Raftland Pty Ltd v Commissioner of Taxation

Federal Court of Australia (Full Court)|2007-01-31|Before: Edmonds J, Edmonds JJ, Dowsett J

REASONS FOR JUDGMENT DOWSETT J: 1 I have had the opportunity of reading the reasons prepared by Edmonds J and agree in the orders which his Honour proposes. I also generally agree with his Honour's reasons save in one respect. That concerns the primary Judge's finding that the appointment of the E & M Unit Trust as a tertiary beneficiary of the Raftland Trust was 'made only as part of the façade and should also be disregarded'. The finding that the appointment of the E & M Unit Trust was, in effect, a 'sham' was a consequence of observations by her Honour at [83] et seq of her reasons that: '83. It may readily be inferred that Raftland and the other entities controlled by Mr Brian Heran which had an interest in the transaction were not concerned about the creation of a relationship of trustee and beneficiary between Raftland and the E&M Unit Trust. They had no reason to benefit that Trust or its unitholders. The only reason why the Raftland Trust was created with the E&M Unit Trust as a beneficiary was to enable income to be channelled to a Trust which had accumulated losses. Mr Brian Heran was frank in his evidence that, had the E&M Unit Trust not been available, he would not have had Heran Projects and Maggside enter into the initial transaction. The resolutions must be seen in this light. 84. Raftland at no time had an intention to make the payment of the further $2.6 m to the E&M Unit Trust. It did pay a substantial sum, but not apparently by way of a distribution of trust income. Whilst not critical to an analysis of Raftland's view of the transaction, it is a fact that the money paid was not income of the Raftland Trust. It was provided by other entities having either a present or future interest in the use of the E&M Unit Trust. The payment was to be a one-off payment with nothing further to take place between the parties. 85. The payment of the $250 000 does not provide support for Raftland's case that Raftland was paying under a distribution and that Mr Carey was receiving a distribution of Raftland Trust income in his capacity as trustee of the E&M Unit Trust. Clearly the sum paid was understood to be the price for control of the Trust, access to the accumulated losses and the co-operation of Mr Carey and Mr and Mrs Thomasz. That was the true character of that transaction. It was a transfer of interests for valuable consideration. 86. So far as concerns the second resolution to distribute, Raftland had no intention of ever paying it and Mr and Mrs Thomasz had no expectation that the E&M Unit Trust would even receive those moneys or any other benefits. Mr Thomasz knew that that income was to be applied against the Trust's losses. He knew that whilst a debt was to be recorded as owed to the E&M Unit Trust, in its books of account, he and his wife would be having no further dealings with the trust. Those controlling Raftland and the E&M Unit Trust well understood that the only transaction which was to take place between them was that relating to the control of the Trust. There is no direct evidence that Mr and Mrs Thomasz promised never to seek any further monies. I infer however that they had no intention of doing so, consistent with their understanding of the transaction.' 2 The significance of the appointment of the E & M Unit Trust as a tertiary beneficiary was that pursuant to the terms of the Raftland Trust Deed, in the event of a failure by the trustee to appoint, the income would pass firstly to the tertiary beneficiary or beneficiaries or, if there were no tertiary beneficiaries, to the primary beneficiaries and, if there were no primary beneficiaries, to the secondary beneficiaries. The primary beneficiaries were Messrs Brian Heran, Martin Heran and Stephen Heran. In the relevant assessments, the Commissioner has included all relevant income in Raftland's assessment, notwithstanding purported distributions to the E & M Unit Trust. This was done upon the basis that there was, in reality, no distribution to that trust. However the effect of such a finding was that, prima facie, entitlement to the trust income vested in the E & M Unit Trust as the only tertiary beneficiary. The effect of her Honour's finding that the appointment of the E & M Unit Trust as tertiary beneficiary 'should also be disregarded' was that the undistributed income of the trust passed to the primary beneficiaries, Messrs Heran. However, as her Honour demonstrated, s 100A then operated so that Raftland was liable to be assessed to the income pursuant to s 99A. 3 In his reasons, Edmonds J concludes that the appointment of the E & M Unit Trust as tertiary beneficiary ought not be disregarded. His Honour's reason for this conclusion is, as I understand it, that such nomination and the distribution of income pursuant thereto were necessary to give effect to the scheme, and that it should therefore be inferred that they were genuine. 4 As both the primary Judge and Edmonds J have recognized, the relevant question is whether or not the parties intended that legal or equitable rights and obligations be created by the various transactions into which they entered. Intention is a question of fact. In a case such as this the question to be addressed is whether the parties intended that the various transactions take effect, or whether they were really trying to camouflage the true nature of the dealings between them. In such a case the Court must decide where reality stops and camouflage starts. My only point of disagreement with the reasons prepared by Edmonds J is that I would not infer that those advising Mr Heran 'were well aware that, only to the extent that the trustee of the E & M Unit Trust was presently entitled to the income of the Raftland Trust, would that income be sheltered by the losses in the E & M Unit Trust'. (See [72] of his Honour's reasons.) It may be that reality stopped and camouflage started at an earlier stage, so that it was not a matter of distributing income to the E & M Unit Trust but of appearing to have so distributed income. The distinction is subtle. It is likely that a relevant client taxpayer will have only the intention of minimizing exposure to income tax. The intentions of his or her legal and accounting advisers may be more complex. 5 The point highlights a possible inconsistency in the primary Judge's reasoning. At [83] her Honour observed: 'It may readily be inferred that Raftland and the other entities controlled by Mr Brian Heran which had an interest in the transaction were not concerned about the creation of a relationship of trustee and beneficiary between Raftland and the E & M Unit Trust.' 6 There is also a finding that those previously interested in the E & M Unit Trust had no expectation of further benefits. Such findings as to intention may lead to the conclusion reached by her Honour that such distributions as had purportedly been made were not in fact made. They might also support the finding preferred by Edmonds J that such distributions were to be effective, leading to the conclusion that reality departed from appearance only after they were made (to the E & M Unit Trust). However I am not sure that these findings support the inference drawn by the primary Judge that the nomination of the E & M Unit Trust as a tertiary beneficiary did not occur. In particular I note that her Honour found (at [83]) that: 'The only reason why the Raftland Trust was created with the E&M Unit Trust as a beneficiary was to enable income to be channelled to a Trust which had accumulated losses.' 7 This finding seems to support the view taken by Edmonds J that such payments were to be made. However it seems inconsistent with the finding that neither side in the transaction involving the 'acquisition' of the E & M Unit Trust was concerned about the trust relationship. 8 As I have said, the question is one of intention, and that is a question of fact. In the present case, the intentions of Messrs Heran, those advising them and the various corporations depend upon inferences to be drawn from established facts. Where the availability of an inference depends upon the weight to be given to various aspects of the evidence, it will generally be a matter best left to the primary Judge. However, in the present case, I am inclined to the inference drawn by Edmonds J, but for slightly different reasons. The appointment of the E & M Unit Trust as a tertiary beneficiary did not necessarily result in any benefit passing to it. It did not reflect an intention that such trust take a benefit but simply that it be a possible recipient of benefit. Many trusts are created with a range of possible beneficiaries, well beyond those which are actually intended to take a benefit. For that reason I see no reason to conclude that there was no intention to nominate the E & M Unit Trust as a tertiary beneficiary. The result is that, subject only to the operation of s 100A, in default of distribution of the income of the Raftland Trust in each relevant tax years, it vested in that trust. I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

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

BETWEEN: RAFTLAND PTY LIMITED AS TRUSTEE FOR THE RAFTLAND TRUST

REASONS FOR JUDGMENT CONTI J: 9 I agree with the reasons for judgment of Edmonds J and the consequential orders he proposes. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Conti .

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

BETWEEN: RAFTLAND PTY LIMITED AS TRUSTEE FOR THE RAFTLAND TRUST

Introduction 10 This is an appeal from a single judge of this Court dismissing an appeal against objection decisions disallowing objections against income tax assessments issued to the appellant ('Raftland'), as trustee of the Raftland Trust, in respect of each of the years ended 30 June 1995, 1996 and 1997 (collectively 'the relevant years of income'). 11 The learned primary judge concluded that in each of the relevant years of income s 100A(1) of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') applied so as to disqualify any beneficiary's present entitlement to a share of income of the Raftland Trust that might otherwise exist and leave the s 95 'net income' in each of those years to be assessed to Raftland pursuant to s 99A of the 1936 Act. 12 The primary judge reached the conclusion that she did by findings that certain 'distributions' of income by Raftland, as trustee of the Raftland Trust, to the trustee of the E & M Unit Trust and the nomination of the trustee of that unit trust as a 'Tertiary Beneficiary' of the Raftland Trust at the time of the latter's creation, were sham transactions which could and should be disregarded. It was these findings that formed a substantial part of Raftland's grounds of appeal.

Background 13 To a large extent, the findings of primary fact are not in dispute. They are set out at [2] - [45] of the reasons of the primary judge and, relevantly, are summarised at [14] - [35] below. In doing so, I indicate where such findings are disputed.

The Heran Companies and Trusts 14 Towards the end of the year ended 30 June 1995, various building development companies controlled by the Heran brothers - Mr Brian Heran, Mr Martin Heran and Mr Stephen Heran - were projected to make substantial taxable profits for that year. The principal company was Heran Projects Pty Ltd ('Heran Projects'), but there were others, including Northbank Homes Pty Ltd ('Northbank Homes') and Southbank Homes Pty Ltd ('Southbank Homes'). Mr Brian Heran contacted his solicitor, Mr Tobin, concerning the possible 'acquisition' of a trust which had tax losses from previous years and which might be utilised so as to absorb the projected profits. Mr Heran asked Mr Tobin to speak with Mr Adcock of Harts Accountants ('Harts') to this end. Information was subsequently provided concerning the E & M Unit Trust which apparently had tax losses from previous years in the order of $4 million. A 'price' of $250,000 was nominated by Mr Adcock to be paid with respect to the E & M Unit Trust. 15 Maggside Pty Ltd ('Maggside') was the trustee of the Brian Heran Discretionary Trust and, in that capacity, carried on a business of renting properties it owned as such. At the time, it owed moneys to Heran Projects. On 22 June 1995 Heran Projects entered into an agreement with Maggside by which Maggside, as trustee of the Brian Heran Discretionary Trust, was to be paid the sum of $2,915,000 for granting Heran Projects the right to sell investment properties owned by Maggside as such, and to retain any proceeds of sale of them. The dealings between the two companies involved the payment by Heran Projects to Maggside and a payment by Maggside to Heran Projects in the same sum, by way of repayment of its loan, and a further loan to Heran Projects.

