Pearson v Commissioner of Taxation

Federal Court of Australia|2001-10-11|Before: Emmett JJ, Mansfield JJ

TAMBERLIN & MANSFIELD JJ: 1 This appeal is from the summary dismissal under O 20 r 2 of the Federal Court Rules of an application to the Court under s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the TA Act") on the motion of the first respondent Commissioner of Taxation ("the Commissioner"). Although s 14ZZ refers to an appeal to the Court, the proceeding is in the original jurisdiction of the Court, and it is convenient in these reasons to call it "the application". That application was brought to challenge the decision of the Commissioner notified on 20 September 1999 disallowing an objection by the second respondent Jancy Pty Ltd (In liquidation) ("Jancy") against the assessment issued on 10 December 1996 of income tax payable by it as trustee for the Jancy Trust in respect of the year of income ended 30 June 1991 (the objection disallowance decision). 2 The application to the Court was instituted by the present appellants because Jancy went into liquidation on 24 April 1998, whilst the Commissioner was still considering its objection to that assessment. There is a sixty day time limitation for any appeal under s 14ZZ: s 14ZZN of the TA Act. It appears that the liquidator of Jancy was not asked to consider any appeal from the objection disallowance decision until 9 November 1999. He informed solicitors for the appellants that he has no funds in the administration and that he had no opportunity to properly assess whether there was any benefit to Jancy in being involved in the application. He has not filed an appearance for Jancy. Jancy did not participate in the hearing on the motion, or on this appeal. 3 Although Jancy is named in the proceeding as a respondent, no leave was obtained under s 471B of the Corporations Law to proceed against it. It is now sought to obtain that leave from the Full Court nunc pro tunc. 4 The basis of the summary dismissal of the application was that none of the appellants had standing to institute and maintain it. Counsel for the appellants does not now pursue the appeal on behalf of the second or third appellants, as it is now accepted that they had no standing to institute the application on behalf of Jancy against the objection disallowance decision. Their appeals can therefore now be dismissed. 5 The first appellant Janette Ann Pearson ("Ms Pearson") in her capacity as a beneficiary of the Jancy Trust, maintains the claim that she is entitled to institute and maintain the application, and this appeal, on behalf of Jancy. She claims that standing on the basis that she is bringing a derivative action on behalf of Jancy because the liquidator of Jancy has declined to do so, notwithstanding that s 14ZZ of the TA Act creates the right of appeal only in respect of the taxpayer. 6 The learned judge at first instance properly identified and applied the test as to whether an order summarily dismissing a claim should be made. It should be made only in the clearest of circumstances: Dey v Victorian Railways Commissioner (1948 - 1949) 78 CLR 62 per Dixon J at 91. That is not to say that the power should be exercised only where the futility of the proceedings is self-evident. In General Steel Industries Inc v Commissioner for Railways (N.S.W.) (1964) 112 CLR 125, Barwick CJ said at 130 : "... in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed." 7 Section 14ZZ is part of Part IVC of the TA Act concerning "Taxation Objections, Reviews and Appeals". It relevantly provides : "If the person is dissatisfied with the Commissioner's objection decision, the person may ... (c) if the decision is an appealable objection decision (other than a reviewable objection decision) - appeal to the Federal Court against the decision" (Emphasis added) 8 It was not contested on the part of the Ms Pearson that "the person" these referred to is the taxpayer. In our view, that is an appropriate acknowledgment. The legislative scheme for objection to a taxation assessment commences with s 175A of the Income Tax Assessment Act 1936 (Cth) ("the ITA Act"). It provides that : "A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953." (Emphasis added) 9 "Taxpayer" is defined in s 6 of the ITA Act to mean "a person deriving income or deriving profits or gains of a capital nature". Section 14ZL in Part IVC of the TA Act provides : "14ZL(1) This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision may object against it in the manner set out in this Part. (2) Such an objection is in this Part called a 'taxation objection'." (Emphasis added). 