Account (or the CLC bank account) to fund future share purchases. 9. Where the proceeds of the share sales were remitted to CLC's bank account, CLC remitted those proceeds to Salina or Kolton respectively. 10. HSBC Republic Bank (Monaco) S.A. subsequently became HSBC Private Bank (Monaco) S.A. 16 Upon closure of the Westpac Custodian business in 2007, Mr Leighton instructed Westpac to "transfer all assets held in the above [custody] account back to my own name direct." 17 Article 308 of the Monaco Criminal Code prohibits any person divulging secret information received by virtue of its capacity or profession, unless required or authorised by law to divulge such information. While company service providers have a "semi-regulated" status in Monaco, there is no exclusion for such category of professionals in respect of information received in their professional capacity. Therefore, Mr Leighton, considered as a "Corporate Service Provider", or CSP, would risk prosecution under Article 308 if he released information obtained under the Salina and Kolton Directors and Management Service Agreements. 18 As at 27 August 2010, the taxable income in dispute was: Year Taxable Income 2002 $2,849,734 2003 $2,424,308 2004 $7,646,906

19 These primary facts are not in dispute. What is in dispute is their legal characterisation. Further facts are addressed in section E of these reasons for decision, entitled "Analysis".

Taxation of non-residents 20 During the relevant income years, s 6-5 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) relevantly provided: (1) Your assessable incomeincludes income according to ordinary concepts, which is called ordinary income. (2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. (3) If you are not an Australian resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. (4) In working out whether you have derivedan amount of ordinary income, and (if so) when you derivedit, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. 21 Section 6-10(5) went on to provide that: If you are not an Australian resident, your assessable income includes: (a) your statutory income from all Australian sources; and (b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source. 22 As noted earlier, Mr Leighton is a non-resident of Australia for tax purposes. Salina and Kolton are non-residents of Australia for tax purposes. Consequently, each of Mr Leighton, Salina and Kolton is assessable only on income derived from Australian sources: ss 6-5 and 6-10 of the 1997 Act.

Taxation of trusts 23 Division 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) (as in force during the relevant income years) applies in relation to income of a trust estate. During the relevant income years, s 96 provided that "[e]xcept as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate". 24 Section 98 was one of the exceptions provided by the 1936 Act. Subsections 98(3) and (4) of the 1936 Act (as in force in the relevant income years) taxed trustees in respect of the income of the trust estate to which non-resident (respectively corporate and non-corporate) beneficiaries were entitled. During the relevant income years, s 98(3) of the 1936 Act provided: Where a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate: (a) is a company and is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate; (b) is a non-resident at the end of the year of income; and (c) is not: (i) a beneficiary to whom subsection 97A(1A) applies in relation to the year of income; or (ii) a body, association, fund or organization referred to subparagraph 97(3)(c)(i) or (ii); the trustee of the trust estate shall be assessed and is liable to pay tax in respect of: (d) 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; and (e) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; at the rate declared by the Parliament for the purposes of this subsection. 25 Former s 98(4) of the 1936 Act dealt with the situation where the beneficiary of the trust estate, presently entitled to a share of the income of the trust estate, was not a company and was a non-resident. That is not applicable here. 26 Section 98A provided protection against so called double taxation by providing, so far as is relevant, that: (1) Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3) or (4), the assessable income of a beneficiary who is presently entitled to that share of the income of the trust estate shall include: (a) … (b) so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. (2) Where subsection (1) applies in relation to a beneficiary in relation to a year of income: (a) there shall be deducted from the income tax assessed against the beneficiary the amount (in this subsection referred to as the relevant amount) of the tax paid by the trustee in respect of the beneficiary's interest in the net income of the trust estate; and (b) if the relevant amount is greater than the amount of the income tax assessed against the beneficiary - the Commissioner shall pay to the beneficiary an amount equal to the difference between those 2 amounts. 27 Section 95(1) of the 1936 Act provides (and provided) that, in Div 6 of Part III: net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except [various exceptions] ... 28 By s 6(1) of the 1936 Act: trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes: (a) an executor or administrator, guardian, committee, receiver, or liquidator; and (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability ... (emphasis added). It is sub-paragraph (b) of the definition of "trustee" which is important in the resolution of these appeals. 