The E & M Unit Trust 16 The E & M Unit Trust was not initially associated with any of the entities controlled by the Heran brothers. The trustee was E & M Investments Pty Ltd, the directors and shareholders of which were Mrs Elizabeth Cox Kerr Thomasz (formerly E C K Carey) and her husband, Mr Mark Thomasz. Shares in the trust fund were divided into units and ten units were on issue - five held by Mrs Thomasz as trustee of the E C K Family Trust and five by Thomasz Enterprises Pty Ltd as trustee of the Thomasz Family Trust, sometimes referred to as the Mark Thomasz Family Trust. Mr Glen Carey, the son of Mrs Thomasz, subsequently became the trustee of the E & M Unit Trust, the Thomasz Family Trust and, apparently, the E C K Family Trust. 17 The financial statements of the E & M Unit Trust for the year ended 30 June 1991 disclosed accumulated losses of $4,017,291.09. Liabilities, including those to beneficiary loan accounts, stood at $3,966.478.01. Relevantly, this situation did not substantially change during the years 1992, 1993 and 1994.

The 1995 Transactions 18 On or before 30 June 1995, two companies - Raftland and Navygate Pty Ltd ('Navygate') - were acquired by Heran interests. All three brothers were directors of the companies and Brian and Stephen Heran were shareholders. Two trusts were settled: the Raftland Trust, of which Raftland was trustee, and the Heran Developments Trust, the trustee of which was Heran Developments Pty Ltd ('Heran Developments'). The latter trust assumed more relevance in the 1996 tax year. In each of the trusts the trustee of the E & M Unit Trust was included as a Tertiary Beneficiary. 19 Clause 3 of the deed pursuant to which the Raftland Trust was constituted ('the Raftland Trust deed') relevantly provides: '… b) The Trustee may at any time prior to the expiration of any year which ends before or upon the Perpetuity Date determine with respect to all or any parts of the income of the Trust Fund of such year: i) to pay to or apply or set aside the same or any part thereof for one (1) or more of the Primary, Secondary and Tertiary Beneficiaries living or in existence at the time of the determination; ii) to accumulate the same or any part thereof; PROVIDED THAT if the Trustee shall not by the Thirtieth day of June have exercised its discretion to pay apply set aside or accumulate the whole or any part of such income in the manner aforesaid then the Trustee shall hold the income not so paid set aside or accumulated for that year in trust for such of the Tertiary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares and if there be no Tertiary Beneficiaries then living or in existence for such of the Primary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares and if there be no Primary Beneficiaries then living or in existence for such of the Secondary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares. (c) The following rules shall apply to any determination pursuant to sub-clause 3(b) of this clause namely:- (iii) Any determination may be made in writing signed by the Trustee or by resolution duly passed at a meeting of the Trustee or in the case of the determination to pay apply or set aside any amount for any Beneficiary may be made by placing such amount to the credit of such Beneficiary in the books of the Trust Fund, by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such Beneficiary or by paying the same in cash to or for the benefit of such Beneficiary. … (f) It is declared that each of the Beneficiaries in whose favour the Trustee shall pay apply or set aside the income for that year or failing the exercise of the Trustee's discretion to pay apply set aside or accumulate as aforesaid who shall be entitled to share in the income for that year as is herein provided shall have an immediate and indefeasible vested interest in that part of the income for that year to which that Beneficiary is entitled hereunder, it being the express intention of the Settlor (as the Trustee acknowledges) that such of the Beneficiaries in whose favour the Trustee shall pay apply or set aside the said income or failing the exercise of the Trustee's discretion to pay apply set aside or accumulate as aforesaid who shall be entitled to share in the said income as herein provided shall be presently entitled to his or her share of such income. …' 20 On 30 June 1995 Mr Carey executed a deed in which he acknowledged, as trustee of the E & M Unit Trust, acceptance of appointment as a beneficiary of the Raftland Trust and in which he agreed not to disclaim his interest as beneficiary or any distribution from the Raftland Trust. In the same document he also acknowledged that he was also the trustee of the Thomasz Family Trust and the E C K Family Trust and that they were the sole unitholders in the E & M Unit Trust. Further, he amended the deed pursuant to which the E & M Unit Trust was established ('the E & M Unit Trust deed'), removed himself as trustee of the E & M Unit Trust and appointed Raftland as trustee in his place effective on and from 2 July 1995. 21 Her Honour found that on 30 June 1995 Maggside resolved to distribute all the income of the Brian Heran Discretionary Trust for that year ($2,892,762 but $2,849,467 after allowing for carry forward trust losses of $43,295) to the Raftland Trust. No finding was made that this was permitted by the terms of the Brian Heran Discretionary Trust; it just seems to have been assumed it was permissible. No issue was taken by the respondent that it was not permitted; indeed it seems that notwithstanding the Raftland Trust was established some five years after the Brian Heran Discretionary Trust, the definition of 'Primary Beneficiaries' in the Schedule to the deed of settlement pursuant to which the Brian Heran Discretionary Trust was established contemplated that the Raftland Trust could be such a beneficiary; it is a trust in which 'Brian Joseph Heran or any of his brothers have an interest whether vested or contingent'. 22 The internal accounts of the Brain Heran Discretionary Trust record such a distribution and the internal accounts of the Raftland Trust show the corresponding receipt. 23 On the same day two resolutions were passed by the directors of Raftland: that the Raftland Trust distribute the sum of $250,000 to Mr Carey, in his capacity as trustee of the E & M Unit Trust; and that the Raftland Trust distribute the balance of its income for 1995 to Mr Carey in that same capacity. 24 The moneys for the bank cheque in the sum of $250,000, payable to Mr Carey and given to him at a meeting on 3 July 1995, were provided by Heran Projects, Northbank Homes and Southbank Homes. By a written direction, Mr Carey requested that payment be made to Harts Accountants. That firm deducted the sum of $30,000 and the balance was paid to Mr Carey, who in turn paid it to Mr Thomasz. Mr Thomasz said that the Heran interests were not party to the arrangement for the payment to Harts. It was his decision to have the balance of the $250,000 paid to the Thomasz Family Trust. The Thomasz Family Trust income tax return for the 1996 year (not the 1995 year) shows the sum of $220,000 as having been received by way of 'business income'. 25 Raftland has not in fact paid the balance sum of $2,642,762/$2,599,467 (i.e. after deduction of the $250,000 paid to Mr Carey) to the E & M Unit Trust, a finding which Raftland accepts. However, apparently Raftland does not accept her Honour's further finding that it was not intended to do so. Her Honour said (at [35]): 'I do not understand Raftland to suggest that it ever held that intention. Mr Tobin conceded as much and in any event its intention not to do so may readily be inferred. He agreed that there was no particular business purpose to the steps devised and although he sought to resile from this statement on one aspect it is clearly the case. He went on to say that the purpose was to make use of the E&M Unit Trust's losses and that it was made a beneficiary as a mechanism for distributing funds from the 'Heran entities' in a tax effective way.' 26 Her Honour went on to find that the E & M Unit Trust has not called for or got in those moneys and has recorded no intended distribution to its unitholders. Again, Raftland accepts her Honour's finding in this regard. 27 On 3 July 1995 Raftland's directors met. The chairman reported that, apart from the amount of $250,000 to be distributed to the trustee of the E & M Unit Trust for immediate payment to creditors and/or beneficiaries, the company did not expect to require the funds to which it was entitled under resolutions of Maggside made on 30 June 1995. He proposed that the available funds of the company be used to subscribe for non-voting shares in Navygate. To this end, it was resolved that: '…all the moneys to which the company became entitled as at 30 June 1995 from Maggside Pty Ltd be applied in the subscription for such shares in Navygate Pty Ltd to be paid as soon as any necessary alterations to the Memorandum and Articles of Association and to the authorised capital of Navygate have been effected.' 28 The same day the directors of Navygate met and resolved to accept Raftland's offer to subscribe for shares and to do what was necessary to enable the issue of the additional shares. On 7 July 1995, at an Extraordinary General Meeting, the members of Navygate resolved to increase its share capital by 3 million shares of $1.00 each and to alter the Memorandum and Articles of Association accordingly. The directors of Raftland then resolved to apply in writing for 3,999,998 shares in Navygate. The Chairman reported that the company, as trustee - '… had received substantial funds by way of income which were not otherwise required to be used in the business of the trustee and that other members of the Heran Group had offered to provide additional loan funds to enable the company to subscribe for 3,999,998 shares in the capital of Navygate Pty Ltd.' 29 The minutes record the Chairman tabling cheques totalling $3,999,998 in favour of Navygate but this did not in fact occur. 30 On 7 July 1995 Navygate resolved to issue the shares. The Navygate shareholding is recorded in the accounts of Raftland as trustee of the E & M Unit Trust. The share register of Navygate did not record this further issue of shares. This was said to be due to error.

The 1996 and 1997 Transactions 31 In July 1995 an agreement was entered into by which Heran Developments, as trustee of the Heran Developments Trust, took over the assets and liabilities of Heran Projects. Heran Developments distributed all of its trust income for the 1996 year to the Raftland Trust, as did Maggside, as trustee of the Brian Heran Discretionary Trust and Northbank Homes, as trustee of the Northbank Trust. The Raftland Trust then resolved to distribute its income for that year to the E & M Unit Trust. The 1996 income tax return of the Raftland Trust shows a distribution of its income of $779,705 and the return of the E & M Unit Trust discloses income in that amount, which it offset against prior year tax losses. Its net income was again nil. Again, her Honour found that payment by Raftland was not in fact made to the E & M Unit Trust and that it is not intended to do so. Raftland accepts the first part of this finding, but not the second. Her Honour also found that the latter Trust has not proposed any distribution. 32 In the 1997 year, Northbank Homes distributed the first $386,035 of the Northbank Trust's income to the Raftland Trust and that Trust's return states that that income has been distributed to it. The E & M Unit Trust's return discloses the sum as income, which was again offset against prior year tax losses and a nil net income obtained.

