Piccolo v McVeigh

REASONS FOR JUDGMENT 1 The present appeal concerns decisions by the respondent, in his capacity as trustee in bankruptcy of the estate of the applicant, to issue contribution assessment notices to the applicant under Div 4B of Pt VI of the Bankruptcy Act 1966 (Cth) ("the Act"). The Division provides for a compulsory income contribution regime for bankrupts whose income during the period of bankruptcy exceeds a specified threshold amount. The assessment notices relate to four contribution assessment periods, 9 May 1996 to 8 May 1997 ("the first period"), 9 May 1997 to 8 May 1998 ("the second period"), 9 May 1998 to 8 May 1999 ("the third period") and 9 May 1999 to 8 May 2000 ("the fourth period"). 2 The applicant applied to the Administrative Appeals Tribunal ("the AAT") to review the decisions of the respondent to issue the assessment notices. The AAT set aside each of the decisions and remitted the decisions in respect of the first, third and fourth periods to the respondent with directions that he: "(1) calculate the applicant's contribution on the basis that: (a) the monetary amount that the applicant received as reasonable remuneration from his employment with Poole Levy and Appel Pty Ltd in each of the contribution assessment periods was $35,000 per annum; (b) any moneys paid to the applicant's wife from PIC Pty Ltd as trustee for the J & S Piccolo Family Trust during each of the contribution assessment periods (be it paid directly or through some other account such as that of Poole Levy and Appel Pty Ltd) is income in relation to the applicant; (c) the value of the Mercedes Benz 300E is to be assessed according to the provisions of the Fringe Benefits Tax Assessment Act 1986 as modified by the Bankruptcy Act 1966 and the Bankruptcy Regulations; and (d) the Mercedes Benz 500S is not to be taken into account in assessing the applicant's contribution; and (2) issue a contribution assessment notice or fresh contribution assessment notices, as the case may be, in relation to each period." 3 In reliance upon the decision of the Full Court in Challen v Bendeich [1999] FCA 845 ("Challen") the AAT also directed that a fresh contribution notice may not be issued in respect of the second period as the original assessment notice for that period was not issued within the second period. The AAT determined that the assessment notices issued in respect of the second period were not authorised by s 139W of the Act with the consequence that it was no longer within the power of the respondent to issue any contribution assessment notices in respect of that period. 4 The applicant appealed to the Court against the direction of the AAT set out in para (1)(b) above. In substance, the AAT concluded that advances made by PIC Pty Ltd ("PIC") in its capacity as trustee of the J & S Piccolo Family Trust ("the Family Trust") to the applicant's wife after the applicant's bankruptcy were made to her as a result of the exercise by the applicant of his power, as the "controlling mind" of the Melbourne real estate company Poole Levy and Appel Pty Ltd ("PLA"), to direct moneys from PLA to PIC. The question of law said to be raised by the appeal is: "whether s.139L(a)(vii) of the Bankruptcy Act 1966 may be construed so that moneys received indirectly by a bankrupt's wife from an entity controlled by the bankrupt, can (as opposed to must) be regarded as having been so received 'as a result of' work done or services performed by the bankrupt." 5 The respondent cross-appealed against the AAT's direction that no further contribution assessment notice issue in respect of the second period. However, the respondent accepted that, as a single judge, I was bound by the decision of the Full Court in Challen although he reserved his right to argue the correctness of that decision on an appeal, if any, to a Full Court. 6 The objects of Div 4B are set out in s 139J: "(a) to require a bankrupt who derives income during the bankruptcy to pay contributions towards the bankrupt's estate; and (b) to enable the recovery of certain money and property for the benefit of the bankrupt's estate." 7 The respondent made his assessments of the applicant's "income" in respect of the four contribution assessment periods pursuant to s 139W of the Act. Under s 139L "income" in relation to a bankrupt is defined to have its ordinary meaning, subject to certain qualifications. The qualification that is relevant for present purposes is that set out in s 139L(a)(vii) which is as follows: "(a) the following are income in relation to a bankrupt (whether or not they come within the ordinary meaning of 'income'): … (vii) the amount of any money, or the value of any other consideration, received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt, less any expenses (other than expenses of a capital nature) necessarily incurred by the first-mentioned person in connection with the work or services;" 8 Under s 139P the bankrupt is liable to pay to the trustee the contribution assessed by the trustee in accordance with the formula set out in s 139S. One of the elements of that formula is the "income" assessed by the trustee to be income the bankrupt is likely to derive, or derived, during the contribution assessment period. In that context s 139 entitles a trustee, for the purpose of making