The validity of the determinations
22 The first question of law goes to the validity of the determinations made by the Commissioner.
23 The appellants contend that all three determinations are invalid for the reason that the Commissioner has failed to identify 'a tax benefit' obtained by a taxpayer. Instead, the Commissioner is said to have identified multiple tax benefits comprising a tax benefit obtained by Farrago and further tax benefits obtained by Mr and Mrs McCutcheon as primary beneficiaries of the P & A Trust. The appellants say the Commissioner has not complied with the pre‑condition upon which s 177F operates when it can be seen that multiple determinations have been made in respect of different taxpayers (not all of whom have been assessed to tax) where each determination relates to the 'one fund of money or one stream of income'. The appellants say that the Commissioner has a statutory obligation in acting in reliance upon s 177F to define the scheme by which a taxpayer has obtained a tax benefit and then determine in respect of the stream of assessable income comprising the tax benefit, the particular taxpayer that obtained the particular benefit. The appellants say in oral submissions that the Commissioner in that sense has 'one shot' at it.
24 The appellants accept that the Commissioner as a proper exercise of the power conferred by s 177F can make on the one hand a determination that postulates an amount not included in the assessable income of a taxpayer that would or might reasonably be expected to have been included in the assessable income of that taxpayer in the relevant year of income had the scheme not been implemented and, on the other hand, make a determination that also postulates, in the alternative, an amount not included in the assessable income of another taxpayer that would or might reasonably be expected to have been included in that taxpayer's assessable income had the scheme (in connection with the same amount) not been implemented. Each of those determinations could support, in principle, an amended assessment addressed to each taxpayer the subject of the determination for the whole amount of the determination.
25 The point of departure from that principle represented by this case is said by the appellants to be this. A single stream of income the subject of the scheme has been identified by the Commissioner for treatment by the scheme ($3,232,813.00 in all). The Commissioner determined that a taxpayer, Farrago as trustee of the AM Trust, would or might reasonably be expected to have received all of that assessable income but for the scheme being implemented. Such a determination might be said to support an amended assessment raised to that taxpayer. At the same time, the Commissioner has determined that Mr McCutcheon would or might reasonably be expected to have received 50% ($1,616,406.00) of the income stream dealt with by the scheme, as assessable income as a primary beneficiary of the P & A Trust on the footing that had the scheme not been implemented, a reasonable prediction of future events involved a distribution by the trustee to each of the beneficiaries in the ratio 50/50. An amended assessment on the footing of that determination might then have issued to Mr McCutcheon reflecting the inclusion of $1,616,406.00 in his assessable income in the year of income. At the same time, on the same basis, the Commissioner has determined that Mrs McCutcheon would or might reasonably be expected to have received 50% of the income stream dealt with by the scheme as assessable income resulting in an amended assessment reflecting the inclusion of that amount in her assessable income in the year of income.
26 The appellants say that the Commissioner has made three determinations which identify two separate tax benefits obtained by (or as the appellants put it, in the hands of) different taxpayers (one by Farrago and an entirely separate benefit obtained by Mr and Mrs McCutcheon) arising out of the 'one fund' (that is, the aggregate amount of $3,232,813.00). The appellants say s 177F requires the identification of a tax benefit referable to a taxpayer in connection with a scheme for the non‑inclusion in assessable income of a relevant taxpayer of an amount. As a result, because all the determinations are said to be invalid by reason of the vice of multiple determinations referable to separate tax benefits involving different taxpayers, the amended assessments are also said to be invalid. The making of differential determinations based on separate tax benefits is said not to apply the construct required by s 177F(1)(a) having regard to the notion of a tax benefit required by s 177C(1)(a) and because a tax benefit for the purposes of s 177C(1) has not been identified, the first limb of s 177D(a) is said to fail with the result that the scheme comprising the set of interposed transactions, distributions and gifts is not a scheme to which Part IVA applies as required by the integers of s 177D.
27 Section 177F(1)(a) provides that where a tax benefit has been obtained or would but for s 177F be obtained by a taxpayer in connection with a scheme to which Part IVA applies, the Commissioner may in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of the year of income, determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income. The obtaining of a tax benefit by a taxpayer in connection with a scheme is a reference to, relevantly here, an amount not being included in the assessable income of the taxpayer of the relevant year where that amount would have been included or might reasonably be expected to have been included in the assessable income of the taxpayer for that year, if the scheme had not been entered into or carried out (s 177C(1)(a)).