The Amended Assessments 33 By letter dated 15 July 2002, Raftland was advised that a determination had been made under Part IVA of the 1936 Act. On 19 July 2002 a notice of amended assessment was raised by the respondent for the 1995 year on a taxable income of $2,849 467. The total tax assessed was $2,973,766.28, of which $1,594,622.26 was said to be for 'understatement penalty and interest'. It was further explained that $689,571.01 of that sum was by way of penalty and $905,051.25 for interest. An objection was lodged on 13 September 2002 and a notice of disallowance given on 29 October 2002. 34 The amended assessment issued to Raftland for the 1996 year, on a taxable income of $779,705, was for $837,610.43 of which $25,820.10 was said to be for 'additional tax for late return' and $433,633.41 for 'understatement penalty and interest'. Of this latter amount $189,078.76 was for penalty and $244,544.65 for interest. For the 1997 year, an amended assessment on a taxable income of $386,035 raised a total of $393,693.59 which included additional tax for late return of $10,819.45, understatement penalty of $93,999.58 and $100,875.50 for interest. 35 Other amended assessments were raised against Mr Stephen Heran, Maggside, Mr Brian Heran, Heran Developments and Northbank Homes. Shortly prior to the date for their hearing the respondent advised that he no longer resisted these appeals and did not rely upon the provisions of Part IVA so far as concerns this appeal.

The Arguments and Reasons Below 36 Before the primary judge, the respondent contended that the E & M Unit Trust was not in existence as at 30 June 1995, with the result that there had been no effective distributions to it. Her Honour rejected this argument, finding that the E & M Unit Trust continued in existence as at 30 June 1995 (at [73]). Her Honour's finding in this regard was not re-agitated on appeal. 37 The respondent next contended that neither of the 'purported distributions' - that of the sum of $250,000 or that of the balance of the Raftland Trust's income for the 1995 tax year - reflected the true arrangement or transaction between the parties. It was submitted that the resolutions to distribute are a 'sham' and should be disregarded, as should the appointment of the E & M Unit Trust as a Tertiary Beneficiary of the Raftland Trust, since it was made, and made only, to facilitate the false distributions. 38 Her Honour said in response (at [90]): 'A conclusion that a transaction is a sham means that it may be ignored and regard had to the real transaction. In the present case I conclude that there were no distributions of income of the E&M Unit Trust. The appointment of the E&M Unit Trust as a Tertiary Beneficiary was made only as part of the façade and should also be disregarded.' 39 Her Honour concluded (at [91]) that, pursuant to the terms of cl 3(b) of the Raftland Trust deed, it followed, in the case of the 1995 income, that Raftland held the income on trust for the Primary Beneficiaries - the three Heran brothers. They were presently entitled to that income unless subs 100A(1) of the 1936 Act applied to disqualify such entitlement and leave the income to be assessed in the hands of Raftland as trustee pursuant to s 99A of the 1936 Act. It was to this latter matter that her Honour then turned. 40 After reviewing the terms of subs 100A(1) by reference to the definitional provisions of s 100A, notably subss 100A(7), (8), (9) and (13), and by reference to relevant authorities such as Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195 and Idlecroft v Commissioner of Taxation (2005) 144 FCR 501, her Honour concluded that subs 100A(1) applied so that the Principal Beneficiaries are not to be taken as presently entitled to the income; rather, Raftland is liable to be assessed on the income pursuant to s 99A (at [101]). 41 Her Honour went on to observe that subs 100A(3A) did not apply to prevent this consequence even though it would have applied to the E & M Unit Trust had there been a distribution to it. Her Honour observed that the Primary Beneficiaries, to whom subs 100A(1) does apply, are not trustees and do not qualify as trustee beneficiaries for the purpose of subs 100A(3A). 42 Finally, her Honour concluded that the same conclusions apply to the assessable income of the Raftland Trust in each of the years 1996 and 1997. At [104] her Honour said: '…The further purported distributions from Raftland, albeit as a conduit of other entities, are characterised by the initial transaction. There were not in reality further distributions and the parties did not intend them to take effect as such. The Primary Beneficiaries are deemed not to be presently entitled to the income and Raftland's income is to be assessed under s 99A.'

Sham 43 The appellant's submissions on this subject take issue with a number of findings or conclusions which the primary judge made or drew in the course of dealing with the respondent's 'sham' submission below. In essence, the appellant's submission is that such findings or conclusions are infected with error, but there is little in the way of substantive argument, as distinct from bald assertion, to enable one to comprehend the nature of the alleged error. 44 The appellant's case on this subject is that the two resolutions made on 30 June 1995 to distribute $250,000 and the balance of the income of the Raftland Trust to Mr Carey as trustee of the E & M Unit Trust created present entitlements to, or vested and indefeasible interests in, the income of the Raftland Trust in the sums of $250,000 and the balance amount of $2,599,467, even if payment were not made: Reference was made to subs 95A(2) of the 1936 Act; FCT v Whiting (1943) 68 CLR 199 at 219; Harmer v FC T (1991) 173 CLR 264 at 271; Dwight v FCT (1992) 37 FCR 178 at 189; Walsh Bay Developments Pty Ltd v FCT 95 ATC 4378 at 4388 - 4389; (1995) 130 ALR 415 at 427 - 428; Trustees of the Estate Mortgage Fighting Fund v FCT (2000) 102 FCR 15 at [37] - [40]; [55] - [59]. 45 The appellant submits that there are at least four cases where a court may take the acts done and documents executed by the parties otherwise than at their face value: (1) Where the parties did not intend to create any legally enforceable rights and obligations. (2) Where the parties intended to create legal rights and obligations in accordance with the tenor of their acts or agreement, but on their true construction the actual legal relations created are different from those intended by the parties (see e.g. Radaich v Smith (1959) 101 CLR 209). (3) Where the parties intended not to create legally enforceable rights and obligations in accordance with the apparent tenor of their acts and agreement (i.e. according to what their words and conduct would be reasonably understood to convey) (Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [46]), if those apparent legal relations were intended by the parties to be a 'pretence' to deceive third parties about their actual legal relations (if any): Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802. (4) Where the party or parties intended to create legal rights and obligations that, due to fraud or mistake, the instruments do not record or effect (i.e. on their true construction do not have the intended legal or factual operation), in which case equity may rectify the documents to reflect the true intention or agreement (Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329; cited with approval in Fitzwood Pty Ltd v Unique Goal Pty Ltd (In Liq) [2002] FCAFC 285 at [172]). 46 According to the appellant, '[s]ham ... refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences': Equuscorpat [46]). 'A "sham" is … something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive': Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454; Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243 at 257.4 - 258.4; Snook at 802. 47 The opposite conclusion follows, the appellant submits, where 'all the parties to this transaction or series of transactions intended that the instruments in question should take effect or operate according to their tenor and that they should respectively have the rights and be bound by the obligations thereby created …': Lau v Federal Commissioner of Taxation (1984) 54 ALR 167 at 172 - 173; (1984) 15 ATR 932 at 936.10 - 937.1 per Connelly J; aff'd (1984) 6 FCR 202. This is so even if the motive or reason for the arrangements is tax minimisation: Oakey Abattoir Pty Ltd v FCT (1984) 54 ALR 595 at 601; (1984) 15 ATR 680 at 685.5; aff'd (1984) 55 ALR 291 at 297; (1984) 15 ATR 1059 at 1065.3 - 1065.6; Sonenco (No 87) Pty Ltd v FCT (1992) 38 FCR 555 at [81] - [84]); which supports a presumption that the transactions were intended to be legally effective: See Martin v Martin (1959) 110 CLR 297 at 305. 48 Finally, on this subject, the appellant submitted that although a document including a deed of settlement may be a sham if intended to be a facade to deceive others, the Court will not lightly infer that documents, particularly those executed under seal, do not reflect the true intentions of the parties. Faucilles Pty Ltd v FCT (1989) 90 ATC 4003 is distinguishable from the present case, because Mr Tobin, who settled the terms of the Raftland Trust, intentionally and deliberately named the trustee of the E & M Unit Trust as one of the Tertiary Beneficiaries, without any intention of misleading anyone.

Onus of proof 49 The appellant observes her Honour held, at [89], that the onus shifts to the appellant to prove that the inferences, concerning the parties' common intention, were not correct. Her Honour, having stated earlier that there was no direct evidence of the intention of Mr and Mrs Thomasz (at [80]), continued: 'It might have done so by direct evidence from the parties [as] to what had taken place between them, if that had been helpful. Having not done so it has not been established that there were distributions of income'. 50 The appellant submits that although the burden of proving that an assessment is excessive lies upon the taxpayer (Taxation Administration Act 1953 (Cth), s 14ZZO; FCT v Dalco (1990) 168 CLR 614), an evidentiary onus lies on the person making the allegation of sham where otherwise the taxpayer bears the onus of proof under the statute: Cf. Richard Walter at 246.3, 259.6. This is not a case where the taxpayer had lost his memory or his books (Trautwein v FCT (1936) 56 CLR 63 at 87 - 88), or where the architect of the scheme is unavailable being deceased (Sharrment), but was one where extensive evidence was given about the course of negotiations, the circumstances surrounding the transactions, how the transactions were carried out, the object of the transactions, and what occurred afterwards, as well as extensive cross-examination about their actual understanding and expectations: See McCormack v FCT (1979) 143 CLR 284 at 301.9 - 302.3 ('… it would be wrong to regard the evidence of a taxpayer to be prima facie unacceptable'.); Pascoe v FCT (1956) 30 ALJR 402 at 403; Hawke v Edwards (1947) 48 SR (NSW) 21 at 23; cf. John v FCT (1988) 166 CLR 417. Nevertheless, in this case, the most reliable evidence of what was intended is the contemporaneous record, rather than oral evidence reconstructing subjective intentions held 10 years ago. Where relevant (cf. Equuscorp at [33] - [35]), the knowledge and intention of a party's representative may in appropriate cases be imputed to them (FCT v Bidencope (1978) 140 CLR 533 at 547; FCT v Consolidated Press Holdings Ltd (2001) 201 CLR 235 at [95]), but at all material times there was nothing to indicate any belief or reason to believe on the part of any of the parties or their representatives that the transaction into which they were entering was intended to mislead anyone. No submission was made that material witnesses had not been called. 51 In such cases, the appellant submitted, 'mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth': Miles v Bull [1969] 1 QB 258 per Megarry J at 264, cited by Lockhart J in Sharrment at 455.5. To draw an inference from the surrounding circumstances that a particular transaction is a 'sham' is to reach a strong finding, and one which cannot be made if another inference is at least equally open: WGOC v GH & Anor [2006] FamCA 539 at [74] (citing Moss J in Wilson v Wilson (1994) 114 FLR 439 at 445 - 446). In this case, the only inference or conclusion reasonably open on the evidence was that the trust resolutions and payment were intended to operate according to their tenor, not as a deceptive sham for the purchase and sale of a trust to access the losses, which would necessarily be self defeating, as they could only be accessed by trust resolutions creating present entitlements in the relevant beneficiary.

