Thomas v Commissioner of Taxation

Background matters 9 The applicants in the various proceedings are Thomas Nominees Pty Ltd ("Thomas Nominees"), Martin Andrew Thomas ("Martin Thomas") and Martin Andrew Pty Ltd ("MAPL"). Thomas Nominees, in the relevant tax years, was the trustee of the Thomas Investment Trust (the "trust") established by a trust deed dated 1 February 1979. The trust deed was amended by Deed Poll on 19 September 1986 and on 25 October 1991. A further amendment, of some importance, was made by Deed Poll on 1 October 1992. 10 Martin Thomas and MAPL were, in the relevant tax years, beneficiaries of the trust. References to the relevant tax years are references to, in the case of Martin Thomas, the tax years ending 30 June 2006, 2007, 2008 and 2009; in the case of MAPL, the tax year ended 30 June 2008; and in the case of Thomas Nominees, the tax years ending 30 June 2006, 2007, 2008 and 2009. 11 Martin Thomas and Carmel Thomas (his mother) were the directors and equal shareholders of Thomas Nominees. 12 Martin Thomas was the sole director and shareholder of MAPL. 13 Martin Thomas was a skilled and experienced business person and he utilised the professional services of a qualified accountant and tax agent, Ms Beth Abbott, a Certified Practising Accountant ("CPA") of Drake and Associates to lodge income tax returns for each of the relevant tax years. Ms Abbott was retained by Martin Thomas, the trustee, and MAPL from 1998 as their accountant and tax agent. 14 On a monthly basis, Ms Abbott prepared the financial accounts for the trust based on instructions received from Martin Thomas. Neither Martin Thomas nor Ms Abbott asked either the Commissioner or the Australian Taxation Office ("ATO") for an opinion on any of the relevant issues prior to lodgement of each applicant's tax return. 15 As mentioned, the trust was established on 1 February 1979 by the trust deed. The trust deed was amended on 1 October 1992 so as to amend cl 4 of the trust deed. By the amendment, the former cl 4 became cl 4(1) and cl 4(2) to cl 4(8) were introduced into cl 4. Other than renumbering the earlier cl 4 to cl 4(1), the earlier cl 4 was retained in the amended deed in its entirety. 16 Clause 4(1) of the amended deed is, relevantly, in these terms: During the continuation of the Trust hereby created the Trustee shall apply the income of the Trust Property in such manner as it[,] subject only to the provisions herein contained[,] in its absolute and uncontrolled discretion shall think fit for the benefit maintenance education advancement in life and general well being and comfort of the Nominated Beneficiaries [and five other identified categories of beneficiaries] equally or unequally and to the exclusion of any one or more of such beneficiaries as it shall see fit. … [emphasis added] 17 Clause 4(1) of the amended deed further provides: … If during any year the Trustee has not as aforesaid paid or applied the whole of the net income of the Trust Property by the exercise of its discretion such remaining net income for that year that has not been so paid or applied shall be held by the Trustee upon trust to pay or apply the same to or for the benefit maintenance education advancement in life and general well being and comfort [of the nominated beneficiaries in the manner described]. [emphasis added] 18 The new cl 4(2) is in these terms: The Trustee may in the books of account and records of the Trust separately record each of the following categories of income received into the Trust property: (a) dividends which under The Income Tax Assessment Act 1936 - as amended hereinafter referred to as "the Act": (i) are fully franked; (ii) are unfranked; (iii) to which a foreign tax credit attaches; or (iv) any other separately identifiable taxation consequence or benefit is attached or arises. (b) income, including capital gains, which under the Act: (i) has an Australian source; (ii) has an ex-Australian source; (iii) has a foreign tax or other credit attached; or (iv) is exempt or otherwise liable not to be taxed; (v) has or gives rise to any other separately identifiable taxation consequence or benefit. [emphasis added] 19 Clause 4(2) is, however, not exhaustive as cl 4(3) provides that the trustee may identify and separately record and maintain in the books of account and records of the trust, income or capital "having, or in respect of which there is attached, individual or unique characteristics" other than as described in cl 4(2) as the trustee by resolution determines. 20 Clause 4(4), relevantly, is in these terms: (a) A resolution or determination of the Trustee by which income of the Trust property is distributed or accumulated may separately deal with the whole or part of the income of a category so that the same or any part thereof may be specifically paid, applied or set aside for the benefit of any one or more of the beneficiaries exclusive of the other or others or accumulated, to the extent to which income of the Trust is permitted to be accumulated by this deed and become part of the capital of the Trust property or be held as part of the Trust property as undistributed Tax exempt income as the Trustee may in its absolute discretion determine; and … [emphasis added] 21 Clauses 4(5), 4(6) and 4(7) are in these terms: 4(5) Expenses and outgoings of the trust fund may at the discretion of the Trustee be allocated against and deducted from income or capital of any one or more categories in such manner as the Trustee may see fit. 4(6) In the event that the Trustee shall not exercise its discretion as provided in the preceding sub-clause in respect of a financial year, outgoings and expenses of the Trust property for that year shall be allocated firstly against and deducted from income which is not income of a category and to the extent to which the same is not sufficient to absorb all such expenses and outgoings, then the part thereof which is not so absorbed shall be allocated in such manner as the Trustee may decide against income of a category or categories to which a tax credit or rebate does not attach, and thereafter against the remaining income of the Trust property. 4(7) Income or capital of the Trust property to which a default beneficiary becomes entitled and which can be identified from the books and records of the Trust as being of a category, shall retain its separate identity when the same passes to or is received by the default beneficiary or when the default beneficiary otherwise becomes entitled thereto. [emphasis added] 22 Finally, cl 4(8) is in these terms: Notwithstanding anything hereinbefore in this clause contained or implied the Trustee shall have the right to accumulate as an accretion to the Trust Property all or any part or parts of such income of the Trust Property upon which no further tax of any kind or nature is payable by the Trustee or any beneficiary hereunder and subject always to the Trustee having the power to determine at any time or times that all or any part of such accumulated tax free income shall be distributed to such beneficiary or beneficiaries and in such manner equally or unequally as the Trustee in its absolute discretion shall think fit. [emphasis added] 23 In 1992, the Commissioner issued draft ruling EDR 89 followed by a public ruling TR 92/13 entitled Income Tax: distribution by trustees of dividend income under the imputation system which was operative in the relevant tax years. 24 In the relevant tax years the trustee carried on an exchange-traded option ("ETO") trading business. The ETO business involved dealing in exchange-traded options in respect of shares. The options were exercisable by one or other of the parties as provided in the option document at a specified date. The ETO business involved writing or granting "put options" and receiving premiums for writing/granting those put options pursuant to which the trustee became obliged to buy shares at a future date at an agreed "strike" price. If the market value of the shares was less than the nominated strike price at that future date, the trustee would be required to buy those shares for that higher price. 25 Also, the ETO business involved writing or granting "call options" and receiving premiums by which the trustee became obliged to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was higher than the strike price at that future date, the trustee would be required to sell those shares for that lower strike price. The business also involved acquiring "call options" and paying premiums by which the trustee became entitled to buy shares at a future date for an agreed strike price with the result that if the market value of the shares was greater than the strike price at that future date, the trustee would be able to buy those shares for that lower price. 26 Similarly, the business involved acquiring "put options" and paying premiums by which the trustee became entitled to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was lower than the strike price at that future date, the trustee would be able to sell those shares for that higher strike price. The trustee's decisions to grant options or acquire options and so too pay and receive premiums depended upon its view at the time of the best option-trading strategy. 27 There is now no dispute between the parties as to the amount of the net income of the trust estate for the purposes of s 95 of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act") arising out of the trustee's conduct of the ETO business (and otherwise). The agreed net income of the trust for the purposes of s 95 of the 1936 Act in each of the relevant tax years is this: Section 2006 2007 2008 2009 Section 95 net income $798,826 $1,839,635 $142,651 $173,743

28 At all relevant times, Martin Thomas controlled the trustee and MAPL. 29 In each of the relevant tax years, Thomas Nominees received dividend income (dividends) that were franked in accordance with Div 207 of Pt 3-6 of the 1997 Act. 30 Thomas Nominees also derived other income in each relevant tax year and incurred expenses in deriving that income. For each of the relevant tax years, the trustee made formal resolutions in the terms as drafted by Ms Abbott. In each of the relevant tax years, the trustee passed two separate resolutions for each relevant income year. 31 The resolutions are described as the "net income distribution resolutions" and the "franking credit distribution resolutions", respectively. 32 By each of the net income distribution resolutions and the franking credit distribution resolutions, the trustee resolved to apply "the net income of the trust fund" for the relevant tax years to the benefit of the beneficiaries by credit to accounts maintained by the trustee for such beneficiaries as specified in the resolutions. 33 For example, the "net income distribution resolution" for the income year ending 30 June 2006 is in these terms: TRUST INCOME Resolved [by Martin Thomas and Carmel Thomas - Mr Martin Thomas's mother] pursuant to DISTRIBUTION: the powers vested in the trustee under the Deed of Settlement establishing the abovenamed trust fund [Thomas Investment Trust] that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them. BENEFICIARY PROPORTION MARTIN A THOMAS THE FIRST $21,600 [MAPL] THE BALANCE Should the Commissioner of Taxation disallow any amount as a deduction or take any action that would have the effect of creating undistributed net income in the trust as at 30 JUNE 2006 then such net income shall be deemed to be distributed on 30 JUNE 2006 to the abovenamed beneficiaries in proportions as stated above, except where there is a remainder nomination then this amount shall be distributed to that person. [emphasis added] 34 The "franking credit distribution resolution" for the income year ending 30 June 2006 is in these terms: TRUST INCOME Resolved pursuant to the powers vested in the trustee under the Deed DISTRIBUTION: of Settlement establishing the abovenamed trust fund that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them. BENEFICIARY PROPORTION MARTIN A THOMAS FRANKING CREDITS $2,416,217.92 TFN WITHHELD $17,502.00 [MAPL] FRANKING CREDITS $228,900.38 FOREIGN TAX CREDITS $4,267.42 Should the Commissioner of Taxation … [and concluding language in the same terms as that set out at [33] of these reasons] [emphasis added] 35 Apart from the proportions and the reference to the relevant year, each "net income distribution resolution" for the income year ending 30 June 2007, 2008 and 2009 is in the same terms as the resolution for 30 June 2006. Similarly, each "franking credit distribution resolution" for those three income years is in the same terms as the resolution for 30 June 2006 apart from the allotted proportions and the reference to the relevant year. 36 Set out below are the proportions reflected in the trustee's "net income distribution resolutions" for each relevant income year: Beneficiary 2006 2007 2008 2009 Martin Thomas The first $21,600 The first $4,615 The first $50 $16,600 MAPL The balance The balance The balance $157,143

37 Set out below are the proportions reflected in the trustee's "franking credit distribution resolutions" for each relevant income year (rounded to the nearest whole number): Beneficiary 2006 2007 2008 2009 Martin Thomas $2,416,218 $4,765,353 $1,030,839 $1,050,925 Franking credits $17,502 - - - TFN withheld MAPL $228,900 $548,489 $42,780 $46,900 Franking credits $4,267 $1,821 $1,185 - Foreign tax credits

38 In each of the relevant tax years, Martin Thomas lodged his income tax returns which disclosed the amount of franking credits credited to him by the trustee pursuant to the franking credit distribution resolution. The Commissioner paid amounts to him on the basis of the amounts of franking credit distributions stated in those returns. 39 The income tax returns for the trust for each of the relevant years disclosed the following: 2006 2007 2008 2009 Section 95 Net Income $798,826 $1,839,635 $142,651 $173,743 Distributions to Martin Thomas: $21,600 $4,615 $50 $16,600 Share of non PP income $2,416,217 $4,765,353 $1,030,839 $1,050,925 Franking credits $17,502 - - - TFN withheld Distributions to MAPL $763,149 $1,822,307 $138,109 $157,143 Share of non PP income $228,900 $548,488 $42,780 $46,900 Franking credits $125 $0 - - Attributed foreign income $13,952 $12,713 $4,492 - Other foreign income $4,267 $1,821 $1,185 - Foreign tax credits

40 The statistics in the above table are drawn from the Statement of Agreed Material Facts. However, the Commissioner asserts that the following amounts are referrable to the following categories in the above table concerning MAPL: 2006 2007 2008 2009 Attributed foreign income $125 $12,713 - - Other foreign income $13,952 $1,821 $4,492 - Foreign tax credits $4,267 - $1,185 -

41 On 12 May 2009, the Commissioner notified the trustee of his intention to commence an audit for the tax years ended 30 June 2005 to 30 June 2009. The Commissioner subsequently decided that the audit for the year ended 30 June 2005 would not continue. 42 On 3 November 2009, Drake and Associate wrote to the Commissioner on behalf of the trustee explaining that an error had been made in the income tax returns lodged for the relevant tax years. On 16 November 2009, Drake and Associates again wrote to the Commissioner on behalf of the trustee advising that the letter of 3 November 2009 was itself based on a mistake and the ATO ought to treat it as withdrawn. Financial statements and tax reconciliations were provided to the Commissioner as part of the audit. Corrected financial statements for the years ended 30 June 2005 to 30 June 2008 were provided to the Commissioner by Drake and Associates by facsimile on 4 December 2009. That correspondence enclosed financial statements for the year ended 30 June 2009 prepared by the applicants on the same basis as the earlier corrected financial statements. 43 Following completion of the audit in 2011, Notices of Amended Assessment were issued to Martin Thomas for each of the relevant tax years and to MAPL for the year ending 30 June 2008. Notices of Amended Assessment were issued to the trustee for the tax years 2006 to 2008. These amended assessments, issued to the beneficiaries and the trustee, were concerned with the primary tax liabilities of those parties. Notices of Assessment were also issued in 2011 to the applicants in respect of penalty assessments as follows: to Martin Thomas for each of the relevant tax years; to MAPL for the year ended 30 June 2008; and to the trustee for each of the tax years 2006 to 2008. 44 These various assessments are set out in the table below: Tax Years Martin Thomas MAPL The Trustee 2006 Primary tax - amended taxable income $7,104,552 - $7,777,789 Tax payable $995,538 - $1,105,963 Penalty assessed $856,714 - $276,491 2007 Primary tax - amended taxable income $13,851,053 - $15,420,180 Tax payable $1,648,483 - $1,854,720 Penalty assessed $1,604,426 - $463,680 2008 Primary tax - amended taxable income $2,494,654 $1,647,581 $4,074,925 Tax payable $96,775 $451,800 $820,036 Penalty assessed $280,868 $112,950 $205,009 2009 Primary tax - amended taxable income $19,129 - - Tax payable $903 - - Penalty assessed $261,886 - -

45 The applicants lodged taxation objections in respect of each of these assessments in 2011. 46 The Commissioner disallowed each of the relevant objections and gave notice of his objection decisions on 18 April 2012 together with his reasons for his decisions. 47 The applicants challenged the objection decisions of 2012 concerning their primary tax assessments for the tax years 2006, 2007 and 2008 by filing applications in the Federal Court of Australia on 8 June 2012. Those appeals are proceedings QUD 274, 275 and 276 of 2012 by Martin Thomas, Thomas Nominees and MAPL respectively. The applicants also challenged the objection decisions of 2012 concerning their penalty tax assessments for the tax years 2006, 2007 and 2008 by filing appeals in this Court on 15 June 2012. Those appeals are proceedings QUD 283, 284 and 285 of 2012 brought by Thomas Nominees, Martin Thomas and MAPL respectively. The applicants also challenged the decision not to remit the penalties by filing the Applications for Review before the AAT. 48 In mid-2012, however, after the making of the April 2012 objection decisions, the Commissioner issued further Notices of Amended Assessment to the beneficiaries concerning their primary tax liabilities in respect of the relevant tax years. On 2 November 2012, consequent upon a review of the Applicants' Appeal Statement filed on 20 September 2012, the Commissioner advised the applicants that he now accepted one of the grounds relied upon in each of the relevant objections to the effect that all premiums paid by the trustee as part of its ETO options trading business were deductible under s 8-1 of the 1997 Act. 49 This change of position is described as the "options concession". 50 It seems that this concession led to an agreement between the parties that the net income of the trust estate pursuant to s 95 of the 1936 Act in each of the relevant tax years was that set out in the table at [27] of these reasons. 51 Having made the options concession, the Commissioner then contended that the expenses of the trust exceeded its income with the result that it had made a net loss for the 2009 tax year and that no beneficiary was presently entitled to a share of the trust income in that tax year. However, the net income of the trust for the purposes of s 95 of the 1936 Act for the 2009 tax year was $173,743, as agreed. 52 The Commissioner issued the trustee with a Notice of Assessment dated 25 January 2013 for the 2009 tax year imposing upon it liability to tax in respect of the whole of the s 95 net income of the trust estate, in reliance upon s 99A of the 1936 Act. 53 On 28 February 2013, Thomas Nominees lodged a taxation objection in respect of the 2009 assessment to the trustee. The Commissioner disallowed that objection and gave notice of his objection decision on 17 April 2013 together with reasons for his decision. The trustee challenged the objection decision by filing an application in this Court on 17 June 2013. That appeal is QUD 325 of 2013. 54 The Commissioner no longer seeks to rely upon the assessments issued to the trustee in each of the 2006, 2007 and 2008 tax years as alternative assessments and does not now oppose the trustee's appeal against the Commissioner's objection decision in relation to those assessments. That appeal is proceeding QUD 275 of 2012. Moreover, the Commissioner no longer opposes the appeals in relation to the penalty assessments in respect of MAPL or the trustee. Those appeals are proceedings QUD 283 and QUD 285 of 2012 respectively. The Commissioner no longer opposes the related Applications for Review before the AAT. Those matters are the application by the trustee for the 2007 and 2008 tax years (2450/2012) and the application by MAPL for the 2008 year (2453/2012). 55 The amounts of the penalty assessments for Martin Thomas were re-calculated following the Commissioner's options concession, as follows: 2006 2007 2008 2009 Tax payable/ (refundable) on original assessment ($2,431,319) ($4,769,221) ($1,026,699) ($1,046,641) Tax payable/ (refundable) on Martin Thomas' taxable income per Commissioner's current position $995,538 $1,648,483 $96,775 $903 Shortfall amount $3,426,857 $6,417,704 $1,123,474 $1,047,544 Penalty at 25% $856,714 $1,604,426 $280,868 $261,886

The proceedings in the Supreme Court of Queensland 56 On 24 August 2010, the trustee commenced proceedings in the Supreme Court of Queensland. The trustee sought directions under s 96 of the Trusts Act 1973 (Qld) as to the proper construction of the trust deed and the dual resolutions passed in the tax years 2006, 2007 and 2008. The proceedings did not engage any question concerning the 2009 tax year. The beneficiaries, Martin Thomas and MAPL, were the first and second respondents to the trustee's application. Although they were present at the hearing, they played no active part in it: Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417; (2010) 80 ATR 828, Applegarth J at [10]. The trustee put the Commissioner on notice of the application. However, a representative of the ATO advised the trustee's solicitor that it was not appropriate for the Commissioner to be a party to the application: Applegarth J at [11]. The factual contentions put before Applegarth J in the affidavits of Ms Abbott and Martin Thomas were uncontradicted: Applegarth J at [36]. 57 On 11 November 2010, Applegarth J published reasons for judgment in the proceeding and called upon the applicant to make submissions as to the form of orders to be made. 58 On 12 November 2010, Applegarth J made orders in these terms: 1. The court directs the applicant under s 96 of the Trusts Act 1973 (Qld), and declares, that: (a) on the proper construction of the Income Tax Assessment Act 1997 (Cth), franking credits in respect of a franked distribution made to the trustee of a trust confer a financial advantage which falls to be dealt with by the trustee of the trust; and (b) on the proper construction of the trust deed for the Thomas Investment Trust and of the resolutions of the directors of the applicant for the years ended 30 June 2005 to 2008, those resolutions were effective to: (i) allocate to the following beneficiaries in the following amounts the benefits pertaining to the franking credits; and (ii) entitle those beneficiaries to those benefits in the proportions which those amounts bear, each to the other: Date of Resolution Martin A Thomas Martin Andrew Pty Ltd

30 June 2005 $282,631.49 $17,860.51 30 June 2006 $2,416,217.92 $228,900.38 30 June 2007 $4,765,353.11 $548,488.89 30 June 2008 $1,030,838.70 $42,780.30

(iii) confer on each of those beneficiaries respectively a vested and indefeasible interest in possession in a share of the distributable income that is consistent with the above allocation to those beneficiaries of the benefits pertaining to the franking credits; (iv) distribute all the distributable income of the Trust in each year among the above beneficiaries in accordance with those resolutions. 2. The court orders that the application for equitable rectification of those resolutions be dismissed. [emphasis added] 59 The franking credit proportion of the total franking credits for each income year 2005-2008 allocated to Martin Thomas was approximately 94%, 91%, 89% and 96% respectively. 60 It will, of course, be necessary to examine the question of whether the direction and declaration of the Supreme Court is binding upon the Commissioner and correspondingly the extent to which the scope and operation of the trust deed, the resolutions and the relationship between those things and the taxation law of the Commonwealth can properly be put in issue in these proceedings in the determination of the appeals from the objection decisions under the scheme contemplated by the TAA. 61 In summary, the position in relation to the various appeals and Applications for Review seems to be this. 62 As to the appeal by Martin Thomas from the objection decision of the Commissioner in relation to the amended assessments directed to him for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 274/2012. 63 That position prevails in relation to MAPL's appeal for the tax year 2008: QUD 276/2012. 64 As to the alternative assessment issued to the trustee, Thomas Nominees, for the tax years 2006, 2007 and 2008, the Commissioner no longer opposes the trustee's appeal: QUD 275/2012. 65 As to the assessment issued to the trustee for the tax year 2009, the Commissioner challenges and opposes the appeal: QUD 325/2013. 66 As to the appeal by Martin Thomas from the objection decision in relation to penalty for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 284/2012. 67 As to MAPL's appeal from the objection decision concerning penalty, the appeal is no longer opposed by the Commissioner: QUD 285/2012. 68 Nor is the trustee's appeal from the objection decision concerning penalty for the tax years 2006, 2007 and 2008 opposed by the Commissioner: QUD 283/2012. 69 As to Martin Thomas's appeal from the refusal to remit penalties for the tax years 2006, 2007, 2008 and 2009, the Commissioner opposes that application: Tribunal proceedings 2445/2012. 70 The Commissioner no longer opposes MAPL's application for the tax year 2008 concerning the remission of penalties: Tribunal proceedings 2453/2012. 71 Nor does the Commissioner oppose the trustee's application in respect of the refusal to remit penalties for the tax years 2006, 2007 and 2008: Tribunal proceedings 2450/2012. 72 I propose to now examine aspects of the statutory regime relevant to these proceedings before examining aspects of the contested evidence given by Ms Abbott and Martin Thomas. The statutory provisions of the 1936 Act and the 1997 Act relevant to these proceedings in the form in which these provisions took throughout the income tax years in issue are set out in Schedule 1 to these reasons.

Trust income under the 1936 Act and the franking credits regime under the 1997 Act