29 The history of Commonwealth legislation for the taxation of trusts was considered at first instance in Harmer v Commissioner of Taxation (1989) 91 ALR 550 at 553 to 557 and more recently by the High Court in Commissioner of Taxation v Bamford (2010) 264 ALR 436 at 441. The following summary includes extracts from those analyses: 1. Prior to 1915, income tax was imposed by the States: eg Land and Income Tax Assessment Act 1895 (NSW) and the Income Tax Act 1895 (Vic). Under both Acts, tax was imposed on income "arising or accruing to any person" (described as "income the product of property and also income from personal exertion" in the Victorian Act), the trustee was liable to pay tax on the income of beneficiaries and separately in respect of income received by the trustee as trustee. The trustee had a right of indemnity for tax paid. 2. The Commonwealth legislative history begins with ss 26 and 14 of the Income Tax Assessment Act 1915 (Cth) (the 1915 Act). The 1915 Act taxed the trustee under s 26 and the beneficiary under s 14. The trustee was taxed on the retained income, the beneficiary taxed on the distributed income. Any person who derived income as a trustee was liable to tax as if beneficially entitled: s 26(1). Where any trust income was distributed to beneficiaries (the secondary taxpayer), a pro rata amount of tax was deducted from that assessable to the trustee (the primary taxpayer): s 27(2). The expanded definition of "trustee" under the 1915 Act was identical to that which appears in the current 1936 Act: see [28] above. 3. In 1918, ss 26 and 27 were repealed. The new sections (the 1918 sections) were remodelled on the recommendation of the Conference of Commissioners of Taxation: see Commonwealth, Parliamentary Debates, House of Representatives, 1 May 1918, p 4258. To avoid the inequities which had arisen under the 1915 Act (a trustee being taxable on undistributed income at the rate applicable to the total income of the trust estate), under the 1918 sections the trustee was not liable to pay tax except as provided by the Act: s 26(1). However, each beneficiary who was under no legal disability and was presently entitled to a share of the income of the trust estate was assessed in his individual capacity in respect of his individual interest in the income of the trust estate subject to deductions which would have been allowable to the trustee were he liable: WM Kuhnel & Company Limited v Deputy Federal Commissioner of Taxation (South Australia) (1923) 33 CLR 349 at 361 and 367. The trustee remained liable to pay tax in respect of that part of the income of the trust estate which fell into two categories - where beneficiaries were under a legal disability and where no other person was presently entitled and in actual receipt of the income: s 26(2). 4. In 1922, the 1915 Act was repealed and a consolidating Act, the Income Tax Assessment Act 1922 (Cth) (the 1922 Act), was enacted. The new concept of trust taxation that had been introduced in 1918 and the original definition of "trustee" were retained. Taxation of trusts was provided for by s 31 of the 1922 Act. So far as is relevant, it was in the same terms as that enacted in 1918. Section 31 provided, in part, that: (1) A trustee shall not be liable to pay tax as trustee, except as provided by this Act, but each beneficiary who is not under a legal disability and who is presently entitled to a share of the income of the trust estate shall be assessed in his individual capacity in respect of … (2) A trustee shall be separately assessed and liable to pay tax in respect of that part of the income of the trust estate which if the trustee were liable to pay tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after all deductions under this Act … … 5. Division 6 of Pt III was enacted in the 1936 Act. Sections 95 to 102 related to the taxation of trust income and reflected the general principle previously embodied in s 31 of the 1922 Act that the person entitled to receive and retain income is the person who should pay tax in respect of it: NE Challoner and CM Collins, Income Tax Law and Practice (Commonwealth) (1953) p 494. Sections 95 to 99 were designed to secure payment of tax upon the whole of the net income of a trust estate, either from a beneficiary or the trustee, whether or not that income was paid over to or on account of the beneficiary: Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608 at 618-619. Section 96 restated the general principle that, except as provided in the 1936 Act, trustees are not liable to pay income tax upon the income of the trust estate (emphasis added). Where a beneficiary is "not under any legal disability" and "is presently entitled to a share of the income of the trust estate" his assessable income will include his share of the net income of the estate: s 97 of the 1936 Act (as applied in this case). 6. Sections 98 and 98A (as applied in this case) were introduced into the 1936 Act by the Income Tax Assessment Amendment Bill 1983 (Cth) (the Bill). Clause 18 of the Bill entitled "Liability of a Trustee" was explained in the Explanatory Memorandum to the Bill as follows: This clause proposes the amendment of section 98 of the [1936] Act to include two new sub-sections. The amendment complements the amendment proposed by clause 17 - that is, to exclude from the operation of sub-section 97(1) of the [1936] Act the trust income of certain non-resident beneficiaries. The new sub-section of section 98 will provide, broadly, that the trustee of a trust estate is to be assessed and liable to pay tax in respect of the relevant share of the trust income to which a beneficiary who is a non-resident at the end of the year of income is presently entitled. After setting out the proposed new sub-section 98(3), the Explanatory Memorandum stated that: If any of the above tests are not satisfied, the relevant trust income will continue to be taxed to the company beneficiary under section 97 of the [1936] Act. Where all the tests are satisfied, the trustee will be assessed and liable to pay tax, under the new sub-section 98(3), on behalf of the company beneficiary at the rate declared by the Parliament. … (emphasis added). 30 The construction of Div 6 of Pt III of the 1936 Act has "vexed" Courts and commentators for years: see, for example, the analysis in Bamford at [22] - [35] and the authorities cited; Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 77 to 83; Union Fidelity Trustee Company of Australia Ltd v Commissioner of Taxation (1969) 119 CLR 177and Tindal at 618-620. The division creates fictions - it imposes tax on some amounts which are not received by any beneficiary or even held by a trustee. The division arguably lacks a unifying scheme and, at the very least, in relation to s 98(3), reveals a different scheme at different times: see [29(6)] above. Adopting a construction of the various sections within the division to achieve "consistent" outcomes in cases arising under Div 6 of Pt III is not straightforward. In the present case, those issues are exacerbated by the fact that the legislation applicable in the relevant income years has been subsequently amended, in particular in 2007 by Sch 9 to the Tax Laws Amendment (2007 Measures No 3) Act 2007 (Cth). Neither party submitted that those amendments can or should assist in the resolution of the issues in the present tax appeals. 