Characterisation and Intention 52 The appellant submits that her Honour erred in finding or concluding that the trust resolutions of the appellant were never intended to have effect according to their tenor but were intended merely to be a cover for a secret transaction between the parties. On the evidence, the Court should have been satisfied that the genuine intention of the parties was that the trust resolutions would confer on the beneficiary a present entitlement to payment in each of the income years and the payment of $250,000 was made under or pursuant to the first of those trust resolutions. 53 The appellant submits that the parties by their agreement constituted by the exchanges of correspondence and the transaction documents determined the form of the transaction and the payment was made in precisely the manner provided for in their agreement, i.e., a distribution to the E & M Unit Trust which the unitholders were able to and did access. They obtained no rights or benefits, and incurred no obligations, other than those provided for in their agreement. Expectations about the non-exercise of rights do not alter existing legal rights or support a finding of sham: See Mullens v FCT (1976) 135 CLR 290, 301.8 - 302.2 per Barwick CJ; 316.5 - 317.5 per Stephen J. 54 According to the appellant, it was not open to the court below to re-characterise the agreement. To do so involved, not the application of the doctrine of sham, but adoption of notions of economic equivalence which are not open in this area of the law: IRC v Europa Oil (NZ) Ltd [1971] AC 760 at 772; Europa Oil (NZ) Ltd v IRC (No 2) (1976) 76 ATC 6001 at 6007; IRC v Duke of Westminster [1936] AC 1; JB Chandler Investments Co Ltd (in liq) v FCT (1993) 93 ATC 4810 at [36] - [38], even if the parties in evidence acknowledge the equivalence 10 years later. 55 Finally under this head the appellant submitted that: 1. The court took into account irrelevant considerations or gave excessive weight to a number of considerations or evidence in making its findings and conclusions. 2. The court failed to take into account relevant considerations or gave no weight or too little weight to a number of considerations or evidence in making its findings and conclusions. 3. The court erred in finding or concluding that the Herans did not intend the trust resolutions to have effect according to their tenor, or the appellant had not proved that was their intention, having regard, inter alia, to a number of relevant matters (which, in addition to the foregoing, it did not take into account or gave too little weight). 4. The court erred in finding or concluding that Mr Tobin did not intend the trust resolutions to have effect according to their tenor, or the appellant had not proved that this was his intention, having regard, inter alia, to a number of relevant matters (which, in addition to the foregoing, it did not take into account or gave too little weight). 5. The court erred in findingor concluding that Mr and Mrs Thomasz did not intend the first trust resolution to have effect according to its tenor, or the appellant had not proved that was their intention, having regard, inter alia, to a number of relevant matters (which, in addition to the foregoing, it did not take into account or gave too little weight).

Reimbursement Agreement 56 The appellant submitted that, in terms of subs 100A(7) of the 1936 Act, there was no reimbursement agreement that provided for the payment of money, transfer of property, provision of services or other benefits to a person other than the beneficiary, identified by the respondent or the Court: Cf. [105] and [106]. The alleged benefits were too remote or further or alternatively were not benefits within the meaning of the section or within the extended meaning in subs 100A(12). 57 Further or alternatively, it was submitted that there was no such benefit in respect of the first resolution to distribute Raftland Trust income of $250,000 to Mr Carey as trustee of the E & M Unit Trust in the income year ended 30 June 1995, which was paid on 3 July 1995: Cf [111]. 58 Finally, it was submitted that if the E & M Unit Trust was presently entitled or deemed to be presently entitled to the income of the Raftland Trust, whether by reason of the trust resolutions or as a Tertiary Beneficiary under the default provisions of the deed of settlement, then subss 100A(3A) or (3B) apply and subss 100A(1) and (2) are not applicable.

A Failure to Prove the Assessments were Excessive 59 The respondent submitted that the appellant's concentration on 'sham' in its recitation of what it contends to be the 'main issues' in the appeal and the way it has consequently developed its outline of argument evidences a vice identified by Lockhart J in Richard Walter at 245 - 246: 'Use of the word "sham" in some cases, and this is indeed one of them, obscures the fundamental issue between the parties. Essentially, it is for the taxpayer to prove that an assessment is excessive: McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; and Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Limited (1994) [181 CLR 466]. The onus of proving that the assessment is excessive lies upon the taxpayer; although the evidentiary onus in a particular case may shift from time to time.' 60 In that same case, and to like effect, Hill J elaborated (at 258 - 259) upon the observation made by Lockhart J in the passage quoted as to the fundamental issue between the parties in a taxation appeal being whether the assessments concerned were excessive. Applying his Honour's reasoning to the circumstances of this case, 'the principles work out in the present case in the following way'. 61 The respondent alleged that net income of the trust estate, admittedly derived by the appellant in its capacity as trustee of the Raftland Trust, fell to be assessed to the appellant pursuant to s 99A of the 1936 Act. The respondent submitted that in order to show that the assessments were excessive, the appellant thus had to show, on the balance of probabilities, materially, that that net income was included in the assessable income of a beneficiary not under a legal disability who was presently entitled to that income, i.e. that the net income fell to be assessed to another person pursuant to s 97 of the 1936 Act. It sought to do that by making a case that, in each year of income, the net income of the Raftland Trust was income to which the trustee of the E & M Unit Trust was presently entitled because there was an effective decision to distribute that income to that trustee and/or that the E & M Unit Trust was made an effective taker in default by its appointment as a Tertiary Beneficiary in the Raftland Trust deed. Alternatively, it sought to show that if there were no effective distribution, s 100A did not have the effect of deeming the Heran brothers not to be presently entitled to the net income of the Raftland Trust. 62 In the court below, the appellant sought to prove that there had been effective distributions to the trustee of the E & M Unit Trust by certain transactional documents and by the evidence of the Heran brothers, their solicitor, Mr. Tobin, Mr and Mrs Thomasz, Mrs Thomasz' son, Mr. Carey, Mr. Harris and Mr. Maharaj. Her Honour did not accept that evidence as persuasive of there being any intention to benefit the E & M Unit Trust or of any expectation by the beneficiaries of that trust of ever receiving a benefit by way of distribution. She found that the evidence strongly raised the inference that none of the relevant parties to the purported trust distributions intended that there be any distribution of the net income of the Raftland Trust in the income years in question and that the appellant had not proved otherwise. That being the case, there were no distributions. She also found that the appointment of the E & M Unit Trust as a Tertiary Beneficiary was also made only as part of the facade and should also be disregarded. 63 To paraphrase from the judgment of Hill J in Richard Walter, whether distributions were what they purported to be was of relevance to the question of sham, but that can for the moment be put to one side. It is not correct to say that the onus lay upon the respondent to establish that the purported distributions were shams. Rather, it was for the appellant to show that there were effective distributions. If the appellant failed to do this it did not satisfy the onus of showing that the assessments were excessive. 64 To paraphrase further, even if it were necessary to determine whether the purported distributions were shams, the onus was not on the respondent to prove what the real transactions were (at 259): 'Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise: Coppleson v Federal Commissioner of Taxation (1981) 52 FLR 95. But as that case itself illustrates, that is in the overall context of the statutory imposition of the burden of proof on the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham.' 65 As it happened, the respondent identified that the real transaction was the transfer of control of the E & M Unit Trust with its carried forward losses for the sum of $250,000, but that does not mean that the 'main issue' in the case was anything other than whether the appellant had proved the assessments to be excessive: Section 14ZZO(b) of the Taxation Administration Act 1953. 66 It is evident from the reasons for judgment of the primary judge that she was well aware that this was the 'main issue' (at [81]). Her Honour made the further observations (at [82]), in respect of the 1995 income year, that: 'Raftland's case is that the assessment on income of $2,849,467 is excessive and should not have been [made] because it has distributed that income. It is therefore necessary for it to prove that distributions were made. It does so by relying upon the two written resolutions and the payment of the sum of $250,000 which is said to be in accordance with one of them.' Contrary to the appellant's contention, these observations are not in error, but are a pithy and accurate summation of the application of the impact of the statutory onus of proof, as discussed by Lockhart and Hill JJ in Richard Walter, to the circumstances of the present case. 67 So far as the 1995 income year is concerned, the respondent did not contest that, if they were intended to take effect according to their tenor, the appellant's two resolutions of 30 June 1995 to distribute $250,000 and the balance of the income of the Raftland Trust to Mr. Carey, in his capacity as trustee of the E & M Unit Trust, created present entitlements to, or vested and indefeasible interests in, the income of the Raftland Trust even if payment were not made. The same applies in relation to the corresponding distribution resolutions for the 1996 and 1997 income years. What bedevilled that consequence for the appellant, the respondent submitted, was the appellant's inability to persuade the court below not to infer - '… that Raftland and the other entities controlled by Mr. Brian Heran which had an interest in the transaction were not concerned about the creation of a relationship of trustee and beneficiary between Raftland and the E&M Unit Trust.' (At [83]) 68 According to the respondent, there was an abundance of evidence to support the inference of an absence of any intention to create a relationship of trustee and beneficiary as between the appellant as trustee of the Raftland Trust and the trustee for the time being of the E & M Unit Trust. 69 It has been said that '[s]ham … refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences': Equuscorp at [46]. In the circumstances, the making of a decision to distribute the net income of the Raftland Trust, however contrived the arrangement, was not a decision that made sense. It was objectively inconceivable that Raftland intended to confer real entitlement to $4 million on complete strangers. Faced with admissions of the kind quoted above, the accuracy of which was inherently likely in the context of the mere circumstance of relations between the Heran and the Thomasz interests, it is unremarkable that the primary judge concluded (at [89] and [90]) that the appellant had not established that there were distributions of income and that the appointment of the E & M Unit Trust as a Tertiary Beneficiary in the Raftland Trust deed was made only as part of the facade and should also be disregarded. Contrary to the appellant's contention (see [54] supra) that conclusion did not involve 'recharacterisation' or 'economic equivalence', only a failure on the part of the appellant to prove that transactions were indeed intended to be what the documents purported them to be.