10 The reference to "the person" in s 14ZZ is a reference to the person who made the taxation objection under s 14ZL. That person, by reference to s 175A of the ITA Act, is the taxpayer. In McCallum v Federal Commissioner of Taxation (1997) 145 ALR 446, Lehane J, with whom Whitlam J agreed, said at 460 : "There can, I think, be no doubt that 'the person' referred to in s 14ZZ and the other sections following s 14ZU is the same person as the one referred to in s 14ZU itself and, in turn, in s 14ZL(1); and s 14ZL(1) makes it clear that the 'person' concerned is the taxpayer referred to in s 175A of the Assessment Act who is dissatisfied with an assessment 'made in relation to the taxpayer'. And, as Hill J points out, whereas s 220(7) of the Assessment Act empowers an executor or administrator of a deceased estate to lodge an objection to an assessment, there is no corresponding provision enabling a trustee in bankruptcy to lodge an objection and thus to become 'the person' for the purpose of the provisions of the Administration Act to which I have referred." 11 Ms Pearson nevertheless contends that she is entitled to institute and maintain the application on behalf of the taxpayer Jancy because she is a beneficiary of the Jancy Trust. The Commissioner contends that she is not entitled to do so because s 14ZZ creates a right of appeal only in the person who satisfies the statutory criteria under the section, namely the taxpayer. That statutory right of appeal, he contends, cannot be exercised by a third person purporting to act on behalf or and in the interests of the taxpayer. He relies upon the majority judgment in Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 133, and the earlier decision of Hill J in Prestige Motors Pty Ltd v Federal Commissioner of Taxation (1993) 48 ALR 497, for the proposition that the statutory right of appeal in s 14ZZ is not property of the taxpayer, and cannot itself be assigned: cf National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (No 1) (1995) 132 ALR 514 at 569 per Lindgren J. That right of appeal is vested only in Jancy, and may be exercised in the present circumstances only by Jancy by its liquidator. 12 There is no decision on the particular question concerning s 14ZZ, but there is authority which indicates that a beneficiary of a trust may bring proceedings in exceptional circumstances on behalf of the trust, at least in the equitable jurisdiction of the Court, naming the trust as a respondent where the trustee has refused to act in the interests of the trust: for example Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 ("Lamru"); Lidden v Composite Buyers Ltd (1996) 67 FCR 560 ("Lidden"); Ramage v Waclaw (1988) 12 NSWLR 84 ("Ramage"). 13 Certain observations of Finn J in Lidden would appear to support Ms Pearson's contention that such action may be taken in appropriate circumstances, where the only right sought to be exercised is one granted by statute. His Honour said at 563 - 564 : "Were there no authority on the matter from which guidance could be had, I would in any event have been inclined to the view that such claims could properly be made. I can see no compelling reason of principle or policy which should preclude this. And it is not at all apparent to me why, today, we should insist on a multiplicity of suits - as the older equity rule, unmodified, would require - for the purpose of resolving a matter which gives rise to claims for other, as well as equitable, relief: cf Federal Court of Australia Act 1976 (Cth), s 22. ..... In the absence of any compelling reason in a Judicature Act system to limit the right of a beneficiary to claim equitable relief alone, in light of the approach taken in the authorities I have referred to, and given the undesirability of adhering to an approach which promotes multiplicity of suits, I am prepared to hold that, provided the other - the 'exceptional' or 'special' circumstances - requirement of the rule is met, it is not necessary in a Judicature Act system that the relief be equitable or equitable alone that is sought by the beneficiary instituting proceedings for a trust." 14 We do not consider it necessary to decide whether s 14ZZ permits of a beneficiary of a trust bringing an appeal against an objection decision where the taxpayer, the trustee of the trust at the relevant time, has declined to do so. Adopting the view favourable to Ms Pearson on that question, she acknowledges that she would only be entitled to do so in special or exceptional circumstances: see Lidden at 564. The longstanding rule, as stated in Jacobs' Law of Trusts in Australia (5 ed, 1986) par 2303, is that : "... where a trustee refuses to institute proceedings against a debtor or to recover trust property, the beneficiary may wish to institute proceedings himself, either in his own name or in the name of the trustee. The rule here is that a beneficiary may sue in his own name only where the relief sought is in the equitable jurisdiction of the court and even then only where the circumstances are exceptional. If they are not exceptional or if the proposed action is to be commenced in the common law jurisdiction, the beneficiary's remedy is to sue the trustee for the execution of the trust and then apply for the appointment of a receiver and for leave to sue in the name of the trustee or of the receiver." 