31 As Wilcox and Lee JJ explained in Federal Commissioner of Taxation v Harmer (1990) 24 FCR 237 at 244: The object of Div 6 is to set out some principles of derivation in respect of the income of a trust estate from which liability to income tax may follow. In broad terms the liability to pay income tax is distributed between the trustee of the trust estate and the beneficiaries according to those principles of derivation: see RW Parsons, Income Taxation in Australia, pars 2.233, 4.26-4.30, 4.88. 32 As noted above, former s 98(3) formed part of Div 6 of Pt III of the 1936 Act and taxed trustees in respect of the income of the trust estate to which non-resident corporate beneficiaries were entitled: see [24] above. Some terms are defined including "trustee" and "net income". Others are not. 33 The definition of "trustee" introduced in the 1936 Act both then and now extends "trustee" beyond its conventional sense. The definition gives it a very wide meaning: Harmer 24 FCR 237 at 241. The word "trustee" includes not only a trustee in the equitable sense of that word but, "by para (b), is extended to include a person having the administration or control of income affected by any express or implied trust as well as a person acting in any fiduciary capacity": Harmer at 241. The definition is, however, subject to a number of limits. First, the definition is subject to any contrary intention appearing from the Act. Accordingly, it was held that the word "trustee" had to be read in the light of the reference in s 31 of the 1922 Act (and therefore Div 6 of Pt III of the 1936 Act) to "income of the trust estate" with the result that the person who answers the description "trustee" must stand in some relation to the proprietary right by virtue of which the income exists: Howey v Federal Commissioner of Taxation (1930) 44 CLR 289 at 293. Secondly, the definition is limited by the minimum requirement that there be a fiduciary obligation towards some other person: Manning v Federal Commissioner of Taxation (1928) 40 CLR 506 at 509. And that obligation must involve a liability to account at the instance of that other person: Manning at 509. 34 "Trust estate" is not defined. It now appears accepted that the expression "trust estate" is synonymous with "trust property": Halsbury's Laws of England (3rd ed, vol 38) p 810. The High Court considered the phrase when construing the expression "income of a trust estate" in Howey (which considered s 31 in the 1922 Act) and in Commissioner of Taxation v Everett (1980) 143 CLR 440 (which considered s 95 of the 1936 Act). For example, Rich and Dixon JJ in Howey (at 293) when construing the expression "income of a trust estate" in s 31 of the 1922 Act said that: Income has been remitted by the trustee to the appellant, who has expended substantial portions of the money so remitted pursuant to the trust instrument for the maintenance, education, benefit and advancement in life of each of the two children. But for each of the financial years beginning on 1st July 1926 and 1st July 1927 the appellant has been assessed as trustee upon a taxable income consisting of the whole sum remitted to him in the preceding year. To this he objects, not upon the ground that he ought not to be assessed at all as trustee, but upon the ground that a single assessment upon the total sum remitted to him in a year of income is wrong, and that he should be separately assessed upon the actual amounts expended by him in respect of each child. This contention is based upon sub-sec. 2 of sec. 31 of the Income Tax Assessment Act 1922-1928. It is by no means clear, however, that any assessment of the appellant can be supported under that provision. It appears to relate to income derived by a trustee from property under his control. The income derived by the appellant is not that of a trust estate of which he is a trustee. To meet this difficulty it is said that the wide definition of "trustee" in sec. 4 covers his case. But the word is to have its defined meaning only unless the contrary appears, and it is therefore difficult to apply the definition in order to overcome the effect of the references in sec. 31 to "income of the trust estate." These references suggest that the person who answers the description "trustee" must stand in some relation to the proprietary right in virtue of which the income arises, even although he need not be a trustee in the proper sense. In this case, however, the appellant is constituted as an intermediary between the trustee of the estate and the beneficiaries contingently entitled, and he is empowered to deal only with the income paid to him by the trustee of the trust estate. (emphasis added). Given the way the case was argued in Howey, it was unnecessary for the Court to ultimately decide the issue. In that case, the assessment failed because the appellant did not hold a trust estate in virtue of which the income arose: see Barwick CJ, Stephen, Mason and Wilson JJ in Everett at 452. In Everett, Barwick CJ, Stephen, Mason and Wilson JJ (at 452), when dealing with s 95 of the 1936 Act, pointed out that income which "is the trust estate" cannot be the "net income of a trust estate". 35 Consistent with those authorities, I accept that the expression "trust estate" in Div 6 of Pt III refers to trust property which gives rise to the income derived by the trustee. 36 For completeness, I should note that s 31 was also considered by the High Court in Executor Trustee & Agency Company of South Australia Limited v Federal Commissioner of Taxation (1932) 48 CLR 26 (Pearson's Case). Gavan Duffy CJ and Starke J (at 35) described the "scheme of" s 31 of the 1922 Act as being "that in all cases in which any of the beneficiaries of the trust estate are assessable, then the trustees of that estate shall not be assessable or liable to tax, whilst in cases in which the beneficiaries or any of them are not assessable, then the trustees shall be assessed and liable to tax". Section 98(3) (as in force in the relevant income years) reveals a different "scheme": see [29(6)] above.