The Consequences of the Reimbursement Agreement 70 The respondent submitted that it is not controversial that, if the provision for the E & M Unit Trust to be a Tertiary Beneficiary and the relevant distribution resolutions are shams or otherwise ineffective, the Primary Beneficiaries of the Raftland Trust take the income of that trust. The Primary Beneficiaries are the Heran brothers. 71 For the reasons given by the primary judge, in each of the income years, subs 100A(l) of the 1936 Act applies such that the Heran brothers are not to be taken as presently entitled to the income of the Raftland Trust. That had the consequence in each income year that the appellant, as the trustee of that trust, fell to be assessed pursuant to s 99A of the 1936 Act. 72 The primary judge was correct to conclude (at [96]) that the series of transactions commencing with the purchase of rights by Heran Projects from Maggside, Maggside's distribution as trustee of the Brian Heran Discretionary Trust to Raftland and its purported distribution to the E & M Unit Trust was capable of and did constitute a 'reimbursement agreement' for the purposes of s 100A. As her Honour recognised, that conclusion accords with the width of meaning given to s 100A(13) by the Full Court in Prestige Motors. 73 The conclusion that there was a connecting circumstance between the reimbursement agreement and the arising of an entitlement under the Raftland Trust of the Heran brothers as Primary Beneficiaries was unexceptional, for the reason given by the primary judge, applying Idlecroft (at [100]). The entitlements of those default beneficiaries came about because the appointment of income was invalid. That appointment was made pursuant to the reimbursement agreement - '[b]ut for the existence of the agreement, the appointments would not have been made' ([at 100]). 74 The respondent submitted his agreement with her Honour's conclusion that neither subs 100A(3A) nor subs 100A(3B) applies where Raftland holds income on trust for the Primary Beneficiaries (at [103] - [104]).

Sham 75 Even if the two resolutions of the directors of Raftland were not efficacious to bring about the consequence that the trustee of the E & M Unit Trust was presently entitled to the whole of the income of the Raftland Trust for the year ended 30 June 1995, either because they were shams which could be ignored (see [90] of her Honour's reasons) or because the appellant did not discharge the onus it carried to prove the assessment was excessive (see [81] of her Honour's reasons), the failure of the default provisions of the proviso to cl 3(b) of the Raftland Trust deed to bring about that same consequence was, as a process of her Honour's reasoning, solely due to her finding that the nomination of the trustee of the E & M Unit Trust as a Tertiary Beneficiary in the Raftland Trust deed as executed was a sham (see [90] of her Honour's reasons). In other words, it had nothing whatsoever to do with the failure of the appellant to discharge the onus it carried. 76 The proposition that a provision contained in a deed of settlement pursuant to which a trust fund is established, such as the default provisions of the proviso to cl 3(b) of the Raftland Trust deed, is a sham, but not the deed itself, is not new. Such a submission was considered and accepted by a Full Court of this Court in Faucilles. This was an appeal from the Administrative Appeals Tribunal. It concerned the establishment of a discretionary family trust known as the John Kakridas Family Trust No. 2. The settlor of that trust was shown to be Julia Sztainbok, the wife of Mr Kakridas' accountant and tax adviser. What was assailed as a sham was the nomination of non-resident relatives of Mr Kakridas as primary beneficiaries of the trust, being takers in default of appointment of income of the trust fund. In the year in question, $4,000 could be derived by a non-resident individual without attracting a liability to Australian tax. 77 After discussing the nature of 'sham' in relation to schemes to avoid or minimize liability to taxation, the Tribunal said (Case W48, 89 ATC 460): '24. I have no doubt that neither [John Kakridas] nor [Sztainbok's] wife as settler of [John Kakridas'] Family Trust No. 2 intended that the persons constituting the primary beneficiary of the trust should be entitled to have any part of the income of the trust distributed to them in default of the exercise by the trustee of its discretion. I am satisfied that they did not intend there to be any realdistribution of the income of the trust to anyone other than [John Kakridas] and possibly his children. I find that [John Kakridas] meant to utilise the discretionary distribution provisions of the deed of settlement to cloak the real transactions which he intended to undertake, and that he meant the default distribution provision, if it ever purportedly took effect, similarly to disguise the real situation. 25. I have come to the conclusion, therefore, that the provision of the deed of settlement of [John Kakridas'] Family Trust No. 2 for default distribution to the primary beneficiary was a sham, that is to say that it was never intended to create legal or equitable rights or obligations. It was never intended that, if there were no distribution to any other beneficiary in accordance with the terms of the deed of settlement, there should be a real distribution to persons constituting the primary beneficiary. By contrast, however, although [John Kakridas] undoubtedly intended that bogus use should be made of the discretionary power of distribution to the secondary beneficiary, that power could be exercised in favour of himself and his children and also in favour of [Jim Kakridas] and his children and might at some time in the future have been genuinely so exercised. I have come to the conclusion, therefore, that the provision of the deed of settlement conferring that discretionary power on the trustee was intended to be available to be validly exercised if and when it became advantageous to exercise it so. Its inclusion in the deed was, therefore, not a sham. 26. … I have, therefore, come to the conclusion that [John Kakridas'] Family Trust No. 2 was validly created and validly existed during the 1982 taxation year, and that there was no valid distribution of any of its income in that year either as the result of the exercise of any discretion by the trustee or as the result of any of the terms of the deed of settlement taking effect in default of the exercise of such a discretion. Consequently, sec. 99A of the Act was applicable.' 78 On appeal, Lockhart and Neaves JJ dismissed the application. Hill J, for reasons which are not presently relevant, would have remitted the matter to the Tribunal and set aside its determination. However, what is instructive for present purposes is what his Honour had to say on the question: Whether there was evidence on which the Tribunal could have concluded that Mrs Sztainbok had the intention that the default clause was a sham? His Honour said (at 4025): 'Mrs Sztainbok was not called to give evidence. Although there seems to have been no evidence to support it, the Tribunal referred to Mrs Sztainbok as the wife of the accountant for the applicant. Her husband also was not called to give evidence. For a transaction to be a sham there must be an intention common to the parties to it that the transaction is a cloak or disguise for some other and real transaction, or sometimes as in Clyne v. F.C. of T.83 ATC 4508 for no transaction at all. It is, as Lockhart J. pointed out in Sharrment Pty. Ltd. v. Official Trustee in Bankruptcy(1988) 18 F.C.R. 449 at p. 454 something which is not genuine or true but false or deceptive. Where it is alleged that the trusts of a settlement or some of them are a sham, of necessity it will need to be proved that it was the intention of the settlor that the settlement itself be a sham, or in a case such as the present that some of the trusts of that settlement are a cloak or disguise for the real trusts intended to bind the trustee. Commr of Stamp Duties (Qld) v. Jolliffe(1920) 28 C.L.R. 178 at p. 181 is clear authority, if authority be needed, for the principle that intention is a necessary ingredient in the establishment of a valid express trust. The Tribunal found, and it was open for it so to find, that the settlement was brought about by Mr Kakridas; that he "caused" it to be made. That fact, coupled with the fact that Mrs Sztainbok was the wife of the tax accountant to Mr Kakridas and could be expected to give effect to her husband's client's wishes, plus the inference which could properly be drawn from their failure to give evidence that the evidence of the accountant and his wife would not assist the taxpayer, was sufficient in my opinion to permit the Tribunal to draw an inference as to the intention of Mrs Sztainbok and thereby justify the conclusion reached by the Tribunal that Mrs Sztainbok, like Mr Kakridas, did not intend that the default distribution provision would be effective.' 79 In the present case, the evidence is quite clear that the Raftland Trust was established by Mr Tobin on the instructions of Mr Brian Heran and that the settlor, Ms Somerville, Mr Tobin's employee, was but a nominal instrumentality through whom he (Mr Tobin) arranged for Mr Brian Heran's instructions to be carried out. It is also clear that Mr Tobin deliberately intended that the trustee of the E & M Unit Trust be a Tertiary Beneficiary for the Raftland Trust to enable it to receive distributions of, or otherwise be entitled in default of such distributions to, income of the Raftland Trust to be absorbed by the losses of the E & M Unit Trust; and that Mr Tobin was alive to the prospect that because the unit holders of the E & M Unit Trust had the right to call up the moneys representing their respective entitlements, steps had to be taken to ensure that, if such moneys were called up, that the call could be met by transferring shares in Navygate to the unit holders. 80 So much is to be discerned from the evidence given by Mr Tobin in the course of his cross-examination (T 103 - 104): 'Now, the Raftland Trust, was that set up by you?---Yes. Ms Somerville who was the settler, did she work in your office?---Yes. And I take itif you determined the terms of the Raftland Trust?---Yes And one of the matters in particular was that the trustee of the E and M Unit Trust was named as the tertiary beneficiary?---Correct. That was what you had intended?---Yes. Perhaps was advised that that was a deliberate step?---Yes. I take it that Mr Brian Heran played no part in the determination of what the terms of the trust should be?---He simply would have been advised by me. That is, he was advised what was necessary?---Yes. And the Heran Developments Trust was settled on the same day?---I think that's right, yes. HER HONOUR: I'm sorry, which trust was that? MR HACK: Heran Developments Trust. The purpose of name E and M Unit - or the trustee of the E and M Unit Trust as a beneficiary of the Raftland Trust was to enable it to receive distributions from the Raftland Trust?---Correct. And in that way use up the losses that it had?---Correct. It was a mechanism for injecting funds from the Heran entities in a tax effective manner?---Yes. I take it that it was - you never intended that - leaving aside the question of the purchase price, that the trustee of the E and M Unit Trust ever benefit from these arrangements?---Well, in fact, the trustee would have benefited from the arrangements. That's how it was set up. In what way?---Well, that's what the document said. Sorry. It may say it but it was never the intention that there be real distributions to it, was there?---We recognized that the unit holders of that trust could call up those funds. And you created a mechanism to prevent that from happening?---Well, we did some things such as we took control of the trustee of the E and M Unit trust, which was Raftland, and we did some other things which involved Navygate, and I suppose those things were done because we had a concern that the unit holders could call up those funds. And you wanted to ensure that they were not in a position to do so?---Well, there was a commercial risk that they could have. Well, by naming it as a beneficiary, it was not then in contemplation that anything other than a purchase price would have been paid to he trustee of the E and M Unit Trust?---Sorry, can you just repeat that? The trustee of the E and M Unit Trust was named as the tertiary beneficiary of the Raftland Trust?---Yes. At that time it was never in contemplation, leaving aside the question of $250,000,, that any amount would be paid to the trustee of the E and M Unit Trust?---Do you mean physically paid? Well, let's start with physically paid?---Well, that's probably right, yes. And what was in contemplation at best was a distribution on paper only?---I think that sells it a bit too short because we recognized that there was a real risk that the unit holders could call up those funds.' 81 Those who advised Mr Brian Heran, notably Mr Tobin, but there were others such as senior counsel retained by Mr Tobin, were well aware that, only to the extent that the trustee of the E & M Unit Trust was presently entitled to the income of the Raftland Trust, would that income be sheltered by the losses in the E & M Unit Trust. The attainment of that fiscal objective drove the transaction from the point of view of its participants. Hence, if it was not achieved by a determination to pay to or apply or set aside the income of the Raftland Trust to the trustee of the E & M Unit Trust pursuant to cl 3(b)(i) of the Raftland Trust deed, it was to be achieved by the default provisions of the proviso to cl 3(b), reinforced by the provisions of cl 3(f), (see [10] supra). One is reminded in this context of what was said by Lehane J in Richard Walter at 267 - 268: '… it must be borne in mind that it is of the essence of a structure intended to be effective to minimise tax that it be created by means of real transactions, giving rise to real rights and obligations, however "artificial" they may be, in the sense of being incapable of rational explanation except on the basis of their tax consequences. It cannot be said, I think, that there is anything more artificial in the transactions with which we are concerned than there was in those which, in a somewhat different context, confronted the Court in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449. One expects, in a case such as this, that transactions are intended to have their apparent legal effect because it is only if they do that they are efficacious to achieve the desired consequences. In this particular case, it is no longer suggested that any of the transactions involved in the 1981 "re-structure" had any legal effect other than their apparent effect; it is suggested only that the "loans" to the taxpayer were not really loans at all but payments which were gratuitous and which were not intended to be recoverable. That, for reasons which I have given, seems to me a conclusion so surprising that one would be reluctant to accept it in the absence of cogent evidence. However, there is nothing in the documentary evidence which supports that conclusion: indeed, the documentary evidence is to the contrary effect. Nor, of course, is there anything in the affidavit or oral evidence of Mr Holden that does so.' 82 While Lehane J dissented in Richard Walter, he was the only member of the Court who directly addressed the primary judge's finding below that loans deemed to have been made to the taxpayer by Morlea were shams in the sense that it was never intended by the taxpayer and Morlea that the taxpayer would repay the moneys which it received from Morlea. Lockhart and Hill JJ dismissed the taxpayer's appeal on the basis that 'Richard Walter failed to show, on the balance of probabilities, that the payments to it by Morlea were not assessable income, with the result that it failed to show that the Commissioner's assessment was excessive': At 261 per Hill J; see too at 247 per Lockhart J. 83 With respect to the conclusion of the primary judge on this issue, I am of the view that the nomination of the trustee of the E & M Unit Trust as a Tertiary Beneficiary of the Raftland Trust is not a sham, but rather was at the forefront of the intentions of those charged with responsibility for establishing the Raftland Trust. In other words, to establish it in such a way that the income of the Raftland Trust passed to the trustee of the E & M Unit Trust, to be sheltered by the losses of that trust, if not by distribution - in the sense of payment to, application or setting aside of such income for the E & M Unit Trust - then by the default provisions of the proviso to cl 3(b), reinforced by the provisions of cl 3(f). 84 It follows, in my view, that in each of the years ended 30 June 1995, 1996 and 1997 the trustee of the E & M Unit Trust was presently entitled to the whole of the income of the Raftland Trust of those years, if not by force of resolutions to distribute such income passed by the trustee of the Raftland Trust on 30 June 1995 in the case of the 1995 year of income and by force of written determinations signed by Mr Brian Heran as a director of the trustee on 30 June 1996 and 30 June 1997 in the case of the 1996 and 1997 year of income, then by force of the default provisions of the proviso to cl 3(b), and the provisions of cl 3(f), of the Raftland Trust deed.