an assessment, to treat the bankrupt as receiving "reasonable remuneration" for the employment, or other work or activities that resemble work, engaged in by the bankrupt. Relevantly, for present purposes, the applicant's reasonable remuneration was determined by the AAT to be the remuneration he might reasonably be expected to earn for the managerial functions he performed for PLA after his bankruptcy. The "reasonable remuneration" determined by the AAT under s 139Y to apply to those functions was $35,000 per annum. Although the trustee criticised the determination, on the basis that it appeared to disregard the continuing activities of the applicant as the "controlling mind" of PLA, the determination was not the subject of any cross-appeal and, accordingly, is to be accepted as binding for the purposes of the present appeal. 9 The AAT directed that distributions by PIC, as trustee for the Family Trust, to the applicant's wife during the relevant contribution assessment periods be treated as the applicant's income. It made the direction on the basis that those distributions were "income" for the purposes of s 139L(a)(vii) as each distribution was an "amount of…money…received by a person other than the bankrupt from another person as a result of work done or services performed by the bankrupt…". 10 The "work done" or "services performed" by the applicant were described by the AAT as follows: "I am satisfied that the "work" or "services" performed by Mr Piccolo are those he has performed as the controlling mind of PLA. They have tended to help or benefit PLA. In that capacity, he has directed moneys from PLA to PIC Pty Ltd. There is no evidence that PIC Pty Ltd obtains moneys from any sources other than PLA. Certainly, the Family Trust is a discretionary trust and there is no guarantee that PIC Pty Ltd will direct that a payment to be made to Mrs Piccolo rather than to a charity. Even so, on the occasions on which it does, it does so as a result of Mr Piccolo's work or services in directing PLA's funds to it. Therefore, without his work or services, Mrs Piccolo could not have been the beneficiary of PIC Pty Ltd's discretionary act in relation to the Family Trust. Mrs Piccolo received that money as a result of work done or performed by Mr Piccolo and it must be regarded as his income pursuant to s. 139L(a)(vii)." 11 It appears that the s 139L(a)(vii) issue was first raised by the AAT after the hearing had concluded. Although submissions were made as to its operation no further evidence was adduced. Consequently, no evidence was specifically directed at the s 139L(a)(vii) issue. Nonetheless, the respondent claimed that the AAT's conclusion was supported by the findings made by it. There are, however, problems with the approach taken and the findings made by the AAT. 12 The AAT did not identify the post-bankruptcy activities of the applicant that were found by it to enable him, as "the controlling mind" of PLA, to direct moneys from PLA to PIC. It made no finding as to who was "the controlling mind" that directed moneys from PIC to his wife, who was a beneficiary of the Family Trust. Further, and surprisingly, there was almost no information as to the distributions made by PIC to beneficiaries of the Family Trust of the substantial amounts of income to which the Family Trust was entitled during the relevant periods. Also, other than the finding that the loan account of the applicant's wife increased in the first period there were no other findings as to the advances or distributions made by PIC to the applicant's wife, or to any other persons, after the applicant's bankruptcy. 13 Notwithstanding the absence of findings in respect of the above matters the AAT directed that "any moneys paid" by PIC to the applicant's wife be treated as the applicant's income. Section 139L(a)(vii) is concerned with moneys paid to any person other than the bankrupt. Thus, if the AAT's reasoning is correct all distributions or advances to any beneficiary might be deemed to be income of the applicant as would the distributions that were made by PLA to PIC. 14 It is necessary to consider the findings the AAT made that were said to support, or that might be relevant to, the conclusions at which it arrived. 15 The basic facts were not in dispute. The applicant, a real estate agent, became a bankrupt on 9 May 1996. Prior to his bankruptcy the applicant and his wife were the sole directors of PLA. PLA conducted its real estate business as trustee of the Rosen Poole Levy Appel Unit Trust ("the RPLA Unit Trust"). All of the issued units in the RPLA Unit Trust were held by PIC as trustee of the Family Trust, which was a discretionary trust established for the benefit of the applicant, his wife and their family. Prior to his bankruptcy the applicant was in effective control of PLA and PIC. Although the applicant and his wife appear to have been directors of PLA and PIC prior to the applicant's bankruptcy, his wife played little or no role in relation to decisions made by PLA and PIC. 16 The AAT accepted that PLA operated within the unit and family trust structure outlined above. The deed establishing the RPLA Unit Trust was not in evidence but I infer that, as is usual with a unit trust, the Deed required that the annual net income of PLA as trustee of the unit trust be paid to the unit holder, PIC, in its capacity as trustee of the Family Trust. There is no evidence that PLA was entitled to exercise a discretion as to whether income was to be paid to the unit holder. 