15 The learned judge at first instance concluded that : "There is nothing special or unusual in the present case. The only circumstance which is said to warrant Mrs Pearson as beneficiary acting independently of the liquidator is the circumstance that the liquidator has declined to challenge the appealable objection decision. ..." 16 In our judgment, his Honour is not shown to have been in error in this matter in that conclusion. In accordance with O 20 r 2(2) of the Rules, affidavit evidence as to why Ms Pearson was bringing an application in her name was adduced before the judge at first instance. Ms Pearson may be taken to have put before the Court, in response to the Commissioner's motion, all that she could reasonably put. There is no dispute as to any of that material. It does not demonstrate that the liquidator of Jancy was asked to, and declined to, exercise the right of appeal under s 14ZZ. 17 As noted earlier in these reasons, that evidence indicates that the liquidator of Jancy first had raised with him the prospect of appealing from the objection disallowance decision by letter from Ms Pearson's solicitors on 9 November 1999. That letter did not request the liquidator to have Jancy exercise the right of appeal. It did not offer to the liquidator any funds to conduct the appeal. It did not offer to the liquidator any funds to procure independent advice about the prospects of success on an appeal, nor did it proffer to the liquidator any formal opinion or advice about the prospects of success on an appeal. It sought the liquidator's written approval under s 471A(1)(c) of the Corporations Law for Ms Pearson herself to institute the appeal (presumably in the name of Jancy), and as part of the request Ms Pearson undertook to fund the appeal and to indemnify the liquidator against any liability in respect of costs. It did not provide any information about Ms Pearson's assets and liabilities, so as to proffer to the liquidator any comfort about her capacity to meet that undertaking, nor offer any security to support the undertaking. The liquidator did not give his consent at that time. The next communication with the liquidator of Jancy in evidence is after the commencement of the proceedings, and the liquidator's response was to indicate that he had no funds in the administration, that he had had no opportunity to properly assess whether the proceeding could convey any benefit to the creditors of Jancy or to Jancy itself, and that he proposed to take no part in the hearing. He complained that no leave to proceed against Jancy under s 471B of the Corporations Law had been sought. 18 Moreover, although counsel for Ms Pearson in submissions claimed that the application involved two causes of action, namely one against the liquidator Jancy for breach of his obligation by failing to institute the application from the disallowance objection decision and secondly the application under s 14ZZ of the IT Act itself, the proceedings do not in fact express any claim for relief against Jancy or its liquidator and do not make any allegation that Jancy through the liquidator has failed to take action which properly it ought to have taken to protect the interests of the beneficiaries of the Jancy Trust or the interests of Jancy or its members or creditors. On the information which Ms Pearson presented to the Court, such a claim could not possibly succeed, yet it is acknowledged by her that the establishment of such a failure on the part of Jancy through the liquidator is an essential step in showing her entitlement to bring the application in their present form. 19 Consequently, in the circumstances, even if it be assumed that Jancy, had it appealed within the sixty day period fixed by s 14ZZN, would have had good prospects of success in disturbing the objection decision (an assumption upon which we express no view as to its merits), we agree with the learned judge at first instance that Ms Pearson could not succeed. 20 In our view, the appeal should be dismissed with costs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin and the Honourable Justice Mansfield.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT EMMETT J: 21 The first appellant, Janette Ann Pearson ("Mrs Pearson") is a beneficiary of the Jancy Trust ("the Trust") constituted by a deed of settlement bearing the date 1 November 1983 ("the Settlement Deed"). By application filed on 19 November 1999, Mrs Pearson commenced an appeal in the Court "for and on behalf of" the second respondent, Jancy Pty Ltd (In Liquidation)(ACN 010 482 747) ("the Trustee"), against an appellable objection decision made by the first respondent, the Commissioner of Taxation ("the Commissioner"). The Commissioner disallowed an objection by the Trustee in relation to an assessment of the Trustee for tax in respect of the year ended 30 June 1991 pursuant to s 99A of the Income Tax Assessment Act 1936 (Cth) ("the Assessment Act"). The Commissioner applied to the Court for summary dismissal of that appeal. On 2 March 2001, a judge of the Court ordered that the application by Mrs Pearson be dismissed with costs. Mrs Pearson now appeals to the Full Court from the orders of 2 March 2001.