Trust income 73 Division 6 of Pt III of the 1936 Act addresses the topic of "Trust income". 74 The term assessable income has by s 6(1) of the 1936 Act the meaning given by Div 6 of the 1997 Act and an assessment in the case of a trustee of a trust estate (relevantly, the class of trustee such as Thomas Nominees) involves the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax and the tax payable on that net income (or that no tax is payable): s 6(1), 1936 Act. The assessable income of, for example, an Australian resident includes income according to ordinary concepts, ordinary income, derived directly or indirectly from all sources, and amounts that are not ordinary income but which are included in assessable income by provisions of the 1936 and 1997 Acts about assessable income: s 6-5(1) and s 6-10(1) and (2), 1997 Act. 75 Such amounts of non-ordinary income included in assessable income are called statutory income: s 6-10, 1997 Act. 76 If an amount would be statutory income apart from the fact that the addressee (of the section) has not received it, it becomes statutory income as soon as it is applied or dealt with in any way on behalf of that person or as that person directs: s 6-10(3), 1997 Act. 77 Classes of statutory income are set out, as a guide to the operative provisions, at s 10-5 of the 1997 Act and those classes include credits on franked dividends within Div 207 of Pt 3-6, 1997 Act. 78 Exempt income is not assessable income but some ordinary income and some statutory income is neither assessable nor exempt income: s 6-1, 1997 Act. 79 Section 95 of the 1936 Act defines net income, in relation to a trust estate, to mean the total assessable income of the trust estate calculated under "this Act" as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions (except deductions under Div 16C or Sch 2G) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Div 36 of the 1997 Act in respect of such of the tax losses of previous years as are required to be met out of corpus. 80 A trustee, of course, is not liable as trustee to pay income tax upon the income of the trust estate, except as provided by "this Act": s 96, 1936 Act. The term "this Act" is defined to include the 1997 Act: s 6(1), 1936 Act. A trust estate is taken to be a resident trust estate in relation to the year of income if the trustee was a resident at any time during the year of income: s 95(2), 1936 Act. 81 Section 97(1)(a)(i) of the 1936 Act provides (subject to Div 6D) that where a beneficiary of a trust estate (who is not under any legal disability) is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary shall include so much of that share, of the net income of the trust estate, as is attributable to a period when the beneficiary was a resident. 82 As to the position where a beneficiary is presently entitled to a share of the income of the trust estate but under a legal disability, see s 98, 1936 Act. 83 Section 95A(1) of the 1936 Act provides, for the purposes of that Act and the 1997 Act, that where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for, the benefit of the beneficiary. 84 Section 95A(2) of the 1936 Act provides, for the purposes of both Acts, that where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate, but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate. However, when s 97(1)(a)(i) of the 1936 Act refers to the "income of a trust estate" to which a beneficiary is presently entitled, that reference does not include a reference to income of the trust estate to which a beneficiary is deemed to be presently entitled by virtue of s 95A(2) where the beneficiary is a natural person: s 97(2). 85 Section 99A of the 1936 Act addresses the circumstances when certain trust income is to be taxed at a special rate. 86 Section 99A(4) is in these terms: Where there is no part of the net income of a resident trust estate: (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or (c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. 87 Section 101 of the 1936 Act addresses the topic of present entitlements in the context of the exercise of a discretionary power by a trustee. 88 It provides (framed in the masculine) that where a trustee has a discretion to pay or apply income of the trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion. It follows that in those circumstances, such a beneficiary would be "presently entitled to a share of the income of the trust estate" for the purposes of s 97(1)(a)(i). Section 97(2) which operates to exclude the deeming effect brought about by s 95A(2) does not exclude the deeming effect of a beneficiary being presently entitled to amounts paid to him or applied for his benefit by the trustee in the exercise of a discretion, by force of s 101, for the purposes of s 97(1)(a)(i). 89 In the case of a corporate trustee exercising a discretionary power to apply the income of the trust property, the making of each payment to the beneficiary may well properly involve the exercise by the corporate trustee of a discretion to so apply the income without the formal passing of a resolution: Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 per Gummow J at 553. 90 Although the phrase net income, in relation to a trust estate, is defined by s 95(1) of the 1936 Act, the phrase income of the trust estate in s 97(1) is not defined. Nevertheless, as a matter of construction, the references in s 97(1) to a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate, coupled with the definition of trustee in s 6(1) of the 1936 Act, suggests a reference to the general law of trusts: Commissioner of Taxation v Bamford (2010) 240 CLR 481 ("FCT v Bamford") by the Court at [36] to [39]. 91 The "income of the trust estate" is the distributable income of the trust estate ascertained by the trustee (applying the general law of trusts), determined according to appropriate accounting principles taking account of relevantly applicable presumptions (if any) about receipts, outgoings and losses: FCT v Bamford at [17]) and the terms of the trust instrument, measured in respect of distinct income years. 92 The shorthand description "distributable income" would normally be understood as a matter of orthodoxy as a reference to the income of the trust estate available for distribution to beneficiaries or accumulation by the trustee reflecting a net accretion to the trust estate for the relevant income year. 93 The determination of a beneficiary's share of the distributable income, so understood, to which the beneficiary is presently entitled, is the determinant of the beneficiary's share or proportion of the s 95(1) net income of the trust estate to be included in the assessable income of that beneficiary: FCT v Bamford at [45]; Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 74-75, per Sundberg J. 94 Thus, s 97(1)(a)(i) adopts a so-called proportionate approach to determining the share the s 95(1) net income of the trust estate to be included in the assessable income of the beneficiary (that is, the same proportion as that beneficiary enjoys of the distributable income to which the beneficiary is presently entitled). Where there is no part of the net income of a resident trust estate that is included in the assessable income of a beneficiary of the trust estate pursuant to s 97, s 99A(4) is engaged and in that event the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate determined by the Parliament. 95 As to the question of when a beneficiary is presently entitled to a share of the income of a trust estate, the High Court observes, (by the Court: Mason CJ, Deane, Dawson, Toohey and McHugh JJ) in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271 that the parties, in that case, had agreed that the authorities establish that (a) a beneficiary is presently entitled to a share of the income of a trust estate if, but only if, the beneficiary has an interest in the income which is both vested in interest and vested in possession, and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. The High Court proceeded to determine the question in issue in the appeal in Harmer upon an acceptance of the correctness of that agreed position. 96 The Court observed at 271: That being so, the question on the appeal is whether any one or more of the claimants either were "presently entitled" in that sense [as described above] to the interest earned on the funds deposited with the Building Society or had a "vested and indefeasible interest" in that interest. [emphasis added] 97 Those propositions derive from Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 at 215-216, 219-220; Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 at 450-452 and Federal Commissioner of Taxation v Totledge Pty Ltd ("FCT v Totledge") (1992) 60 FLR 149 at 157 and 158. 98 In Harmer v Federal Commissioner of Taxation, the question of the role or engagement of s 101 of the 1936 Act did not arise. Section 101, however, was considered by Latham CJ and Williams J in Federal Commissioner of Taxation v Whiting at 215. Section 101 was said to be entirely consistent with the construction attributed to s 97 of the 1936 Act. At 215, their Honours said this: Section 98 deals with the case of a beneficiary who is presently entitled, but who is under a legal disability. In such a case the beneficiary under a legal disability may have a vested interest, but the trustee is nevertheless required to pay the tax. The circumstance which distinguishes this case from the case of a beneficiary presently entitled to whom s 97 applies is the existence of a legal disability. That legal disability does not prevent the beneficiary from having a vested interest. The effect of it is to prevent him receiving payment, because he is incapable of giving an effective discharge to the trustee. This provision, therefore, supports the view that when the Act speaks of a beneficiary being presently entitled to a share in income, it refers to the right of a beneficiary to obtain immediate payment, rather than to the fact that a beneficiary has a vested interest. Section 101, which provides that where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion, fits in with this construction. [emphasis added] 99 It follows that a beneficiary is presently entitled to a share of the income of a trust estate (within s 97 of the 1936 Act) if the beneficiary has an interest in the income of the trust estate, vested in interest and possession (otherwise described as a vested indefeasible interest vested in possession), coupled with an immediate legal right to demand and receive payment. Actual payment or application of income of the trust estate to or for the benefit of a beneficiary gives rise to a present entitlement under s 101, consistent with such a construction of the notion of being "presently entitled" for the purposes of s 97 of the 1936 Act. 100 The relevant trust deed might provide expressly and unambiguously (or where ambiguity arises a proper construction of the instrument will be necessary), that an object of the trust has an entitlement to be paid gross income as received. Where the instrument is silent about the nature and extent of a beneficiary's interest, if any, in the gross income of the trust estate, the nature and extent of that interest (if any) falls to be determined according to settled principle (that is, the accepted precepts of the general law of trusts). As to that, Bowen CJ, Deane and Fitzgerald JJ said this in FCT v Totledge at 157: A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee's proper costs, expenses and outgoings. Regardless of whether one regards his interest as beneficial "ownership" subject to a charge in favour of the trustee (see, for example, per Lord Wrenbury in Baker v Archer-Shee) or whether one regards the concept of equitable "ownership" misleading where other than a bare trust with one ascertained beneficiary is involved, the life tenant or a beneficiary entitled to income under a trust ordinarily has a present beneficial interest in gross income as derived. [emphasis added] [footnotes omitted] 101 As to s 97(1), their Honours said this at 159: … the preferable construction of s 97(1) is to treat the requirement of present entitlement to a share of the income of the trust estate as not being concerned with distinctions between gross income as derived and "surplus income" after payment of costs, expenses and outgoings but as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate. Such a right to demand and receive payment represents a present entitlement to receive a share of what retains its character as income of the trust estate regardless of whether, upon closer analysis, it can be seen to reflect a beneficial interest in gross income as derived or whether it represents no more than, for example, the right of an annuitant to be paid a particular amount from surplus or net income. [emphasis added] 102 Plainly enough, there is likely to be (or may well be) in most cases a difference between the distributable income of the trust estate and the s 95(1) net income of the trust estate as not all outgoings, costs and expenses will necessarily be allowable deductions for the purposes of the 1936 and 1997 Acts.

The franking credit regime 103 Put simply, the 1997 Act establishes an imputation system (see particularly Div 207) for determining how and when the income tax paid by a corporate tax entity (as that term is defined) is imputed to its members who might be shareholders, beneficiaries or partners. The tax is imputed to members by marking or franking the relevant distribution. A franked distribution has tax credits (franking credits) which reflect the tax already paid by the corporate tax entity on its profits distributed to members. The tax credits that can be imputed to members are recorded in the corporate tax entity's "franking account" as "franking credits". The franking credit related to a distribution is an imputation credit in the member's hand which will usually give rise to a tax offset dollar-for-dollar and also, in the case of individuals, relevantly in issue here, an eligibility for refunds of excess imputation credits. 104 Section 63-10(1) of the 1997 Act (and all references are to the 1997 Act unless otherwise indicated) tells the addressee that if you have one or more tax offsets for an income year, they are applied against the person's basic income tax liability in the order shown in the table and to the extent that an amount of a tax offset remains, Item 40 in the table provides that a tax offset which is subject to the "refundable tax offset rules" (see Div 67) gives rise to a "refund of the remaining amount". 105 Section 67-25 provides that tax offsets available under Div 207 (which sets out the effects of receiving a "franked distribution") are subject to the refundable tax offset rules unless otherwise stated in the section. Section 67-25(1B) does so state in this circumstance: if a trustee to whom a franked distribution flows indirectly (as that term is understood in s 207-50(4)), is entitled to a tax offset under Div 207 for an income year because of the distribution and the trustee is liable to be assessed under s 99A of the 1936 Act on a share or all or a part of the trust's net income for the relevant year, the tax offset is not subject to the refundable tax offset rules. Thus, in principle, a trustee might well seek to exercise powers conferred under the trust (or a settlor might seek to include terms) that avoids the circumstances contemplated by s 99A arising so as to ensure that the tax offsets available under Div 207 are, by s 67-25(1), subject to the refundable tax offset rules so as to preserve the right to a refund on the amount of the excess tax offset: s 63-10(1), Item 40. 106 Subdivision 202-A (s 202-5) provides that an entity franks a distribution (see s 960-120 as to a distribution; such as a dividend) if it is a franking entity (as to which see s 202-15) which satisfies the residency requirement when the distribution is made; and, the distribution is a frankable distribution (as to which see s 202-40); and, the entity allocates a franking credit to the distribution (as to which see s 202-5). 107 Subdivision 202-B addresses the question of whether an entity is a franking entity at a particular time and Subdiv 202-C addresses which distributions can be franked. The object of Subdiv 202-C is to ensure that only distributions equivalent to realised taxed profits can be franked: s 202-35. The maximum franking credit for a distribution (of, for example, dividends by a corporate tax entity) is equivalent to the maximum amount of income tax that the entity making the distribution could have paid, at the prevailing corporate tax rate, on the profits underlying the distribution: s 202-55. 108 A franking credit is the amount of a credit that arises in the franking account of an entity and the table at s 202-15 sets out when such a credit arises. 109 A franking account is an account for each entity that is, or has at any time been, a corporate tax entity (as defined). The maximum franking credit for a distribution is calculated, relevantly for the income tax years in question, according to the following formula: the amount of the frankable distribution multiplied by 30 and divided by 70: s 202-60(2). If the frankable distribution is, for example, $3,500, the maximum franking credit according to the formula is thus $1,500. 110 An entity that makes a frankable distribution must give the recipient a distribution statement reciting, among other things, the amount of the distribution and the amount of any franking credit specified on the distribution: s 202-75(1); s 202-80(3). 111 Section 207-5(1) provides that if a corporate tax entity (such as a company) makes a franked distribution to a member (a shareholder in the case of a company), then as a general rule, an amount equal to the franking credit on the distribution is included in the member's assessable income (s 202-5(1)(a)) and the member is entitled to a tax offset (dollar-for-dollar) of the same amount (s 202-5(1)(b)). If the member is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member's assessable income for the purposes of s 207-5(1)(a): s 207-5(3). 112 As to the tax offset, however, s 207-5(4) provides (and s 207-5(3) and s 207-5(4) need to be read together) that a tax offset in relation to that distribution is only available to an entity (which might be a trustee or a beneficiary or a partner in the partnership) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. In that case, the tax offset available to the relevant entity described above, is equal to its "share of the franking credit on the distribution": s 207-5(4). 113 Section 207-5(4) has the following note which forms part of the provision: Note: That share [of the franking credit on the distribution] is a notional amount and the entity [trustee, beneficiary or partner] can have that share without actually receiving any of the franking credit or distribution. [emphasis added] 114 Section 207-15(1) provides that Subdiv 207-A sets out, as a general rule, the "tax effect of receiving a franked distribution". However, the subdivision does not apply to a partnership or trustee to whom a franked distribution is made (such as the franked dividends made to the trustee in this case) or an entity to whom a franked distribution flows indirectly (such as the beneficiaries of the Thomas Investment Trust): s 207-15(2). 115 Section 207-25 provides a description or explanation of the matters Subdiv 207-B addresses. 116 Section 207-25 says that Subdiv 207-B deals with an entity that receives a benefit of a franked distribution where the distribution is made to a partnership or the trustee of a trust and the benefit is received by the relevant entity either directly or through other interposed partnerships or trusts. In those circumstances, the distribution is regarded as flowing indirectly to the entity. What follows is that on the basis of a notional amount of the entity's share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under Subdiv 207-B. 117 As to the operative provisions of Subdiv 207-B, s 207-35(1) provides for a "gross-up" notion in the following way. 118 If a franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust and the recipient entity is not a corporate tax entity when the distribution is made (accepting and recognising that Thomas Nominees as trustee of the trust was not a corporate tax entity and that s 207-35(1)(c) is not engaged), then the assessable income of the trust (or partnership) for that income year includes the amount of the franking credit on the distribution. 119 Section 207-35(3) bears the sub-heading: "Allocation of the additional amount of assessable income". It provides that despite any of the provisions of Div 6 (and also Div 5) of Pt III of the 1936 Act, if four particular integers are engaged, then a certain consequence arises. 120 The four integers or pre-conditions to that consequence are these. 121 First, a franked distribution is made, or flows indirectly to, a trustee of a trust or a partnership in an income year: s 207-35(3)(a). 122 Second, the assessable income of the trust or partnership for that income year includes an amount (called the franking credit amount) which is (in whole or in part) the additional amount of assessable income included under s 207-35(1) in respect of the distribution: s 207-35(3)(b). 123 Third, the distribution flows indirectly to an entity that is a beneficiary, a partner or the trustee of the trust: s 207-35(3)(c). 124 Fourth, the entity (partner, beneficiary or trustee) has an amount of assessable income for the relevant income year that is attributable to (that is, plays some part in) the distribution (in whole or in part): s 207-35(3)(d). 125 The consequence is this. If those four integers are engaged, then the entity's assessable income (the assessable income of the beneficiary, relevantly) for that income year also includes so much of the franking credit amount as is equal to the entity's share of the credit on the distribution: s 207-35(3). 126 The entity's share of the franking credit on the distribution is determined by s 207-57: s 995-1. 127 Section 207-35 at the foot of s 207-35(3) contains a worked example illustrative of the operation of the section (which also forms part of the section). The worked example is this: Example: A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust's assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year [made up of the $70 distribution, the $30 franking credit on the distribution [included by s 207-35(1)] and $100 from other sources]. There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust's income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income. The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207-55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P's assessable income also includes the full amount of the franking credit (as P's share of the franking credit on the distribution is $30 under section 207-57). Q's share of the net income therefore does not include any of the franking credit. [emphasis added] 128 The above example seems to recognise that so long as the trust deed confers power on the trustee to apply classes of income of the trust estate to particular beneficiaries to the exclusion of others (or differentially among beneficiaries), Div 207 recognises that a trustee might stream all of (or most of) the franked distribution to one beneficiary and other income to another beneficiary. Beneficiaries might have differential shares of the s 95(1) net income of the trust estate yet 100% of the franked distribution is allocated to a particular beneficiary which leads to a particular consequence under s 207-55 and a determination of the beneficiary's share of the franking credit on the franked distribution under s 207-57. 129 A franked distribution flows indirectly "to a beneficiary" in an income year if, and only if, during the income year, the following three integers are engaged: s 207-50(3). 130 First, relevantly here, during the income year the franked distribution is made to the trustee of the trust: s 207-50(3)(a). 131 Second, the beneficiary has, for that income year, an amount called a share amount (whether or not the share amount becomes assessable income in the hands of the beneficiary), described as a "share of the trust's *net income for that income year [as defined, that is, the s 95(1) of the 1936 Act, net income] that is covered by s 97(1)(a) of the [1936 Act]": s 207-50(3)(b)(i). 132 Third, the beneficiary's share of the distribution under s 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share): s 207-50(3)(c). 133 It will be necessary to return to s 207-55 and the determination of whether the beneficiary's share of the distribution under that section is positive (irrespective of whether the beneficiary actually receives any of that share). 134 Section 207-45 provides that an entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year equal to the entity's share of the franking credit on the distribution if the entity is an individual, and, by force of s 67-25(1) and s 63-10(1), Item 40, a refund to the extent of any excess franking credit beyond the tax offset. 135 Section 207-55 has, as its object, ensuring that the amount of a franked distribution made to the trustee of a trust (or a partnership) is allocated notionally amongst those entities who derive benefits from that distribution and the allocation corresponds with the way in which those benefits were derived: s 207-55(1). Section 207-55 is effecting a notional allocation of the franked distribution made to the trustee, to those entities deriving benefits from the franked distribution, in proportion to the derived benefits. The statute effects the allocation as a construct or notional allocation. The note to s 207-55(1) is in these terms: Note: An entity can derive a benefit from that distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207-50. 136 Section 207-55(2) provides that an entity's share of a franked distribution is an amount notionally allocated to the entity as its share of the distribution whether or not the entity actually receives any of that distribution. The amount of the notional allocation (and thus the entity's share of the franked distribution) is equal to the entity's share of the distribution as the focal entity for the purposes of Column 3 in an item of a table contained in s 207-55(3). 137 The relevant item is Item 3. 138 The entity to whom the franked distribution is made (relevantly for the purposes of the income years in question, the trustee of the trust estate, Thomas Nominees) is described, for the purposes of s 207-55(3) and the table, as an intermediary entity. The entity whose share of the distribution is to be determined so as to achieve the object of the section as required by s 207-55(1) is described as the focal entity. 139 For Item 3, the trustee is the intermediary entity and a beneficiary of the trust is a focal entity if a franked distribution is made to the trustee and the beneficiary (relevantly here) has, in respect of the trust, a share amount mentioned in s 207-50(3) (beneficiaries) or (4) (trustees - in the case of interposed trusts). In those circumstances, the trustee's share of the franked distribution, if the trust has a positive amount of net income for the relevant income year, is, relevantly, the "amount of the franked distribution" (Item 3, Column 2). The focal entity's share of the franked distribution is so much of the amount worked out under Column 2 (namely, the amount of the franked distribution to the trustee) as is taken into account in working out the share amount mentioned in s 207-50(3). Once the amount notionally allocated as the share of the franked distribution has been determined, s 207-57 provides that an entity's share of the franking credit on a franked distribution is an amount notionally allocated to the entity as its share of that credit according to the s 207-57(2) formula. 140 Put simply, the beneficiary's share of a franked distribution is a notional amount equal to so much of "the amount of the franked distribution" (see Item 3, Column 2) as was taken into account in working out the beneficiary's share of the s 95(1) net income that is, the share amount referred to in s 207-50(3)(b), being the beneficiary's share of the trust's s 95(1) net income. 141 By s 207-57, a beneficiary's share of the franking credit on a franked distribution is an amount notionally allocated to the beneficiary as its share of the franking credit on the distribution (s 207-57(1)) irrespective of whether or not the relevant entity actually receives any of the credit or the distribution. The amount notionally allocated is worked out under s 207-57(2) according to the following formula: the entity's share of the franked distribution divided by the amount of the franked distribution multiplied by the amount of the franking credit on the franked distribution. 142 Although I will return to the facts of these applications later in these reasons, let it be assumed that in an income year a trust has a positive amount of net income and that the trust receives income comprising a franked dividend of $3,500 and other income of $5,000. Assume also that there are two presently entitled beneficiaries of the trust, X and Y. The trust law income is $8,500. Assume also that the outgoings are $7,000 and thus the net profit according to the trust law P & L is $1,500. Assume also that the beneficiaries are entitled by an exercise of the trustee's discretion to 60% and 40% of the net profit so that X is entitled to $900 and Y is entitled to $600. The assessable income of the trust includes the franking credits on the franked distribution (s 207-20, s 207-50(1)) and thus the assessable income of the trust is $10,000. Assume that not all of the outgoings of $7,000 are allowable deductions with the result that only $5,000 is allowable. The s 95 net income is then $5,000. Section 97(1)(a) requires a proportionate approach so that the assessable income of each beneficiary is $3,000 (X) and $2,000 (Y). In the absence of any streaming of the franked dividends and the other income, on one view, the whole of the franked dividend was taken into account (s 207-55) in calculating the s 95 share amount of each beneficiary and therefore X's assessable income includes 60% of the franking credit - $900 and Y's assessable income includes 40% - $600: s 207-35(3). Each beneficiary is entitled to a tax offset on tax otherwise payable, of $900 and $600 respectively. Assume, however, that the trustee resolves according to a relevant power in the trust deed to allocate all of the franked dividend to X and all of the other income to Y. Since the profit in the trust is only $1,500, the trustee cannot allocate $3,500 to X or $5,000 to Y. Their respective proportionate share of the trust income based on streaming the classes of income would be 41.17% as to X and 58.82% as to Y. If the profit was distributed according to those shares, X and Y would enjoy, approximately, $617.55 and $882.30 respectively. The assessable income in the trust, however, is $10,000: s 207-20, s 207-35(1). The s 95 net income remains $5,000. On the footing that the whole of the franked dividend is taken into account in calculating X's share of the s 95 net income, his share amount would be 41.17% of $5,000 - $2,058.50, on one view of it. X's share amount would be $2,941. X's assessable income would include 100% of the franking credits on the dividends ($3,500) paid to the trust, namely, $1,500. X's assessable income would be $3,558.50 (s 207-35(3)) and the tax offset would be $1,500 (s 207-45, s 207-55 and s 207-57). Some of the questions raised by these proceedings involve a question of whether the provisions might operate in this way.