17 Under the Deed establishing the Family Trust PIC, as the trustee, had the discretionary power to accumulate income or to make distributions of corpus and income to the beneficiaries. It also had power to lend moneys to beneficiaries "with or without security and upon such terms and conditions as to repayment and with or without interest". The "beneficiaries" of the Family Trust included the applicant and his wife. 18 The AAT found that the balance sheet of PIC, as trustee of the Family Trust, disclosed that at 30 June 1996 which is shortly after the applicant's bankruptcy, unsecured loans had been made by PIC to the applicant totalling $616,253.83. Substantial loans had also been made to the applicant's wife. However, after the applicant's bankruptcy no further loans were made to the applicant but the amount of the unsecured loans to his wife, made in the period from 30 June 1996 to 30 June 1997, increased from $298,010.24 to $390,463.06. During the years ending 30 June 1997, 30 June 1998 and 30 June 1999 the net profits earned by PLA, to which PIC was entitled as the unit holder in the RPLA Unit Trust, totalled $244,797.00, $548,092.43 and $116,365.49 respectively. As explained above, other than the finding concerning the increase in the loan account of the wife of the applicant, no other findings were made as to how those moneys were dealt with by PIC. 19 The critical finding of the AAT was that the applicant was the "controlling mind of PLA both before and after his bankruptcy". As a result of the exercise of that power prior to the bankruptcy of the applicant, the AAT concluded that, as a director of PLA and of PIC, he was able to procure advances of moneys to him on his "loan account" with PLA and PIC. The AAT found that, in the absence of evidence of any agreement that the applicant was to repay the loans made by PLA, they were moneys paid for his own use and, as such, were his "remuneration for efforts as director" of PLA. In so far as the "loans" had been advanced by PIC the AAT stated: "Why did PIC Pty Ltd pay those moneys to him? I find that it did so as he was a Specified Beneficiary, and so a General Beneficiary, of the Family Trust. That is a discretionary trust and it may apply the funds for any charitable purpose or for any one or more of the General Beneficiaries as it thinks fit. Mr Piccolo, therefore, does not have any right to a distribution from that trust from year to year. Whether or not Mr Piccolo had an expectation is another matter. There is no evidence as to the directors or shareholders of PIC Pty Ltd and so no evidence as to whether he, or he and his wife, were the controlling minds in making the distributions. Whether they were or not does not make any difference to the fact that he received those funds as a beneficiary of the trust. He did not receive them by virtue of his being an employee of PLA. The moneys paid through PLA's accounts and ultimately reflected in the loan account of PIC Pty Ltd as trustee for the Family Trust were moneys that were generated by the efforts of PLA and its staff. They were not generated solely by the efforts of Mr Piccolo for other agents were listing and selling property and revenue was gained from PLA's property management interests." 20 The AAT summarised the applicant's evidence as to the drawings or moneys advanced after his bankruptcy as follows: "After his bankruptcy, Mr Piccolo continued to be employed by PLA. He said that he had not received any drawings or moneys from a loan account since his bankruptcy. Mr Piccolo agreed that, in the balance sheet of PIC Pty Ltd as trustee of the Family Trust, his wife's loan account was shown to have increased from approximately $298,000 as at 30 June, 1996 to approximately $390,000 as at 30 June, 1997 ie, in the first year of his bankruptcy (T documents, T19). At the same time, his loan account had remained unchanged in the order of approximately $616,000. When asked whether drawings were channelled to his wife, Mr Piccolo said that he did not know what happened to drawings. After he lost control of the company, his position changed and he no longer had access to that information." 21 In summary, the AAT found that: · advances by PLA to the applicant prior to his bankruptcy were part of his remuneration as a director of PLA; · advances by PIC to the applicant prior to his bankruptcy were advances to him as a beneficiary of the Family Trust; · after the applicant's bankruptcy he received no further advances from PLA or PIC; · after the applicant's bankruptcy the loan account of the applicant's wife with PIC for the year ended 30 June 1997 increased; · the applicant claimed he had no knowledge about his wife's drawings after his bankruptcy. 