D. THE PARTIES' SUBMISSIONS 37 Mr Leighton submitted that the central issue is who derived the income which is alleged by the Commissioner to have been derived by Mr Leighton in his capacity as trustee of a trust for non-resident beneficiaries, namely Salina and Kolton. Put simply, Mr Leighton submitted that s 98(3) of the 1936 Act cannot and does not apply if the share trading was undertaken by Salina and Kolton and not him. Mr Leighton submitted that the profits on the share transactions were derived by the entities that undertook the transactions - Salina and Kolton - and that derivation of income by one or both of those entities meant that the income was not derived by any other person, and in particular, not by Mr Leighton. 38 On the other hand, the Commissioner submitted that Mr Leighton was a trustee of a trust estate within the meaning of trustee in s 6(1) of the 1936 Act and that it was Mr Leighton, in his capacity as trustee, who entered into the share trading. The Commissioner's position was summarised in his written submissions as follows: The Australian taxation system seeks to include in taxable income all assessable income derived by persons from all Australian sources [ss 6-5(3) and 6-5(10) of the 1997 Act and former ss 98(3) and (4) of the 1936 Act]. The present case reveals that, through the investment structure and the transactions outlined in these submissions and established by the evidence: 1.1 income has been derived from share trading activities conducted in Australia, funded with moneys that are channelled through accounts operated by … [Mr Leighton] or by entities that he controls; 1.2 the income derived from the share trading activities has been remitted, in due course, to Monaco without payment of Australian income tax; 1.3 Mr Leighton is a non-resident of Australia for income tax purposes and conducts his business from Monaco; 1.4 Mr Leighton is liable for tax in respect of the income derived from the share trading activities; and 1.5 neither Mr Leighton nor any other person has paid that tax. 39 The Commissioner had issued assessments which were the subject of appeal (VID 115-117 of 2009) based on the contention that Mr Leighton carried on the business of share trading personally. Just prior to the hearing, the Commissioner consented to Orders that those tax appeals be allowed. Accordingly, the only assessments in issue are those issued to Mr Leighton on the grounds that the net profits from the share trading activities were assessable to him as a trustee of a trust estate pursuant to s 98 of the 1936 Act.

E. ANALYSIS 40 In my view, any analysis must start with the statute (see Spencer v Commonwealth (2010) 269 ALR 233 at [50] and the authorities there cited) and, in the present case, with Div 6 of Pt III of the 1936 Act dealing with the taxation of trusts. 41 The question posed by s 98(3) of Div 6 of Pt III of the 1936 Act is whether Mr Leighton was a "trustee" within the definition of that word in s 6(1) and, if so, then what is the "trust estate" and the "income of [that] trust estate" for the purposes of s 98(3)? It was common ground that the other elements of s 98(3) were satisfied, namely that each of Salina and Kolton was a company that was not a trustee (subsection (a)), was a non-resident at the end of each relevant income year (subsection (b)); and was not a body of a kind referred to in subsection (c) of s 98(3).