The contentions of the applicants - the propositions 143 Having regard to Mr Harrison QC's contention that the Commissioner is seeking to attribute a case to the applicants not being run by them and Mr Looney QC's contention that the parties may possibly be akin to ships passing in the night (or not), it is now necessary to identify, first of all, the case actually being run by the applicants. 144 I propose to do so by identifying the essential propositions contended for by the applicants in their oral submissions as the nub of their case although I have had regard to all aspects of the written submissions as well. The essential propositions are these. 145 First, when cl 4(1) of the trust deed (see [16] and [17] of these reasons) talks about the trustee applying the income of the trust property in its absolute discretion and goes on to talk about the trustee not having applied the whole of the net income by the exercise of its discretion (with the result that such remaining net income shall be applied for the benefit of the nominated beneficiaries), the clause is necessarily concerned with s 95(1) net income. 146 The default distribution clause concerning the net income suggests that cl 4(1) should be construed, it is said, against the background of the income tax legislation because the only reason for adopting a default distribution of the net income (or remaining net income) is to avoid exposing the trustee to a tax liability. 147 This context is said to lend force to the notion that the trust deed is concerned with the s 95(1) income tax law notion of net income. 148 This proposition is said to have particular resonance for the 2009 income year because the trust law expenses exceeded the trust law income of the trust estate in that income year notwithstanding that the s 95(1) net income was $173,743. The applicants say that although the Commissioner contends that because there was no net profit according to accounting concepts at 30 June 2009 (and thus a contention that no person was presently entitled to income within s 97(1)(a) of the 1936 Act on the Commissioner's construction of the trust deed), this problem does not arise, in truth, it is said, because the trust deed, properly construed, adopts a s 95(1) definition of income. 149 Thus, for each income year, the beneficiaries were presently entitled: T, p 6, lns 33-41; T, p 135, lns 35-36. 150 The applicants say that because the language of cl 4(1) is - "the Trustee shall apply the income" - the notion is not one of "distributing" income, and the second part of cl 4(1) brings into operation a default position if, during the income year, the trustee has not applied the whole of the net income that may be applied. Therefore, it is said, the clause is concerned with income up to midnight on 30 June and not income as at 30 June. Therefore, the "distribution resolutions", properly construed, refer to the income as at the end of the financial year because the trustee does not know until the end of the financial year whether there is going to be net income in trust law terms or s 95(1) terms until then: T, p 130, lns 27-45. 151 The second proposition is concerned with cl 4(2) of the trust deed (see [18] of these reasons) which was inserted by amendment on 1 October 1992 along with cls 4(3) to 4(8). 152 The applicants say that when the trust deed by cl 4(2) recognises that the trustee may separately record in the books of account and records of the trust, categories of income, defined at cl 4(2)(b) as "income, including capital gains, which under the [1936 Act] … has or gives rise to any other separately identifiable taxation consequence or benefit" (see cl 4(2)(b)(v)), that definitional language of "income" is sufficient to "catch up the benefits that come from being entitled to the tax offset - the income tax offset": T, p 10, ln 37. 153 Thus, the franking credit benefit as a tax offset is said to be income of the trust estate under cl 4(2)(b) of the trust deed. 154 The applicants also say that cl 4(2) treats the income of the trust as including income which is only relevant to s 95 income: T, p 130, lns 46-47. The applicants say that the amended deed should be read as a whole and as a matter of construction the intention of the settlor in amending the deed ought to be understood as amending it in conformity with cl 4(2) as relevant only to s 95 net income: T, p 131, lns 3-7. 155 Third, even if the applicants' contentions as to the construction of the trust deed are not accepted, the way those concerned with the administration of the trust have dealt with cl 4 gives rise to an estoppel by convention which would establish, as the proper interpretation and operation of the trust deed, the way in which it has been so construed and dealt with by those persons, that is, in a manner consistent with the contended construction: T, p 131, lns 7-15. 156 Authority for such a proposition is said to be found in Shanemist Pty Ltd v Denmac Nominees Pty Ltd [2003] QSC 373 and Unruh v Seeberger (2007) 10 HKCFAR 31 at [142] to [148] which support, it is said, the proposition that an estoppel by convention can apply to effect a change to a contract: T, p 132, lns 1-3. See also The Bell Group Ltd (In Liq) and Others v Westpac Banking Corporation and Others (No 9) (2008) 225 FLR 1, Owen J at [3515] and following. The applicants then say that although the relevant instrument here is a trust deed, that instrument is in the nature of a contract and, as a matter of principle, the authorities say that contractual principles apply to the construction of the terms of a trust deed: T, p 132, lns 39-47. Byrnes v Kendle (2011) 243 CLR 253 at [59], per Gummow and Hayne JJ, is said to support that proposition. 157 The applicants say that although there is no authority to the effect that estoppel by convention applies to trust deeds, the analogous application of estoppel by convention to contracts gives rise to the reasonable proposition that the doctrine ought to apply to the construction of a trust deed if participants have acted on a certain assumption or footing when engaging with the trust instrument. Thus, one would not impose, it is said, a s 97 process upon the trustee of first determining the trust law distributable income if that is not required of the trustee by the terms of the trust deed: T, p 133, lns 4-18. FCT v Bamford (2010) 240 CLR 481 is said to be authority for the proposition. 158 In short, the applicants say that if the trust deed tells the trustee to distribute the s 95 income, that is also the "distributable income": T, p 134, lns 10-11. The applicants also say that Goldie v Getley (No 3) (2011) 8 ASTLR (Australian Succession and Trusts Law Reports) 166 at [215] to [226] and Public Trustee v Smith (2008) 1 ASTLR 488 at [83]-[95] may be of assistance on the estoppel question although they are said not to be sufficiently relevant to the questions in issue here that copies of them should be provided to the Court. They may be of assistance, it is said. 159 The applicants also say that it is not necessary for them to go so far as an estoppel by convention as a broader principle applies which is that it is not for the Commissioner to challenge distributions that the beneficiaries have chosen not to challenge themselves. The applicants rely upon Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 and Federal Commissioner of Taxation v Noza Holdings Pty Ltd (Full Court of the Federal Court) (2012) 201 FCR 445 as support for that proposition. 160 Fourth, cl 4(1) does not require the trustee's application of the income to be by way of "resolution" and cl 4(4)(a) (see [20] of these reasons) which addresses the trustee's entitlement to distribute or accumulate income by separately dealing with the whole or part of the income of a category, for the benefit of one or more beneficiaries, talks about exercising the power by resolution or determination. It follows for the applicants that the trustee's decision to make payments to the beneficiaries throughout the 2009 income year is just as much an application of the benefit (income) as a resolution to do so: T, p 136, lns 1-2. 161 The applicants say that the decision of the trustee to make the payments and the making of the payments falls within s 101 of the 1936 Act, and thus they were presently entitled. 162 Because the applicants say that cl 4(2) treats "any other separately identifiable taxation consequence or benefit" as income, cl 4(4)(a) should be construed so as to empower the trustee to deal with tax benefits "insofar as they may be dealt with under the relevant [tax] legislation": T, p 11, lns 31-33. 163 Fifth, the applicants say that consistent with their contentions, Applegarth J in the Supreme Court of Queensland proceedings held, on the trustee's application for directions, that the tax benefits (in the form of franking credits giving rise to income tax offsets) either came within the notion of income under the trust deed (T, p 12, lns 12-13) and therefore could be dealt with by the trustee under cl 4(4)(a) or were, at least, a financial benefit. The applicants say that the trustee had a duty to deal with that financial benefit in a way that most advantaged or benefited the beneficiaries and in the written submissions they say that certainly the "financial benefit" could not be "wasted" by the trustee without the trustee falling into breach of duty. The applicants say that the franking credit benefit is a "real thing" which has monetary value and the trustee has a duty to deal with it: T, p 138, lns 35-41. 164 Sixth, the orders of the Supreme Court in the form of directions and declarations (Order 1 - see [58] of these reasons) determines the proper construction and legal effect of the resolutions (see [32] - [37] of these reasons as to the resolutions) and the Commissioner must necessarily accept, as a matter of law, the construction attributed to the resolutions by the Supreme Court and assess the participants to tax on the footing of the Court's orders. In other words, the applicants say that the Commissioner cannot simply ignore the directions and declarations and adopt his own view of it notwithstanding that the orders were made inter-parties in the absence of the Commissioner (as the Commissioner declined the invitation by the trustee applicant to be heard or joined in those proceedings). The applicants say that the Commissioner must take the world as he finds it. 165 The seventh proposition (although the applicants say the proposition does not take the matter very far) is that s 207-5(4) (see [112] of these reasons) seems to operate on the assumption that a determination is made as to where the "franking credit" will go as there is no reference to a "franked distribution" in the subsection which, it is said, seems to be inconsistent with the Commissioner's contention that the legislation requires the trustee to say, by resolution, where the distribution will go not where the franking credit will go. 166 Thus, in effect, as the argument goes, so far as the applicants understand the Commissioner's position (although putting their understanding of it in my own language), resolutions which, taxonomically, address the distribution of a franking credit fail to address the statutory requirement to address the allocation of the distribution to which the franking credit relates. 167 Eighth, s 207-35(3) seems to adopt a concept that first selects the franking credit amount but which has both the franking credit amount and the distribution flowing to the beneficiary or partner. In other words, the allocation of an additional amount of assessable income begins with an allocation of the franking credit amount under s 207-35(1) and provides for the franking credit amount and the distribution to which it relates, to flow to the beneficiary. The applicants say that their case is (T, p 16, ln 36) that a franked distribution has flowed indirectly to a beneficiary and under s 207-45 the beneficiary is entitled to a tax offset equal to the beneficiary's share of the franking credit. 168 Ninth, s 207-50(3) simply determines whether one can say that a franked distribution has flowed indirectly to a beneficiary of the trust which engages the question of whether the beneficiary's share of the distribution under s 207-55 is a positive amount which, in turn, asks the question of how much of a share of the distribution does the beneficiary enjoy. The applicants say that the object of ss 207-55, as recited at s 207-55(1), (which talks about ensuring that the amount of a franked distribution to the trustee is allocated notionally amongst entities who derive benefits from the distribution), suggests that the real focus is the identification of the derived benefits which then "drags along the franked distribution": T, p 17, lns 26-27. 169 The tenth proposition starts with the ninth proposition and asserts that s 207-55 determines the notional allocation to the beneficiary of the amount of the franked distribution made to the trustee, according to derived benefits, and that s 207-57 determines the beneficiary's notional allocation, by operation of the section, of its share of the franking credit on the franked distribution, so determined. The applicants then say that the Commissioner's position asserted in all of the objection decisions that the "legislative provisions make it clear that the franking credit, both as an offset and as a grossed-up amount, cannot be considered separately from the franked distribution to which it attaches" and "the Act itself makes plain that a beneficiary's share of the franking credit is calculated by reference to their share of the distribution to which the franking credit is attached", is correct "as far as it goes": T, p 19, lns 42-47. 170 However, the applicants say that the Commissioner seems to be postulating that the trustee must make a direct reference in the distribution resolutions to the notional proportion of the franked distribution. As the applicants understand the Commissioner's position, the Commissioner is contending that the trustee must work out a percentage of the franked distribution (to be allocated to a beneficiary) and it is not possible for the trustee to apply the franking credit benefits for the benefit of a particular beneficiary by resolving to apply so much of the franked distribution as carries with it a nominated amount of franking credits: T, p 20, lns 1-7. 171 Rather, the proposition is that, consistent with the legislation, a trustee could identify a percentage of the franked distribution (to which the franking credit is attached) to be allocated to a beneficiary or the trustee could allocate so much of the franking credit benefits as it determines should go to a particular beneficiary and in that event the legislation "steps in" and has the effect, it is said, of treating the beneficiary as having notionally received the benefit of the franked distribution. In short, the applicants say that the trustee has resolved that the franking credit benefits go in the way allocated in the resolutions and the legislation brings along the franked distribution. The material consideration is the intention of the trustee in framing and passing the resolutions. 172 The applicants therefore contend that "there was a distribution [by allocating the franking credits] and we say that it is unnecessary, as it were, to stream the franked distribution, that's the original dividend, in any way through": T, p 136, lns 6-9; T, p 136, lns 45-46; T, p 137, lns 1-2. 173 The eleventh proposition is concerned with the resolutions themselves. 174 The applicants say that the resolution at [33] of these reasons, for example, (and all the equivalent net income distribution resolutions for each income year), applying the net income of the trust fund for the 2006 income year to Martin Thomas as to $21,600 and the balance to MAPL confers a "real or present entitlement" on Martin Thomas calculated by reference to the taxable income, that is, calculated on the assumption that the trust deed is concerned with s 95(1) net income. The applicants understand the Commissioner's position to be that despite his contentions concerning the 2009 income year (of no present entitlement in any beneficiary due to no trust law accounting profit at 30 June 2009), the Commissioner accepts that the distributions of s 95 taxable income is effective under the trust deed. 175 The twelfth proposition concerns the next group of resolutions called the franking credit distribution resolutions an example of which for the 2006 income year is at [34] of these reasons. These resolutions deal with franking credits and foreign tax credits. The twelfth proposition is related to the tenth proposition and goes to the proper construction of the resolutions as showing an intention on the part of the trustee to allocate the franking credits or the benefits of the franking credits as specified in each resolution: T, p 21, lns 26-28. That, it is said, was the intention and the resolutions reveal it precisely: T, p 24, lns 16-18. That being so, the legislation, it is said, simply has the effect of "bringing along … - an appropriate amount of the franked distribution": T, p 21, lns 28-29. 176 Thirteenth, support for the twelfth proposition is to be found in the orders made and reasons for judgment published by Applegarth J in the Supreme Court of Queensland proceedings. The applicants say that Applegarth J held that the resolutions "had achieved the effect that was intended [and as they contend for]": T, p 21, lns 35-36; T, p 22, ln 11. The applicants contend that Order 1 (see [58] of these reasons) declares that the franking credits confer a "financial advantage" as referred to in the trust deed which is rendered "income" for the purposes of the trust deed thus empowering the trustee to deal with them, as a matter of construction of the deed. 177 Fourteenth, as the applicants understand the position, the Commissioner is not contending that the applicants could not have achieved the intention (or at least the intention that the applicants contend for) sought to be achieved by the resolutions but rather that the resolutions do not give effect to the intention sought to be achieved. 178 The fifteenth proposition concerns the operation of a franking account by MAPL which is a corporate tax entity as that term is defined. MAPL has, by s 205-5(1) and s 205-10, a franking account. Section 205-15(1) provides that a credit arises in the franking account of an entity and the amount of the credit (called a franking credit) is determined according to, among other items, Item 4. That item is engaged if a franked distribution flows indirectly to, in this case, MAPL, through a trustee of a trust; MAPL is a franking entity when the franked distribution is made; and MAPL is entitled to a tax offset under Div 207. In that event, a credit arises in MAPL's franking account of its share of the franking credit on the distribution at the end of the income year during which the franked distribution flows indirectly to the entity: s 205-15(1), Item 4; s 205-15(2). Ms Abbott, the accountant to the trustee and the beneficiaries, gave evidence in re-examination when producing additional documents (a file containing franking account transactions and financial statements for MAPL - Exhibits 3, 4, 5(1/3) and 5(2/3)) that she had made entries (credits) in MAPL's franking account in the income years 2006 to 2009 consistent with the franking credit distribution resolutions. 179 So, the proposition is that it would be contrary to Ms Abbott's understanding of the resolutions and contrary to the way they ought to be interpreted to conclude that MAPL received anything other than the franking credits (and thus the tax offset benefit) reflected in the credit entries in the franking account. Further, it is said, it must follow inferentially that Martin Thomas must have received the rest of the franking credits because the intention was to deal with them all: T, p 134, lns 30-45; T, p 138, lns 12-15. 180 The sixteenth proposition concerns s 207-35(3) and the four integers that must be satisfied before the section is engaged: see [117] to [126] of these reasons. The proposition is this: when s 207-35(3) talks about a distribution flowing indirectly to a beneficiary and the beneficiary having an amount of assessable income for the income year that is attributable to all or a part of the distribution, all that is necessary is that the franked distribution was taken into account in calculating what was available: T, p 139, lns 33-39. 181 The seventeenth proposition concerns s 207-55 which effects a proportionate notional allocation of a franked distribution made to a trustee or partnership to those entities who derive benefits from it. The proposition is this: s 207-55 itself operates to allocate the franked distribution (made to the trustee of the trust) to or amongst those beneficiaries who derive franking credit benefits, in proportion to the benefits derived. Thus, the section is making plain that if a beneficiary derives a franking credit benefit from a franked distribution made to the trustee, then the franked distribution is notionally allocated in proportion to the benefits derived. It follows, it is said, that the section does not require the trustee to distribute the franked distribution. 182 Put simply, on that footing (putting the contention in my terms), the section contemplates an ex ante allocation of the benefits by the trustee and a consequential proportionate notional allocation of the distribution by the statute. 183 Item 3 in the table determines the notional allocation. The applicants say, that which is "real", is the share of the franking credit benefit, and that which is notional, is the franked distribution: T, p 145, lns 12-14. 184 Eighteenth, the Commissioner's contention as to the operation of the imputation provisions is inconsistent with the operation of the partnership provisions and thus the provisions must be given a construction that makes sense of franked distributions to the trustee of a trust and also a partnership with distributions flowing indirectly to either beneficiaries or partners. 185 Nineteenth, the resolutions must be construed against the relevant background circumstances and not simply in isolation, with the result that if the selected language of the resolutions does not give effect to the intention of Mr Thomas and the trustee as advised by Ms Abbott, the intention is nevertheless clear. The applicants say that by analogy the "generous interpretation" given to the terms of contracts and deeds to give effect to the true and clear intention of the relevant participants "applies equally" to the construction of the resolutions: T, p 141, lns 42-47. 186 The twentieth proposition concerns the 2009 income year. 187 The proposition is that even though the trust is a discretionary trust, the trustee operated on the footing (on the evidence) that the beneficiary had a beneficial interest in the gross income as it was derived with the result that income could be applied by the trustee for the benefit of a beneficiary during the course of the income year (without having to wait to the end of the income year) with the trustee thus foregoing a lien over the gross income as security for its right of indemnity for costs and expenses. Should the trustee apply too much of the gross income to the benefit of a particular beneficiary, the trustee would, it is said, nevertheless remain personally liable for costs and expenses incurred: T, p 142, lns 44-47; T, p 143, lns 1-2. 188 Subject to the applicants' contentions as to the effect that a court ought not to allow a deficiency of form to prevail over the true intention of the taxpayers (and should strive to give effect to the true intention of the taxpayers); contentions going to s 357-60 in Sch 1 to the TAA having regard to Taxation Ruling TR92-13; and the rectification claims, these propositions represent the essence of the case put by the applicants. 189 Fundamentally, the applicants say that Mr Thomas and Ms Abbott endeavoured to ensure each year that all trust income was distributed (the distributable income being said to be the s 95 net income for the purposes of the trust deed) so as to avoid the operation of s 99A, and in doing so, ensure that the distribution occurred in a way that maximised the cash refunds payable to Mr Thomas. At para 9 of the submissions, the applicants put the matter this way: 9. The Trustee, intending to avoid the operation of s 99A and to maximise the refundable tax offsets available only to Martin Thomas, passed dual net income distribution resolutions at the end of each year, which Beth Abbott drafted in consultation with Martin Thomas: 9.1 one resolution shared the net income relating to franking credits and foreign income (which had a similar tax advantage) between Martin Thomas (as to over 90%) and Martin Andrew Pty Ltd (as to less than 10%); 9.2 the other resolution shared all other net income between Martin Thomas (as to less than 1%) and Martin Andrew Pty Ltd (as to more than 99%). 190 The applicants say that Martin Thomas was thus required by s 97(1)(a) of the 1936 Act to include a share of the trust's s 95 net income in his assessable income. They say that that circumstance then qualified him to receive a share of the franking credits on the franked dividends received by the trustee (s 207-50(3)(b)) and thus an entitlement to tax offsets under s 207-45 which became refundable to him (as to surplus offsets) under s 67-25. However, his share of the franking credits is determined by s 207-57 according to the formula which engages, as an integer of the formula, the beneficiary's "share of the franked distribution" as determined under s 207-55. That section determines, it is said, Martin Thomas's share of the franked dividend having regard to his entitlement to the benefit of the franked distribution to the trustee whether or not he actually received any of the distribution, rather than by reference to his share of overall trust income. Then, s 207-57 notionally allocates a corresponding amount of the franking credit to Martin Thomas whether or not he actually received any of that credit or distribution. 191 As to the Commissioner's notion (as the applicants understand the Commissioner's case) that what must be distributed is the franked distribution represented by the dividend income, the applicants say that a trustee might receive an amount of dividend income yet that income is depleted by expenses and thus there is no franked dividend income to distribute by resolution or otherwise. Nevertheless, a beneficiary can be notionally allocated the franked distribution by operation of s 207-55. At para 42, the applicants say this: … the Thomas Investment Trust Deed expressly allowed the Trustee to confer entitlements to franked distributions on Martin Thomas when making its distributions of net income. The Trustee's intention by its net income resolution was plainly to allocate to Martin Thomas so much of that income as would confer on him 90% of the franking credits. If the respondent [Commissioner] is right in his submission that the wording of the resolution should in form have been an allocation of "franked distributions" or "notionally allocated franked distributions", it gets him nowhere [as] … Courts of Equity do not deal with such resolutions with that formality. [emphasis added] 192 At para 49, the applicants emphasise this matter again in this way: Martin Thomas was, under the twin resolutions, entitled inter alia to net income that corresponded with certain amounts of franking credits, being over 90% of that net income. Of course the only income that carried franking credits was the franked dividend income, which was depleted by the trust's losses and could not in fact be distributed. Those notionally allocated amounts were his share of the franking credits on the franked dividends within s 207-57. Accordingly, he was entitled to tax offsets equal to those additional amounts under s 207-45. They were "refundable tax offsets" under s 67-25(1) because he was an individual not excluded by the later subsections in s 67-25. [emphasis added] 193 At para 60, the applicants say that the sole basis for the Commissioner's contention about the meaning of the resolutions is that they are "internally inconsistent". The applicants say that the Commissioner's contention seems to be that income under the trust deed means income according to ordinary concepts and since franking credits are not income according to ordinary concepts, the franking credit resolution must be ignored as having no effect at trust law or for taxation purposes. Thus, it follows, so the argument is said to go, that the net income distribution resolutions (the non-franking credit resolutions) are the only resolutions that properly determine the trustee's true intention. However, at para 65, the applicants say that objectively construed, having regard also to the terms of the trust deed, the resolutions are plainly concerned with allocating the net income that relates to franked dividends (and foreign-sourced income) so as to confer the benefits of the tax characteristics of those types of income on the named beneficiaries only, and in the amounts set out in the resolutions. 194 In each income year there were the dual resolutions as described at [32] to [37]. Each resolution recites that the trustee, pursuant to the powers vested in it under the Deed of Settlement, resolves that the net income of the trust fund for the relevant financial year be applied for the benefit of the nominated beneficiaries by credit to accounts maintained by the trustee for them. The subject matter of the application of the net income of the trust fund by one resolution is the application of the net income which is said to be the distributable income which, in turn, is framed, by the trust deed, in terms of the s 95 net income of the trust. In the 2006 income year resolution, the net income was applied to Martin Thomas as to $21,600 and to MAPL as to the balance (which is now known to be $777,226). In the second resolution for that income year, the resolution recites that the net income of the trust is being applied by allocating franking credits of $2,416,217.92 to Martin Thomas and franking credits of $228,900.38 to MAPL. Those franking credits amount to $2,645,118.30.

The evidence 195 Before examining the contentions of the Commissioner in respect of these matters and related questions, it is necessary to examine the evidence of Mr Thomas and Ms Abbott concerning the intention of the trustee as formed by the sole guiding mind of the trustee, Mr Thomas (see T, p 32, lns 15-22), acting on the advice of Ms Abbott, and consider that matter in the context of the language of the resolutions passed by the trustee.

Mr Martin Thomas 196 Mr Thomas understood for each of the relevant income years that if he had an entitlement to dividend income that carried franking credits, he could claim, as an offset against tax payable, the relevant amount of the franking credits by way of a dollar-for-dollar reduction of the tax otherwise payable (T, p 33, lns 7-13) and agreed in evidence that that offset might be described as the "franking credit benefit": T, p 33, lns 15-16. 197 Ms Abbott was Mr Thomas's accountant for the relevant tax years (and well before). She prepared the tax returns, did all the bookwork and prepared monthly accounts for the trust: T, p 33, lns 34-41. The monthly accounts contain a Monthly Position Statement for the trust at a particular date from 1 July of the relevant income year (on a cumulative basis); a Profit and Loss Statement ("P & L Statement") to that date for the trust (showing a full year comparison with the preceding financial year) and a Balance Sheet for the trust also showing a comparison with the previous year. 198 For example, for the month ending 31 July 2008, the net profit of the trust was $799,107 according to the P & L Statement. The monthly Position Statement starts with that net profit, adds non-deductible expenses of $6,997 (being expenses Mr Thomas understood could not be claimed as a deduction for income tax purposes) and adds imputation credits of $361,157 to produce taxable income of the trust of $1,167,261. Mr Thomas understood that amount to represent the taxable income of the trust on the assumption that these transactions were the last set of transactions for the financial year, in theory. As to the non-deductible expenses, two particular items in the expenses in the P & L Statement amount to $6,997. 199 As to the imputation credits, Mr Thomas understood that this item related to the franking credits on the dividend income received by the trust ($842,700). The monthly Position Statement then sets out particulars of "Distribution and tax position" which shows firstly a notional distribution (T, p 37, ln 47) to MAPL of $1,107,261; tax at 30% of $332,178.30; less imputation credits of the same amount as the tax; and tax payable of nil. Secondly, it shows a notional distribution to Mr Thomas of $60,000; other taxable income (capital gain - Telstra) of $19,327; tax payable of $18,988.01; less imputation credits of $28,978.70; and tax refundable of $9,990.69. The notional allocation of the proportion of the franking credit offsets or franking credit benefits to MAPL was intended to reduce the whole of the tax payable by it (as a notional position as at 31 July 2008). 200 As to Martin Thomas, the imputation credits allocated to him represent the balance of those credits/benefits ($28,978.90) after allocating notionally to MAPL sufficient of them to extinguish MAPL's notional tax at 30% of $332,178.30, resulting in a notional refund of $9,990.69 to Martin Thomas: T, p 39, lns 1-9. 201 As to the position at 30 September 2008, the trust had made a profit according to the P & L Statement (including significant capital gains on securities), although the net taxable loss according to the monthly Position Statement was $2,830,343 which meant that there would be no notional distributions to MAPL or Martin Thomas thus overtaking the notional distribution calculation as at 31 July 2008. 202 The same position obtained as at 31 October 2008. 203 By then, the net taxable loss was $2,223,438 and again no notional distributions occurred. The same position obtained at 30 November 2008 and at February 2009 although the particular numbers are different. 204 As to the position at 31 March 2009, the P & L Statement shows a net pre-tax profit of $14,164,933 which after adding non-deductible expenses of $132,840 and imputation credits of $1,054,333 (on dividends of $2,460,112), gave rise to $15,352,106 as the taxable income of the trust subject, however, to the proper removal of the non-assessable capital gains (of $15,083,854) for the purposes of the calculation of the net taxable profit, resulting in a net taxable profit of $268,252. That amount was distributed notionally by the Monthly Position Statement to MAPL as to $188,252. The tax at 30% was $56,475.60. Imputation credits of the same amount were allocated resulting in no tax payable by MAPL. 205 The balance of the net profit ($80,000) was notionally distributed to Martin Thomas. The tax payable was $19,800. The balance of the imputation credits (the franking credit benefits) after the notional allocation to MAPL of sufficient credits to extinguish its tax liability, were distributed to Martin Thomas ($1,054,333 less $56,475.60 amounting to $997,857.40) resulting in a refund, notionally, of $978,057.40 after extinguishing the tax payable by Mr Thomas of $19,800. 206 The same approach obtained at 31 May 2009. 207 In the case of the notional distributions as at 31 March 2009 and 31 May 2009, the notional allocations allocated the net taxable profit of the trust shown on the Monthly Position Statements. That amount took into account the dividends received by the trust in calculating the net profit according to the P & L Statements (dividends at 31 March 2009 of $2,460,112 and at 31 May 2009 $2,561,592). In each case, the net profit according to the P & L Statement is the starting point of the calculation of the net taxable profit. To that is added non-deductible expenses and the imputation credits on the franked distribution (dividends) as a required "gross-up". Non-assessable capital gains are removed. The result is net taxable profit at 31 March 2009 of $268,252 and by 31 May 2009, $262,131. That amount is then notionally distributed to MAPL and Martin Thomas according to the approach earlier described. 208 Mr Thomas accepted that although reference is made to the term "franking credits", it is necessary to focus on whether what is being addressed by that term is the amount of the franking credit representing the gross-up of the income for tax purposes or the amount of the offset or franking credit benefit obtained even though numerically the amounts are the same: T, p 42, lns 11-14. 209 Mr Thomas accepted that the franking credit income gross-up has been taken into account in the calculation of the net profit of the trust for tax purposes which is to be the subject of notional allocation to the beneficiaries: T, p 42, lns 16-18. 210 Mr Thomas also accepted that, in effect, it follows that the net taxable income of the trust is calculated after including the franking credit income and after including the relevant dividends (the franked distributions) received by the trust (T, p 42, lns 30-33) and that the net result (which takes account of these two things plus the other factors of non-deductible expenses and removed non-assessable capital gains) is that which is notionally distributed between MAPL and Martin Thomas according to the method earlier described: T, p 42, lns 34-43. 211 Mr Thomas also accepted three other things on this topic. 212 First, the calculation of the amounts to be notionally distributed to each beneficiary did not involve any calculation or identification of particular components of the net income making up the notional distributions: T, p 43, lns 34-42. 213 Second, having made that notional allocation, a separate decision was then made concerning how the franking credit benefits might be allocated to each beneficiary: T, p 43, lns 44-46. 214 Third, the allocation of the franking credit benefits to each beneficiary bears no relation to the allocation of the taxable net income except to the extent of allocating to MAPL sufficient franking credit benefits (setoffs) equal to the tax payable on the net distribution to MAPL (its share of the net taxable income of the trust): T, p 44, lns 1-5. 215 Mr Thomas also accepted that the same calculations (that is, the same methods of calculation) were done, together with the assistance of Ms Abbott, for each of the net income years 2006, 2007, 2008 and 2009 for the "end of year figures" and those calculations were done before the resolutions were passed for each year: T, p 44, lns 9-18; lns 27-29. 216 As to these various Monthly Position Statements and the calculations (including the ultimate "end of year figures" calculations) Mr Thomas understood that it was the s 95 taxable income of the trust that was being calculated (and it was his intention aided by Ms Abbott's professional knowledge) to "get to the same position as the s 95 net income": T, p 45, lns 10-25. 217 As to the 30 June 2009 income year (recognising that the documents and calculations along the lines of the 31 May 2009 Monthly Position Statement calculations for June 2009 do not now exist), Mr Thomas accepted that the s 95 taxable income of the trust was calculated for that financial year by having regard to the dividend income to 30 June 2009 disclosed in the original version of the accounts which item did not change in the amended accounts. The dividend income in the P & L Statement is $2,561,592 at 31 May 2009 and also at 30 June 2009. The amount of the imputation credits related to those dividends is $1,097,825 which is the amount of the gross-up forming part of the s 95 assessable income of the trust. The non-taxable capital gains were excluded in calculating the s 95 net income. The s 95 net income of $173,743 was then distributed by the net income distribution resolution for that year to Martin Thomas ($16,600) and MAPL ($157,143). Mr Thomas accepted that the intention of the resolution was to distribute the then known s 95 net income of the trust to 30 June 2009: T, p 49, lns 15-19. 218 Thus, the calculation took into account the gross dividends received by the trust that year ($2,561,592); the gross-up of the assessable income by the amount of the franking credits on those dividends; and excluded the non-taxable capital gains; T, p 49, lns 15-38. 219 As to the franking credit distribution resolution that year, Mr Thomas accepted that the amount of the franking credit offset allocated to him of $1,050,925 out of a total of $1,097,825 (95.72%) bears no relation to the proportion of the s 95 net income distributed to him that year (that is, $16,600 out of $173,743 or 9.55% of the net income): (T, p 49, lns 45-46; T, p 50, lns 1-2; T, p 57, lns 23-24.) Mr Thomas accepted that the franking credit distribution resolution for 2009 seeks to allocate to the respective beneficiaries an entitlement to claim a franking credit offset (T, p 49, lns 41-43) and the only relationship between the s 95 net income distribution resolution and the franking credit distribution resolution is to allocate to MAPL sufficient franking credit offsets as would extinguish its tax on the net income distributed to it: T, p 50, lns 4-8. 220 Nor was there any relationship between the amount of the franking credit offset (benefits) allocated to each beneficiary and any particular component of the taxable income of the trust: T, p 51, lns 29-32; T, p 52, lns 12-13. 221 The same position obtained for 2006, 2007 and 2008: T, p 52, lns 15-17. 222 Mr Thomas swore an affidavit in the Supreme Court proceedings which is part of the record in these proceedings: see trial bundle pp 646-720. 223 In that affidavit Mr Thomas said this: 34. Each year the Trustee made resolutions concerning the income of the Trust. 35. My aim was to distribute all the trust income so that no income was left sitting in the Trust. 36. I understood that once the Trustee makes the resolution giving the beneficiary a particular allocation of income, the beneficiary is entitled to that income. 37. My intention was to minimise tax generally under the income tax law consistently with the trading and investment activities that I was carrying on in the course of the year by not leaving undistributed trust income in the hands of the trustee. I understood that if there is some income of the trust which was not allocated to a particular beneficiary, then there would be some income to which no beneficiary of the trust would be presently entitled. That income would be taxed at a higher rate than if given to a beneficiary of the Trust such as [MAPL]. 38. I did not want that to happen. 39 My intention as a director of the Trustee was always to ensure that every year the Trust i.e. The Thomas Investment Trust, had all its income cleaned out and distributed to particular beneficiaries leaving no income sitting there in the Trust undistributed. 40. In more recent times, and in particular in the years, the subject of this application, I formed my intention after discussions with the Trustee's accountant, Beth Abbott. I gave Ms Abbott instructions to prepare trustee resolutions to achieve that aim, and also my aim, referred to below, to provide me with refunds from the distribution to me of franking credits. My intention in signing the trustee resolutions was to achieve my purpose of leaving no trust income undistributed in the Trust in any financial year. 41. For me all these trust distributions were happening in the context of the income tax law. [emphasis added] 224 As to the distribution resolutions, Mr Thomas said this in his affidavit: 52. For each financial year for the Trust there would be two distribution resolutions. 53. There would be a distribution resolution concerning the distribution of the franking credits. 54. There would be a distribution resolution for other net income of the Trust. 55. Beth would submit draft distribution resolutions to me for my approval. After discussions with her they would be adopted, or amended and adopted. … 57. Before the end of each financial year I was aware of the amount of the dividends received by the Trustee and the amount of franking credits available for the Trustee to distribute. I was also aware of my own personal taxation circumstances. 58. In the case of the two distribution resolutions for each year my intention was always to get whatever other income was necessary to get the franking credits that were available for distribution by the Trustee of the Trust. 59. My overriding intention in regard to the annual distribution resolutions was to make sure that I got the franking credits because that was by far the greatest benefit from the Trust for me personally where I was in a personal loss position due to my option trading activities. 60. I had no intention, in executing the resolution that did not deal with franking credits, to deal with franking credits. My intention was solely to deal with the other net income of the Trust. 61. The refund of the franking credits was all calculated in by me as part of my decision making. [emphasis added] 225 Mr Thomas says that when he realised that the franking credits were refundable, he brought that circumstance into everything he was doing, taking steps "with the knowledge that I could get the unused franking credits back at the end of the year because I could arrange some option positions and then sort out what was to happen with those positions the next year": para 62. Mr Thomas says that he understood when swearing his affidavit that the Commissioner was asserting that the franking credits were intended to be allocated in accordance with the net income distribution resolution not the franking credit distribution resolution. He says at para 64 that it was never his intention to do so in causing the resolutions to be passed. 226 When Mr Thomas uses the term "trust income" in para 35 he accepts that he is talking about the amounts dealt with by the net income distribution resolutions: T, p 56, lns 11-13. 227 In para 39 where Mr Thomas talks about his intention of causing all trust income to be cleaned out and distributed, he is referring to the s 95 net income the subject of the income distribution resolutions: T, p 56, lns 21-22. 228 At para 53 where he talks about the distribution of the franking credits, he is referring to the franking credit offsets or benefits: T, p 56, lns 30-31. 229 At para 54 where Mr Thomas refers to a distribution resolution for "other net income of the Trust", he accepts that he is only talking about the s 95 net income of the trust (T, p 56, lns 34-35) as there was no other net income and the only other resolution passed by the trust concerned the franking credit benefit conferring an entitlement to a setoff. 230 As to para 58 and the intention of Mr Thomas in passing the two distribution resolutions to "get whatever other income was necessary" so as to get the available franking credits, he accepted that he did not "allocate any income so that the benefits, the franking credit benefits would follow the income, [he] just simply purported to allocate an entitlement to claim those benefits" [emphasis added]: T, p 57, lns 43-46. 231 As to para 60 concerning Mr Thomas having no intention (when executing the net income distribution resolution) (T, p 58, lns 15-16), to deal with franking credit benefits (the subject of the other resolution each year), Mr Thomas accepted that he did not intend, by the net income distribution resolution, to deal with the franking credit income which grossed-up the Trust income in calculating the s 95 net income: T, p 58, lns 28-34. 232 Mr Thomas also swore a principal affidavit in these proceedings. 233 At para 27 he says that with the advice of Ms Abbott he elected to adopt a simple corporate beneficiary structure where all taxable income of the trust would be shared between him and MAPL. At paras 28 and 29, he says this: 28. Over the years, I have wanted regular snapshots of the financial and taxation position of the Trust. 29. To this end I engaged Drake & Associates to produce Monthly Position Statements that showed (a) The profit and loss statement for the month from option trading, interest and dividends (b) [T]he balance sheet for the month, showing assets and liabilities, including margin loan liabilities (c) What the cash and tax position would be after distributing all the income and franked dividends among [MAPL] and me as beneficiaries of the Trust in the tax-effective manner that (i) utilised franking credits against [MAPL'S] tax liability to the extent of that liability and (ii) fully utilised franking credits against my tax liability so as to allow me cash refunds (d) What capital losses were available. 234 As to those paragraphs and particularly para 29(c), this exchange occurred (T, p 60, lns 16-37): Q. Now, you would agree with me, wouldn't you, that what they [the Monthly Position Statements] show is what the cash and tax position would be after distributing not all the income, but all the section 95 net income or tax net income of the trust. A. Yes. Q. And not the franked dividends but, in fact, the allocation of the franking credit benefits. There was no purported distribution of franked dividends, was there? The only thing that you did was distribute the net income - taxable net income A. Yes. Q. … or purport to distribute that, and purport to allocate the franking credit benefits? A. Yes. That's right. Q. You didn't make any decisions about franked dividends? A. In what way, sorry? Q. Well, in any way. You didn't turn your mind to a distribution, specifically, of franked dividends between the two beneficiaries? A. In the monthly statements? Q. Yes? A. No. No. Q. Thank you. And insofar as what's set out in that paragraph differs from the answers you've given to me today about what the monthly statements show, you would prefer your answers given to me today? A. Well, to the best of my knowledge, yes. [emphasis added] 235 As to the cash drawings in 2009, Mr Thomas said this at paras 33-39 of his affidavit: 33. I have no regular income to live on separately from the resources of the Trust. I do not cause my entities to pay me any salary. 34. Accordingly, approximately each month in 2009 I took cash of around $20,000 from the Trust for my monthly living expenses. I also caused the Trust to pay some of my living expenses directly. The bank account out of which I withdraw these funds is the same bank account into which all franked dividend receipts were deposited. The bulk of the dividend receipts were deposited in July and September 2008. 35. My living expenses covered, amongst other things, expenses on food, dining out, repairs and maintenance of a boat and travel and accommodation expenses. 36. I knew that the Trust had made over the years and was continuing to make significant profits from its activities and that these payments to me for my living expenses would not affect the capacity of the Trust to meet its liabilities. 37. The total amount paid to me or for my benefit from the Trust for my living expenses for 2009 was approximately $205,000. 38. I did not consider those sums to be loans by the Trust to me. They were disclosed by me as my living expenses to Beth Abbott, to be dealt with by her in a manner appropriately authorised by the Trust deed. 39. Occasionally I take other monies from the Trust that I do intend to pay back, such as where I wish to purchase share in my own name and where there might be restrictions on amounts to which any particular person can subscribe, e.g. the Telstra float. … [emphasis added] 236 As to these matters, the proposition was put to Mr Thomas that whenever (2009 or otherwise) he took a cash drawing he never turned his mind to the question of whether it was a "distribution of the Trust". Mr Thomas said that he always treated these amounts as income although he regarded them as and called them "drawings": T, p 60, lns 40-45; T, p 61, lns 1-6. 237 Mr Thomas accepted that he did not regard drawings as income upon which he would be required to pay tax: T, p 61, lns 11-12. As to whether he turned his mind, standing in the shoes of the trustee, to whether by making the payments and taking the drawings he was making a distribution of income, Mr Thomas said that he left, in effect, the characterisation of the payments, to his accountant. He accepted that he drew down the money which was to be accounted for at the end of the financial year with year-end income resolutions to be passed formalising whatever had occurred during the year: T, p 61, lns 14-24. 238 As to the 2009 resolutions, Mr Thomas also says this at paras 45-47 of his affidavit: 45. I intended that the 2009 resolutions would cover all the dividends in fact received by the Trustee for the 2009 year and I confirm that all income available for distribution under the Trust Deed had been distributed to the beneficiaries. 46. Since executing the resolutions I have been made aware that the Profit and Loss Statement for the 2009 year was adjusted to show an overall net loss for accounting purposes as at 30 June 2009. 47. The distributions [were] actually made to me as a beneficiary during the year for living expenses out of the dividends received during the year. I never intended to repay them. The Trustee has not treated it as a distribution of capital, and will not unless ordered by the Court upon action by any affected person [to], so treat it. [emphasis added] 239 As to his intention recited at para 45 concerning the 2009 resolutions, Mr Thomas accepted that the only intention he formed about distributing income of the trust was to distribute the s 95 net income of the Trust as had been calculated prior to formulating the resolutions (T, p 61, lns 40-42) and he accepted that he did not turn his mind specifically to whether the resolutions would cover all the dividend income received by the Trust: T, p 61, lns 44-45. 240 Mr Thomas accepted that insofar as the dividends formed a part of the calculation of the net taxable income of the trust, he assumed that they were "incorporated that way": T, p 62, lns 1-3. 241 Mr Thomas gave evidence that he believed that all of the income of the trust had been distributed by reason of the distribution "resolutions themselves": T, p 62, lns 11-12.