BACKGROUND 22 The Jancy Trust may be described as discretionary in the sense that the distribution of income derived by the Trustee in respect of the Trust is at the discretion of the Trustee. The Settlement Deed defines two classes of beneficiaries being "the primary beneficiaries" and "the discretionary beneficiaries". The primary beneficiaries are Mrs Pearson and her husband, Cyril John Pearson ("Mr Pearson"). The discretionary beneficiaries, subject to qualifications not presently relevant, are: · the primary beneficiaries; · the children of the primary beneficiaries and the spouses, widows, widowers and issue of those children; and · any of a class of natural persons or other entities set out in the Settlement Deed which the Trustee may at any time and from time to time nominate in writing as a discretionary beneficiary.

23 Clause 3 of the Settlement Deed deals with the distribution of the net income of the Trust to discretionary beneficiaries at the discretion of the Trustee. Clause 3 provides that so much of the net income in each accounting period as is not dealt with in the discretion of Trustee is to be held in trust for the primary beneficiaries living at the end of the accounting period "who shall be presently and absolutely entitled thereto in equal shares". 24 In the relevant year of income, the period ended 30 June 1991, the Trustee, in its capacity as trustee of the Trust, was the holder of units of the Corplan Financial Network Unit Trust ("CFNUT"). The Trustee of CFNUT was Pearson Associates Pty Limited ("Pearson"). The Trustee also held units in the Corplan Financial Unit Trust ("CFUT"). The trustee of CFUT was Corplan Group Holdings Pty Limited ("Corplan"). 25 Minutes of a meeting of the directors of Pearson, as trustee for CFNUT, record that on 30 June 1991 it was resolved that the income of CFNUT for the year ended 30 June 1991 be distributed as a whole to the Trust. In addition, minutes of a meeting of the directors of Corplan, as trustee for CFUT, record that on the same day it was resolved that the income of CFUT for the year ended 30 June 1991 be distributed as to the whole to the Trust. 26 Pearson, as trustee of CFNUT, filed an income tax return referring to the distribution of the net income of CFNUT to the Trust in the sum of $162,713. Corplan, as trustee of CFUT, filed an income tax return on behalf of CFUT showing distribution of net income to the Trust in the sum of $28,117. It appears that those amounts were disclosed as assessable income in the income tax return lodged by the Trustee on behalf of the Trust for the year ended 30 June 1991. That return shows a loss and, therefore, no distribution to beneficiaries. Mrs Pearson's income tax return for the year ended 30 June 1991 disclosed income in the sum of $39,926. It did not disclose any income in the nature of distributions from the Trust. 27 On 10 December 1996, the Commissioner issued a notice of assessment to Pearson as trustee of CFNUT. The notice of assessment was accompanied by an adjustment sheet showing that adjustments had been made to the net income shown in the return lodged by Pearson as follows: · to include an increase in the balance of the "proprietorship account" in the sum of $1,639,522; · to disallow expenses claimed that had not been substantiated in the sum of $331,953;

The adjustment sheet showed that the net income had been adjusted from the sum of $162,713 as returned to the sum of $2,134,188. It also showed distribution to the Trust of the adjusted net income of $2,134,188 . 28 On the same day, the Commissioner issued a notice of amended assessment to the Trustee in its capacity as trustee of the Trust. The notice of amended assessment was accompanied by an adjustment sheet showing adjustments as follows: · for increase in distribution from CFNUT in the sum of $1,971,475; · to include the increase in the balance of the "proprietorship account" in the sum of $401,859; · for expenses claimed that had not been substantiated in the sum of $189,393.

The adjustment sheet showed net income adjusted from the loss as returned of $1,394 to the sum of $2,561,733. The adjustment sheet contained the following note:

"Distribution of adjusted net income A/c income to which no beneficiary is presently entitled - $2,561,733." 29 The notices of amended assessment and adjustment sheets were accompanied by a document headed "Reconciliation of Adjustments to Taxable Income of Final Taxpayer". The document referred to the distribution by CFNUT to the Trust of $1,971,475 and referred to "Taxable Income Section 99A Assessment" in respect of the Trust in the sum of $2,561,733. 30 On 20 December 1996, a notice of objection was lodged in respect of the assessment dated 10 December 1996. The notice of objection contained an assertion that the amount of $1,971,475 included as a distribution from CFNUT was not income of the Trust but was "an adjustment by journal entry of assets intended to be acquired by [the Trustee as trustee of the Trust], but originally wrongly entered in the books of CFNUT as assets of that trust". Significantly, for present purposes, no mention was made of the application of s 99A of the Assessment Act. By letter dated 13 September 1999, the Commissioner gave notice that he disallowed the objection by the Trustee. 31 On 5 July 1995, Mr Pearson had been made bankrupt on the acceptance of his own petition. On 24 April 1998, the Supreme Court of Queensland ordered that the Trustee be wound up in insolvency and that liquidators be appointed for the purpose of the winding up. The application to wind up the Trustee was made by the trustee of the bankrupt estate of Mr Pearson. 32 On 9 November 1999, solicitors acting for Mrs Pearson wrote to the liquidators of the Trustee referring to the assessments of 10 December 1996 and to the disallowance of the objections notified on 13 September 1999. The letter of 9 November 1999 relevantly said as follows: "For the 1991 year, the Commissioner, by reassessment, increased the assessable income of Jancy by $2,563,127.00 and taxed it on that amount. He also made large increases to Jancy's assessable income in the 1992, 1993 and 1994 years of income but for those years included all or part of those increases in Mrs Pearson's taxable income. Before Jancy went into liquidation, Mrs Pearson as public officer lodged an objection to that reassessment. Mrs Pearson also lodged objections to reassessments assessing those increased amounts to her income. All objections have been substantially disallowed in the case of that of Jancy by a notice of decision on objection dated 13 September, 1999 received at our office on 20 September, 1999. Mrs Pearson is appealing against her assessments. The Commissioner's conduct of the matter in all four years of income is relevant, in our view, to be placed before the Court in relation to Mrs Pearson's assessments. We therefore think it desirable to appeal also against the assessment against Jancy Pty Ltd as well as for the simple reason that we have been advised that it is wrong. We regret not having advised you of the Commissioner's decision earlier. We sought instructions initially from the only person having any real knowledge of the matters in question, Mr Cyril Pearson, who is currently in prison. ……………………… As we understand it, the assessment to Jancy Pty Ltd (like the assessments to Mrs Pearson) are in respect of moneys that were never actually received so it is doubtful whether they are liabilities provable in the estate and your position as liquidator in respect of the matter and your duties in respect of any appeal are, to say the least, problematical. To avoid the possibility of an appeal by Mrs Pearson against Jancy's assessment failing for want of your consent or other participation, on behalf of Mrs Pearson we request your written approval, under section 471A(1)(c) of the Corporations Law, for her to lodge an appeal. In view of the fact that you have been allowed only a short time to consider the matter, we would be content to proceed initially on the basis that you may review the matter in due course, but obviously any appeal has to be lodged as a matter of urgency. In addition to section 471A(1)(c), Mrs Pearson would propose to support her locus standi on the basis that she is the person who lodged the objection and as a beneficiary of the Jancy Trust. In any event, since you are only being asked to give your approval to her taking these steps, we would not think that you would be liable for any costs of the appeal. ……………………… We should mention to you specifically that in 1997 Muir J refused to grant the Commissioner summary judgment for the assessment against Jancy Pty Ltd as well as the assessments against Mrs Pearson. His Honour required undertakings from Mrs Pearson in relation to the disposal of her assets but excepted from those undertakings the payment of legal expenses of conducting any legal proceedings in which she is a party and thus is able to fund the conduct of the appeal and undertakes to indemnify you against any liability in respect of costs. We have assumed that you do not intend to appeal but please let us know if this is not correct." 33 Before any response had been received by Mrs Pearson's solicitors to their letter of 9 November 1999, the appeal to the Federal Court was filed on 19 November 1999. The respondents to the application were the Commissioner and the Trustee. Three applicants were named, being:

· Mrs Pearson, in her capacity as a beneficiary of the Trust,

· Mrs Pearson, in her capacity as public officer of the Trustee, and

· Propcombe Pty Limited, which was appointed as the new trustee of the Trust on 18 November 1999.