Was Mr Leighton a "trustee"? 42 First, I consider that Mr Leighton did satisfy paragraph (b) of the definition of "trustee" in s 6 of the 1936 Act. He had, and took upon himself, "the administration or control of income affected by [a] … trust". That conclusion requires explanation. 43 It was common ground that the share trading in Australia was conducted in the name of Salina and Kolton and that the various broking accounts were in their individual names "c/ Leighton & Leighton 4 rue des Orchidees MC98000 Monaco" or words to similar effect. The invoices issued by the various brokers confirming a buy or sell trade were addressed to Kolton or Salina. Settlement of those invoices was subject to two recorded instructions in the following general terms. First, that the registration details for the shares was "Westpac Custodian Nominees" and, secondly, that payment was to be effected along the following lines: Unless we hear from you before the settlement day we will be settling direct with Westpac Custodian Nominees Limited on the settlement day. Of course, the relevant Westpac Custodian Account was in the name of Mr Leighton: see [7] above. But that is not the only connection. 44 Critically, Mr Leighton administered and controlled the share trading (and, as will become apparent, administered and controlled the income arising from the share trading conducted through the share broking accounts) pursuant to the administrative and management services he provided to each of Salina and Kolton under the Directors and Management Services Agreement (see [9] and [11] above) he had with each of them. These "basic" services (for which he was paid a fee based on a percentage of sales proceeds from the sale of shares) were defined in each agreement as: Leighton will provide the following basic services or any part thereof (together with any ancillary, additional or other services provided by Leighton on behalf of SALINA, "the Services") to SALINA as and when SALINA may reasonably require: 1.2.1 management services, including the opening of bank accounts, and the purchase, sale, settlement and safekeeping of securities and other assets and property; 1.2.2 accounting services; 1.2.3 corporate services; 1.2.4 provision of director(s) and secretary (as applicable); 1.2.5 provision of office facilities; and 1.2.6 provision of Board Room facilities upon notice … … 45 Put simply, Mr Leighton was contracted by each of Salina and Kolton to administer and control "the purchase, sale, settlement and safekeeping of securities", which in this case included the 676 share trades the subject of the dispute: see [15] above. In that direct sense, Mr Leighton controlled the income of Salina and Kolton. He controlled, by direction, which shares were purchased and which shares were sold. He also controlled, by direction, settlement of those share trades through the Westpac Bank Account which had a number of important characteristics. 46 In relation to the Westpac Custodian Agreement: 1. it was signed by Mr Leighton in his own name; 2. Mr Leighton held an equitable interest in the shares the subject of the Custodian Agreement, the legal title to which was vested in Westpac. Mr Leighton held that equitable interest not for his own benefit but on trust for the benefit of Salina or Kolton; and 3. Mr Leighton's obligations under the Westpac Custodian Agreement and in relation to the shares were of a fiduciary nature: see [33], [43] - [44] above and [51] below. 47 Similarly, in relation to Mr Leighton's Westpac Bank Account: 1. it was opened and operated by Mr Leighton in his own name; 2. there was a debtor / creditor relationship between Mr Leighton and Westpac in relation to the moneys standing to the credit of the account; 3. the source of the moneys standing to the credit of the account was from Salina, from Kolton or from the sale of securities purchased with their money; 4. the rights Mr Leighton held as creditor against Westpac were held not for his own use and benefit but for the benefit of Salina and Kolton. Mr Leighton had a fiduciary obligation (see [33], [43] - [44] above and [51] below) to apply those funds to purchase shares (registered in the name of Westpac Custodian) on behalf of Salina and Kolton; and 5. when proceeds from the sale of shares were paid into Mr Leighton's Westpac Bank Account, he did not receive those proceeds of sale for his own benefit but for the benefit of Salina and Kolton. The proceeds were marked with a fiduciary obligation to apply the proceeds for the benefit of Salina and Kolton: see [33], [43] - [44] above and [51] below. The proceeds were not retained in Mr Leighton's Westpac Bank Account. They were used for further share purchases on behalf of Salina or Kolton or transferred to CLC's account with HSBC and CLC then distributed the proceeds to Salina and Kolton's respective bank accounts with HSBC. 48 By making the arrangements between Mr Leighton, on the one part, and Kolton or Salina, on the other part, as recorded in the Directors and Management Services Agreement (see [44] - [45] above) it was intended that the moneys received by Mr Leighton be kept separate from his personal moneys and be accounted for separately, consistent with a fiduciary obligation: see [33], [43] - [44] above and [51] below. That was not only the intention but what was in fact achieved. 49 As the Commissioner submitted, applying the reasoning of Wilcox and Lee JJ in Harmer 24 FCR 237 at 247-248: 1. Legal title to Salina and Kolton's money was given to Mr Leighton to enable him to invest the moneys and earn income therefrom; 2. There was more than a mere grant by Salina or Kolton of enjoyment of possession of their money by Mr Leighton pending demand for redelivery to them coupled with a right to collect any income accruing to the owner; and 3. The object of the arrangements between Salina and Kolton and Mr Leighton was to deliver the funds to Mr Leighton for him to hold for the eventual benefit and use of Salina and Kolton. 50 It was common ground that where, as here, a taxpayer (namely Salina or Kolton) is trading in stock, including shares, income is earned on a sale when a recoverable debt comes into existence, even though the debt may be payable at a later date: J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 at 450. Mr Leighton conceded (as he had to) that in relation to each purchase, the debt was discharged by payment into the Westpac Bank Account at the direction of Salina or Kolton. This statement of the position is accurate, so far as it goes. However, contrary to Mr Leighton's submissions, that is not the end of the enquiry which Div 6 (and in particular, the definition of "trustee") requires you to make. The statement, at the direction of Salina or Kolton - invites the further question - how was the debt discharged? Here, it was discharged through the Westpac Bank Account which could only be, and was only, operated and conducted by Mr Leighton. Whether the brokers had rights against Salina or Kolton is not conclusive. The question is the proper characterisation of the role of Mr Leighton. If the income was earned on a sale when a recoverable debt came into existence, then the capacity and manner in which Mr Leighton administered or controlled that income was under the Directors and Management Services Agreement which included his capacity as a director of Salina or Kolton and the management services of opening bank accounts etc under cl 1.2.1. If, however, the timing of the earning of income by Salina or Kolton was not until settlement through Westpac, then the capacity and manner in which Mr Leighton administered or controlled that income again was under the Director and Management Services Agreement and included his capacity as a director of Salina or Kolton and the management services of opening bank accounts etc under cl 1.2.1. 51 Consistent with earlier authority (see [33] above), for each of Salina and Kolton, Mr Leighton stood in some relation to the proprietary right by virtue of which the income exists (Howey at 293) and he owed a fiduciary obligation towards them which included a liability to account to them: Manning at 509; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97 and 142. That is sufficient to make him a "trustee" within the meaning of the term in s 6 of the 1936 Act having the administration and control of income from the share trading affected by a trust in favour Salina and Kolton.