28 Section 177D applies Part IVA to any scheme where a taxpayer, described in s 177D(a) as 'the relevant taxpayer' has obtained or would but for s 177F obtain a tax benefit in connection with the scheme and, having regard to eight matters identified in s 177D(b), it would be concluded that the person or one of the persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or, for the purpose of enabling 'the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)'. The concepts of 'tax benefit' (s 177C), 'scheme' (s 177A) and 'scheme to which this Part applies' (s 177D) have, viewed objectively, an inter‑related operation in s 177F in deciding whether the power conferred upon the Commissioner by s 177F(1)(a) can be exercised (Commissioner of Taxation v Hart (2004) 217 CLR 216 at [37]).
29 In determining whether either appellant has obtained a tax benefit in connection with the scheme the Commissioner was required under s 177C(1)(a) to consider whether an amount not included by the taxpayer in his or her assessable income as returned would have been included had the scheme not been implemented. That consideration contemplates the most likely prediction of future events absent the sequence of distributions and gifts interposed after or from the distribution by OPSL as trustee of the PGUT. A reference to obtaining a tax benefit is also to be read as reference to an amount that 'might reasonably be expected to have been included'. That phrase seems to contemplate a lower threshold of prediction although in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at p 385, the Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) concluded that a 'reasonable expectation' involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'. The Court in FCT v Spotless Services Ltd (1996) 186 CLR 404 at p 424 (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ), observed that in establishing, for the purposes of s 177C(1)(a), a tax benefit by reason of the non‑inclusion of assessable income in a taxpayer's assessable income, 'it is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out'.
30 The Tribunal decided that even though s 97 of the ITAA enables an assessment to issue to a presently entitled beneficiary of a trust, the susceptibility of the beneficiary to tax 'does not mean that the section 177F determination referable to [Farrago] as trustee of the AM Trust is an operative determination in relation to Mr McCutcheon. This particular determination is not self‑executing or complete in that sense' [132] (emphasis added). The Tribunal also said s 177F 'does not enable the Commissioner to make and give (in the sense of serve) two separate section 177F determinations directed to two different taxpayers and then to rely on these alternative determinations as a basis for a subsequent amended notice of assessment directed to one particular taxpayer that relies on the determination which is foreign to that taxpayer' [133] (emphasis added). The Tribunal found that the determination concerning Farrago was invalid and could not support the amended assessment issued to Mr McCutcheon principally because the determination was foreign to the taxpayer to whom the assessment issued. The appellants say, in effect, there is no symmetry between the multiple determinations and the taxpayers assessed to the tax benefit obtained.
31 In order to make a valid determination under s 177F, the Commissioner must identify a taxpayer that falls within the reach of the section. If the taxpayer is Farrago as trustee of the AM Trust, the Commissioner must ask whether the trustee has obtained a tax benefit in connection with an identified scheme. The Commissioner must be satisfied that Part IVA applies to that scheme. Finally, if the tax benefit is referable to an amount not included in the assessable income of Farrago as trustee in the relevant income year, the Commissioner may determine that the whole or part of that amount shall be included in the assessable income of Farrago for the relevant year of income. If the integers defining a valid exercise of the conferred power are made out, an amended assessment can properly issue to the taxpayer. Section 177C(1)(a) is directed to the precision attaching to the notion of a taxpayer obtaining a tax benefit. Farrago as trustee of the AM Trust obtains a tax benefit if an amount not included in the assessable income of Farrago (as trustee) is an amount that would have been included or might reasonably be expected to have been included in the assessable income of Farrago (as trustee) in the year of income, if the scheme had not been 'entered into' or 'carried out'. The hypothesis of the Commissioner was that had the scheme not been entered into or carried out, the income distributed by NOPL as trustee of the P & A Trust would have been distributed to Mr and Mrs McCutcheon equally. That prediction of future conduct, had the scheme not been implemented, was said to reflect what would have occurred or alternatively that it was sufficiently plain that the relevant amount might reasonably have been expected to be distributed to each taxpayer. The Tribunal found that as to that hypothesis the taxpayers failed to advance evidence of what would otherwise have occurred and thus failed to discharge the onus cast upon the taxpayer of demonstrating that the assessment was excessive (s 14ZZO(b)(i) Taxation Administration Act 1953 (Cth)).
32 The alternative hypothesis said to enliven s 177F(a) was that had the scheme not been entered into or carried out, an amount of $3,232,813.00 would have been included or at least might reasonably have been expected to be included in the assessable income of Farrago. It seems to have been contended before the Tribunal that that hypothesis could not be reasonably held by the Commissioner as the AM Trust was settled as late as 2 March 1998 as a vehicle integral to the implementation of the scheme. Therefore, it would not have existed had the scheme not been entered into or carried into effect. Because Mr and Mrs McCutcheon as directors of Farrago elected to distribute all of the income of the AM Trust to Mr McCutcheon, an ex post facto examination of the sequence of events comprising the scheme might be thought to support a reasonable prediction that since the appellants, in fact, sought to ultimately place all of the monies distributed by NOPL as trustee of the P & A Trust in the hands of Mr McCutcheon through the vehicle of the scheme, they would have done so had the scheme not been entered into or carried out.