Section 100A 85 It then becomes necessary to consider the application (if any) of s 100A of the 1936 Act and, if it does apply, the consequences of its application. At [40] - [42] supra I observed that the primary judge had concluded that subs 100A(1) applied to deem the Primary Beneficiaries of the Raftland Trust - the three Heran brothers - not to be presently entitled to the income of that trust for any of the relevant years of income. On that hypothesis, that, subs 100A(1) aside, the Primary Beneficiaries were presently entitled to the income of the Raftland Trust for each of the relevant years of income, her Honour concluded, correctly in my view, that the provisions of subs 100A(3A) did not apply to deny the application of subs 100A(1) because the Primary Beneficiaries were not beneficiaries in the capacity of trustees of other trust estates. In passing however, her Honour observed that subs 100A(3A) would have applied to deny the application of subs 100A(1) if the trustee of the E & M Unit Trust, rather than the Primary Beneficiaries, was, subs 100A(1) aside, presently entitled to the income of the Raftland Trust for each of the relevant years of income. On the view I take, that it is the trustee of the E & M Unit Trust which is presently entitled to the income of the Raftland Trust for each of the relevant years of income, the correctness of her Honour's passing remark that, in those circumstances, subs 100A(3A) would deny the application of subs 100A(1), looms as an important issue. 86 Subsection 100A(1) provides: '(1) Where: (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement; the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.' 87 If subs 100A(1) applies to a beneficiary, the effect is that the beneficiary is deemed not to be, and never to have been, previously entitled to income, thereby rendering the trustee assessable at the special rate determined pursuant to s 99A of the 1936 Act. 88 Subsection 100A(3A) provides: '(3A) Where: (a) apart from this section, a beneficiary (in this subsection referred to as the trustee beneficiary) of a trust estate is presently entitled to a share of the income of the trust estate in the capacity of a trustee of another trust estate (in this subsection referred to as the interposed trust estate); (b) apart from this subsection, the trustee beneficiary would, by virtue of subsection (1), be deemed not to be, and never to have been, presently entitled to that share or a part of that share of the income of the first‑mentioned trust estate (which share or part is in this subsection referred to as the relevant trust income); and (c) apart from this section, a beneficiary of the interposed trust estate is or was, or beneficiaries of the interposed trust estate are or were, presently entitled, or deemed to be presently entitled, to any income of the interposed trust estate (in this subsection referred to as the distributable trust income) that is attributable to the relevant trust income; subsection (1) does not apply, and shall be deemed never to have applied, in relation to the trustee beneficiary, in relation to any part of the relevant trust income to which the distributable trust income is attributable.' 89 By way of a definitional context, subss 100A(7), (8), (9) and (13) provide: '(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons. (8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. (9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be. … (13) In this section: "agreement" means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing. "property" includes a chose in action and also includes an estate, interest, right or power, whether at law or in equity, in or over property. 90 As the primary judge observed (at [54]), the background to the introduction of s 100A into the 1936 Act in 1979 is set out in the Treasurer's statement of 11 June 1978 and in the Explanatory Memorandum accompanying the Bill. Extracts of these are recited, at length, in the joint judgment of Hill and Sackville JJ in Prestige Motors at 198 - 201 and, that recitation is summarised by her Honour below at [55] - [57]. There is no utility in repeating what is said at either place; they speak for themselves. But there is utility in distilling some relevant principles which fall from the joint judgment of their Honours in Prestige Motors: (1) While the extraneous materials to which reference was made are available as an aid to interpretation, they are not determinative (at 215). (2) This is not to say that the legislative text is to be considered in isolation. The words are to be understood in context of the enactment as a whole, the legislative history of the provision in question including the mischief to be remedied and, in appropriate cases, having regard to the consequences that would flow if one interpretation were preferred over another (at 215). (3) The statutory concept of a 'reimbursement agreement' is not to be confined to one entered into in relation to an existing trust. In other words, there is no reason why the present entitlement of a beneficiary to trust income cannot be said to arise out of an act or transaction that occurred as a result of a reimbursement agreement, merely because the agreement predated the creation of the trust. For example, in the present case, because the agreement predated the creation of the Raftland Trust (at 218). (4) The definition of 'reimbursement agreement' in subs 100A(7) cannot be controlled by the word 'reimbursement' (at 220). 91 Having regard to the definition of 'reimbursement agreement' in subs 100A(7) - it is not necessary to rely on the expansions provided by subss 100A(9) and 100A(13) (definition of 'agreement') - I am of the view that the agreement of 22 June 1995 between Heran Projects and Maggside, as trustee of the Brian Heran Discretionary Trust, is a 'reimbursement agreement' in relation to a beneficiary of the Raftland Trust namely, the trustee of the E & M Unit Trust - it provides for the payment of money to a person other than the beneficiary (the trustee of the E & M Unit Trust) namely, Maggside. It is not, despite Mr Tobin's suggestion that the sale of Maggside's rights might have some business purpose, an agreement entered into in the course of ordinary family or commercial dealing so as to be excluded under the exclusionary provisions of the definition of 'agreement' in subs 100A(13) and there can be no doubt that at least one of the parties, if not more, which entered into the agreement did so for a relevant tax avoidance purpose so as not to attract the exclusion in subs 100A(8). 92 I am also of the view that the present entitlement of the trustee of the E & M Unit Trust to the income of the Raftland Trust for the year of income ended 30 June 1995 'arose out of' that reimbursement agreement as identified, in the sense that 'but for' that reimbursement agreement there would have been no income of the Raftland Trust to which the trustee of the E & M Unit Trust would have been presently entitled: Mr Brian Heran conceded as much in his evidence in chief ([14] and [15] of his affidavit sworn 13 October 2005) and see Idlecroft at [44]. For these reasons, leaving to one side for the moment the operation of subs 100A(3A), the provisions of subs 100A(1) apply to the whole of the income of the Raftland Trust for the year ended 30 June 1995. 93 The position in relation to the years ended 30 June 1996 and 1997 is not as clear because neither the primary judge in her reasons, nor the Commissioner in his oral argument on appeal, identified a 'reimbursement agreement' in respect of either year. Nevertheless, the appellant would have been aware, from the Commissioner's addendum to outline of submissions - at [31] thereof - dealing with the application of s 100A in the 1996 and 1997 years of income, that the Commissioner had cast his net widely to encompass the '1996 transactions', and these surely included the July 1995 agreement, recorded in writing on 27 June 1996, the subject of a finding by her Honour referred to in [96] below - see [72] of the Commissioner's addendum to outline. 94 The income which came into the Raftland Trust for the year ended 30 June 1996 came from three sources: 1. The Brian Heran Discretionary Trust $57,973 2. The Northbank Trust $148,144 3. The Heran Developments Trust $573,588 The income which came into the Raftland Trust for the year ended 30 June 1997 ($386,035) came from the Northbank Trust - the first $386,035 of the income of the Northbank Trust of that year. 95 The $57,973 which came into the Raftland Trust from the Brian Heran Discretionary Trust for the year ended 30 June 1996 appears to be sourced in rental and interest income. In other words, it is not sourced in the 'reimbursement agreement' between Heran Projects and Maggside, as trustee of the Brian Heran Discretionary Trust, identified in respect of the year ended 30 June 1995 or in the arrangements among Heran Projects, Heran Developments as trustee of the Heran Developments Trust and Northbank Homes as trustee of the Northbank Trust, described and characterised below. For this reason, I do not think it attracts the operation of subs 100A(1). The position with respect to the $148,144 and the $573,588 which came into the Raftland Trust from the Northbank Trust and the Heran Developments Trust respectively for the year ended 30 June 1996 and the $386,033 which came into the Raftland Trust from the Northbank Trust for the year ended 30 June 1997 is different. Again, none of those streams of income is sourced in the 'reimbursement agreement' between Heran Projects and Maggside, as trustee of the Brian Heran Discretionary Trust, identified in respect of the year ended 30 June 1995. In other words, if the trustee of the E & M Unit Trust in relation to the Raftland Trust was presently entitled to income of the Raftland Trust in the years of income ended 30 June 1996 (apart from $57,973) and 1997 in circumstances such as to attract subs 100A(1), it was not because of a 'reimbursement agreement' of the type referred to in [92] supra, but because of a different 'reimbursement agreement' or different 'reimbursement agreements'. As I have indicated, her Honour the primary judge did not deal with this issue. Her Honour said (at [104]): 'The same conclusions apply to the assessable income of the Raftland Trust Estate in each of these years. The further purported distributions from Raftland, albeit as a conduit of other entities, are characterised by the initial transaction. There were not in reality further distributions and the parties did not intend them to take effect as such. The Primary Beneficiaries are deemed not to be presently entitled to the income and Raftland's income is to be assessed under s 99A.' 96 Her Honour did find that in July 1995 an agreement was entered into by which Heran Developments, as trustee of the Heran Developments Trust, took over the assets and liabilities of Heran Projects (at [41]). This agreement was recorded in writing on 27 June 1996. It recited: 'The parties wish to record in writing the agreement they made in July 1995 for Heran Developments to take over the benefits and obligations of Heran Projects in and to a number of contract and "spec" house projects in Brisbane.' 