Existence of a "trust estate" 52 The conclusion that Mr Leighton was a "trustee" within the meaning of the term in s 6 of the 1936 Act having the administration and control of income from the share trading affected by a trust in favour of Salina and Kolton requires further explanation. One of the tests of s 98(3) is not only that Mr Leighton be a "trustee" but a "trustee of the trust estate". In my view, on either construction of the role of Mr Leighton (see [50] above), the "trust estate" included the shares held and the income earned from the share trading. The corpus of the trust estate changed over time consistent with the share trading. And for the reasons earlier identified, the "income" of that "trust estate" was "affected by an … express or implied trust" in favour of Salina and Kolton. Mr Leighton was not administering or controlling the shares and the income derived from the share trading for his own benefit. He was doing it for Salina and Kolton under the terms of their respective Director and Management Services Agreement. In both instances, those Agreements expressly stated that he was an independent contractor: cl 7.2. That is not determinative: cf New Zealand Netherlands Society "Oranje" Inc v Kuys [1973] 2 All ER 1222 at 1229-1230 and Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1. The management services he undertook included responsibility for the "purchase, sale, settlement and safekeeping of securities" for the benefit of Kolton or Salina, as the case may be. Put another way, the "trust estate" was synonymous with the trust property - the shares and the income which was under his direct administration and control: see [34] - [35] above. It was that trust property which gave rise to the income derived by the trustee, the trustee having satisfied all of the tests in s 98(3) of the 1936 Act.

Fallacies in Mr Leighton's submissions 53 As noted earlier, it was an essential plank of Mr Leighton's submission that because Salina and Kolton "derived" the income, Mr Leighton could not. Mr Leighton pointed in particular to the way in which the share transactions were undertaken as evidenced in the contract notes (see [43] above). Mr Leighton submitted that those buy and sell documents record the point of derivation of income from the share trading, and that the income is derived only by Kolton and Salina, described by Mr Leighton as "the only entities who were liable on the transactions" and the "only parties to whom the brokers could look for funds … to satisfy the buy or sell contract". That submission proceeds upon a number of false premises. 54 First, the submission is contrary to the express words of s 98(3) and the purpose for which it was enacted (see [29(6)] above) and existing High Court authority. Where all the tests in s 98(3) are satisfied, a trustee will be assessed and liable to pay tax on behalf of the company beneficiary. Nothing more is required. Put another way, if all the tests are not satisfied, the trustee cannot be assessed. If all the tests are satisfied, the trustee is assessed. That is what s 98(3) (as in force during the relevant income years) expressly stated and what Parliament intended. Section 98(3) was one of the stated exceptions to s 96 of the 1936 Act. Moreover, there was no risk of double taxation. That issue was taken care of by s 98A. As the Explanatory Memorandum made clear (see [29(6)] above), it was the trustee of a trust estate that was to be assessed and was liable to pay tax in respect of the relevant share of trust income to which a beneficiary who was a non-resident at the end of the year was presently entitled. 55 Next, contrary to Mr Leighton's submission, the fact that s 6-5(4) of the 1997 Act provided that Salina or Kolton were deemed to have derived the income in any event is irrelevant. If they were deemed to have derived the income and paid tax, s 98A would entitle them to a deduction of the "relevant amount" (being the amount paid by the trustee) thereby avoiding double taxation. Here, Salina and Kolton never paid tax on the income they derived so no question of double taxation arises. 56 Finally, Mr Leighton's submissions proceed on an assumption that if one taxpayer derives income, then it is the only taxpayer to be assessed. Probably since 1932 (Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192 at 207 (per Dixon J), and certainly since 1995 (Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168 at 201-202 (Brennan J), the fact that a tax liability remains outstanding against two taxpayers is no bar to the Commissioner exercising the power to assess both to tax in respect of the same income so long as there is no double taxation. Sections 98 and 98A (as in force during the relevant income years) deal expressly with that issue. And, in any event, the problem here does not arise. For reasons which were unexplained, the Commissioner only chose to assess the trustee, Mr Leighton. 57 There is one further aspect of the way the case was argued that should be mentioned. No distinction was drawn between Salina and Kolton. I doubt that that is correct. The better view seems likely to be that there were in fact two trust estates - one for Salina and one for Kolton. Such a view would not however affect the outcome of the appeals. Mr Leighton has failed to demonstrate the assessments issued to him as trustee were excessive.