33 However, the appeal to this Court is confined to the resolution of the question of law only. The Commissioner made a determination in reliance upon s 177F(1)(a) that Farrago as trustee of the AM Trust had obtained a tax benefit of $3,232,813.00 being an amount not included in its assessable income in its trustee capacity. That determination posits a prediction which is an alternative to and different from the prediction that NOPL would have distributed the stream of income it received to each appellant equally. The Commissioner is entitled to adopt, especially in the context of complex arrangements, alternative views of what would or might reasonably have been expected to have occurred and make alternative determinations of an amount not included in the assessable income of particular taxpayers (Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192; Deputy Commissioner of Taxation v Moorebank Pty Ltd (1988) 165 CLR 55; Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168 per Mason CJ at p 188, Brennan J at p 202, Deane and Gaudron JJ at p 214, Dawson J at p 217, Toohey J at p 229 and McHugh J at p 238). The issue of the validity of the determination made by the Commissioner concerning Farrago is not (as it could not be) that no basis on the facts subsisted for the making of the determination. The question of law concerning validity is the lack of symmetrical treatment between the alternative and multiple determinations made to the particular taxpayers and the issue of amended assessments to different taxpayers in respect of what is described as the one stream of income. The appellants say that FCT v Richard Walter is to be distinguished on its facts from the present case as although the Court recognised that 'alternative assessments' might properly issue to 'two [different] taxpayers' in respect of the 'same item of income' (per Brennan J at p 202) the Court necessarily although implicitly recognised that the validity of such alternative assessments involves the making of alternative determinations (based on the prediction contemplated by s 177C(1)(a)) in respect of the two or more taxpayers leading to an assessment issued to each taxpayer the subject of each determination. Thus, it is contended that a determination made in respect of a tax benefit in a particular amount obtained by taxpayer A cannot support an assessment issued to taxpayer B for the inclusion of that amount in the assessable income of B. As a result, the appellants say not only is the determination made in the alternative to Farrago invalid as a proper exercise of the conferred power as it resulted in an amended assessment to Mr McCutcheon but the alternative determinations addressed to Mr McCutcheon and Mrs McCutcheon are also invalid.
34 It may well be, in the relevant case, that differential or alternative determinations concerning a contended tax benefit obtained by taxpayers A, B and C in respect of particular (and potentially different) amounts not included in the assessable income of those taxpayers, will not or can not support an assessment issued to anyone other than taxpayers A, B and C. However, the capacity in which a taxpayer acts is central to assessments which issue consequent upon a determination. In this case, a determination was made that Farrago obtained a tax benefit through the non‑inclusion of assessable income in the relevant income year. Farrago is a taxpayer the subject of the determination but it is also a trustee of the AM Trust. One of the beneficiaries of that trust was at 30 June 1998 'presently entitled' to all of the income of the trust. Since the trustee in its trustee capacity obtained a tax benefit in an amount of $3,232,813.00 and that amount was determined to be included in the assessable income of the trustee in its capacity as trustee of the AM Trust with a beneficiary entitled to 100% of the assessable income, the determination supports an assessment issued to Mr McCutcheon. Accordingly, there is the necessary symmetrical relationship contended for by the appellants between the alternative determination in respect of a tax benefit obtained by a taxpayer and the assessment issued to Mr McCutcheon, presently entitled to the income of the trust. In that respect, having regard to the capacity in which Farrago acted and the present entitlement of Mr McCutcheon, it seems to me that the determination can not properly be described as 'foreign to [Mr McCutcheon]' in the sense described by the Tribunal at [133]. There is thus a tax benefit obtained by Farrago as trustee of the AM Trust relied upon by the Commissioner in making the determination addressed to Farrago in that capacity which supports the assessment issued to Mr McCutcheon. There is also an alternative tax benefit obtained by Mr and Mrs McCutcheon in the manner previously described. Each of these tax benefits are, by operation of the inter‑related provisions, a tax benefit for the purposes of s 177D. There is no contended error going to s 177D(b).
35 Since the invalidity of the other alternative determinations made concerning Mr and Mrs McCutcheon is said to necessarily arise out of the invalidity in the determination concerning Farrago due to the multiplicity and lack of coherence between the determinations, the taxpayers and the assessments that issued, it follows, on the appellants' argument, that since the Farrago determination is valid, the alternative determinations are also valid. In any event, there is no demonstrated error on the part of the Tribunal in concluding, subject to the remaining grounds of appeal, that the determinations made concerning Mr and Mrs McCutcheon and the assessment issued to Mrs McCutcheon is valid.