97 It operatively provided: 'Effective from the 1st of July, 1995 Heran Developments shall be entitled to the proceeds of sale from and all other income of the said projects to be held by Heran Developments absolutely and Heran Developments agrees to pay to Heran Projects and to indemnify and keep indemnified Heran Projects from all costs and expenses of whatsoever nature in respect of carrying out and completion of the projects and the performance of any building contracts thereunder both before and after the 1st of July, 1995 except to the extent that such costs and expenses have been or are allowed as deductions (whether as direct outgoings, or as part of the value of trading stock, or otherwise) for the year ended 30th of June, 1995 or previous years of income.' 98 Mr Brian Heran described these arrangements between Heran Projects and Heran Developments, as trustee of the Heran Developments Trust, and related arrangements between Heran Developments, as trustee of the Heran Developments Trust, and Southbank Homes, as trustee of the Southbank Trust and Northbank Homes, as trustee of the Northbank Trust, in his evidence in chief (taken from his affidavit sworn 13 October 2005): '57. Heran Developments Pty Ltd acting in its capacity as trustee of the Heran Developments Trust (the trustee and trust being referred to as "Heran Developments") was registered as a builder in July 1995 and began carrying on business as a building contractor and building "spec" houses. 58. No new jobs were started for Heran Projects Pty Ltd after July 1995. … 59. As a matter of administrative and accounting convenience existing construction jobs that had been started by Heran Projects Pty Ltd before 1 July 1995 were left in the name of Heran Projects Pty Ltd, but were completed by Heran Developments in accordance with terms later recorded in a memorandum dated 27 June 1996 between Heran Projects Pty Ltd and Heran Developments. 60. Exhibited hereto marked "BJH 46" [L 75] is a true copy of a memorandum dated 27 June 1996 of an agreement made between Heran Projects Pty Ltd and Heran Developments, which was signed by me on or about 28 June 1996 for each entity pursuant to resolutions as sole director of those entities. 61. … 62.. … 63. … 64. … 65. At all material times, Heran Developments had subcontracting arrangements with the Southbank Trust and the Northbank Trust, under which each of those trusts separately carried out the building work required under particular building contracts and after completion the profit on the job was split, with 35% of the profit being shared by Heran Developments and 65% of the profit by the particular trust that had done the building work. In a few cases where both subcontractors worked on the same job the profit was split into thirds. 66. The Heran Building Group Pty Ltd provided office and administrative services and prepared applications and plans for lodgement with Councils. Heran Building Group Pty Ltd was paid about 4% of the contract price as an administration fee and ran about break even on each job. 67. Progress payments were made by clients under the building contracts to Heran Developments. 68. The Southbank Trust and the Northbank Trust incurred and paid all the costs of labour and materials and other costs involved in building the houses or other building work. Invoices were sent to our offices at Springwood and paid by them at the end of the month or weekly whenever the account was due. 69. Payments were made by Heran Developments to Northbank Pty Ltd for the Northbank Trust and Southbank Pty Ltd for the Southbank Trust when the funds were required which was generally fortnightly. The determining factor was the number of jobs current and our expenditure. However, within 60 days of completion of the house or building work after all the actual costs had been recorded the actual profit was worked out and payment was made of the outstanding balance for the job and the profits shares. 70. … 71. … 72. …the sharing of profits as well as the losses on each job was not a usual contractor/sub-contractor agreement. …' 99 It may be inferred from Mr Brian Heran's evidence in chief, in the absence of any contrary evidence or contention to the contrary, that the whole of the income which came into the Raftland Trust from the Northbank Trust in both the 1996 and 1997 years of income and from the Heran Developments Trust in the 1996 year of income was sourced in the foregoing arrangements among Heran Projects, Heran Developments as trustee of the Heran Developments Trust and Northbank Homes as trustee of the Northbank Trust. Moreover, having regard to the definition of 'reimbursement agreement' in subs 100A(7), as expanded by subss 100A(9) and 100A(13) (definition of 'agreement'), I am of the view that these arrangements among Heran Projects, Heran Developments as trustee of the Heran Developments Trust and Northbank Homes, as trustee of the Northbank Trust, are a 'reimbursement agreement' in relation to a beneficiary of the Raftland Trust namely, the trustee of the E & M Unit Trust - they provide for the payment of money to a person other than the beneficiary (the trustee of the E & M Unit Trust) namely Heran Developments and Northbank Homes. There was no evidence to suggest that the arrangements were entered into in the course of ordinary family or commercial dealing - Mr Brian Heran conceded as much, at least as to part - so as to be excluded under the exclusionary provisions of the definition of 'agreement' in subs 100A(13) and there can be no doubt that at least one of the parties, if not more, which entered into the arrangements did so for a relevant tax avoidance purpose so as not to attract the exclusion in subs 100A(8). 100 I am also of the view that the present entitlement of the trustee of the E & M Unit Trust to the income of the Raftland Trust for the years of income ended 30 June 1996 and 1997 'arose out of' that reimbursement agreement as identified in the sense that 'but for' that reimbursement agreement there would have been no income of the Raftland Trust to which the trustee of the E & M Unit Trust would have been presently entitled: See Idlecroft at [44]. For these reasons, leaving to one side for the moment the operation of subs 100A(3A), the provisions of subs 100A(1) apply to the whole of the income of the Raftland Trust for the year ended 30 June 1997, as well as for the year ended 30 June 1995, and to all but $57,973 of the income of the Raftland Trust for the year ended 30 June 1996. 101 This brings me to the important issue of whether the provisions of subs 100A(3A) deny the application of subs 100A(1) in relation to each of the years of income ended 30 June 1995, 1996 and 1997. For subs 100A(3A) to apply to deny the application of subs 100A(1), three conditions must be satisfied: (1) Apart from s 100A, a beneficiary of a trust estate (the trustee beneficiary) is presently entitled to a share of income of the trust estate in the capacity of trustee of another trust estate (the interposed trust estate) - this condition is satisfied: Mr Carey in the 1995 year and Raftland in the 1996 and 1997 years, in the capacity as trustee of the E & M Unit Trust (the interposed trust) is, apart from s 100A, presently entitled to the whole of the income of the Raftland Trust. (2) Apart from subs 100A(3A), the trustee beneficiary would, by virtue of subs 100A(1), be deemed not to be, and never to have been, presently entitled to that share or a part of that share of the income of the first-mentioned trust estate (the relevant trust income) - this condition is satisfied: Mr Carey in the 1995 year and Raftland in the 1996 and 1997 years, in the capacity as trustee of the E & M Unit Trust would, apart from subs 100A(3A) and, by virtue of subs 100A(1), be deemed not to be, and never to have been, presently entitled to the relevant trust income. (3) Apart from subs 100A(3A), a beneficiary of the interposed trust estate is or was, or beneficiaries of the interposed trust estate are or were, presently entitled, or deemed to be presently entitled, to any income of the interposed trust estate (the distributable trust income) that is attributable to the relevant trust income. 102 This last condition requires one to determine whether, and if so, the extent to which, the beneficiaries of the E & M Unit Trust namely, Mr Carey in his capacity as trustee of the Thomasz Family Trust and Mr Carey in his capacity as trustee of the ECK Family Trust, were presently entitled to the whole of the income of the E & M Unit Trust in each of the relevant years of income, the whole of such income in each of those years being wholly attributable to the relevant trust income. The starting point for this determination is the relevant provisions of the E & M Unit Trust deed. 103 Clauses 21 and 22 of the E & M Unit Trust deed relevantly provide: '21. (a) The Trustee shall collect receive and get in all dividends interest rents and other income from the investment of Trust Fund. (b) The Trustee shall pay out of the gross income of the Trust Fund all costs and disbursements commissions fees taxes (including land tax and income tax) management charges and other proper outgoings in respect of the investments and administration of the Trust Fund. 22. (a) The Trustee shall in each Accounting Period until the vesting day pay apply or set aside the whole of the net income of the Trust Fund of that Accounting Period (or the balance thereof after any accumulation or interim distribution made pursuant to subsequent paragraphs of this Clause) for the benefit of the Unit Holders in proportion to the number of units which they are respectively registered as at the end of the said Accounting Period. (b) Notwithstanding anything contained in paragraph (a) of this Clause the Trustee shall if so directed by a unanimous resolution of the Unit Holders before the expiration of any Accounting Period accumulate all or any part of the income arisen or arising during such period and such accumulation shall be dealt with as an accretion to the Trust Fund. (c) Notwithstanding the foregoing the Trustee shall be entitled to make an interim distribution of income at such time or times as the Trustee determines during any Accounting Period such interim distributions to be made among the Unit Holders in proportion to the number of units of which they are respectively registered at the time. (4) Any amounts set aside for any Unit Holders pursuant to Paragraphs (a) and/or (c) of this Clause shall not form part of the Trust Fund as defined in Clause 1 (3) hereof but shall upon such setting aside be thenceforth held by the Trustee as a separate Trust Fund on trust for such Unit Holder absolutely and immediately upon ascertainment of the precise amount thereof shall be paid to such Unit Holder or where the Unit Holder is an infant to a parent or guardian of such infant and the Trustee shall not be bound to see to the application thereof by such parent or guardian. …' 104 The term 'set aside' in relation to a Unit Holder is defined in cl 1(14) of the E & M Unit Trust deed to include 'placing sums to the credit of such Unit Holder in the books of the Trust Fund' and 'pay' includes 'transfer assign and convey'. 