22 The AAT found that the applicant, as the "controlling mind" of PLA, "directed moneys from PLA to PIC Pty Ltd". Consequently, so the AAT reasoned, advances or distributions made by PIC to the applicant's wife, as a beneficiary of the Family Trust, could not have been made without the applicant's direction of moneys from PLA to PIC. 23 For present purposes I will assume, without deciding, that it was open to the AAT to conclude that the exercise of power by the applicant as "the controlling mind of PLA" is capable of constituting "work" or a "service" performed by the applicant. The AAT recognised that it was required to establish a casual nexus between the "work" or "service" performed by the applicant and the advances or distributions made by PIC to his wife. It also recognised that causation is a question of fact to be answered by reference to common sense and experience and into which considerations of policy and value judgment necessarily enter: see March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506 at 515-517 and Australian Securities Commission v Kavanagh (1993) 11 ACSR 148 at 153. However, the AAT appeared to accept that any causal nexus, irrespective of how remote, indirect or trivial, is a sufficient nexus. 24 The findings made by the AAT were, in effect, that the advances made by PIC to the applicant prior to his bankruptcy were made as a result of a decision by PIC to advance the moneys constituting the loans to the applicant as a beneficiary. There is no basis for any different finding concerning advances made by PIC to the applicant's wife after the applicant's bankruptcy. 25 Assuming part of the income distributed by PLA to PIC was advanced by PIC to the applicant's wife as a "loan" that advance must, presumably, have been made as a result of a decision of PIC to exercise its powers as trustee under the Deed to make the advance to a beneficiary of the Family Trust. If, and in so far as, a distribution of part of the income distributed by PLA to PIC was made to the applicant's wife as a beneficiary other than by way of loan (eg as a distribution of income) the distribution would have been made as a result of a decision of PIC to exercise its discretionary powers under the Deed to make such a distribution. It was not suggested that, after his bankruptcy, the applicant played any role in PIC's decisions or that he remained as, or exercised the powers of, a director of PLA or PIC. 26 While the moneys advanced to the applicant's wife may not have been able to be advanced if PIC had not received distributions of income from PLA those distributions were made as a result of PIC's entitlement, as the sole unit holder, to receive the distributions and PLA's obligation to pay the distributions. In those circumstances it is difficult to conceive of any "work" or "service" provided, or of any exercise of power, by the applicant as "the controlling mind of PLA" that resulted in him "directing" moneys from PLA to PIC. Accordingly, it is difficult to see how the AAT concluded that any distributions to the applicant's wife were made as a result of work or services performed by the applicant. 27 The only causal link between the advances made to the applicant's wife and the applicant's "work" and "services" after his bankruptcy was that the applicant's managerial activities, and any further activities that involved him in being "the controlling mind of PLA", contributed to the generation of income in PLA that was later distributed by PLA to PIC as the unit holder. However, even that indirect nexus overstates the situation because, as was pointed out by the AAT, the annual net income earned by PLA arose not only as a result of the applicant's endeavours, but also as a result of, inter alia, PLA's property management interests and the selling activities of staff members. In any event, in the present context, the functions of the applicant that contributed to the generation of income in PLA are, properly, the subject of a finding in respect of reasonable remuneration under s 139Y, rather a finding under s 139L(a)(vii). 28 In the above context the payment of the relevant advances or distributions to the applicant's wife resulted, directly, from PIC's decision to do so and, indirectly, from PLA's obligation to pay and PIC's entitlement to receive distributions of net annual income as the unit holder in the RPLA Unit Trust. There is no proper basis, on the findings made by the AAT, for it to conclude that any advances or distributions by PIC to the applicant's wife were made as a result of work or services of the applicant and were therefore to be treated as income of the applicant pursuant to s 139L(a)(vii). The error made by the AAT is one of law as the question of whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law: Hope v Bathurst City Council (1980) 144 CLR 1 at 7 per Mason J. 29 There is a further difficulty with the approach of the AAT. The answer to causation issues can differ according to the purpose for which the question is asked: see Environment Agency v Empress Car Co. Ltd [1999] 2 AC 22 at 29 per Lord Hoffman and J & G Knowles & Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 at 409-410. In the present case the question is being asked in order to determine whether the advances or distributions made by PIC to the applicant's wife are to be treated as income derived by the bankrupt (s 139J) as a result of work done or services performed by him (s 139L(a)(vii)). In that context there is no basis for concluding that the advances or distributions were, directly or indirectly, income derived, actually or notionally, by the applicant or were made as a result of work done or services performed by the applicant.