F. PENALTIES 58 The final issue to be resolved is the issue of penalty. 59 Section 284-75(3) of Sch 1 to the Taxation Administration Act 1953 (Cth) (the TAA) provided: You are liable to an administrative penalty if: (a) you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and (b) that document is necessary for the Commissioner to determine a tax-related liability of yours accurately; and (c) the Commissioner determines the tax-related liability without the assistance of that document. In each of the relevant income years, Mr Leighton was liable pursuant to s 98(3) of the 1936 Act to pay income tax. He failed to lodge an income tax return in any of those years. The Commissioner imposed a base penalty of 75% of the tax-related liability under s 284-75(3) of Sch 1 to the TAA for each of the relevant income years. Mr Leighton did not dispute that if he was liable under s 98(3) of the 1936 Act, he was also liable to an administrative penalty of 75% of the tax-related liability under s 284-75(3) of Sch 1 to the TAA. 60 In addition to the administrative penalty under s 284-75(3), the Commissioner increased the base penalty by a further 20% pursuant to ss 284-220(1)(a) and (e) of Sch 1 to the TAA. 61 Section s 284-220 of Sch 1 to the TAA provided, so far as is relevant, that: (1) The base penalty amount for your shortfall amount, or for part of it, for an accounting period is increased by 20% if: (a) you took steps to prevent or obstruct the Commissioner from finding out about the shortfall amount; or … (e) your liability to a penalty arises under subsection 284-75(3) and you were liable to pay a penalty under that subsection for a previous accounting period. 62 The Commissioner's justification for the 20% increase in the penalty under s 284-220(1)(a) in each of the relevant income years was that: [Mr Leighton] hindered the [Commissioner's] inquiries by not responding to questions from the [Commissioner] as to the beneficial owners of Salina and Kolton or to reminders to provide that information, and failing to inform the [Commissioner] about the relevant transactions within a reasonable time. 63 The Commissioner's justification for the 20% increase in the penalty under s 284-220(1)(e) was limited to the years ended 30 June 2003 and 30 June 2004. The Commissioner submitted that because Mr Leighton's liability to penalty in respect of the years ended 30 June 2003 and 30 June 2004 arose under s 284-75(3) and Mr Leighton was liable to a penalty under s 284-75(3) in respect of a previous accounting period (namely 30 June 2002 and 30 June 2003 respectively), an increase in the penalty under s 284-220(1)(e) was justified. 64 Mr Leighton objected to the 20% increase in the base penalty pursuant to s 284-220 on a number of bases. First, Mr Leighton submitted that the Commissioner's imposition of a further penalty based on Mr Leighton's failure to respond to questions as to the beneficial owners of Salina and Kolton or reminders to provide such information had gone away when the Commissioner abandoned the individual assessments. Secondly, Mr Leighton submitted: 1. that it was accepted that Mr Leighton was "confronted by a difficult position" under Monaco law that would expose him to criminal penalties if he divulged details concerning his clients, and that those circumstances had affected his responses (see [17] above); 2. he had difficulty finding any available records from these periods; 3. he did take the necessary steps "within a couple of months" to arrange for the relevant details to be provided by stockbrokers concerning the accounts of Salina and Kolton. Mr Leighton submitted that the "ultimate position" was that there was no information that Mr Leighton could provide, other than that which had been forthcoming from the bank and the brokers, that would have had a bearing on the assessments. 65 As is apparent, the two bases for justification of the imposition of the 20% increase in administrative penalty need to be considered separately. The second basis (s 284-220(1)(e) is straightforward for the years ended 30 June 2003 and 30 June 2004. Mr Leighton's penalty in respect of those two years arose under s 284-75(3) and he was liable to pay a penalty under s 285-75(3) in respect of a previous accounting period: see [63] above. The Commissioner has a discretion to remit all or part of an administrative penalty: s 298-20(1) of Sch 1 to the TAA. I do not consider that the circumstances of this case warrant a remission. Mr Leighton did not lodge an income tax return. Mr Leighton was asked on a number of occasions to provide particular information. Some of the information he was prevented from disclosing. But there are two further facts which must be noted. First, that barrier did not apply to other information which he could have provided and did not. In particular, he failed to advise the Commissioner about the details of the share trading within a reasonable time. Secondly, it took him about two years (until 2 June 2008) to raise the barrier (the law of Monaco) as the reason for not disclosing the identity of the beneficial owners of Salina and Kolton. By that date, it had been approximately 19 months since the Commissioner had requested the information (see [66] below) and had concluded his initial audit. The subsequent information (both documentary and expert evidence of the law of Monaco) should have been provided earlier. 