105 Clause 8 of the E & M Unit Trust deed relevantly provides: '8. (a) The beneficial interest in the Trust Fund as originally constituted and as existing from time to time shall be held by the Unit Holders for the time being in proportion to the units registered in their respective names. All units shall at any given time be of equal value. The initial value of units shall be ONE DOLLAR ($1.00). (b) Each unit shall entitle the registered holder hereof [sic] equally with the registered holders of all other units to the beneficial interest in the Trust fund as an entirety but subject thereof shall not entitle the Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and save as herein expressly provided no Unit Holder shall be entitled to the transfer to him of any property comprised in the Trust fund. (c) … (d) … (e) The Trustee shall in such manner and upon such terms and conditions as the Trustee thinks fit have power to issue additional units from time to time at such value as it thinks fit with power to classify or designate the same or to re-classify units already issued. (f) … (g) … (h) The Trustee may at any time in its absolute discretion redeem and cancel all or any units held by any particular Unit Holder on such terms and conditions and in consideration for such payment or transfer of property as the Trustee shall determine.' 106 I have come to the conclusion that neither Mr Carey, in his capacity as trustee of the Thomasz Family Trust, nor Mr Carey, in his capacity as trustee of the ECK Family Trust, was presently entitled to any of the income of the E & M Unit Trust for the years ended 30 June 1995, 1996 and 1997. In relation to the year ended 30 June 1995 this applies as much to the $250,000 distributed by the trustee of the Raftland Trust to the trustee of the E & M Unit Trust (net $220,000) and onward, after the end of that year of income, to the Thomasz Family Trust as it does to the balance of the income of the Raftland Trust for that year to which I have found, as I did for the whole of the income of the Raftland Trust for the 1996 and 1997 years, the trustee of the E & M Unit Trust was presently entitled. There are a number of reasons for my conclusion in this regard. 107 First and foremost, for the years ended 30 June 1995, 1996 and 1997 the E & M Unit Trust had no net income which it could distribute to unit holders - by way of payment, application or setting aside - pursuant to cl 22(a) of the E & M Unit Trust deed. I am not referring here to the s 95 net income, but to the net income for trust law purposes. Clearly, there was no s 95 net income because of the carry forward tax losses, but equally there was no net income for trust law purposes because of the losses of previous years. The losses of previous years had been incurred by the trustee at the time in carrying on a business of buying and selling real property. The general rule is that such losses in one year must, in the absence of any contrary direction in the trusts instrument, be made up out of profits of subsequent years and not out of capital: Upton v Brown (1884) 26 Ch D 588; Re Reynolds [1942] VLR 158. There can be no profits properly distributable in cash until all past losses are paid: See Jacobs' Law of Trusts in Australia, Seventh Edition, at [1945]. 108 The appellant submitted that the E & M Unit Trust deed contained a contrary direction that this general rule was not to apply. It points to the obligation (cl 22(a)) to distribute 'the whole of the net income of the Trust Fund of that Accounting Period'. But this really begs the question if, because of the previous years' losses, there is no net income. The contrary direction would, at the very least in my view, have to mandate the calculation of the net income of an accounting period without regard to prior year losses. 109 The appellant further submitted that the general rule only has application where the class of income beneficiaries and capital beneficiaries are different and here the unitholders in the E & M Unit Trust have coterminous interests in both income and capital of the trust fund. The origin of the rule may well have been conditioned by situations involving beneficiaries having interest in income but not in capital and vice versa, but the rule itself is not so qualified. 110 In any event, the financial accounts of the E & M Unit Trust were prepared on the basis that the general rule applied, that is, that the prior year losses had to be made good before there was a net income available for distribution. Hence the balance sheets of the E & M Unit Trust for the year ended 30 June 1995 shows the income from the Raftland Trust augmenting the fund by $2,892,762 and a corresponding current asset in the same amount. There were no liabilities nor any record of claims of unitholders upon such assets because the net assets of the fund were shown as $2,892,762. 111 The same treatment is to be discerned in the balance sheets of the E & M Unit Trust for the years ended 30 June 1996 and 1997, with the augmentation of the fund from the previous year in each such case being shown as 'unappropriated profits'. Interestingly, the $250,000 paid to the trustee of the E & M Unit Trust (net $220,000) and onward, after the end of the year of income ended 30 June 1995, to the Thomasz Family Trust, is shown as an asset of the E & M Unit Trust in its balance sheets for each of the relevant years of income, described as 'Loan other entities'. 112 The second reason why I have concluded that the unitholders of the E & M Unit Trust were not presently entitled to the income of that trust for the years ended 30 June 1995, 1996 and 1997 is because even if the E & M Unit Trust, contrary to the position described in [107] - [111] supra, had a distributable net income in each of those years, there is no evidence that the trustee paid, applied or set aside such income for the benefit of unitholders in accordance with cl 22(a) of the E & M Unit Trust deed. Indeed, such evidence as there is, the financial accounts for each of the relevant years of income, points the other way. It is common ground that there was no payment or application of such income to the unitholders and there was no 'setting aside' in the sense of crediting the unitholders in the books of the trust fund - see the definition of 'set aside' in relation to a unitholder in cl 1(14) of the E & M Unit Trust deed. And in the absence of any 'setting aside', the provisions of cl 22(d) have no operation. 113 The appellant submitted that because cl 22(a) of the E & M Unit Trust deed is expressed in mandatory terms, the unitholders could compel the trustee to pay, apply or set aside the whole of the net income of the accounting periods corresponding to the relevant years of income. In this sense, it was submitted that the unitholders had a vested and indefeasible interest in such income such as to deem them to be presently entitled pursuant to the provisions of subs 95A(2) of the 1936 Act. There are a number of answers to this. First, as already indicated, there was no distributable net income for the accounting period corresponding to the relevant years of income. Second, until there was a payment, application or setting aside of such income, the provisions of cl 22(d) of the E & M Unit Trust deed did not operate to give the unitholders a vested and indefeasible interest in such income. Third, until that occurred, the interest of the unitholders in both the income and capital of the trust fund was defeasible at the absolute discretion of the trustee by redemption and cancellation of the unitholder's units pursuant to cl 8(h) of the E & M Unit Trust deed; see too the provisions of cl 8(e). 114 It follows, in my view, that because condition (c) for the application of subs 100A(3A) was not satisfied, subs 100A(3A) does not apply to deny the application of subs 100A(1) to the income of the Raftland Trust to which the trustee of the E & M Unit Trust was otherwise presently entitled for each of the relevant years of income. For the year ended 30 June 1995 this applies as much to the $250,000 actually distributed by the trustee of the Raftland Trust to the trustee of the E & M Unit Trust. Accepting that the trustee of the E & M Unit Trust was presently entitled to that amount by virtue of the default provisions in the proviso to cl 3(b) of the Raftland Trust deed, if not by the resolution of the board of Raftland passed on 30 June 1995 and the subsequent payment to Mr Carey as trustee of the E & M Unit Trust after the end of that year of income, the unitholders in the E & M Unit Trust were not presently entitled to that amount (or, for that matter, the net amount after, deduction of Harts Accountants' commission) as at 30 June 1995. There had been no payment or application of that amount to them as at that date and no such amount had been 'set aside' as at that date by a crediting in the books of the trust fund. The subsequent payment by cheque of an amount of $220,000 by Mr Carey, as trustee of the E & M Unit Trust, to Mr Thomasz and his unilateral decision to include that amount as income of the Thomasz Family Trust for the year ended 30 June 1996 (not 30 June 1995) does nothing to make the unitholders presently entitled to that income as at 30 June 1995. Indeed, it suggests the contrary. 115 With the leave of the Court, the respondent filed a notice of contention that the judgment below should be affirmed for the foregoing reasons. In the result, save for the $57,953 in respect of the year of income ended 30 June 1996, the respondent's objection decisions in respect of each of the relevant years of income are upheld and the appellant's appeal fails.

Additional Tax 116 Having regard to these reasons, the additional tax imposed by way of penalty should only be disturbed to give effect to the saving in respect of the year of income ended 30 June 1996.

Costs 117 I do not think her Honour's order as to costs below should be disturbed.

Conclusion 118 Subject to the saving in respect of the year of income ended 30 June 1996, the appeal must be dismissed. Notwithstanding this saving, as it represents less than 1.5% of the income assessed over all the relevant years of income, the appellant must pay the respondent's costs of the appeal. I certify that the preceding one hundred and nine (109) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Counsel for the Appellants Mr D Russell QC with Mr H Alexander

Counsel for the Respondents Mr J A Logan SC with Mr P A Looney

Solicitor for the Respondents Australian Government Solicitor

(Taxation Administration Act 1953(Cth)

Income Tax Assessment Act 1936(Cth)ss 95, 95A, 99A, 100A

At a glance

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Judgment (28 paragraphs)

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