Ms Beth Abbott 242 As Mr Thomas said in oral evidence, "I've mostly left everything up to the accountants": T, p 61, lns 15-16. 243 In Mr Thomas's affidavit material he says that he acted extensively on the advice of Ms Abbott. 244 Ms Abbott prepared the Monthly Position Statements showing an estimated year-to-date position and a notional ("as in possible", as she said) distribution or allocation of taxable income and a notional distribution of the franking credit benefits - the tax offsets, recognising however, that things might change as the taxable income changed, as can be seen in the comparison between the financial information set out at p 303 of the Monthly Position Statement to 31 July 2008 and p 307 of the statement to 30 September 2008. 245 Ms Abbott also prepared the tax returns and the financial accounts. 246 Ms Abbott's method in preparing the Monthly Position Statements for Mr Thomas and the trustee was this. 247 She would identify the profit, based on the monthly (year-to-date) P & L Statement. 248 She would then make adjustments so as to calculate the s 95 net income assuming no other transactions to year end for the sake of the exercise. The adjustments involved adding back non-deductible expenses and adding the franking credits related to the dividend distributions to the trustee of the trust - the required gross-up. Non-taxable capital gains were excluded and removed from the calculation resulting in the total taxable income at that date upon the hypothesis of no further transactions to year end: T, p 72, lns 3-4. 249 The next step was to notionally allocate the s 95 net income between MAPL and Mr Thomas to ensure that Mr Thomas did not receive an amount that would cause him to be paying more than 30c in the dollar as an average tax rate. 250 After having notionally allocated the s 95 net income, Ms Abbott would notionally allocate the franking credit offsets (benefits) between the two beneficiaries based on an amount sufficient to meet (and no more) MAPL's income tax liability based on the notional s 95 net income distribution with the balance allocated to Mr Thomas. Thus, the "only intention" in allocating a particular amount of offsetting franking credit benefits was to meet the tax otherwise payable by MAPL and no more. The remaining franking credits would then be allocated to Mr Thomas and applied against his tax payable. The assumption was that he would then be entitled to a refund of the surplus or unused franking credit benefits beyond offsetting the tax payable by him. 251 Ms Abbott accepted that these steps reflected her philosophy in preparing the documents throughout the relevant tax years: T, p 73, ln 8. 252 Ms Abbott also accepted that the same philosophy was applied to the determination of the actual resolutions passed each year for the trust: T, p 73, lns 10-11. 253 Having accepted that this was the method or philosophy adopted for each income year, Ms Abbott accepted that the s 95 net income was distributed by means of one resolution but further observed that "it was put into two" resolutions (although she said she might have misunderstood the proposition put to her): T, p 73, lns 13-15. Ms Abbott accepted that one resolution addressed a distribution of s 95 net income and the "other" concerned an allocation of franking credit benefits: T, p 73, lns 17-21. However, momentarily later, at T, p 73, lns 31-40, Ms Abbott observed seemingly by clarification in her mind, that the "other" resolution operated to distribute the franking credits. Mr Looney QC put to Ms Abbott that the subject matter of the resolution was the allocation of the benefits (that is, the potential offset entitlements) and Ms Abbott responded by describing the subject matter of the resolution, in her mind, as the distribution of the franking credit amounts to the beneficiaries: T, p 73, lns 31-45. Mr Looney QC then put to Ms Abbott that her reference to franking credit amounts is to be understood as the franking credit benefits - the "entitlement to claim the offset": T, p 74, lns 1-2. Ms Abbott responded: "Technically. But that's probably not what - the terminology I would use, no. Franking credit benefit - I don't know": T, p 74, lns 4-6. 254 I mention this exchange because it suggests that at least up until that moment in Ms Abbott's cross-examination (and the putting to her, as a frame of reference, that the intention of the resolution at the time of making it was to distribute entitlements called franking credit benefits), Ms Abbott thought that she was framing a resolution which was allocating franking credit amounts and that as a matter of taxonomy or terminology she did not consider (at the time) the resolution as allocating franking credit benefits, so described. 255 Ms Abbott accepted, however, that the franking credits resolution did not seek to do anything with the franking credit income, that is, the amount of the gross-up (T, p 74, lns 17-20; lns 37-38) and observed that the purpose of the resolution was "to indicate who those benefits ["referable to the franking credits that came with the dividend"] were to go to": T, p 74, lns 22-24. It thus seems that although Ms Abbott was not thinking about these things at the time by reference to the term franking credit benefits, the substance and subject matter of her thinking involved the allocation of a benefit in the form of an offset. 256 Nor was there any intention to deal with the original dividends paid to the trust in passing the franking credits resolution: T, p 74, lns 33-35. 257 Ms Abbott seemed to accept that the dividend income and the amount of the franking credit gross-up were included in ("captured in") the s 95 net income resolutions: T, p 74, lns 40-47. 258 In the 2006, 2007 and 2008 income years the net income distribution resolutions allocate a relatively small amount to Mr Thomas and the balance to MAPL. The trust tax returns for those years show that allocation to Mr Thomas and the amount of the balance s 95 net income allocated to MAPL. The total for each income year derived from the trust returns always equals the total of the s 95 net income distributions. The same position obtained for the 2009 income year although two specific amounts are nominated in the resolution for that year, T, p 75, lns 2-25. 259 As to the franking credit distribution resolutions, they address for each income year the total amount of the franking credits (capable of being the subject of offsets) associated with the dividends received by the trust. The amount of those credits (treated as offset entitlements) was then apportioned to the beneficiaries according to the philosophy adopted by Ms Abbott as described: T, p 75, lns 38-39. 260 The tax returns reflect those respective distributions. 261 Ms Abbott accepted that the only relationship between the proportion of the s 95 net income distributed to the beneficiaries and the proportion of the amount of the franking credits (treated as offset benefits) allocated to those beneficiaries was that a proportion of the franking credit amount sufficient to meet the tax payable by MAPL on the s 95 net income distributed to it, was allocated to MAPL: T, p 75, lns 45-47; T, p 76, lns 1-2. 262 For example, in the 2007 income year MAPL was allocated franking credit offsets of $548,489 (out of a total of $5,313,842 - 10.32%) to offset its tax on the s 95 net income distribution and Martin Thomas was allocated franking credit offsets of $4,765,353 (89.68%). In each of the income years in issue, these franking credit offset distributions to the beneficiaries in the ratio so determined each year, bore no relationship to the proportions of the s 95 net income distributed to each beneficiary (save for the imperative of meeting MAPL's tax liability on its s 95 net income distribution). Nor were the resolutions intended, by Ms Abbott, to reflect any relationship with the proportions of the s 95 net income distributed to the beneficiaries: T, p 76, lns 17-31. 263 Ms Abbott swore an affidavit in the Supreme Court proceedings which forms part of the hearing record in these proceedings (pp 730-734). In that affidavit Ms Abbott refers to her practice of preparing the Monthly Position Statements and in respect of the income years 2005 to 2008 Ms Abbott describes the preparation of the two distribution resolutions each year. 264 As to the Monthly Position Statements, those statements adopted the philosophy of splitting the s 95 net income (calculated to the relevant date) between the two beneficiaries and separately splitting the franking credit benefits: T, p 77, lns 20-21. 265 Ms Abbott accepted that as to the draft distribution resolutions, they were discussed with Mr Thomas and reflected his wishes which were consistent with the intention for the resolutions held by her in preparing them, as earlier described: T, p 77, lns 29-30. 266 Ms Abbott accepted that the references in her affidavit to trustee distributions of income were intended to mean a distribution of s 95 net income and references to trustee distributions of franking credits were intended to be references to: "[b]enefits would be what I call that" - franking credit benefits: T, p 77, lns 42-44. 267 Ms Abbott accepted that the reference in para 12 to the distribution resolution addressing net income was intended to be a reference to the net taxable income and where Ms Abbott says that she did not intend or understand the resolution to include franking credits, the reference to franking credits was intended to be a reference to the franking credit benefits - that is, the offsets: T, p 77, lns 32-47; T, p 78, lns 1-8. That reference was not intended to be a reference to, or include, franking credits in the form of income by reason of the income gross-up obligation. Thus, the resolution was dealing with the franking credit benefits and Ms Abbott understood that they had to be "allocated by the trustee": T, p 78, lns 14-16. Similarly, the reference at para 36 of her affidavit to franking credits being given personally to Mr Thomas and attaching to his other income was intended to be a reference to an entitlement to the benefit of a setoff: T, p 80, lns 1-12. 268 Ms Abbott gave evidence that she understood the role played by being "presently entitled" in relation to the distribution of income of a trust and accepted that in preparing the distribution resolutions she was not intending or purporting to allocate the "distributable income of the trust": T, p 78, lns 35-36. Ms Abbott understood the term "distributable income" to mean the income of the trust less its expenses, otherwise distributable under the trust deed: T, p 78, lns 38-41. Notwithstanding that understanding, it was Ms Abbott's intention to distribute just the s 95 net income when forming her intention together with Mr Thomas: T, p 78, lns 43-44, T, p 79, lns 18-19. 269 In that context, Ms Abbott also said this at T, p 79, lns 21-32: Q. You didn't form an intention and you didn't understand Mr Thomas to instruct you about his intention to distribute the income of the Trust other than the section 95 net income? A. Yes. But my understanding was what I was - I mean, to go forward a step, to I know what you're saying about the trust deed, my understanding was I was [following] the trust deed in my resolutions, because that's what I turned my mind to, if that clarifies that. Q. Thank you. And you were drafting the resolutions with the intention not to waste franking credit benefits by them being left with the trustee? A. That particular resolution. Q. Yes? A. Yes. [emphasis added] 270 At para 39 of her affidavit (filed in the Supreme Court proceedings), Ms Abbott said this: 39. The aim each year was to distribute income of the Trust in a way that always used up all of the franking credits and obtained the full benefit of all of the franking credits available in any year. [emphasis added] 271 Mr Looney QC put to Ms Abbott that para 39 introduced the notion of a distribution of income that was distributed so as to always use up the franking credits. Ms Abbott, however, accepted that there was one resolution which dealt with the s 95 net income and a second resolution which dealt with the franking credit benefits: T, p 80, lns 28-30. That led to a second proposition put to Ms Abbott that it was not her intention, in framing the resolution, to distribute income so as to cause the franking credit benefits to be used up, but rather, the intention was to distribute an entitlement to the franking credit benefits. Ms Abbott disagreed with that proposition. Ms Abbott said that Mr Looney QC's second proposition seemed to suggest that the only thing she was trying to achieve was to "get those franking credits" to which she said: "I disagree with that": T, p 81, lns 9-13. 272 Ms Abbott accepted that when the franking credit distribution resolution was drafted, all of the income that was intended to be distributed was separately addressed by the net income distribution resolution although the two resolutions were "done at the same time". Ms Abbott also accepted that in passing the franking credit distribution resolution, the "thing being done" by the resolution was to confer the benefit of an entitlement to a tax setoff amount on the particular beneficiaries and in the case of Mr Thomas, a refund of the unused balance: T, p 81, lns 28-43. 273 That led to this exchange (T, p 81, lns 45-47; p 82, lns 1-35) Q. ... in doing that, you didn't, as a starting point say, "Take this amount of income and what will follow that income are these franking credit benefits? A. Well, but it does follow them because it has to follow them. Q. Follows what? A. The income. Q. Which income? A. All of the income of the trust, including the franked dividends and the franked distribution. Q. You've already dealt with those? A. Yes. Q. So they've already been distributed by the net income resolution? A. Yes. Yes. True. Q. My proposition to you is that the resolution in relation to the franking credits didn't have anything to do with the net income distribution resolution and wasn't intended to? A. I still don't think I agree, because they [the franking credits] do have something to do with the income resolution because they - because part of that income is the franked income, so they do. Q. … well, when you say "part of the income is the franked income" - A. Well, it is by nature, because that's what's been declared in the tax return. Q. So the franked dividends received by the trust identify the amount of the potential benefit? A. Yes. Q. --- that relates to the franking credits on those franked dividends? A. Yes. Q. You agree with that? A. Yes I do. Q. What you've attempted and intended to do by the resolution is to allocate that benefit in a way that is different to the allocation of the franked dividend? A. Yes. Q. There is a relationship because you don't get a franking credit benefit unless there is a dividend in the first place to the trust that carries franking credits? A. Correct. Yes. Q. But what's then the intention is that, however you distribute the franked dividends or the franking credit income that is part of the section 95 net income, the intention was to distribute this benefit - the right to claim the offset - in an unrelated way, but to the same beneficiaries? A. Yes. [emphasis added] 274 In Ms Abbott's principal affidavit in these proceedings she says this about the resolutions: 11. In respect of each of the tax years 2005-2008, I prepared two draft distribution resolutions for the Trust in relation to the income generated by the Trust in each of those tax years. 12. I prepared those draft distribution resolutions for discussion with Mr Thomas based on his instructions to ensure the trustee distributed income and imputation credits in a way that would not attract more income tax than was necessary. 13. One of the draft distributions concerned the distribution of the net income (which did not and was not intended to include imputation credits) and the other concerned the distribution of the net income comprising the imputation credits. 14. These could have been dealt [with] within the one resolution, however they happened to be put into two resolutions. 15. My intention in drafting the resolutions was to ensure that all the taxable income of the Trust (being the s 95 net income and all the imputation credits) was distributed and allocated among the beneficiaries so that: (i) income became the beneficiaries' assessable income under s 97; (ii) the beneficiaries could utilise the imputation credits distributed to them; (iii) there was no amount for which the trustee was liable to pay tax under s 99A; and (iv) there were no imputation credits being wasted by being left with the trustee or with [MAPL]. … 17. As far as I can recall, all imputation credits available in any tax year were used up and never wasted. 18. Mr Thomas and I would confer each year about the Trust income distribution resolutions before they were signed off by him. My draft would be adopted or amended by him and then signed. [emphasis added] 275 As to para 12, Ms Abbott was referring to the franking credit benefits when using the term "imputation credits": T, p 83, lns 34-35. The reference to "net income" in para 13 is a reference to the s 95 net income (T, p 83, ln 37) and the two references to "imputation credits" in para 13 are again references to the franking credit benefit: T, p 83, lns 39-41. The same meaning is intended to be conveyed by the use of the term in paras 15 and 17. Ms Abbott accepted that apart from the two distribution resolutions in each year from 2006 to 2009 (eight resolutions in all) she did not receive instructions from Mr Thomas to make any other distributions from the trust. 276 At paras 20 to 28 of her affidavit Ms Abbott explains the steps she undertook in calculating the figures for the distribution resolutions. This method was deployed by her in each of the relevant income years. Ms Abbott's oral evidence about her methodology or philosophy has been described earlier in these reasons. 277 As to steps 6 and 7 of that method, Ms Abbott says this: 27. Step 6 - I would calculate the tax payable by [MAPL] and allocate to [MAPL] imputation credits equal to the figure which represented its tax liability. 28. Step 7 - The balance of the imputation credits would be allocated to Mr Thomas personally as they could be applied against his other income and he would be entitled to cash refunds whereas [MAPL] would not. 29. In this way, it was intended and I believed that all the imputation credits in every year were used up in the most effective way in accordance with Mr Thomas's instructions. 30. The aim each year was to distribute income of the Trust in a way that always used up all the imputation credits and obtained the full benefit of all of the imputation credits available in any year. [emphasis added] 278 The references to "imputation credits" in paras 27, 28 and 29 are again intended to be references to the franking credit benefits (adopting the use of that taxonomy): T, p 83, lns 35-40. 279 As to para 30, Mr Looney QC again put to Ms Abbott that the intention was to allocate the franking credit benefits themselves (the offset entitlements) rather than an intention, as recited at para 30, to distribute the income of the trust in a way that used up all the imputation credits. Ms Abbott said that she believed the aim was to ensure that all of the s 95 net income was distributed to the beneficiaries so that the trustee was not assessable to tax: T, p 84, lns 45-46; T, p 85, lns 1-2. Although Ms Abbott accepted that the intention was to separately allocate the benefits associated with franking credits, Ms Abbott believed that by distributing all of the s 95 net income, the trustee was distributing all of the imputation credits, grossed-up as income, in the calculation of the s 95 net income as reflected in the tax returns each year: T, p 85, lns 10-12. Ms Abbott also accepted that the only relationship between the two separate resolutions was the allocation of sufficient franking credit benefits to MAPL so as to offset its tax liability: T, p 87, lns 10-24. Ms Abbott also accepted that she was not suggesting, by para 30, that the intention was to distribute the s 95 net income of the trust in a way or by a method that suggested a relationship between that distribution and the using up of all of the franking credits. 280 At para 41, Ms Abbott rejects the notion that the imputation credits were intended to be allocated in accordance with the net income distribution resolution rather than the franking credit distribution resolution. 281 As to the 2009 year Monthly Position Statements, they were prepared by Ms Abbott according to the method earlier described and in her affidavit she says this: 44. The monthly position statements identified the net financial position of the Trust (which was calculated by adding the net profit or loss of the Trust for that particular month - taken from the profit and loss statement for that month - and the non-deductible expenses and imputation credits). 45. As is evident from these statements, for each month the Trust had income available for distribution among Mr Thomas and [MAPL], including, franked dividends, and distributions could be made each month of that month's net profit, including franked dividends, as had been done for 2005-2008. 46. The position statement also set out for each month how the Trust income could best be distributed so as to not attract more tax than necessary to be paid. 47. As for the years 2005-2008, for the 2009 tax year, Mr Thomas received the bulk of the franked dividend income from the Trust, [MAPL] could receive the other income and so much of the imputation credits that would offset its tax liability on its distribution of income. [emphasis added] 282 The reference in para 45 to "these statements for each month" is a reference to the papers in the hearing record at pp 303-334: T, p 96, lns 35-43 and the Monthly Position Statement as at 30 June 2009 (although that document is no longer available): T, p 97, lns 19-23. The reference at para 45 to the trust having "income available for distribution" is a reference to the "income that was banked to the trust, that was from part [formed part] of the gross income for the profit and loss statements", that is, "total income" including the dividends (as illustrated, for example, in the income components of the P & L statement for 31 July 2008 at p 304 of the trial bundle amounting to $1,119,453), that is, gross income: T, p 112, lns 24-25; lns 36-38; lns 40-41; and ln 45. 283 Ms Abbott took the view that even though para 45 subsequently refers to distributions from "net profit", she was intending to mean that, as dividends from various sources came into the trust (as part of the gross income), Mr Thomas "could take … any distributions or drawings from that income". Ms Abbott also accepted that by reason of the restatement of the financial accounts there was no net profit at year end. 284 As to para 47 and the statement that Mr Thomas received the bulk of the franked dividend income from the trust with MAPL receiving other income and only sufficient imputation credits to offset its tax liability, Ms Abbott gave evidence that: "what I'm getting at in paragraph 47 is that that's what [Mr Thomas] drew from the trust, the source of his - what he took from the trust was the franked income": T, p 115, lns 30-31. That explanation arose from this exchange at T, p 115, lns 8-31: Q. In 2008, the net income distribution resolution provided for Mr Thomas to get $50? A. Yes. Q. That $50 was … part of the section 95 net income? A. Yes. Q. And that section 95 net income itself dealt with whatever was to be distributed of the franked dividends received? A. It did by --- Q. And [MAPL] got in excess of $140,000 from that section 95 income? A. Hundred - correct. Q. So to say that Mr Thomas received the bulk of the franked dividend income from the trust as implying that that's what had occurred relevantly in 2008 is just not correct? A. But it's not correct in terms of those - of that resolution. Q. That's right? A. That's correct. In terms of the resolution. Q. What I've said is - you're agreeing with what I've said in terms of the resolution? A. Terms of the resolution, yes. Q. And that's what you're intending to refer to in paragraph 47? A. No, because that's … what I'm getting at in paragraph 47 is that that's what he drew from the trust, the source of his - what he took from the trust was the franked income. [emphasis added] 285 Ms Abbott gave evidence that the bank statements for the trust show that income came into the trust in the form of dividends and "that's what I believe that Mr Thomas was drawing on when [at para 47] I refer to that: T, p 115, lns 45-46. 286 Ms Abbott says that the intention in framing the 2009 distribution resolutions was the same intention adopted in framing the resolutions for the 2005-2008 income tax years (para 50 of the affidavit). 287 Ms Abbott says that in the 2009 income year the Trust received franked dividends of $2,561,592. At para 49(a), Ms Abbott says that during the 2009 year and commencing from July 2008, Mr Thomas made regular drawings out of the same Trust bank account (into which the franked dividends had been paid) in an amount of $20,000 and some miscellaneous amounts totalling approximately $204,750. Ms Abbott says that she understood these drawings were to be used for Mr Thomas's living expenses and she never considered them and nor was she ever instructed to treat them as separate loans by the trust to be repaid by Mr Thomas. Ms Abbott says that these amounts were "treated simply as non-refundable drawings". Ms Abbott attaches to her affidavit a handwritten list of drawings and also the relevant bank statements and ledgers. 288 As to the preparation of the annual financial statements for the trust for the 2009 financial year and the restatement of the financial statements for the 2005 to 2009 financial years, Ms Abbott says this. She prepared the annual financial statements for the trust which reflected a net profit for the 2009 financial year of $11,548,686 (para 54). These financial statements were approved by Mr Thomas and he signed a declaration to that effect as director. Ms Abbott then prepared the 2009 trust tax return. The return showed s 95 net income of the trust of $173,743. Ms Abbott says that the difference between the net profit (of the trust - T, p 116, lns 28-30) and the s 95 net income of the trust - T, p 116, lns 29-30 ($173,743) is due to a reconciliation of the net profit in the financial accounts having regard to the provisions of the income tax legislation that "allow for imputation credits, different types of deductions, timing issues, and different capital gains tax treatment etc" (para 55). 289 During the course of a meeting with the ATO on 8 September 2009, Ms Abbott became aware that the net income of the trust for the 2006, 2007 and 2008 financial years had been recorded as a negative amount. Ms Abbott says that this was a mistake and was incorrect with the result that she reviewed the financial statements for the 2005 to 2009 financial years. At para 57 of her affidavit, Ms Abbott says that she was advised by Mr Thomas's barristers to restate the financial statements for those years on the basis that the purchase of an exchange traded option was a capital outgoing for the purposes of the trust because it was simply the exchange of one asset for another asset. Thus, at para 57: … transactions involving exchange-traded options were brought into the profit and loss accounts if they were closed out before the end of the year. Otherwise, the accounts would not reflect an open option as an asset of the Trust. 290 At para 58, Ms Abbott says this: (a) This restatement, which commenced with the financial statements for the 2005 financial year, flowed through to the financial statements for the 2006, 2007, 2008 and 2009 financial years, which resulted in the restated net loss for the year ended 30 June 2009 being made up of: (i) gross revenues of $2,688,155, comprising, inter alia, dividends received of $2,561,592 and interest of $119,804; and (ii) gross expenses of $10,388,752 giving a net loss of $7,700,597. 291 At para 59, Ms Abbott says that some of the "distributions" made to Mr Thomas for the 2009 year (which is a reference to the amounts taken and recorded as drawings mentioned earlier - T, p 116, ln 40) were made out of "gross dividends received in July 2008, and before these expenses had been incurred". The amounts were simply drawings and accounted for as such, to be dealt with later, according to Ms Abbott: T, p 116, lns 46-47. 292 As to the income distributions more generally and Ms Abbott's reference at para 45 to trust income "available for distribution", Ms Abbott gave further evidence that she was referring to the s 95 net income and also "the income that's evident by … each month's profit and loss, so there's income there": T, p 97, lns 30-32. Ms Abbott understood her earlier evidence to be that the net income distribution resolutions were concerned with the s 95 net income not that there was no other net income. Ms Abbott gave evidence that, in addition, there was net income of the trust: T, p 98, ln 7. That position was also Ms Abbott's understanding when the resolutions were prepared: T, p 98, ln 11. In other words, that which was available for distribution when the resolutions were prepared was "the profit in the profit and loss statement" of the trust: T, p 98, lns 13-15. Ms Abbott also gave evidence that the s 95 net income distribution resolutions did not deal with all the profit available for distribution: T, p 98, lns 17-19. Ms Abbott also said that "the income was distributed according to a journal entry to distribute the profit as per the profit and loss statement, but the resolution was drawn on the s 95 income": T, p 98, lns 27-29; lns 41-42; lns 44-45. Thus, there was a difference: T, p 101, lns 5-9. 293 As to the question of present entitlement of each of the beneficiaries and Ms Abbott's understanding of whether the "distributable income" of the trust was treated by her and Mr Thomas as the s 95 net income for the purposes of the trust deed, Ms Abbott accepted that the trust returns ought to reflect each beneficiary's entitlement to the relevant share of the s 95 income: T, p 99, lns 39-40. Ms Abbott was then asked this question and responded in the following way: Q. And did you understand at the time that you were preparing those trust returns that that should be prepared on a proportionate basis of the entitlement to whatever was the distributable income of the trust so that the share of the section 95 net income should reflect the same share of the distributable income? Was that your understanding at the time of preparing the returns? A. No. 294 However, Ms Abbott said that the net income of the trust was distributed by journal entries to each beneficiary and each beneficiary's share of the s 95 net income was determined in the same proportion or ratio as the distribution made by the journal entries of the net income of the trust: T, p 100, lns 3-10. In other words, there was a difference between the s 95 net income on the one hand and the net income of the trust - the profit according to the P & L statement on the other hand: T, p 101, lns 5-11. However, the relevant ratio was applied. 295 As to the distributable income, Ms Abbott understood the distributable income to be that which the beneficiaries were drawing upon during the year. She said that the distributable income less trust expenses formed the net income of the trust. Ms Abbott gave evidence that the s 95 net income was represented by the net income of the trust reconciled to the s 95 taxable income (that is, taking account of total assessable income comprised of any dividends, interest and any separately identifiable items that came into the trust, less all expenses qualifying as allowable deductions): T, p 102, lns 26-30; lns 32-41. 296 Ms Abbott understood, when the resolutions were passed, that the components of the distributable income were reflected in the accounts because those items were all separately recorded in the trust P & L statement (T, p 102, lns 43-45) and they all added up to the amount recorded as the total income: T, p 103, lns 1-5. Ms Abbott accepted that in order for all the s 95 income to be "effectively distributed" to the beneficiaries, the entitlement of the beneficiaries to the net distributable income (that is, distributable income as she described it less trust expenses) needed to be identified and reflected in the shares of the s 95 net income to which those beneficiaries were entitled, that is, the adoption of a proportionate approach was required: T, p 103, lns 11-21. Further, Ms Abbott understood that if the net distributable income (so understood) was greater than the s 95 net income, the trustee needed to distribute all of the net distributable income so as to ensure that the beneficiaries were presently entitled to it: T, p 103, lns 23-28. 297 Thus, if the income of the trust had been $100 and the expenses $80, the net distributable income would have been $20. If the adjustments necessary to identify the s 95 taxable net income had been such that the s 95 net income was $25 rather than $20, Ms Abbott accepted that as she understood the position at the time of the preparation of the resolutions (on this analogue), as a general proposition, it would have been necessary to distribute the $20 to the beneficiaries in some fashion or ratio and then apportion the $25 in that same ratio to the beneficiaries. Ms Abbott accepted that if, on the other hand, the s 95 net income had been $15 and the distribution resolution (of the net distributable income) had been $5 to Beneficiary A and the balance ($15) to Beneficiary B, the share of the s 95 net income applying a proportionate approach would then have been calculated as: Beneficiary A, $5 divided by $20 multiplied by $15 equals $3.75; Beneficiary B, $15 divided by $20 multiplied by $15 equals $11.25. 298 However, Ms Abbott did not accept the validity of an analogue put to her that if the resolution distributed $5 to Beneficiary A, and the s 95 income as shown in the tax return was also $5, then no proportionate approach had been adopted to determining the share of the s 95 income. She rejected that proposition on the footing that firstly the net income distribution resolution was only distributing the s 95 net income not the net income of the trust and secondly, there may have been some other act or step taken by the trustee to distribute other parts of the net distributable income: T, p 105, lns 27-35. If other net distributable income had been distributed by, for example, a journal entry outside the operation of the resolution, then Ms Abbott accepted that that amount would need to be added to the s 95 net income for the purpose of calculating the relevant proportionate share of the s 95 net income (T, p 105, lns 37-43) and that did not occur: T, p 105, ln 45. 299 Ms Abbott, however, seemed to be confused about these propositions when giving evidence: see also her later evidence at T, p 109, lns 12-22. 300 Ms Abbott accepted that the amount to which the beneficiaries were presently entitled by acts done by the trustee was either equal to the s 95 net income or not: T, p 106, lns 21-23. 301 As a matter of principle, Ms Abbott accepted that the amount the trustee is required to consider under the trust deed in determining what is to be distributed, needs to be taken into account when determining the shares of the s 95 net income (the proportionate approach) although as a matter of construction in the relevant case it may be that the trust deed only contemplates the distribution of s 95 net income as the distributable income for the purposes of the deed. 302 Ms Abbott accepted that in each of the income years, when the share of the s 95 net income was determined for the trust, the only amount that was taken into account in determining those shares was the amount of the s 95 net income itself (T, p 106, lns 34-37) and in the four income years no regard was had to the net distributable income: T, p 106, ln 39; T, p 107, lns 1-4. 303 Ms Abbott seemed, at one point, not to press any suggestion that there was an amount of net distributable income that should have been taken into account and was not considered: T, p 106, lns 6-8. She accepted that having regard to the resolutions and the trust tax returns for 2006-2008, the only amount regarded as having been distributed and intended to be distributed by the net income resolutions was an amount equal to the s 95 net income: T, p 107, lns 10-19. 304 However, Ms Abbott rejected the notion that at the time of formulating and passing the resolutions she did not have in contemplation that either of the beneficiaries had become presently entitled to any other income of the trust estate that should be taken into account in determining entitlements to the shares of the s 95 net income. She rejected that notion because even though the s 95 net income formed the basis of the resolutions, the trustee by journal entries had distributed net income of the trust estate although the resolutions did not distribute that income: T, p 107, lns 24-27. 305 Nevertheless, Ms Abbott accepted two other propositions on this topic. First, the share of the s 95 net income recorded in the returns for each of the beneficiaries in the trust do not take into account any such asserted distribution by journal entry (or otherwise) of net distributable income: T, p 107, lns 29-31. Second, as Ms Abbott understood the operation of the taxation legislation at the time, the proportion of the amount that was distributed to the beneficiaries as their share of the s 95 net income ought to have been determined by having regard to the greater amount that Ms Abbott regarded as the net distributable income of the trust estate so distributed and not simply the s 95 net income: T, p 108, lns 13-20. Ms Abbott accepted that in determining the share of the s 95 net income she did not consider the entitlement of the beneficiaries to the net distributable income: T, p 108, lns 41-46; T, p 109, lns 1-9. 306 As to the journal entry or entries, Ms Abbott accepted that by reference to the original accounts before restatement in late 2009, it was always understood by her that the trust had made a loss in the 2008 financial year (and thus no net profit) which was the position when the 2008 resolutions were passed. Thus, there simply was no journal entry prior to late 2009 that dealt with any profit in the trust at 30 June 2008 because as Ms Abbott understood the matter (relevantly her and Mr Thomas) no one thought there was any profit. 307 Thus, the resolution only dealt with s 95 net income. 308 Yet, as Ms Abbott observed, Mr Thomas was "actually drawing income from the trust" (T, p 110, lns 31-32) recorded in the books of account as drawings: T, p 110, lns 42-43. Ms Abbott was then required to decide at the end of the financial year when determining the income distributions by the trustee, how the drawings ought to be treated or characterised: T, p 110, lns 46-47. Ms Abbott accepted that if there was a profit in the trust to be distributed as part of the net distributable income, she would treat the drawings by Mr Thomas as part of that distribution (T, p 111, lns 16-20) although that was not actually done: T, p 111, lns 22-24. The amounts were left as drawings: T, p 111, ln 24. These amounts were not treated as distributions of income when the s 95 net income tax returns were being prepared (T, p 111, lns 26-30). Ms Abbott observed that even though the amounts may not have been treated as drawings from income expressly, they certainly were not a redemption or distribution of capital. Until the restatement of the accounts in late 2009, the trust was also understood to be in a net loss position for the years 2006 and 2007 and thus the position as explained by Ms Abbott concerning the 2009 financial year applied equally to those financial years. 309 At the conclusion of Ms Abbott's evidence, she observed that she had been thinking about the object of the franking credit distribution resolutions (T, p 118, lns 4-8) and said that she accepted this proposition put to her at T, p 118, lns 30-37: In relation to the [franking credit distribution resolutions] that we have spoken about, I had understood you to agree with me yesterday that they dealt only with offsets that were able to be claimed by beneficiaries that were referable to franking credits but didn't themselves deal with the relevant franking credit income that has to be grossed up and put into the books - into the return of the trust. [emphasis added] 310 The following further exchange occurred: Q. Can I suggest to you that the streaming that you've identified here, that you understood was able to be done was streaming of dividends which related to - to which franking credits were related. That was the streaming that you understood was possible? A. Attached to them, yes. Q. And you accept that what the resolutions, that were purported to be drawn up, didn't attempt to do that? They didn't attempt to stream the dividends to which the franking credits related, they only purported to deal with the benefit that might come from that? A. Yes. 311 Ms Abbott identified further documents in the course of her re-examination which were tendered in evidence. Ms Abbott identified from her MAPL franking account file, a Register of franking account transactions. The Register (Ex 3) shows an opening balance of franking credits recorded in the franking account of 1,878,514 and credit entries at 30 June 2007, 2008 and 2009 described as "Thomas Investment Trust franking credits". For example, the franking credit distribution resolution of 30 June 2007 shows an imputation credit distribution to MAPL of $548,488.89 which is the same number (but for 89c) as the credit recorded in MAPL's Register for 30 June 2007. Ms Abbott was asked by the applicants' counsel to identify the amount she "intended to distribute as franking credits, not franking credit benefits, but franking credits, to [MAPL]" and she responded by saying $548,488 (rounded). 312 Exhibit 4 from Ms Abbott's file is the tax return for MAPL for the 2007 income year. As to the income component in the calculation of the profit and loss (Item 9) of the return at Tab E - "gross distribution from trusts", an amount of $1,286,531 is shown which is said by Ms Abbott to include the distribution from the Thomas Investment Trust and also foreign income distributed to MAPL: T, p 121, lns 46-47; T, p 122, lns 1-2. 313 The s 95 net income that year was $1,839,635. 314 Of that, Mr Thomas received a distribution of $4,615 resulting in a balance distribution, in principle, of $1,835,020 (an amount also shown adjacent to Item E in the return), allotted to MAPL. The MAPL share of the s 95 distribution shown in the Schedule at [39] (which is concerned with the trust tax returns as part of the agreed facts) is $1,822,307. The difference of $12,713 represents the same amount shown as MAPL's foreign income in the return. Nevertheless, the amount of the franking credits distributed to MAPL under the franking credit distribution resolution for the 2007 income year was $548,488.89 and that sum (rounded to $548,489) was taken from the amount of $1,835,020 resulting in the Tab E amount - gross distribution from trusts - of $1,286,531 shown on MAPL's return (although that amount is said to include foreign income which is $12,713 which would then result in a balance of $1,273,828): T, p 122, lns 2-3. 315 If the Thomas Nominees trust distribution is $1,286,531 as recited in the tax return, the maximum franking credit amount would have been, relevantly, $545,926.28 under the 1997 Act. 316 The total expenses of MAPL in that year were $660. MAPL's surplus of income over expenses was shown in the return as $1,285,871. The amount of the distributed franking credits ($548,489 - Tab J of the return) was then added to the amount of $1,285,871 resulting in total taxable income of $1,834,360. The gross tax on that income at 30% was $550,308. Since the foreign tax credits were $1,819.11, the tax payable by MAPL, subject to any other credits/offsets, was $548,488.89. 317 The amount of the franking credit distribution resolution for that year was $548,488.89, consistent with Ms Abbott's evidence that the determinant of the amount of any franking credits (using that terminology) allocated to MAPL was to be found in the answer to this question: What amount of the franking credits related to the dividends distributed to the trustee would be sufficient to reduce MAPL's tax on its taxable income (including its share of the s 95 net income allocation and income from other sources), to nil? The answer to that question in the 2007 income year was $548,488.89. 318 However, Ms Abbott gave evidence that having regard to each of the franking credit distribution resolutions, it was her intention for the 2007 income year to allocate an amount of franking credits to Martin Thomas of $4,765,353.11. 319 Ms Abbott gave evidence that for the 2008 income year it was her intention to allocate an amount of franking credits to MAPL of $42,780.30 and to Martin Thomas an amount of those credits of $1,030,838.70. 320 Ms Abbott also gave evidence that for the 2006 income year it was her intention to allocate an amount of franking credits to MAPL of $228,900.38 and to Martin Thomas an amount of those credits of $2,416,217.92. As to the matters at [308] to [310] of these reasons, see T, p 123. 321 As to the net income distribution resolutions, Ms Abbott was asked whether when drafting these resolutions, did she think or did she intend to allocate to Martin Thomas any of the components that went into making up, for example, the first $21,600 of the net income of the trust for the 2008 income year that was allocated to Martin Thomas or was Ms Abbott simply allocating a proportion of the net income of the trust. Ms Abbott said that she did not intend to allocate any particular component or all of the components making up that amount nor any of the expenses that went into the calculation of that amount: T, p 123, lns 40-45; T, p 124, lns 1-2.