It is now conceded that it was misconceived for Mrs Pearson in her capacity as public officer of the Trustee and for Propcombe Pty Limited to be applicants in the proceeding. Accordingly, no argument was advanced in support of the appeal to the Full Court against the order dismissing the proceeding, in so far as it was brought by Mrs Pearson in her capacity as public officer and by Propcombe Pty Limited. 34 By letter of 10 December 1999, the liquidators of the Trustee responded to Mrs Pearson's solicitors' request of 9 November 1999. The response was relevantly in the following terms: "I note that Jancy Pty Ltd is a respondent and Janette Ann Pearson as Public Officer of Jancy Pty Ltd is the second applicant. As a respondent to the appeal application, you should note that there are no funds in this administration to arrange for an appearance at the hearing, on behalf of Jancy Pty Ltd. In addition, I note that leave of the Court has not been obtained in respect of the appeal proceedings as required by Section 471B of the Corporations Law. In respect of Janette Pearson's standing as a Public Officer of Jancy Pty Ltd and as an applicant in the proceedings, the provisions of Section 471A of the Corporations Law apply to suspend her powers as an officer of the company without the written approval of the Liquidator or approval of the Court. As indicated in my letter of 25 November, 1999 my written approval for the proceedings was not obtained prior to the filing of the appeal application. As I have not had the opportunity to properly assess whether there is any benefit for creditors in respect of the proceedings and that the steps required to be taken by your client under the Corporations Law in respect of seeking leave of the Court have not been taken, please note that I do not intend to appear at the hearing and object to being included as a party to the proceedings." 35 The Commissioner's application for summary dismissal was filed on 25 February 2000. After a hearing on 4 August 2000, the primary judge made the orders for dismissal on 2 March 2001. In his reasons for those orders, the primary judge held that the only person who had standing to appeal against the objection decision was the taxpayer originally dissatisfied with the relevant assessment and the person dissatisfied with the Commissioner's objection decision. His Honour concluded that Mrs Pearson, as beneficiary of the Trust, did not have standing to challenge an appellable objection decision in respect of an objection lodged by the Trustee in its capacity as trustee of the Trust. 36 His Honour also rejected Mrs Pearson's contention that she was entitled, in the circumstances, to bring a derivative action in her own name, joining the Trustee as respondent, because of the Trustee's failure to institute an appeal itself. The primary judge accepted that, if it was arguable that Mrs Pearson had standing to bring the appeal, then the Commissioner's notice of motion for summary dismissal should be dismissed. However, his Honour concluded, in substance, that Mrs Pearson did not have standing to bring the proceeding in her own name, whether as a derivative proceeding or otherwise.

LEGISLATIVE FRAMEWORK 37 Section 175A of the Assessment Act provides as follows: "A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953." "Taxpayer" is defined in s 6 of the Assessment Act to mean "a person deriving income or deriving profits or gains of a capital nature". 38 Part IVC of the Taxation Administration Act 1953 (Cth) ("the Administration Act") is headed "Taxation Objections, Reviews and Appeals" and contains s 14ZL as follows: "(1) This Part applies if a provision of an Act or of regulations (including the provision as applied by another Act) provides that a person who is dissatisfied with an assessment, determination, notice or decision may object against it in the manner set out in this Part. (2) Such an objection is in this Part called a 'taxation objection'." The Administration Act then sets out the procedure to be followed in relation to the making of an objection decision. Those procedures are not presently relevant. 39 Sections 14ZY and 14ZZ of the Administration Act provide as follows: "14ZY(1) If the taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to:

(2) Such a decision is in this Part called an objection decision .

(3) The Commissioner must cause to be served on the person written notice of the Commissioner's objection decision. 14ZZ If the person is dissatisfied with the Commissioner's objection decision, the person may:

(a) if the decision is both a reviewable objection decision and an appealable objection decision - either:

(i) apply to the Tribunal for review of the decision; or

(ii) appeal to the Federal Court against the decision; or

(b) if the decision is a reviewable objection decision (other than an appealable objection decision) - apply to the Tribunal for review of the decision; or

(c) if the decision is an appealable objection decision (other than a reviewable objection decision) - appeal to the Federal Court against the decision." 40 Section 97(1) of the Assessment Act provides that, 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, the assessable income of the beneficiary is to include that share of the net income of the trust estate. Section 98(1) of the Assessment Act provides that where a beneficiary of the trust estate, who is under a legal disability, is presently entitled to a share of the income of the trust estate, the trustee of the trust estate is to be assessed and liable to pay tax in respect of that share of the net income of the trust estate. However, under s 99A(4) of the Assessment Act, where there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary under s 97 or in respect to which the trustee of the trust estate is assessed pursuant to s 98, the trustee is to be assessed, and is liable to pay tax, on the net income of the trust estate at a special rate declared by the Parliament for the purposes of s 99A. 41 Sections 471A(1) and 471B of the Corporations Lawrelevantly provided as follows: "471A(1) While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except:

(a) as a liquidator appointed for the purposes of the winding up; or

(b) as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made; or

(d) with the approval of the Court. (2) While a provisional liquidator of a company is acting, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except:

(b) as an administrator appointed for the purposes of an administration of the company beginning after the provisional liquidator was appointed; or

(d) with the approval of the Court. (3) This section does not remove an officer of a company from office. (4) For the purposes of this section, a person is not an officer of a company merely because he or she is:

(a) a receiver and manager, appointed under a power contained in an instrument, of property of the company; or

(b) an employee of the company. 471B While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company or in relation to property of the company; or

(b) enforcement process in relation to such property;

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes."