66 That leaves the question of the imposition of the 20% increase in administrative penalty for the relevant income years under s 284-220(1)(a). The Commissioner submitted that the basis for the imposition of the further penalty could be found in a letter from the Australian Taxation Office (ATO) to Mr Leighton of 9 October 2006 in which the ATO requested, inter alia, that Mr Leighton "help [the Commissioner] progress with [their] enquiries" by providing additional information listed in an attached schedule. The attached schedule listed the following information: 1. A list of all Australian bank account(s), cash management account(s) etc used by Norman Leighton, CLC Corporation, Salina Investments Ltd, and Kolton Holdings Ltd during periods 1 July 2001 to 30 June 2005. For each of these account(s) please provide the name of the account holder(s), BSB number, account number, and the name of the financial institution. 2. The place of incorporation of CLC Corporation, Salina Investments Ltd, and Kolton Holdings Ltd. 3. The name(s) of the director(s) and shareholder(s) of CLC Corporation, Salina Investments Ltd, and Kolton Holdings Ltd. 4. The name(s) of the beneficial owner(s) of the shares in CLC Corporation, Salina Investments Ltd, and Kolton Holdings Ltd. 5. (a) Are the shares bought through the stock broking accounts of Salina Investments Ltd registered in the name of Salina Investments Ltd? If not, please provide the name(s) of the individual(s)/entity(s) that hold title to the shares. (b) Are the shares bought through the stock broking accounts of Kolton Holdings Ltd registered in the name of Kolton Holdings Ltd? If not, please provide the name(s) of the individual(s)/entity(s) that hold title to the shares. 6. Please describe the general process in which shares are bought and sold in Australia (i.e. from dealing with the brokers through to settlement). 7. To whom and to what account(s) are any dividends on the shares paid to. 8. (b) Please provide the name(s) of the individual(s)/entity(s) that provide the instructions to the stock brokers acting on behalf of Salina Investments Ltd. (c) Please provide the name(s) of the individual(s)/entity(s) that provide the instructions to the stock brokers acting on behalf of Kolton Holdings Ltd. 9. Please provide the name(s) of the individual(s)/entity(s) that make the investment decisions as to what shares to buy and sell. 10. Please provide the name(s) of the individual(s)/entity(s) that manage the day to day administration of the share portfolio. 11. Are the share trades carried out on behalf of other individual(s)/entity(s)? If yes, please provide the name(s) of those individual(s)/entity(s). 12. Please provide the name(s) of any advisor(s) you have in Australia. The ATO sent reminders on 12 December 2006 and 20 December 2006 requesting Mr Leighton to confirm receipt of the letters and provide the requested information. Mr Leighton did not respond. The Commissioner submitted that his failure to provide the requested information prevented or obstructed the Commissioner in preparing his assessments and determining Mr Leighton's tax-related liability in contravention of s 284-220(1)(a). In particular, the Commissioner submitted that he was required to determine Mr Leighton's tax-related liability without those documents including issuing the individual assessments on 21 December 2007 and the trustee assessments on 9 April 2009. 67 I do not accept Mr Leighton's submission that the imposition of the 20% increase in administrative penalty for the relevant income years under s 284-220(1)(a) should be set aside. Mr Leighton referred the Court to a letter dated 4 November 2005, almost 12 months before the letter of 9 October 2006, as evidence that he had supplied information to the Commissioner. That letter was a response to earlier requests by the Commissioner. It did not and cannot explain the lack of response to the letter of 9 October 2006. As noted earlier, while I accept that Mr Leighton ought not to have responded to some aspects of the request (concerning Salina and Kolton's beneficial owners), there was other information that could have and should have been provided by him. No response was not a sufficient response. The failure to respond was a step taken to prevent or obstruct the Commissioner from finding out about the shortfall amount.

G. CONCLUSION AND ORDERS 68 For those reasons, I consider that pursuant to s 98(3) of the 1936 Act, Mr Leighton as trustee is assessable on the trust income derived by two non-resident corporations, Salina and Kolton, which was from Australian sources and includes the profits from the sales of shares in Australian companies purchased with the funds entrusted to Mr Leighton for that purpose by Salina and Kolton: s 6-10(5) of the 1997 Act. Further, the penalties imposed by the Commissioner should not be set aside or remitted. 69 I would dismiss the appeals and order Mr Leighton to pay the Commissioner's costs of the appeals, such costs to be taxed in default of agreement. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.