The contentions of the Commissioner 322 These are the propositions of the Commissioner. 323 First, having regard to the evidence of Mr Thomas and Ms Abbott, the terms of the relevant resolutions and the amounts recorded in the trust tax returns for each of the income years, the trustee intended, by the resolutions, to distribute amongst the beneficiaries not the income associated with the franking credits but rather only the "benefit that would obtain in relation to the franking credits manifest in the offset that's able to be claimed". That proposition is said to be made good, in part, by an examination of what was distributed to the beneficiaries pursuant to the s 95 net income distribution resolutions which of themselves take into account (and thus include) "that which is left of the income associated with the franking credits that might not have been used up by other deductible items". 324 So, the Commissioner says that the intention of the trustee was to allocate the offset benefits not the income related to the franking credits, the franked dividends. Had it been otherwise, the s 95 net income resolutions, it is said, would have purported to "hive off" the amount of the franking credit income, rather than, as occurred, the shares of the s 95 net income having been determined on the basis of a calculation that includes the franked dividends and the franking credit gross-up amount. 325 Second, although the applicants say that the trust deed, properly construed, is one by which the amount of the distributable income of the trust for the purposes of establishing the present entitlement of the beneficiaries is equal to the s 95 net income of the trust, the Commissioner contends, firstly, that the trust deed does not bear such a construction and secondly, that the evidence demonstrates that Ms Abbott and Mr Thomas conducted themselves, wrongly, on the footing that the trust deed did so operate with the result that only the amount of the s 95 net income of the trust was taken into account by each of them for the purpose of the trustee allocating, distributing and dealing with income of the trust estate. 326 Although Ms Abbott made reference to journal entries that had the effect of distributing other distributable income outside the resolutions, the Commissioner says that nothing now turns on these entries because the contention of the applicants is that the trust deed only deals with s 95 net income as the distributable income in any event. Thus, it follows for the Commissioner that if the applicants are shown to be wrong about their construction of the trust deed, then the applicants have simply failed to prove that the trustee addressed other net distributable income, as the only income dealt with, and intended to be dealt with, by the resolutions, was the s 95 net income. 327 Third, as to the question of the construction of the trust deed, the Commissioner says that the proper inquiry is whether the beneficiaries were presently entitled to a share of the income as required by s 97(1)(a) of the 1936 Act. The Commissioner accepts that it is appropriate to look to the terms of the trust deed to determine whether the beneficiaries were "presently entitled to a share of the trust income" in the s 97(1)(a) sense. The Commissioner says that, in the ordinary course, that to which a beneficiary is presently entitled is the net distributable income: see FCT v Bamford and FCT v Totledge. 328 Fourth, the Commissioner's point of construction is that cl 4(2)(a) and cl 4(2)(b) (see [18] of these reasons) address "categories of income". Subclause (a) is concerned with the category "dividends" and recites four classes of dividends in that category. Subclause (b) is concerned with the category "income" and recites five classes of income within that category each class of which has particular differentiating characteristics. The Commissioner says, in effect, that cl 4(2)(a)(i) to (iv) describe those characteristics which identify differentiated classes of dividends that might be separately recorded in the "books of account and records" of the trust. However, the category of income is and remains "dividends" and in the case of cl 4(2)(a)(iv), for example, identifiable taxation benefits attached to particular dividends do not separately become elevated themselves into a category of income. 329 The taxation benefits, it is said, simply define the relevant class of dividends. 330 The Commissioner says that there is no evidence that the classes of dividends relevant to these proceedings in the income years (fully franked dividends, unfranked dividends and dividends with attached foreign tax credits) were entered into the books of account of the trust as separate categories under the deed for particular treatment. Rather, the Commissioner understands the proposition of the applicants to be that the franking credits were separately dealt with by the trustee as a species of income, separate from the dividends. 331 In particular, the Commissioner says "franking credit benefits" do not fall within the category of "income" under cl 4(2)(b) of the deed as a separate class of income. Income under cl 4(2)(b) is, it is said, something, so far as cl 4(2)(b)(v) is concerned, that has or gives rise to something else, namely, a separately identifiable consequence or benefit (other than those described in cl 4(2)(b)(i) to (iv)). The Commissioner says that the consequence or benefit itself is not income and cl 4(2)(b)(v), at best, refers to franking credits not franking credit benefits. 332 So, the proposition (related to the first proposition) is this: the matter fundamental to the case is whether the franking credit distributions were an attempt to distribute franking credits, as income, as compared with an attempted distribution of the benefits franking credits may confer (in the relevant circumstances) of an entitlement to an offset, and those benefits cannot be "income". 333 Properly understood, the entitlement to offset against a tax liability otherwise arising (and a refund of the surplus unused offsets), an amount by reference to franking credits allocated or attached to a relevant dividend distribution to the trust, is not itself income under the trust deed or the 1936 or 1997 Acts (although the franking credits will be grossed up). 334 Fifth, as to the construction of the deed and cl 4(1) concerning income, the Commissioner says that if the deed was intended to operate on the footing of s 95 equivalency, one would expect to see the definitional integers of s 95(1) reflected in the deed although, of course, it would not be necessary to recite a reference to s 95. 335 Although the amended deed makes reference to the 1936 Act and thus matters arising under that Act have consequences in the operation of the deed, the Commissioner says that the deed does not say, in terms, that cl 4(1) income available for distribution is that amount determined by the s 95 factors or integers in the definition of net income in s 95(1). 336 The proposition then is that cl 4(1) is left undefined by the deed and the reference to "net income" later in cl 4(1) is explicable as a reference to the relationship between the necessary present entitlement of the beneficiaries to all the distributable income of the trust on the one hand and the shares of the s 95 net income of the trust on the other. The Commissioner says that thus the default clause is inserted to ensure that by oversight in the exercise (or not) of the discretionary allocation power, there is no net distributable income to which a beneficiary is not presently entitled. 337 Sixth, as to the problem of the 2009 income year, the Commissioner says that there simply was no distributable income of the trust (on the Commissioner's construction of the deed) but there was, nevertheless, s 95 net income (now as agreed). So, the problem as to the 2009 income year, so far as the Commissioner is concerned, is not that there was net distributable income of the trust and no beneficiary entitled to it but rather, there was no distributable income. 338 Seventh, the Commissioner accepts that income falling within a category under cl 4(2) of the trust deed can be separately sent by the trustee, by resolution or determination, in different ways to different beneficiaries and under cl 4(5) expenses and outgoings of the trust fund may be allocated by the trustee against, and deducted from, income or capital of any one or more of the categories as the trustee determines. Thus, separate streaming of income is contemplated by the deed. The separate allocation of expenses is also contemplated by the deed. 339 The Commissioner says that expenses allocated to franked dividends might not offset the quantum of the franked dividends "so that they flow in a certain way" to a resident individual beneficiary. The Commissioner's proposition is this: these concepts just described were "at play" in the resolutions drafted by Ms Abbott and Mr Thomas. However, they failed to appropriately draft the resolutions, in large part because, their "underlying fundamental intention" was "misconceived". Although they could have streamed the whole or part of a relevant category of income and have allocated expenses to the relevant stream, they simply did not do those things. Rather, they purported to allocate the offset entitlements (the benefits of the franking credits). Thus, there was "simply a failure to appreciate how the trust deed worked". 340 What also follows for the Commissioner is this proposition: in the absence of appropriate streaming of income and allocation of expenses, the residual position is that the beneficiaries presently entitled to a share of the distributable income do not have any particular entitlement to any particular category of income and thus they take pro rata all that makes up that to which they are presently entitled. 341 Eighth, another aspect of construction concerns cl 4(8). The Commissioner says that cl 4(8) is the closest the deed reaches to contemplating s 95 net income. That clause confers permission on the trustee to accumulate, as accretions, parts of the income of the trust. The Commissioner says that if the only distributable income of the trust is the s 95 net income, the condition for accumulation would never arise. 342 Ninth, as to estoppel by convention, the Commissioner says that the question simply does not arise; the evidence does not make it out; it does not apply as a doctrine to alter the terms of a trust deed; if there is any relevant analogue to be found in contract, the relevant parties to the contest would need to be the settlor and the trustee not the trustee and the beneficiaries (although a trustee might be able to raise a defence of estoppel by convention against the beneficiaries in circumstances of informed consent); and where a "formal deed" is the instrument that someone is to be estopped from contesting (as to the operation of its terms) by estoppel by convention, one would apply "a greater degree of circumspection" than if the instrument was a contract not under seal. 343 Tenth, as to Div 207 and Subdiv 207-B, the Commissioner says as follows. 344 Section 207-55, Item 3 (concerning the calculation to be undertaken to establish a beneficiary's notional share of a franked distribution), relevantly requires that where the net income of the trust is positive (> 1), first, the amount to be taken into account in the calculation of the share is the whole amount of the franked distribution to the trust (see Column 3; then Column 2) and second, the question then arising under Column 3 is how much of the franked distribution was taken into account in working out the "share amount". The share amount is said to be a reference to the beneficiary's share of the s 95 net income having regard to s 97(1)(a). Therefore, the question is how much of the whole of the franked distribution was taken into account in working out the beneficiary's share of the s 95(1) net income of the trust. 345 So, a number of propositions arise for the Commissioner on this topic. 346 First, there must be a nexus between the franked distribution, and the franked distribution having been taken into account when working out the beneficiary's share of the s 95 net income. How that was done is said to be a matter of "interpretation" and "application" to the particular facts. 347 Second, if the facts reveal that any relevant proportion of the franked distribution played no part in working out the beneficiary's share of the s 95 net income, then the statutory test for determining the beneficiary's notional share of the franked distribution simply cannot be satisfied. 348 Third, the resolutions which purport to independently deal with the franking credit benefits or even the franking credits do not meet the statutory description of identifying how much of the franked distribution was taken into account in working out the s 95 net income. 349 Fourth, the net income distribution resolutions dealt with the s 95 net income of the trust allocating it to the two beneficiaries. The question then is how much of the franked distribution was taken into account in working out Martin Thomas's share of the s 95 net income and that of MAPL. The matters relevant to answering that question are said to be: the terms of the trust deed and the terms of the resolutions made in exercise of the trustee's discretion by which the beneficiaries were to be conferred with a present entitlement to the relevant net distributable income which, the Commissioner says, "links inextricably" to the determination of the beneficiary's share of the s 95 net income due to the proportionality notion (recognising, of course, that the Commissioner says that under the deed the net distribution income is not simply the s 95 net income). 350 Fifth, the deed taken in conjunction with the resolutions might have said that Beneficiary A is entitled to "all franked dividends" (that is, a streaming of the franked dividends in a particular way). However, the Commissioner says that purporting to allocate or stream the franking credits "wouldn't work", that is, the franked distribution has to be taken into account for the purposes of the s 207-55 calculation and thus "unlinking", in this way, cannot occur as doing so fails to meet the statutory requirement. 351 Sixth, the trust deed enables streaming of income and the allocation of expenses to each stream. Those two actions of the trustee (if they had occurred) would be potentially relevant, it is said, to determining a particular beneficiary's share of the s 95 net income of the trust but since neither step was taken by the trustee in fact, the true position is that each beneficiary takes a proportion of everything that goes into making up the s 95 net income. The Commissioner's proposition then is that Subdiv 207-B does not require a proportional approach. However, the subdivision nevertheless dictates a consideration of the amount of the franked distribution be taken into account in determining the beneficiary's share of the s 95 net income as an essential calculation. 352 Thus it follows for the Commissioner that by reason of Subdiv 207-B the franked distribution cannot be "unlinked" from the "associated benefits that might flow from it" as might otherwise be suggested by the notion that if a beneficiary has received a share of the s 95 net income (perhaps a very small share), the trustee is then enabled (by the deed and Subdiv 207-B) to move the franking credits allocated to the dividend received by the trust or the franking credit offset benefit that might arise for a beneficiary, wherever the trustee chooses as a matter of discretion. 353 Mr Looney QC, however, says that the Commissioner does not understand the applicants to be suggesting in their oral or written submissions that this case is an example of such a notion. However, the Commissioner's proposition about impermissible unlinking (although a different point) might be the source of the applicants' understanding that the Commissioner holds a so-called "unshakeable determination" to attribute a case to the applicants they say is not being run by them - a power to allocate franking credit entirely unrelated to the franked distribution from which those credits, in effect, derive. 354 Eleventh, the Commissioner contends that the fatal error in the applicants' case is that although the entitlement of a beneficiary to assert a right of offset (and in the case of an individual a refund of the surplus offsets) may have financial value, the entitlement only arises in conformity with the tax legislation and cannot be dealt with independently of the statutory conditions under which it arises which, in turn, determine the extent of the financial benefit that might be available to a taxpayer. The entitlement to a share of offsetting credits calculated under the s 207-57(2) formula arises only as a function of a beneficiary's notional share of the franked distribution. 355 Twelfth, the Commissioner says that s 207-35(3) provides for an adjustment mechanism such that if a trustee streams a franked distribution to a beneficiary disproportionately to the way in which the beneficiary's entitlement to a share of the s 95 net income arises, then the assessable income of the beneficiary is adjusted as an equalisation measure so as to reflect the tax (the franking credit gross-up amount in the trust) on the franking credit proportion of the franked distribution flowing to the beneficiary. The equalisation measure is, as a matter of construction, intended to create a match-up, it is said, between the franking credit income (gross-up) appropriate to be taken into account in a beneficiary's assessable income (to whom a franked distribution has been streamed) and the corresponding offset the beneficiary derives. 356 Thus, the Commissioner says that the s 207-35(3) adjustment mechanism looks to the beneficiary's share of the franking credit on the distribution which is determined by s 207-57 and s 207-55 both of which require an answer to the question of how much of the franked distribution was taken into account in working out the beneficiary's share of the s 95 net income "covered by s 97(1)(a) of the [1936 Act]". Having so worked out the beneficiary's share of the franking credit, the beneficiary's assessable income also includes an amount determined as so much of the s 207-35(3)(b) franking credit amount (the gross-up in the trust under s 207-35(1)) as equals the beneficiary's share of the franking credit on the distribution. 357 If, however, there was no streaming of the franked distribution there is then no statutory alteration to the beneficiary's assessable income. The Commissioner says the calculation of a specific amount representing the beneficiary's share of the franking credit is a calculation required to be done based on the deed and the relevant resolutions. 358 Thirteenth, the entitlement to an offset under s 207-45 only arises if the pre-conditions to its engagement are met by reference to the particular statutory terms used in the section and, in particular, the interaction with s 207-55 and s 207-57. The Commissioner describes s 207-45 as the entitlement provision. 359 Contextually, the Commissioner says that s 207-35(3)(c) contemplates a franked distribution made to the trustee of a trust flowing indirectly to a beneficiary. A distribution flows indirectly to a beneficiary if, and only if, a franked distribution is made to a trustee; a beneficiary of that trust has a share of the s 95 net income of the trust covered by s 97(1)(a); and the beneficiary's share of the distribution determined by s 207-55 (the notional allocation corresponding with the way benefits were derived) is a positive amount: s 207-50. The Commissioner says that s 207-50(3) is thus a definitional section of indirect flows to a beneficiary but also a section whose reference to a "share amount" becomes relevant for s 207-55 which engages with the formula in s 207-57(2). The out-working of those provisions determines the amount of the offset entitlement for the purposes of s 207-45. 360 Fourteenth, the Commissioner says that the trust deed permitted the streaming of income and the allocation of expenses to a relevant stream but, on the facts, neither of those things was done by the trustee. Further, there was no differential distribution, it is said, based on any of the components of the net income of the trust fund. The Commissioner says that the net income of the trust fund was the only amount distributed and dealt with by the net income distribution resolutions. The other resolutions purported to deal with allocations of franking credit benefits. The Commissioner also says that a differential distribution based on the components of the net income is inconsistent with the express intention of the trustee as revealed in the evidence. 361 Fifteenth, as to the question of the position that might prevail if the franked distribution to the trustee is used up or exhausted by expenses, the Commissioner says that the distribution by the trustee was of an amount representing an "understood entitlement" of the beneficiaries to the s 95 net income, required by the trust deed. That step required a calculation to be done to establish the profit of the trust. The calculation took into account the franked distributions and some other things which necessarily go into the calculation of the s 95 net income. The Commissioner's proposition is that in the absence of a specific allocation of expenses to a particular stream or type of income, what one is left with in the case of a trust estate where there is positive net income (or in the case of a partnership where there is either positive income or a loss), is a calculation that takes into account the entirety of the franked distributions in determining the relevant profit or loss. The Commissioner says that the question is not whether the franked dividends have been used up and cannot specifically be distributed because the calculation required by the Act is a notional calculation. 362 Sixteenth, as to the proposition set out at para 49 of the applicants' written submissions (see [192] of these reasons), the Commissioner says that in so far as Martin Thomas was entitled to any net income that corresponded with certain amounts of franking credits, the entitlement is measured by the amount of the net income distribution resolution. The Commissioner says that the net income did not carry with it franking credits. The only income that carried franking credits was simply the franked distribution, that is, the franked dividends. 363 The Commissioner says that it is in this respect that the applicants and the Commissioner are ships passing in the night. The applicants contend that certain amounts of franking credits correspond with net income. The Commissioner says that that notion is simply misconceived and that the only income that carries with it franking credits is the franked distribution itself. The question to be determined is how much of the franked distribution was taken into account as part of the relevant statutory test. 364 Seventeenth, the Commissioner says that he does not profess to completely understand the interpretation of Div 207 put against him. The Commissioner's fundamental point is that whatever proposition the applicants are contending for concerning the construction and interpretation of Div 207, it does not accord with the legislation for the central reason that the contention of the applicants "unhinges the rights to the benefit from the original franked distribution made to the trust": T, p 188, lns 43-44. Secondly, the Commissioner says that the evidence of Ms Abbott and Mr Thomas as to the intention of the trustee is clear. Their intention (and thus that of the trustee) was to distribute, it is said, the franking credit benefits not the franking credits. Moreover, the Commissioner says that it is not relevant to the legislative regime whether (or not) franking credits were (or were not) able to be distributed or whether franking credits were in fact distributed. The relevant statutory matter, it is said, is to understand and come to grips with, what share of the franked distribution was taken into account in working out the share of the s 95 net income. The Commissioner says that that statutory question was simply not addressed and the evidence of Ms Abbott and Mr Thomas make that position plain. 365 The Commissioner has two other propositions on this topic. 366 The applicants say that, as they understand the Commissioner's contentions, Ms Abbott and Mr Thomas, relevantly informing the trustee, "muddled up" the wording of the resolutions which ought to have referred to franked distributions rather than amounts of franking credits. 367 If the Commissioner's contention is correctly understood and has substance, it might be said that the first resolution for the 2006 income year, for example, might have dealt with the net income of the trust fund by distributing that net income (said to be the distributable income in conformity with the s 95 net income) in the way described in the existing resolution. The second resolution might have resolved that: The franked dividends received by the trustee of the trust during the financial year ended 30 June 2006 of $X with attached franking credits of $2,645,118.30 be applied to Martin Thomas and [MAPL] by means of the following allocation of the attached franking credits: Martin A Thomas $2,416,217.92 [MAPL] $ 228,900.38 Would such a resolution have accommodated the relevant sections of the legislation? 368 First, if the true intention of Ms Abbott and Mr Thomas (and thus the trustee) by passing the franking credit distribution resolutions was an allocation of an entitlement to the franking credit income, one would expect to see that income position reflected in the tax returns. However, the Commissioner says that one sees nothing in the tax returns of the trust, or the returns for the individuals, that suggest anything other than an entitlement to the relevant amount of the s 95 net income of the trust and the claimed offset. 369 Second, the only amount that goes to income is the s 95 net income (so far as is related to the matters in issue in these proceedings). The Commissioner says that certainly there is no additional franking credit income added because of or attributable to the franking credit distribution resolutions. 370 Eighteenth, as to the applicants' contended discontinuity in the operation of the provisions as between a trust and a partnership based on the Commissioner's interpretation of the operation of Div 207, the Commissioner says that in relation to a partnership, losses might arise in the partnership and those losses flow through to the partners whereas a loss in a trust does not flow through to the beneficiaries. Thus, there is a distinction between how a partnership might allocate a relevant "share" in comparison with the way in which the legislation deals with a trust and the trustee. As to the partnership position, the legislation provides that a partner's share of a franked distribution is an amount that is equal to so much of the franked distribution as was taken into account in working out the partner's individual interest in the partnership net income or loss. In the case of a partnership, the same principle applies of looking back to see how the profit or loss was distributed and whether the relevant shares were allocated, by reference to the partnership deed, having regard to particular income. 371 The Commissioner says that as a matter of principle the same fundamental question arises in the case of a partnership - partners and the trustee of a trust - the beneficiaries. 372 Nineteenth, the Commissioner asserts a series of propositions in relation to the decision of the Supreme Court of Queensland in Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417; (2010) 80 ATR 828, per Applegarth J. However, I propose to deal with that matter separately and I will now turn to the issues in relation to the Supreme Court decision.