THE ISSUES On APPEAL 42 The issues, as refined at the hearing of the appeal to the Full Court, were effectively limited to the nature of a derivative proceeding by a trustee. Mrs Pearson did not seek to agitate any contention that, apart from a derivative proceeding, she had standing to maintain the proceeding. The Commissioner contended that there were two bases upon which the proceeding should not be permitted to continue: · A derivative action is not available in relation to the enforcement of a right such as that in question, namely, a right of appeal from an objection decision under the Administration Act; · The circumstances of this case are such that, whether or not a derivative proceeding could be brought as an appeal from an objection decision, no court would, as a matter of discretion, allow a derivative action in this case.

DERIVATIVE ACTION IN RESPECT OF A STATUTORY RIGHT OF APPEAL 43 The primary judge concluded that Mrs Pearson, as a beneficiary of the Trust, does not have standing to challenge the objection decision. She is not the taxpayer referred to in s 175A of the Assessment Act. The taxpayer is the Trustee. The Trustee is the only person who has standing, under the Administration Act, to appeal to the Federal Court against the objection decision. Since the Trustee is in liquidation, a decision to appeal to the Federal Court is one that would have to be made by the liquidator. It is not a decision that could be made by a person who was a director at the time of the winding up order, by reason of the operation of s 471A of the Corporations Law. 44 The Trustee, in its capacity as trustee of the Trust, would normally have a duty to consider the question of whether to appeal to the Federal Court from an objection decision affecting the Trust. The failure to consider such a course may of itself be a breach of trust. Remedies would be available to beneficiaries who suffer some loss as a consequence of such a breach of trust. Further, a liquidator of a company that was a trustee would normally have a duty to consider the question of whether to appeal from an objection decision that affects the company in its capacity as a trustee. Remedies would be available for contributories and creditors where the liquidator of such a company, for inadequate reasons, declined to appeal from such an objection decision that affected the company in its capacity as a trustee. However, no such remedies have been invoked in the present case. 45 Where the steps necessary to prevent a loss to a trust estate or to preserve the assets of the trust estate involve an action at law, it is the trustee who is the proper and necessary claimant. However, a beneficiary will, in some circumstances, be entitled to take steps to prevent loss to a trust estate where the trustee of that trust fails to take such steps. Where a trustee declines to enforce a cause of action available for the benefit of the trust estate against a third party, a beneficiary may, in appropriate circumstances, commence a derivative action against that third party and prosecute it for the benefit of the trust estate, so long as the trustee is joined as a defendant. That, in effect, is the course that Mrs Pearson has adopted. 46 However, the Commissioner contends that, while such a course is available to a beneficiary in relation to certain causes of action, it is not available in relation to a cause of action consisting of a right of appeal to the Federal Court from an objection decision. He contends that, while it may be possible for a beneficiary to take proceedings in a court having appropriate equitable jurisdiction for an order compelling a trustee to institute such an appeal, or to compel the liquidator to cause the company to institute such an appeal, it is not open to a beneficiary to commence and prosecute an appeal as a derivative action. 47 There will, of course, be issues that arise as to whether all the prerequisites that are necessary for a derivative action have been satisfied. Those matters are not of direct concern to the Commissioner. So long as a trustee is joined as a party, and will therefore be bound by the result of a proceeding, the Commissioner will not be disadvantaged, except perhaps in relation to costs. Any disadvantage in relation to costs could be remedied by an appropriate costs order. For example, it may be appropriate that any additional that are costs incurred by the Commissioner by reason of the need to commence a derivative proceeding, be borne by the beneficiary on an indemnity basis in any event. That, of course, is a matter for the discretion of the Court in any particular case. 48 I can see no policy reason as to why a derivative action should not be available to a beneficiary in respect of an appeal to the Federal Court under the Administration Act. Rather than require a multiplicity of proceedings, where the Federal Court has adequate equitable jurisdiction, there are good policy reasons why a beneficiary should be entitled to bring a derivative action in the name of the beneficiary against the Commissioner by way of enforcing the right of appeal of a trustee, so long as the trustee is joined as a respondent. However, having regard to the conclusion I have reached on the question of whether the prerequisites for a derivative action have been made out, there is no need to express a final view on the availability of a derivative action in the case of an appeal under the Administration Act.