The Supreme Court of Queensland decision in Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417; (2010) 80 ATR 828 373 The decision addresses a number of issues which are relevant to these proceedings concerning, among other issues, the construction of provisions contained in the trust deed; the relationship between that matter and Div 207; and the efficacy of the resolutions in achieving certain contended outcomes. The Commissioner contends that the directions and declarations made by the Supreme Court are not binding upon him or this Court in the sense of operating as a determination of related questions (or the same questions) in issue in these proceedings that engage aspects of the application or construction of Commonwealth taxation law. That is said to be so especially since the questions before this Court involve, unlike the proceedings before the Supreme Court, a detailed contested analysis of the relevant provisions of the 1936 Act and the 1997 Act relating to the trust; the distribution resolutions and the subject matter of those resolutions; the interaction of the franking credits regime with the exercise of powers by the trustee; and the testing of the evidence of Mr Thomas and Ms Abbott in relation to the making and passing of the resolutions by the trustee. 374 In my view, it is necessary to examine not just the orders of the Supreme Court (comprising directions and declarations which I will describe as orders) but also the reasons for judgment published by Applegarth J in support of those orders for the following reasons. The reasons explain contextually terms adopted in the orders and the particular integrated structure of the orders by reference to the schedule at Order 1(a)(ii). The reasons are relevant to the construction of the orders themselves. The reasons explain the engagement between the trustee and the ATO concerning the Supreme Court proceedings. The applicants rely upon aspects of the reasoning in support of their contentions as to the construction and interpretation of the trust deed and the resolutions (and aspects of the franking credit regime) even if (contrary to their contentions), the Court finds that the orders do not bind the hands of the Commissioner or this Court. The reasons in support of the orders (should the Commissioner not be bound to accept the relevant facts as found leading to the form of the orders) nevertheless represent a consideration and findings as between the trustee and the beneficiaries by a superior court of record. The reasons go to the construction of the same terms of the same trust deed and the same resolutions in issue in these proceedings as well as at least some of the provisions of the taxation laws of the Commonwealth in issue in these proceedings. 375 The applicants say that the reasoning is correct; the Court should have regard to it and that it is persuasive in these proceedings. The Commissioner says that, with respect, the reasoning falls into errors of construction of the deed and the resolutions and fails to accord the correct construction to the statutory taxation treatment of franking credits. 376 In short, both sides to the present proceedings urge reference by this Court not only to the text of the orders but also the reasoning of Applegarth J. 377 Notwithstanding that approach, it must be remembered that, first, the orders made by the Supreme Court are the expression of directions to the trustee as to the construction and legal effect of particular matters (being the subject matter of the orders) in its dealings with the beneficiaries upon which the trustee and the beneficiaries may act and rely. Second, the orders are also expressed as declarations as to the true construction and legal effect of the deed, the resolutions and the relationship between those things and aspects of the 1997 Act: as to the making of declarations see [392] and [393] of these reasons. 378 Because the directions and declarations must, metaphorically, stand on their own two feet, very particular close emphasis must be given to the language of the orders in seeking to construe the burden and operation of them. However, on the question of whether the Commissioner is bound to accept particular facts (a topic discussed later in these reasons in the context of the decision in Executor Trustee and Agency Co v Deputy Federal Commissioner of Taxes (South Australia) (1939) 62 CLR 545 and particularly the judgment of Latham CJ at pp 561 and 562) concerning matters relevant to these proceedings (and otherwise in issue) and whether the orders go beyond what might be described as domestic matters inter se between the trustee and the beneficiaries, access to the reasons is a proper analytical and interpretative course to take.

The propositions accepted by the Commissioner 379 The Commissioner accepts these propositions: an order of a court of competent jurisdiction that determines the rights of beneficiaries as against a trustee will be conclusive as between them; the Commissioner must apply the taxation law on the footing that such an order determines those rights whether or not the Commissioner considers particular directions or declarations of right to be incorrectly made; and the Supreme Court orders remain binding unless and until they are set aside and they may not be disregarded even if made in excess of jurisdiction.

The Commissioner's contentions 380 The Commissioner's contentions, however, are these. 381 First, although the trustee is bound by the interpretation of the deed reflected in the orders of Applegarth J, the proper interpretation and effect of those orders remain an issue in these proceedings. 382 Second, the Supreme Court orders cannot determine the legal effect (brought about by operation of a taxation law of the Commonwealth) of the resolutions of the trustee so as to bind the Commissioner or the Federal Court insofar as the orders purport to declare the construction or legal effect of a taxation law, or alternatively, to the extent that the correctness of the orders necessarily depends upon, the construction or determination of the legal effect of a taxation law. 383 Third, the orders do not bind either the Commissioner or the Federal Court as Order 1(a) purports to declare the proper construction of a provision of a taxation law; Orders 1(b)(i), (ii) and (iii) each purport to declare or depend for their correctness upon the construction of the legal effect of a taxation law to the extent that each of those orders refers to the notion of "benefits pertaining to the franking credits". 384 Fourth, Order 1(b)(iv) takes its meaning and is not severable from Orders 1(b)(i) to 1(b)(iii). 385 Thus, for the Commissioner, the proper construction of the resolutions remains a matter to be determined by this Court in these proceedings.

The contentions of the applicants 386 The applicants, on the other hand, say that the precise entitlements of the beneficiaries to the income of the trust as a matter of trust law including how the trustee attributed to the beneficiaries that income which had particular characteristics that would give rise to particular taxation consequences in the hands of the beneficiaries (the most important of which were franking credits) has already been determined by the Supreme Court in a final sense which binds the Commissioner and is not capable of being re-agitated in these proceedings. Moreover the applicants say that the entitlements of the beneficiaries to the income of the trust and how the trustee dealt with income related to franking credits (and foreign income) by one resolution, and income that bore no relation to franking credits, by a separate resolution have also been determined by the Supreme Court in a final sense which binds the Commissioner and is not now capable of re-agitation. 387 The applicants say that there is simply "no doubt" that the issue of whether Martin Thomas had a vested and indefeasible interest in possession to that proportion of the income of the trust for the relevant years that entitled him to the amount of franking credits in each year as set out in Order 1(b)(ii) is foreclosed by the Supreme Court orders. The same position prevails concerning MAPL. The same position prevails concerning the order that the trustee had, in the relevant tax years, distributed all the distributable income of the trust among the beneficiaries in accordance with the proportions concerning the sharing of the franking credits set in Order 1(b)(ii). 388 The applicants say that the Supreme Court declarations foreclose any re-examination of questions concerning the entitlements of the beneficiaries to income and to the benefits relating to franking credits and this is so whether the franking credits are regarded as income under the trust deed or whether they are regarded as "financial benefits" to be dealt with by the trustee in the discharge of the trustee's contended duty to deal with the franking credits for the benefit of the beneficiaries.

The proceedings and the reasons for judgment 389 It is now necessary to deal with the matters in issue in the Supreme Court proceedings and then identify the precise scope of the orders made by Applegarth J. 390 In the Supreme Court proceedings the trustee was the applicant. 391 Martin Thomas and MAPL were the respondent beneficiaries. 392 The trustee sought directions under s 96 of the Trusts Act 1973 (Qld) as to the proper construction of the trust deed and resolutions "purporting to distribute net income comprising, among other things, dividends and franking credits" to the two respondent beneficiaries: [1]. As to the nature of the jurisdiction exercised by the Supreme Court under s 96, see generally Macedonian Church v Eminence Petar (2008) 237 CLR 66 (although the statutory provision under the New South Wales legislation is in different terms). 393 Under s 96, the Supreme Court may give directions to the trustee concerning any property subject to a trust or respecting the management or administration of trust property or in respect of the exercise of any power or discretion vested in the trustee. In the Supreme Court proceedings the Court not only gave directions in reliance upon s 96 but went further and made declarations as to the relevant subject matter. There is, in my view, a serious question about the appropriateness of the Court making declarations as to the relevant matters in such non-adversarial proceedings in the exercise of the powers conferred under s 96 having regard to the historical and jurisprudential foundations of the power to give directions: see Macedonian Church v Eminence Petar, generally. Nor, for the same reasons, would it be consistent with principle to make declarations as ancillary relief to the exercise of the power to give directions under s 96 or in the exercise of the inherent jurisdiction of the Court having particular regard to the special considerations that apply in exercising the power conferred under s 96. In any event, the orders were made and remain in force. 394 As to the Supreme Court proceedings, Mr Harrison QC and Mr Robertson QC, the counsel for the trustee and the beneficiaries in all of the proceedings in this Court and the AAT, represented the trustee before the Supreme Court. The respondent beneficiaries were present before the Supreme Court but took no active part in the proceedings: [10]. I thus assume that they simply elected to abide by the relevant orders. Certainly, they did not contest or oppose or otherwise act as a contradictor to the proposed orders sought by the trustee. 395 Beneficiaries other than the respondent beneficiaries were advised of the proceedings, sought legal advice about it and supported the orders sought by the trustee: [10]. 396 As to the question of the potential engagement by the Commissioner in the proceedings, Applegarth J observes at [7] that the trustee had elected to seek directions from the Supreme Court as to the proper construction of the resolutions due to the "uncertainty injected by the ATO's suggestion about how the resolutions are to be interpreted". That "uncertainty" is explained at [6] of the reasons in this way. Ms Abbott had conducted discussions with the ATO which caused her to understand that its position was that under the resolutions the franking credits were intended to be allocated in accordance with the resolutions passed to distribute the net income of the trust, not the franking credit distribution resolutions. Applegarth J then observes at [6], based on the affidavit evidence before him, the statement of agreed facts and the matters recited at [5] of the reasons that the "ATO's suggestion does not accord with the trustee's intention in making the resolutions". Applegarth J also observed at [6] that: It does not reflect Mr Thomas' instructions to Ms Abbott in preparing the resolutions. It does not accord with the terms of the resolutions which, when read together, clearly indicate that a separate, specific resolution relates to the distribution of the franking credits. 397 At [11], Applegarth J explains the interaction between the applicant trustee and the ATO concerning the Supreme Court proceedings in this way: Since the application was prompted by a query raised by officers of the ATO, and the application involves consideration of provisions of Commonwealth taxation legislation, the applicant sensibly and properly placed the Commissioner of Taxation on notice of the application. Despite the Commissioner's interest in the proper interpretation of such legislation, by a letter dated 24 September 2010 a senior officer of the ATO informed the applicant's solicitor that he did not believe it was necessary or appropriate for the Commissioner to be a party to the application. The Commissioner was given the opportunity to appear and to contradict, if necessary, any submissions of fact or law made by the applicant, and to generally assist the Court concerning the interpretation of legislation that the ATO administers. The applicant, through its solicitor, indicated to the ATO that if the Commissioner appeared in order to make any submissions concerning the law, the applicant would not seek any costs orders against the Commissioner. 398 At [48], Applegarth J observes that his Honour has not had the advantage of oral or written submissions from the ATO. However, his Honour had regard to a letter from a Deputy Commissioner of Taxation dated 15 September 2010. At [48], Applegarth J notes the Commissioner's proposition that there is some uncertainty as to whether franking credits could ever form part of the income of a trust estate for trust law purposes as franking credits are merely a tax concept and they do not represent an accretion to the trust fund beyond the distributions to which they attach. 399 In the reasons, his Honour sets out the unchallenged facts in support of the trustee's application for the income years 2005 to 2008 (recognising that there were no questions in issue concerning the 2009 income year). It seems to me that it is unnecessary to set out the factual contentions upon which Applegarth J relied. Those factual contentions, having regard to the description of the evidence by Applegarth J in the reasons, seem to be entirely consistent with the contentions of Mr Thomas and Ms Abbott in their affidavit evidence relied upon by the applicants in these proceedings in the Federal Court and the related applications in the AAT (leaving aside for the moment the evidence given in cross-examination of each deponent). 400 His Honour makes particular observations about the intentions of Mr Thomas and Ms Abbott concerning the preferred distribution of franking credits and the "rest of the net income of the trust" for each relevant income year: [2]. That matter of intention is examined further at [2], [3] and [4] of the reasons. At [5], his Honour observes that the evidence concerning the intention of the trustee is "clear" and that Mr Thomas had no intention, in executing the resolution that did not deal with franking credits, to deal with franking credits. His Honour accepted that Mr Thomas's intention in respect of that other resolution was solely to deal with "the other net income of the Trust". 401 At [14] to [30], his Honour sets out factual matters drawn from the agreed statement of facts. As mentioned, it is not necessary to examine those matters in any detail. They are simply foundation facts. However, at [21] Applegarth J notes that in each income year before formal distribution resolutions were made, Ms Abbott and Mr Thomas discussed the distributions that ought to be made having regard, in particular, to the amount of the s 95 net income and "the statutory advantages conferred by the franking credits on those beneficiaries entitled to them under Division 207". These were the "two principal taxation factors" taken into account: [22]. The "overriding factor" was to ensure that the "full benefits" of the franking credits were obtained by Mr Thomas "to allow him to claim cash from the Commissioner of Taxation". What followed is described at [24] to [26]. 402 At [31], his Honour describes the cl 4.1 power conferred on the trustee by the deed to apply the income of the trust property and the default distribution provision should the trustee fail to pay or apply the whole of the net income of the trust in any relevant income year. His Honour notes at [32] aspects of Div 6 of the 1936 Act; notions relating to the taxation of s 95 net income; and the effect of s 99A of the 1936 Act. At [33], his Honour notes the orthodoxy of the deed's approach in imposing a duty on the trustee to consider, each year, distributing trust income coupled with a default distribution mechanism as a preference to engaging s 99A with taxation at the top marginal rate. At [34], his Honour notes the terms of cl 4(2) concerning separately recording different categories of income in the books of the trustee and the cl 4(4) authority conferred on the trustee to separately deal with the whole or part of the income of a category so as to pay, apply or set it aside for the benefit of one or more particular beneficiaries. His Honour then refers to cl 4(2)(a)(iv) (see [18] of these reasons) which provides that the trustee may separately record categories of income received into the trust property described as: (a) dividends which under [the 1936 Act] - as amended … … (iv) [to which] any other separately identifiable taxation consequence or benefit is attached or arises. 403 His Honour concludes at [34] and [35] that although the language of cl 4(2)(a)(iv) is awkward: [34] … it is reasonably clear that the taxation benefit given by a franking credit is one of the categories of income received into the Trust Property that may be separately recorded in the books of account and records of the Trust, and separately dealt with in a resolution or determination of the trustee by which income is distributed. [35] In short, the Deed empowers the trustee to separately deal with franking credits so that they may be applied for the benefit specifically of any one or more of the beneficiaries. The Deed enables the Trustee to stream various categories of income among the beneficiaries so as to result in different taxation outcomes for those beneficiaries. The Deed treats the separately identifiable taxation benefit that is a franking credit as income of the Trust Property that is capable of distribution. [emphasis added] 404 Thus, by [34] the benefit conferred by a franking credit is a "category of income" of the trust estate as defined because it must itself be a "dividend", as defined, under cl 4(2)(a)(iv) because the benefit is infelicitously or awkwardly described as income to which "any other separately identifiable taxation consequence or benefit attaches" and by [35] "franking credits" may be separately dealt with by the trustee under cl 4(4) because the deed enables various categories of income to be streamed. Thus, since the benefit conferred by a franking credit is a category of income, it too can be streamed among the beneficiaries. Thus, the construction adopted at [35] by his Honour that the deed treats the separately identifiable taxation benefit of a franking credit (or as conferred by a franking credit), as income. 405 At [36], his Honour observes that unless those franking credits are distributed to individual beneficiaries they may be "wasted" if they remain in the hands of the trustee and therefore the relevant resolutions were intended to distribute all the income that was capable of distribution including franking credits and thus the default provision did not operate. 406 The next step in his Honour's reasoning concerning the construction of the deed and the resolutions made under it is the recognition that the net income of the trust (due to expenses) was in each income year much less than the gross income that comprised the franking credits. At [37], that circumstance led to a "clear intention" on the part of Mr Thomas (and as advised by Ms Abbott) and thus the trustee, to distribute the vast majority of the franking credits to him. His Honour must necessarily have regarded that step as a streaming of a category of income, so construed: [37]. His Honour accepted that that was done by the separate resolution addressing imputation credits and foreign tax credits. 407 His Honour concluded that apart from so distributing "the benefit of these franking credits" (at [37]), a separate resolution dealt with the distribution of the net income of the trust "so as to ensure that all of the distributable income was distributed" (at [37]) so as to avoid engaging s 99A of the 1936 Act. 408 Since, as found, the beneficiaries were presently entitled to the trust's distributable income by reason of the net income distribution resolutions, it seemed uncontroversial to his Honour that "the benefit of the franking credits" (at [38]) could be distributed to those beneficiaries even if the s 95 net income was less (and much less) than the amount of the franking credits included in the assessable income. His Honour also observed that having regard to the Australian Taxation Handbook 2010, gross dividends do not need to be traced and distributed to a particular beneficiary for that beneficiary to obtain the benefit of the franking credits related to the dividends: [39]. 409 At [40], his Honour observes that the issue agitated before him was whether the "franking credits", forming part of the trust property (that is, income of the trust), were distributed in accordance with the franking credit distribution resolutions in a way effective to pass them to the beneficiaries or whether, as the ATO had suggested to Ms Abbott, the franking credits were allocated by the net income distribution resolutions each year. His Honour observes that the ATO's apparent contention "is at odds with the terms of the resolutions" made contemporaneously and "does not accord with the clear intent of the trustee": [40]. His Honour regarded the "essential issue" agitated by the trustee as whether the deed permits a "differential allocation of franking credits". 410 The trustee's contention before Applegarth J on this issue was that because as a general rule s 207-20 of the 1997 Act requires the franking credit on a franked distribution to be included in the assessable income of the receiving entity, franking credits have been clothed by the Parliament, as a general proposition, with the normal attributes of income (that is - ordinary income) which means that franking credits on or related to a franked distribution received by the trustee can be dealt with by the trustee in the same way as other income. 411 His Honour understood the trustee's second contention to be that because s 207-35(3) together with the worked example recognises that a trust deed can deal differentially with franked distributions so as to direct, by its terms, the benefit of franking credit amounts among beneficiaries or to one beneficiary, it follows that a settlor can confer a discretion on the trustee to deal with franked distributions in the same way. 412 At [45], Applegarth J observes that if a trustee of a discretionary trust is so able to distribute franked dividend income to one beneficiary to the exclusion of others, the franking credits "follow the income that is attributable to the franked dividends because that is where the benefit of the franked distribution received by the trustee is conferred" and "it is unnecessary for the s 95 net income to exceed the franking credits included in assessable income for those credits to pass through to the beneficiaries". As to the worked example at s 207-35(3), Applegarth J observes that the franking credits need not follow the shares of the net income included in each beneficiary's assessable income on a pari passu basis. 413 As to this question of whether franking credits are clothed by the Parliament with the attributes of ordinary income, his Honour concludes at [46]: However, in making provision for franking credits to be included as assessable income, and for their allocation in accordance with s 207-35, the Parliament seemingly has given to franking credits the usual attributes of income, save as modified by the provisions of the Act. [emphasis added] 414 At [47], Applegarth J reached this conclusion: If, however, franking credits are not "income" according to the ordinary meaning of that word then under the terms of the Deed they are a category of income received into the Trust Property because they are a taxation benefit that attaches or arises in respect of fully frank[ed] dividends. They are included amongst the categories of income governed by clause 4 of the Deed, and fall to be distributed in accordance with its provisions. [emphasis added] 415 His Honour concluded that franking credits cannot be relegated to the status of a "mere concept" and that (at [49]) taxation legislation has given them at least some of the attributes of income. 416 His Honour said this at [49]: Contrary to the position articulated by the ATO [in the letter dated 15 September 2010], franking credits would appear to be an accretion to the trust fund, and something of substantial value. … As illustrated in this case, they have attributes of income, illustrated by the fact that individuals such as Mr Thomas are able to "cash in" franking credits. In any event, they confer a financial advantage which fall to be dealt with by the trustee. 417 These conclusions on the question of construction and interpretation are reinforced at [50] in these terms: The resolutions under consideration purported to allocate the franking credits differentially. I am unable to see why the trustee was not empowered to do so. I accept the applicant's argument that the Parliament, by providing as it has for the inclusion of franking credits as assessable income and for the allocation of the assessable income of which they form part, has given franking credits many of the same attributes as other categories of income. Franking credits are a benefit that the Deed authorised the trustee to distribute as part of the income of the Trust. The Deed authorised the trustee to distribute them differentially between the beneficiaries. 418 At [51], the primary judge reached the following conclusion: I conclude that the resolutions were effective to distribute the franking credits according to the intent of the trustee, as reflected in the dual resolutions. The franking credits were allocated in accordance with the resolutions that specifically addressed them, and not, as the ATO apparently suggests, by the other resolution that dealt with other categories of income. 419 And at [52]: Upon the facts stated in exhibit 1 (the Statement of Facts), I conclude that the applicant's resolutions to distribute net income for the income tax years 30 June 2005 to 30 June 2008 were, upon the proper construction of those resolutions and the Deed, effective to distribute franking credits in accordance with the intention of the trustee, namely that franking credits form part of the net income of the [Trust] in each of the tax years, and that franking credits were distributed in accordance with the resolution made each year that specifically addressed franking credits.

The Orders 420 As to the orders (see [58] of these reasons). 421 Order 1(a) is a declaration that, on the proper construction of the 1997 Act, franking credits in respect of a franked distribution made to the trustee of a trust confer a financial advantage which falls to be dealt with by the trustee of the trust. Order 1(a), unlike Order 1(b), is expressed as a general proposition concerning the characteristics of franking credits as a function of a construction attributed to provisions of the 1997 Act and the role of the trustee of a trust in respect of a conferred financial advantage. The generality of the declaration, on its face, purports to also apply to the trustee of the Thomas Investment Trust to the extent that the Trust has received a franked distribution conferring a financial advantage by reason of the franking credits which would fall to be dealt with by the trustee of that trust. 422 Order 1(b)(i) operates as a construction of the trust deed and the resolutions for the income years 2005 to 2008 and declares that the resolutions were effective to allocate to Martin Thomas and MAPL benefits pertaining to the franking credits in the proportions set out in the schedule as between the beneficiaries. Order 1(b)(ii) declares that the resolutions were effective to entitle those beneficiaries to the benefits pertaining to the franking credits in the proportions which the amounts in the schedule bear, each to the other, as recited at Order 1(b)(ii). Order 1(b)(iii) declares that the resolutions were effective to confer on Martin Thomas and MAPL a vested and indefeasible interest in possession in a share of the distributable income consistent with the allocation to Martin Thomas and MAPL of the benefits pertaining to the franking credits set out in the schedule at Order 1(b)(iii). Finally, Order 1(b)(iv) declares that the resolutions were effective to distribute all of the distributable income of the trust in each year among the beneficiaries in accordance with "those resolutions" which must necessarily be a reference to the net income distribution resolutions which do not contain any reference to franking credits. 423 Since Order 1(a) expressly operates by way of generality founded upon a construction of the 1997 Act; Orders 1(b)(i) and (ii) each depend upon notions of allocation and entitlement by reference to benefits pertaining to franking credits in respect of franked distributions which, in turn, necessarily has regard to concepts, rights and entitlements deriving from the 1997 Act and particularly Div 207 of that Act; and Order 1(b)(iii) is concerned with conferring a vested and indefeasible interest in possession in a share of the distributable income of the trust by reference to allocations to the beneficiaries of the benefits pertaining to the franking credits, each of these orders engages the construction, operation and application of provisions of the 1997 Act and related provisions of the 1936 Act. Order 1(b)(iv) is necessarily bound up with the other orders. 424 In other words a substantial feature of the orders engages questions relating, particularly, to the 1997 Act and Div 207. 425 The Commissioner has an interest, which might be regarded as its major direct interest, in the question of the construction and operation of Commonwealth taxation law and its application to the relevant factual circumstances concerning the activities of taxpayers. The Commissioner is responsible for the administration of the tax law of the Commonwealth. The Commissioner was not a party to the Supreme Court proceedings. Of course, no question of res judicata arises because neither the Commissioner nor his privy were a party to those proceedings; see generally Res Judicata, Spencer Bower and Handley, 4th Edition, 9.05; Tomlinson v Ramsey Food Processing Pty Limited [2015] HCA 28. In a strict sense, so far as the Commissioner is concerned, the earlier Supreme Court proceeding is regarded in law as simply "a thing done between others" (res inter alios acta). Further, the Supreme Court proceedings were not adversarial proceedings in any event. However, a person who is neither a party nor a privy to proceedings may find his or her rights affected by litigation between others, not because of an estoppel, but because he or she must accept facts created by the judgment: Res Judicata, 4th Edition, 9.32; Executor Trustee and Agency Co v Deputy Federal Commissioner of Taxes (South Australia) (1939) 62 CLR 545 (Executor Trustee v DFCT). The notion that a person who is neither a party nor a privy of a party to a proceeding might be bound to accept facts created by a judgment as between other parties is an inherently counter-intuitive notion because a decision, as an exercise of judicial power, determining questions as to the existence of a right or obligation as between A and B renders that question determined (or quelled) only as between A and B, absent very special considerations. To the extent that the Commissioner seeks to assert rights or obligations (or resist the contentions of those challenging an objection decision under the statutory regime established by the TAA) deriving from the taxation law of the Commonwealth, it remains a principle "at the core of our legal system" that a party claiming or denying the existence of a legal right, entitlement or obligation should have an opportunity to present evidence and arguments to establish the facts and the law on which the claim or denial is founded: see Tomlinson v Ramsey Food Processing Pty Limited at [20] and [38], French CJ, Bell, Gageler and Keane JJ. 426 In Executor Trustee v DFCT a testator by his will, after giving certain annuities and legacies, directed his trustees to stand possessed of the whole of the residue of his real and personal estate upon trust to pay the income to particular nieces and nephews with particular provisions about particular annuities falling into the residuary estate. The will provided that after the death of a particular named annuitant (and identified nephews and nieces), there was a trust for sale and division of the proceeds of the personal residuary estate with accrued income, in a particular way. The will also provided that the trustees could, in their uncontrolled discretion, accumulate the unapplied surplus of such income by particular investments and in the exercise of their discretion they were at liberty to apply accumulations in a particular way. 427 The Full Court of the Supreme Court of South Australia upon an application for directions by the trustee declared that the trustee was empowered, in the exercise of its discretion, from time to time, to pay according to the stocks, the unapplied surplus, or accumulations of the income of the residuary real and personal estate, to the testator's nieces and nephews (or their children if they should die). 428 The Supreme Court also later declared that the trustee was empowered, in the exercise of its discretion, to pay the surplus income arising after a particular date equally to the testator's identified nieces and nephews then living (or their children if they should die). 429 Under this second order, the trustee had exercised its discretion by distributing the whole of the surplus income of the personal and real estate among the nephews and nieces (or their survivors) - six in all. 430 In a relevant year the six individuals received the whole of the income of particular land. 431 None of the questions alive in either of the South Australian Supreme Court proceedings (concerning the construction of the will and the scope of the discretionary powers of the trustee) and particularly the proceeding leading to the second Order upon which the trustee had acted in applying the whole of the income of the land to the six individuals, involved any question of taxation or the construction or interpretation of a taxation law. 432 That question subsequently arose in this way. 433 Section 38 of the Land Tax Assessment Act 1910-1934 provided for the taxation of joint owners of land. The trustee claimed six deductions of £5,000 from the unimproved value of the land on the footing that the six individuals were "joint owners" who held an "original share in the land" as persons specified in the will "entitled" to the income from the land which was said to be a position consistent with the particular definition of the phrase "original share in the land" in that Act. The DFCT contended that the trustee was only entitled to one deduction of £5,000 as the annuitants were not joint owners. The High Court concluded that the annuitants were not joint owners as they were not owners within the relevant definition because they held no relevant "entitlement" to the rents and profits of the land in question, as only the trustee was entitled to receive the rents and profits. Anything further was received by them by virtue only of the exercise of the discretion of the trustee. 434 More importantly, the second order of the Supreme Court had so declared the position. 435 In this context, the trustee contended in the proceedings concerning the taxation assessment that the second order of the Supreme Court was wrong and that it was irrelevant in any event to the present proceedings as the DFCT, not having been a party to the previous proceeding, was not bound by the order made by the Supreme Court and was not entitled to rely upon that order as foreclosing the question of joint ownership simply because it happened to suit the DFCT to do so. In other words, the trustee contended that the DFCT as a non-party to the earlier proceedings could not assert against the trustee, as binding, a determination of the issue of ownership made in the earlier proceedings so as to prevent the trustee asserting a position or construction contrary to the earlier orders. 436 As to that question, Latham CJ at p 561 said this: The order of the Supreme Court is certainly conclusive in relation to the rights inter se of the parties to the proceedings in which it was made. It could have been challenged upon appeal, but so long as it stands, the rights of the annuitants to receive income from the trustee are the rights declared in the order - no more and no less. There is no means whatever whereby either the trustee or the annuitants can, as a matter of right, vary those rights. There is no suggestion that the order was obtained collusively or fraudulently. If the commissioner could get the order set aside, the case would then be different. But there is no basis for setting the order aside. There is no doubt as to the jurisdiction of the Supreme Court to make the order, and an argument that the order is wrong, though it would be the very basis of an appeal, would be irrelevant in any other proceeding. [emphasis added] 437 Latham CJ also said this at p 561: The question which arises in this appeal depends entirely upon the rights of the annuitants against the trustee. Those rights have been defined by a court of competent jurisdiction in a manner which excludes the definition of them now preferred by the annuitants - or any other definition inconsistent with the order of the court. The commissioner is entitled to take, and must take, interests in the land as he finds them [apart from arrangements rendered void as against the commissioner under the Act in question]. A particular decision of a court as to the interest of a person in land, or as to his right to receive moneys by way of income, may be wrong. But the commissioner cannot impose land tax upon interests in land which, if a contrary decision had been given, the taxpayer ought to have, but in fact does not have; nor can he impose income tax upon income which the taxpayer does not derive but which, upon the hypothesis of a contrary decision, he would have derived. [emphasis added] 438 Latham CJ also said this at p 562: The Commissioner of Taxation who takes moneys from a taxpayer as a contribution to the revenue cannot be described as a privy in a state to the taxpayer where rights have been determined in a proceeding to which the Commissioner was not a party. But when, in duly constituted proceedings before a competent court, the rights of a cestui que trust against a trustee and the corresponding duty of the trustee towards the cestui que trust have been defined, there is no means whereby those rights can be otherwise defined, because each party is conclusively bound by the order of the court. When the revenue authorities come to impose a tax in relation to such rights, they must, in my opinion, take them as they in fact actually exist between the parties. Thus, although the commissioner cannot be said to be "bound" by the order of the Supreme Court as res judicata or in any other way, he has no option but to assess the trustee or the cestuis que trust upon the basis of their duties and rights as declared by the order. [emphasis added] 439 Dixon J said this at p 569 and p 570: Even if these two orders [of the Supreme Court] had not been made and the construction of the will were altogether open, I should not place upon it the interpretation for which the appellant [trustee] contends. The orders, however, fix the rights of the beneficiaries in relation to the income of the land upon which the tax is levied, and, in my opinion, they control the situation. There is no question of res judicata or issue-estoppel. But the rights in question being measured by the nature and extent of the interests which are taken in the land as at 30 June 1938, we must look at all operative instruments which define those interests. The orders define the interests of the six beneficiaries. It is true that they do not purport to give new interests and that in law they operate only as declarations determining, as between trustee and beneficiary, the interests otherwise existing, that is, arising under the will. But it is none the less true that the beneficiaries can, after the making of the orders, have no interest in the land inconsistent with the orders. [emphasis added] 440 McTiernan J said this at p 572: It is true that none of the questions decided in [the Supreme Court] proceedings is binding on the Commissioner as if it were a res judicata. But the will and the orders made by the Supreme Court determine the interests which according to the law of South Australia the annuitants have in the income from the land. I agree that the interests were liable to taxation upon the basis that they were correctly declared by the orders. [emphasis added] 441 See also Res Judicata, 4th Edition, at 9.32 to 9.34 and 13.09; Page v McKensey and Ors [2003] NSWSC 759 at [41] to [44]; Solak v Registrar of Titles [2009] VSC 614. 442 In Re Sassoon [1933] 1 Ch. 858, the Court of Appeal considered whether the interest of a person in an estate had passed upon his death. The interest would not have passed if it had, at the date of his death, been forfeited. The issue of forfeiture and the construction of the will was the subject of proceedings before Luxmoore J in the absence of the Inland Revenue Commissioners (the "Commissioners"). Luxmoore J held that the interest had been forfeited. Demands were then made for a refund of duty on the basis that excess duty had been mistakenly paid on the assumption that there had been no forfeiture. Farwell J held that the rights of the beneficiaries had been conclusively settled by the decision of Luxmoore J and the Crown could not tax on any other basis. At least one member of the Court of Appeal disagreed with that view. Romer L.J. at p 893 said this on that topic: In these circumstances it becomes unnecessary to express any final opinion upon the question whether Farwell J. was right in the view that he took of the conclusive effect of the order of Luxmoore J. as to the construction of Ronald Sassoon's settlement. I need only say this. Upon the death of a person the Crown becomes entitled to estate duty upon the property passing or that is to be deemed to pass upon such death, and in the case of property that does not pass to the executor as such, the duty is actually made a charge upon the property, which charge until the duty is paid would appear to be vested in the Crown. Whenever, therefore, after the death of a person a question arises whether certain property does or does not pass, or is or is not in such a situation as to be deemed to pass, upon that death, the Crown is directly interested in that question, and cannot be deprived of any rights it may have in the matter by the decision of the Court given in its absence. [emphasis added]

Conclusions as to the effect upon these proceedings of the Supreme Court proceedings: applicants' contentions 5, 6; Commissioner's contention 19 443 The, in principle, propositions accepted by the Commissioner deriving from Executor Trustee v DFCT are set out at [379] of these reasons. However, the Commissioner's contentions set out at [381] to [384] of these reasons as to the operation of the particular orders of the Supreme Court mean that those in principle concessions, for all practical purposes, operate as no constraint upon the Commissioner's contended right to challenge, in these proceedings, the proper construction of the resolutions and the proper construction, effect and operation of a taxation law of the Commonwealth to the extent that the orders engage those questions in the sense described at [381] to [384] of these reasons. 444 Because the orders of the Supreme Court are made in the exercise of the jurisdiction conferred upon that Court by s 96 of the Trusts Act 1973 (Qld) for the purpose of enabling a trustee or beneficiaries to obtain directions as to a relevant matter; those proceedings are non-adversarial proceedings; the proceedings were not contested as there was no contradictor before the Court; the evidence of the deponents was not tested; the Commissioner was not a party to the proceedings; and the proceedings did not simply engage a domestic question as between the trustee and the beneficiaries but rather sought to address rights and obligations of the trustee and beneficiaries having regard to the operation of a Commonwealth taxation law, the Commissioner, having a direct interest in the relationship between the powers of the trustee, the resolutions of the trustee and the construction and operation of the taxation laws of the Commonwealth, so far as they engage the relevant activities and conduct of the trustee and the beneficiaries, is not bound by the directions and declarations made by the Supreme Court of Queensland to accept facts found by the Supreme Court. 445 Certainly, there can be no issue estoppel or res judicata raised against the Commissioner in the Federal Court proceedings. The propositions identified by their Honours Chief Justice Latham, Dixon J and McTiernan J in Executor Trustee v DFCT have no application to the present proceedings as the Supreme Court proceedings do not represent a determination of matters between the trustee and the beneficiaries inter se which the Commissioner must accept in applying the taxation laws of the Commonwealth but rather those orders represent declarations going beyond the inter se domestic relationship extending into a determination as to the operation of provisions of the 1997 Act (and related provisions of the 1936 Act) central to the present proceedings. The Commissioner simply cannot be deprived, by operation of the Supreme Court orders, of a right to make submissions on all questions of fact and law in issue in the present proceedings in ventilation of the rights the Commissioner seeks to assert which was the subject of orders made in the Commissioner's absence. 446 Thus, this Court must determine all questions in controversy in these proceedings itself.

Applicants' contentions 1, 2, 4; Commissioner's contentions 2, 3, 4, 5, 7 and 8 concerning the construction of the deed of trust 447 The applicants say that the references in cl 4.1 of the deed to income and net income of the trust property coupled with the default distribution provision and important amendments having been made to cl 4 by the settlor on 1 October 1992 expressly in the context of the 1936 Act, suggests that cl 4, construed against the background of the deed as a whole, is concerned with net income in the sense of s 95(1) of the 1936 Act and that the distributable income of the trust is the s 95 net income. 448 The terms "income of the Trust Property" and "net income of the Trust Property" are undefined by the deed. 449 The deed was amended on 1 October 1992 to expressly enable, by cl 4(2), the separate recording in the books of account and records of the trust of "categories of income" of "dividends" and "income" as defined. Each category of dividends is defined by reference to a taxation characteristic (or the absence of such a characteristic) - franked dividends, unfranked dividends, dividends with foreign tax credits attached and other dividends reflecting a separately identifiable taxation consequence or benefit attached. 450 "Income" (including capital gains) for the purpose of separate recording in the books of account and records of the company is income having an Australian or ex-Australian source; income having a foreign tax credit attached; income which is exempt income; income not otherwise liable to be taxed; and, income having any other separately identifiable taxation consequence or benefit. Clause 4(4) enables streaming, in whole or in part, of the income of a category which is necessarily a cross-reference to the categories of income contemplated by cl 4(2). 451 Although the categories of income contemplated by cl 4(2) as "dividends" and "income" so defined and introduced into the deed on 1 October 1992 are bound up with the taxation characteristics exhibited by each class of "dividends" or "income", those matters are concerned with identifying categories of income that might be separately recorded in the books of account and records of the trust and which might then be the subject of a resolution or determination of the trustee to separately deal with income of a category so as to pay, set aside or apply it for the benefit of any one or more of the beneficiaries. These specific matters of separate recording and separate streaming do not, however, limit or define the notions of what might be income or net income of the trust property settled on the trustee for the benefit of the beneficiaries. 452 In the absence of any definition of the terms income and net income of the trust property, prima facie, the term income ought to be understood as all income from all sources and the term net income ought to be understood as that income less the expenses or outgoings of the trust determined according to proper accounting principles. 453 Prima facie, there is no obvious basis for limiting the net income of the trust property to the total assessable income of the trust calculated under the 1936 and 1997 Acts less all allowable deductions contemplated by those Acts nor any obvious basis for treating the s 95 net income of the trust property as the distributable income of the trust. Moreover, although Ms Abbott and Mr Thomas focused upon net income distribution resolutions which had the effect of distributing only the s 95 net income of the trust property, Ms Abbott gave evidence that there was other income of the trust which in each income year was distributed by reference to journal entries although those journal entries were made later in time and not necessarily in each financial year. 454 Thus, the distributable income of the trust was treated by Ms Abbott as not simply the s 95 net income even though it was the only subject matter of the net income distribution resolutions. Ms Abbott who was responsible for formulating the resolutions and who was a very significant influence upon Mr Thomas (and thus the trustee) in the thinking about net income distribution made in each income year took two important steps. First, she drew the net income distribution resolutions framed only by reference to the s 95 net income of the trust property. Second, she made journal entries which had the effect of distributing any other distributable income of the trust so as to ensure that there was no remaining undistributed distributable income of the trust so as to ensure that s 99A of the 1936 Act was not engaged. 455 Thus, as a matter of construction, I conclude that the terms "income of the Trust Property" and "net income of the Trust Property" bear the meaning described at [452] and that the distributable income of the trust was the net income described at [452]. 456 I would respectfully disagree with the conclusion reached by Applegarth J on this particular issue. 457 The next question is whether franking credits or the franking credit benefit represented by imputation credits is properly understood as "income" in the nature of ordinary income or, alternatively, a "category of income" of the trust under cl 4(2) which might then be understood as a category capable of streaming under cl 4(4) of the trust deed. 458 Franking credits represent statutory income for the purposes of the gross-up provisions of the 1997 Act. Franking credits are not income in any sense of the term "ordinary income", as that term is understood as a matter of orthodoxy. Franking credits are included within "assessable income" entirely as a statutory construct for the purposes of the 1936 and 1997 Acts and particularly the statutory integers reflected in Div 207 in determining the amount of a gross-up of income as an element of determining a person's entitlement to the amount of an offset in the calculation of a person's liability to tax. 459 Thus, I would not regard franking credits as ordinary income or something in the nature of ordinary income. 460 Franking credits, however, might be properly regarded, under the trust deed, as a "category of income" capable of being separately recorded in the books of account and records of the trust if franking credits fall within the definition of "dividends" or "income", for that purpose, under cl 4(2) of the trust deed. However, cl 4(2)(a) defines "dividends" by reference to the characteristics earlier mentioned. The characteristics themselves are not elevated to the category of dividends. "Dividends" are those dividends received into the trust property which are fully franked or unfranked, or to which a foreign tax credit is attached, or a receipt of dividends which has attached to it some form of separately identifiable taxation consequence or benefit. If the receipt is one which bears such a characteristic, the dividends comprise a "category of income" called "dividends" so defined. The franking credit itself, however, is not "dividends" nor a "category of income" for the purposes of cl 4(2)(a). 461 Franking credits might be income, however, under cl 4(2)(b) if franking credits fall within the notion of "income" for the purposes of that category under that clause. However, the same difficulty arises with cl 4(2)(b) and especially cl 4(2)(b)(v). If the trust receives income (including capital gains) which has (or gives rise to) some separately identifiable taxation consequence or benefit other than that mentioned in cl 4(2)(b)(i) to (iv), that income, bearing that characteristic, is capable of being separately recorded in the books of account and records of the trust. Such income, so understood, might be distributed or accumulated by the trustee in whole or in part under cl 4(4). Under cl 4(5), expenses and outgoings of the trust fund might be allocated against such a category of income. 462 As a matter of construction, franking credits do not form ordinary income of the trust and they do not fall under the notions of "dividends" or "income", as "categories of income" for the purposes of cl 4(2)(a) and cl 4(2)(b) of the trust deed. 463 However, fully franked dividends are "dividends" which represent a category of income capable of separate recording in the books of account and records of the trust. They are capable of streamed distribution, in whole or in part, by the trustee of the trust for the benefit of any one or more of the beneficiaries to the exclusion of any one of them. Even though the franking credits are not income, the franking credits attached to a franked distribution are something of considerable potential commercial value to a beneficiary (in real dollar terms) if franked dividends, for example, to which franking credits are attached, are streamed to a beneficiary who, by reason of that distribution and other relevant integers under Div 207 of the 1997 Act, is entitled to assert either an offset entitlement against tax otherwise payable or, both an offset entitlement and an entitlement to a refund measured by the amount of any surplus offset entitlements beyond the immediate tax offset. The relevance of recognising that franking credits attached to a franked distribution are something of considerable potential commercial value to a beneficiary once a franked distribution is properly and validly streamed to that beneficiary is that it casts a duty on the trustee to consider how those franking credit offsets might be enlivened for each beneficiary (perhaps differentially or to the exclusion of particular beneficiaries) and what steps would need to be undertaken in conformity with the 1997 Act and related provisions of the 1936 Act to ensure that an opportunity is afforded to one or more beneficiaries to take advantage of whatever offsets might arise or be available to such beneficiaries upon statutorily relevant steps or resolutions being taken or made by the trustee.