DiscRETION AS TO DERIVATIVE ACTION 49 A derivative action will only be permitted where the court considers that it is appropriate in order to avoid a multiplicity of actions. One of the prerequisites for the commencement and prosecution of a derivative action must be that the beneficiary demonstrates that the trustee is, in effect, acting in breach of trust in failing to commence and prosecute a particular proceeding, such as the appeal in the present case. Unless a beneficiary establishes that prerequisite, a proceeding should not be permitted to proceed as a derivative action. 50 In the present case, the liquidator of the Trustee was notified of the objection decision by letter of 20 September 1999. There is no evidence as to the circumstances in which notice of that decision came to the attention of Mrs Pearson. The notice of decision was sent to the Trustee at the office of the solicitors then acting for Mrs Pearson. Those solicitors then wrote to the liquidator on 9 November 1999. That letter was written some eight weeks after notification of the decision on the objection. Even then, there was no request to the liquidator that the Trustee commence appeal proceedings. Rather, the solicitors requested that the liquidator give his approval under s 471A(1)(c) of the Corporations Law for Mrs Pearson to lodge an appeal, presumably in the name of the Trustee. No reasons were advanced as to why Mrs Pearson should have the conduct of the proceeding in the name of the Trustee rather than the liquidator. 51 There was an assertion in the letter of 9 November 1999 that the appellants' solicitors "think it desirable to appeal…for the simple reason that we have been advised that it is wrong". However, no attempt was made to furnish the liquidator with that advice. The letter contains an undertaking to indemnify the liquidator against any liability in respect of costs. That undertaking, however, may be misconceived. It is the Trustee that would incur a liability for costs, if the appeal were unsuccessful. Further, if an appeal were brought in the name of the Trustee, it would be the Trustee that would be liable for the costs of the professional advisors who conducted the appeal on its behalf. There was no offer to fund the costs of an appeal. 52 The appropriate course would have been for Mrs Pearson, as a beneficiary of the Trust, to:

· furnish the Trustee, through its liquidator, with a copy of any advice as to the prospects of success;

· request the Trustee, through its liquidator, to file a notice of appeal to the Federal Court;

· undertake to the Trustee, through its liquidator, to fund the costs of the appeal; and

· undertake to indemnify the Trustee in respect of any costs orders being made in the event of the appeal being unsuccessful.

None of those things was done. In the circumstances, the prerequisites for a derivative action have not been established. Accordingly, there is no reason why this Court should have permitted the proceeding to continue as a derivative action.

conclusion 53 Mrs Pearson contends that, having regard to the provisions of clause 3 of the Settlement Deed, the Commissioner clearly erred in relying on s 99A of the Assessment Act in his notice of assessment to the Trustee of 10 December 1996. The effect of clause 3, it is said, is that Mr and Mrs Pearson, as primary beneficiaries, should be taken as being presently and absolutely entitled to whatever income of the Trust not distributed. Accordingly, s 99A would have no application. Rather, the primary beneficiaries should be assessed under s 97(1) of the Assessment Act. That question would have arisen on the hearing of a properly constituted appeal under the Administration Act. However, it does not arise on the hearing of this appeal to the Full Court. 54 If Mrs Pearson's contention is correct, there could be a windfall for the Commissioner by reason of the failure of the liquidator to cause the Trustee to lodge an appeal from the objection decision. There would, of course, be a corresponding loss to the beneficiaries. If that is so, they may have a claim for that loss against the Trustee. In turn, the Trustee could have a claim against the liquidator. However, those questions are not before this Full Court. 55 The appeal should be dismissed with costs. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Associate: Dated: 10 October 2001 Counsel for the Appellant: Mr P.J Davis and Mr J.A Baker

Solicitors for the Appellant: Hewlett & Company

Counsel for the First Respondent Mr R Derrington and Mr M Hanson

Solicitors for the First Respondent Australian Government Solicitor

Date of Hearing: 16 August 2001

Date of Judgment: 11 October 2001

At a glance

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Judgment (46 paragraphs)

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Legislation Cited (3)

Cases Cited (8)