The applicants' contentions 3, 7-20; Commissioner's contention 1 and contentions 9-18; and the written submissions of the parties 464 Mr Thomas and Ms Abbott caused two separate resolutions to be passed by the trustee contemporaneously in each income year. One resolution effected a distribution of the net income of the trust which on the evidence of Mr Thomas and Ms Abbott distributed only the s 95 net income of the trust. Those distributions are set out at [36] of these reasons. They were effected by the resolutions set out at [33] in each income year subject to variations in the amounts distributed in each income year. In the income years 2006, 2007 and 2008 an amount was allocated to Mr Thomas with the balance being allocated to MAPL. In the 2009 income year two nominated amounts were distributed to the beneficiaries. The resolutions were framed with a preamble which recites that the "net income of the trust fund" for the relevant income year be applied for the benefit of the beneficiaries in the proportions noted at [36]. 465 The second of the dual resolutions recites a distribution of the "franking credits" (TFN withheld, foreign tax income) in each income year in the proportions identified at [37] of these reasons. The preamble to the schedule setting out the proportions of the franking credits applied to each beneficiary in each franking credit distribution resolution again recites that the "net income of the trust" be applied for the benefit of the beneficiaries listed in the resolutions by crediting the relevant beneficiary's account maintained by the trustee with franking credits of a certain amount. 466 The franking credit distribution resolution, on its face, purports to apply the net income of the trust for the benefit of Mr Thomas and MAPL by crediting the relevant beneficiary's account with a proportion of the franking credits. Framing the resolution in that way is odd. The trust deed contemplates that franked dividends might be separately recorded in the trust's accounts and records and those dividends might be separately streamed to any one of the beneficiaries to the exclusion or otherwise of other beneficiaries. Thus the trustee might elect to record and apply the franked dividends as between Mr Thomas and MAPL in certain proportions as it determines appropriate. Such a decision would be entirely consistent with cls 4(1), 4(2) and 4(4)(a) of the trust deed. Prima facie at least and subject to the provisions of the 1997 Act and particularly Div 207 of that Act, the proportion of the franked distribution so allocated would carry with it the corresponding proportion of the franking credit as the franking credits are, in one sense, stapled (to use a descriptive term not a term of art) to the franked distribution. 467 The explanation for the way in which the resolution is framed may be that Ms Abbott simply transposed the introductory language of the net income distribution resolution allocating the s 95 net income into the proposed resolution concerning the allocation of franking credits attached to the dividends which then gave rise to a resolution which, on the face of it, links the application of the net income of the trust on one hand with the distribution of franking credits on the other but in proportions as between Mr Thomas and MAPL which bear no relation to the proportions of the s 95 net income allocated as between them under the net income distribution resolution applying the s 95 net income. However, Ms Abbott did not give any evidence about the basis for the selection of the introductory language of the franking credit distribution resolutions. 468 In any event, a number of things can be said of and questions asked about the dual resolutions. 469 First, neither Mr Thomas nor Ms Abbott (and therefore nor the trustee) intended by the s 95 net income distribution resolutions in each income year to distribute either the franked dividends received by the trust or the franking credits related to those dividends or franking credit benefits in the form of any tax offset entitlements, to Mr Thomas and MAPL or at all. Both Mr Thomas and Ms Abbott thought, intended and understood that by this resolution they were causing the trustee to allocate only the s 95 net income of the trust. 470 Both Mr Thomas and Ms Abbott were honest witnesses who answered questions put to them frankly and without obfuscation. I accept that they did not think, intend or understand the net income distribution resolutions to have any role other than the distribution of the s 95 net income. If their true intention had been to cause the trustee to distribute any of either the franked distribution, the franking credits or the franking credit benefits by the net income distribution resolutions, there would have been no need to cause the trustee to pass, at the same time, the separate franking credit distribution resolution, whatever they intended to achieve by it or whatever it may be construed to mean taking account of the evidence of their intention. 471 Second, what did Mr Thomas and Ms Abbott intend to achieve by causing the trustee to pass the franking credit distribution resolutions? 472 In the early part of Ms Abbott's evidence she said that she did not think about franking credits in terms of "franking credit benefits" as put to her by Mr Looney QC. That was not her taxonomic frame of reference when thinking about (and presumably when advising Mr Thomas about) how "franking credits" or the "franking credit amounts" attached to franked dividends might be susceptible of particular treatment. Nevertheless, Ms Abbott readily accepted that, in substance, what she was attempting and intending to do in framing the franking credit distribution resolutions was to distribute to MAPL a certain amount of franking credits attached to the dividends received by the trust equal to an amount sufficient to offset and extinguish any tax otherwise payable by MAPL and then distribute an amount equal to the amount of the remaining franking credits attached to those dividends to Martin Thomas so as to enable him to assert a tax offset entitlement and as to the excess, a dollar-for-dollar refund of the amount of the excess. 473 The intention was to maximise (subject to offsetting tax payable by MAPL) the refund entitlement available to Martin Thomas. 474 Ms Abbott accepted that, in substance, she was seeking to allocate the advantages or benefits accruing to the beneficiaries by reason of a perceived entitlement to assert a right of offset in the hands of the beneficiaries of amounts corresponding to the quantum of the distributed franking credits. 475 Mr Thomas had precisely the same intention. 476 The mechanism selected by Mr Thomas and Ms Abbott by which that advantage, benefit or entitlement arising solely by operation of the 1997 Act and particularly Div 207 of that Act was to be conferred, was a resolution of the trustee to distribute franking credits attached to the dividends received by the trust. 477 Third, Mr Thomas and Ms Abbott believed that it was open to the trustee under the trust deed and in conformity with the 1936 and 1997 Acts to allocate or stream the distribution of the franking credits so as to confer tax offset entitlements that they believed the beneficiaries would be entitled to assert in a way that conferred the greatest advantage possible upon Mr Thomas (save for allocating amounts sufficient to offset MAPL's tax otherwise payable) and that the proportion of the franking credits conferring that entitlement on Mr Thomas could, and would, be allocated by a separate resolution from the allocation of the s 95 net income of the trust (although the allocation of the net income and the allocation of the franking credits so as to confer the benefits sought to be conferred on each beneficiary, could have been combined in one resolution, in their view, rather than the dual resolutions as passed). The allocations were in proportions entirely different to the proportions of the s 95 net income allocated as between Martin Thomas and MAPL by the net income distribution resolutions. 478 Fourth, it is important to have regard to Ms Abbott's evidence mentioned earlier in these reasons concerning the dual resolutions passed at the end of each income year and their relationship one to the other. 479 Her evidence involved these propositions. 480 Ms Abbott's "philosophy" was to identify the profit of the trust according to the P & L; make adjustments so as to calculate the s 95 net income; allocate the s 95 net income; and allocate franking credit offsets (benefits) so as to offset MAPL's s 95 income tax liability with the balance allocated to Martin Thomas: [252]; [247] to [252]; [259]. The purpose of the franking credit resolutions was to indicate to whom the benefits would go: [255]. There was no intention to distribute the original dividends paid to the trust in passing the franking credit resolutions: [256]. References in Ms Abbott's affidavit material to franking credit distributions were intended to be references to the distribution of "benefits" - "franking credit benefits": [266], [275] and [278]. Nor was Ms Abbott seeking by the franking credit distribution resolutions to distribute the franking credits in the form of income by reason of any gross-up obligation: [255] and [267]. The only relationship between the proportion of the s 95 net income distributed to the beneficiaries and the proportion of the amount of the franking credits allocated to those beneficiaries was that a proportion of the franking credit amount sufficient to meet the tax payable by MAPL on its share of the s 95 net income, was allocated to MAPL: [261], [279]. 481 In preparing the net income distribution resolutions, Ms Abbott was not intending or purporting to allocate the distributable income of the trust: [268]. Rather, Ms Abbott was intending to distribute only the s 95 net income by those resolutions ([268]) although she thought she was following the trust deed by doing so: [269]. Although Ms Abbott intended by the franking credit distribution resolutions to indicate (and allocate) where the franking credit benefits were to go (and understood that the "thing being done" by those resolutions was to confer the offset entitlements on particular beneficiaries for the reasons already mentioned), the allocation of the benefits was not the "only thing" she was trying to achieve: [271], [272]. Ms Abbott seemed to act on the footing or assumption that because a distribution to beneficiaries of income in the form of franked dividends received by the trust necessarily results in the franking credit benefits following the income distribution ("because it has to follow them" [273]), the allocation of franking credit benefits would, in effect, reciprocally, result in the income (franked dividends) following the "benefits" (or to use Ms Abbott's terms, following the franking credits or franking credit amounts: [273]). 482 Although Ms Abbott accepted, however, that the franked dividends and the amount of the franking credit gross-up were already "captured" in the s 95 calculations and the s 95 net income distribution resolutions ([256] and [273]), (with the apparent result that the franking credit distribution resolutions were not intended to and did not operate as a proxy for a distribution of the franked dividends), Ms Abbott nevertheless perceived a necessary relationship between the franking credit distribution resolutions and the net income distribution resolutions because "part" of the income resulting in the net income distribution resolutions included the franked dividends to which the franking credits were attached: [273]. The point of that relationship in Ms Abbott's mind was (and is) that the franked dividends received by the trust identify the amount of the potential benefit measured by the franking credits on the franked dividends that might then be allocated: [273]. Ms Abbott accepted that what she was attempting and intending to do was to take that benefit, so identified, and allocate it in a way that was different to the allocation of the franked dividends themselves: [273]. Thus, the intention was that notwithstanding how she (in effect, for the trustee) distributed the s 95 net income, calculated by reference to the franked dividends (and the franking credit gross-up), her intention was to then distribute the benefit - the right to claim an offset, in an unrelated way but, nevertheless, to the same beneficiaries: [273]. However, although Ms Abbott accepted that her intention was to separately allocate the benefits, she nevertheless believed that by distributing all of the s 95 net income, the trustee was distributing all of the grossed-up imputation credits forming part of the s 95 net income calculation according to the philosophy earlier described: [279]. 483 In her affidavit evidence, Ms Abbott contended by para 47 (see [281]) that during all of the relevant income years (2006 to 2009), Mr Thomas received the "bulk of the franked dividend income" from the trust. MAPL "could receive other income" and would receive so much of the imputation credits sufficient to offset its tax liability on income distributions to it. Ms Abbott accepted that, looking at the terms of the net income distribution resolutions, those resolutions did not allocate the bulk of the franked dividend income to Mr Thomas: [284]. Ms Abbott said and understood that the point of para 47 was to recognise that during those income years the source of the money Mr Thomas drew from the trust was the franked dividend income of the trust: [284], [285]. 484 As to the notion of "income of the trust available for distribution", Ms Abbott understood the net income distribution resolutions to distribute only the s 95 net income in each income year but nevertheless the P & L demonstrated that there was other "income there" and thus there was other net income: [292]. That position prevailed when the net income distribution resolutions were prepared: [292]. That which was available for distribution was represented by the profit shown in the P & L ([292]) and the s 95 resolutions did not deal with all of the profit available for distribution: [292]. Distributions of other income occurred by journal entries and those entries were determined in the same ratio or proportion as the distribution of the s 95 net income: [294]. Ms Abbott believed the distributable income of the trust was represented by the income from which drawings were made by Mr Thomas. That income less trust expenses, formed the net income of the trust: [295]. The s 95 net income represented the trust net income reconciled to the s 95 taxable income: [295]. 485 Ms Abbott understood that the components of the distributable income were all reflected in the trust P & L statement and that in order to distribute the s 95 net income in a way that met the requirements of the 1936 Act, the respective entitlement of the beneficiaries to the net distributable income of the trust would need to be first identified and then, second, reflected in the shares of the s 95 net income to which the beneficiaries were entitled: [296], [305]. 486 However, in calculating the shares of the s 95 net income, the only amount taken into account by Ms Abbott was the s 95 net income itself: [302]. No regard was had to the net distributable income: [302], [305]. The net income of the trust was otherwise distributed not by resolutions but by journal entries ([304]) and in the same ratio as the shares of the s 95 net income: [304] and [294]. At the end of her evidence, Ms Abbott accepted that the franking credit distribution resolutions did not attempt to stream the franked dividends received by the trust to which the franking credits related but rather sought to deal with the benefit that might be conferred by the franking credits to an offset in the relevant circumstances of each beneficiary: [310]. 487 In the course of re-examination, Ms Abbott introduced some additional documents earlier mentioned at [311] drawn from her MAPL franking account file reflecting a Register of franking credit transactions. The effect of Ms Abbott's evidence by reference to the MAPL transactions was that she understood the entries to reflect the distribution of "franking credits" not "franking credit benefits". This was a proposition embraced by her in the way in which the question was framed by counsel for the applicants. To the extent that Ms Abbott regarded the transactions as a distribution of franking credits rather than franking credit benefits in the form of potential tax offsets (conditioned by the circumstances of the particular beneficiary), her observations in re-examination reflect a departure from most of her evidence given in cross-examination about the benefit distribution sought to be achieved by the franking credit distribution resolutions. 488 There can be little doubt, at all, that what Mr Thomas and Ms Abbott intended to do (and thus the intention of the trustee) by the net income distribution resolutions was to distribute the s 95 net income of the trust (divorced from any proportionate consideration of the net distributable income of the trust) to each of the relevant beneficiaries so as to ensure the most favourable outcome for Mr Thomas in terms of the average rate of tax payable on his taxable income with the remainder allocated to MAPL. The calculation of the s 95 net income took into account the total assessable income of the trust estate including the franked dividends and the franking credit gross-up and all allowable deductions. The intention, so described, determined the shares of the s 95 net income to be distributed to Mr Thomas and MAPL. 489 Equally clearly, Mr Thomas and Ms Abbott believed that the franking credits, related to franked dividends paid to the trust (which distributions had been taken into account in the calculation of the trust P & L to produce the trust profit (or loss) and then adjusted as Ms Abbott described according to her philosophy so as to strike the s 95 net income) conferred real and commercially valuable benefits in the hands of the beneficiaries. The measure of that value was the extent of the tax offset entitlements each beneficiary could assert according to their relevant circumstances and, in the case of Mr Thomas, the right to a dollar-for-dollar refund of excess offset entitlements. 490 By the franking credit distribution resolutions they sought to allocate (or cause to be allocated) those benefits separately - that is to say - separate from the way in which the s 95 net income had been distributed by the net income distribution resolutions and in a sense independent of those resolutions. 491 The franking credit distribution resolutions are in another sense anomalous because it makes no sense to speak of the "net income of the trust" being applied by applying the nominated proportions of the franking credits (see [34] and [37]) since franking credits are not related to net income of the trust but are related to franked distributions received by the trust. The preamble to the schedule in each of the dual resolutions was either seen as a convenient duplication with only a change to the subject matter of the schedule in each resolution (from allocations of s 95 net income to allocations of franking credits, in particular) or represented an attempt to recognise, in the franking credit distribution resolutions themselves, for the purpose of the conferral of the franking credit benefit in the proportions nominated in the schedule in each franking credit distribution resolution in each income year, that the net income calculation (being the s 95 net income calculation) took into account the whole of the franked distribution to which the franking credits related and thus there was, in each income year, always an apparent nexus between the determination of the s 95 net income of the trust and all franked distributions made to the trust. Shares of the s 95 net income were allocated according to the intention earlier mentioned and all of the franking credits related to the franked dividends carrying the benefits were seen by Ms Abbott and Mr Thomas as susceptible of separate treatment - separate allocation or separate streaming. 492 Accordingly, the intention of Mr Thomas and Ms Abbott was to cause the trustee, by the franking credit distribution resolutions, to allocate to MAPL and Mr Thomas amounts representing, in the case of MAPL, the amount of an offset sufficient (and only that amount) to extinguish the tax otherwise payable by it, and in the case of Mr Thomas, all other offset entitlements thus maximising a refund. The mechanism for allocating the amount of the offset entitlements (benefits) in each case was the distribution of the franking credits (related to the franked dividends) which were seen as carrying with them the utility of an imputed statutory offset entitlement. Thus, the intended objective of the franking credit distribution resolutions was to allocate the benefits and the mechanism for achieving the intended objective was to distribute the franking credits. 493 The franking credits, however, were not income of the trust. They could not be streamed. The franked dividends could be streamed as a separate "category of income" (cl 4(2) and cl 4(4)). The franked dividends could have been separately recorded in the books of account and records of the trust as a separate category of income, as defined, and streamed separately. Whether or not the franked dividends were separately recorded in the books of account and records, it is clear that Mr Thomas and Ms Abbott intended to attribute separate treatment to the franking credits by their resolutions: see [496]. 494 A question arises as to whether seeking to distribute quantified offset entitlements, as an intended objective, through the mechanism of the distribution of franking credits, accommodates the trust deed and the 1997 Act on the footing that an intention to select the mechanism of distributing franking credits is to be regarded as a proxy for a distribution of the fully franked dividends themselves (otherwise taken up in the calculation of the s 95 net income) which would be represented by, in the case of each beneficiary, an inverse calculation to be undertaken based upon the proportion of the franking credits allocated to each of them so as to identify the amount of the corresponding distribution regarded as having been streamed to each beneficiary. 495 The franking credit distribution resolutions are twice removed from a distribution of the franked dividends received by the trust as they allocate the benefits by reference to franking credits. However, properly construed, is that mechanism to be seen as a proxy for a calculable distribution of the franked distribution to the trust? Does the allocation of the offset benefits by the vehicle of allocating the franking credits have the effect of bringing along with the franking credits (as the applicants contend) the relevantly calculable proportion of franked dividends to which they relate? 496 There can be little doubt that the trustee failed to directly allocate the franked dividends themselves. They simply were not streamed as contemplated by the trust deed. The clear intention was to allocate the benefits by reference to the franking credits. At no point did the trustee seek or intend, by the franking credit distribution resolutions, to distribute, notionally or otherwise, the franked dividends, that is, the franked distribution to the trust. Rather, the trustee treated the franking credits as income under the deed or, or as well as, something quantifiable in value to be treated as in the nature of income even though the franking credits were never received by the trustee itself (since they represent imputation credits that might be utilised by the beneficiaries in the relevant circumstances according to the 1997 Act). It is not clear precisely what the phrase in cl 4(2) "may in the books of account and records of the Trust separately record" the category of income called fully franked dividends, entails. Clearly the books of account have a separate line item called "dividends". However, the "dividends" reflected as a line item in the P & L are not separated out by category as "fully franked" dividends as compared with "unfranked" dividends. Nor does the P & L (or the books of account or records of the trust) otherwise separate out and allocate under cl 4(5) to fully franked or unfranked dividends, expenses and outgoings to be deducted from those or other particular categories of income in a manner that might reflect a decision of the trustee to that effect. 497 Franking credits related to dividend distributions received by the trust are not "income" on either basis. The franking credits, of course, represent statutory income for the purposes of the gross-up requirements of the 1997 Act. 498 How does the imputed entitlement to a tax offset arise under the 1997 Act? 499 It must be remembered that the entitlement to a tax offset is a function solely of the tax legislation. A beneficiary's entitlement to a tax offset arises in conformity with the 1997 Act (and its relationship with the 1936 Act) and not otherwise. If the integers are not relevantly engaged, the beneficiary's entitlement to assert a tax offset falls away. A beneficiary's entitlement to a share of offsetting franking credits under s 207-57(2) of the 1997 Act arises as a function of a beneficiary's share of the franked distribution. A beneficiary's share of the franked distribution is to be worked out in accordance with s 207-55 and, in particular, Item 3. The effect of that provision, having regard to Column 3 of Item 3, is to ask the question of how much of the whole of the franked distribution was taken into account by the trustee in calculating the beneficiary's share of the s 95 net income of the trust having regard to s 97(1)(a). 500 It is now necessary to briefly revisit the critical provisions of Div 207-B relevant to these proceedings. 501 Section 207-45 provides that an entity (beneficiary - in the case of Mr Thomas, obviously enough - an individual), to whom a franked distribution (the franked dividends) flows indirectly in an income year is entitled to a tax offset in that income year equal to its share of the franking credit on the distribution. The entitlement, if the integers are engaged, is to a tax offset. The front-end counter-balance, in a sense, relevant to the offset is that the beneficiary's assessable income for the relevant income year also includes so much of the franking credit amount (on the franked dividends received by the trustee which forms part of the assessable income of the trust under s 207-35(1)), as is equal to the beneficiary's share of the franking credit on the distribution. 502 That front-end result only arises if, relevantly: (1) franked dividends are received by the trustee; (2) the assessable income of the trust includes the amount of the franking credit on the dividends; (3) the distribution to the trustee flows indirectly to the beneficiary; and (4) the beneficiary has an amount of assessable income for the relevant income year which is attributable to all or a part of the distribution. 503 As to (1), franked dividends were received by the trustee. 504 As to (2), the amount of franking credits related to those dividends was included in the assessable income of the trust. 505 As to (3), the distribution to the trustee flows indirectly to the beneficiary if, and only if, the following two things occur. 506 First, the beneficiary has a "share amount" which is a term understood to mean by s 207-50(3)(b) that the beneficiary has a share of the trust's net income "covered by s 97(1)(a)" of the 1936 Act. Section 97(1)(a) contemplates a circumstance where a beneficiary is presently entitled to a share of "the income of the trust estate", that is, the distributable income of the trust ascertained by applying the general law of trusts and determined according to appropriate accounting principles: FCT v Bamford; see generally [90] to [102] of these reasons and the authorities mentioned there. 507 Section 97(1)(a) also contemplates that the assessable income of such a beneficiary includes so much of that share (of the distributable income), of the s 95(1) net income of the trust estate - that is, the proportionate share. Thus, a distribution flows indirectly to a beneficiary (as to this integer) if the beneficiary has a share of the s 95(1) net income of the trust which would be "covered" by s 97(1)(a) if the beneficiary's share of the s 95(1) net income is a proportionate share of the income of the trust estate - the distributable income. 508 Second, the beneficiary's notional share of the distribution under s 207-55 must be a positive amount. 509 If those two things are satisfied, the franked distribution made to the trustee flows indirectly to the beneficiary and in that event, s 207-35(3)(c) would be satisfied. 510 In this case, each beneficiary during the relevant income year had a share of the s 95 net income. Let it be assumed for present purposes that that share is a proportionate share of the distributable income. Whether the distribution has flowed indirectly to the beneficiary ultimately turns upon the operation of s 207-55 and its relationship with the other provisions of Div 207. It should be noted that s 207-35(3) is introduced with the words "[d]espite any provisions in Divisions 5 and 6 of Part III of the [1936 Act]". Those words govern the consequence addressed by the section by the words following the word "then" should the four integers be made out. 511 As to integer (4), each beneficiary had an amount of assessable income for the relevant income year attributable to all or part of the distribution, as the franked dividends were taken into account in calculating the P & L of the trust and, in turn, by reason of Ms Abbott's adjustments, the s 95 net income of the trust which was then distributed to each beneficiary. 512 All that having been said, the consequence is that the beneficiary's assessable income also includes, in each income year, so much of the franking credit amount (included under s 207-35(1)) related to the franked dividends, as is equal to the beneficiary's "share of the franking credit on the distribution". That notion engages s 207-55 and s 207-57. Those two sections are important to the operation of s 207-35(3) and s 207-45. Section 207-35(3), however, operates to include in the beneficiary's assessable income a proportion of the franking credit amount which equals its share of the franking credit on the distribution and in that sense it contemplates a direct relationship between the proportion of the franking credit amount and the share of the franking credit on the distribution. 513 The trustee, through Ms Abbott, set about a course of undertaking the calculations described in her evidence in order to determine the s 95 net income of the trust and then that net income was distributed according to the considerations already extensively described. Fundamentally, Mr Thomas received a very small share of the s 95 net income of the trust so as to ensure his average tax rate over all was approximately 30c in the dollar. The whole of the franked distribution was, of course, taken into account in calculating the P & L of the trust which was then subjected to the "adjustments" Ms Abbott spoke about with a view to determining the s 95 net income. The franking credit offset benefits were then allocated by allocating to the beneficiaries the franking credits in the proportions reflected in the franking credit distribution resolutions. 514 Section 207-55 seeks to ensure, relevantly, that the amount of a franked distribution made to a trustee is allocated notionally amongst the beneficiaries who derive benefits from the distribution and that the notional allocation corresponds with the way in which those benefits were derived. Thus, the section operates to notionally allocate an amount to a beneficiary as its share of the franked dividends made to the trustee, whether or not that beneficiary actually receives any of those franked dividends. The amount notionally allocated is equal to an amount determined by Item 3 of the Schedule. That item asks, by the conjunction of Columns 3, 2 and 1, a relatively straightforward question of how much of the amount of the franked distribution was taken into account by the trustee in working out the beneficiary's s 207-50(3)(b) share amount (discussed earlier) - that is, the beneficiary's share of the s 95 net income of the trust covered by s 97(1)(a) of the 1936 Act. The question is not how much of the amount of the franked dividends was taken into account in working out the s 95 net income but how much of the amount of that franked distribution was taken into account by the trustee in working out the particular beneficiary's share of the s 95 net income? 515 The answer to that question on the evidence is that none of the franked distribution was taken into account in working out each beneficiary's share of the s 95 net income of the trust. The beneficiary's share of the s 95 net income was worked out by the trustee by identifying how much of the s 95 net income ought to be allocated to Mr Thomas so as to ensure that his average rate of tax overall was 30c in the dollar with the remaining amount of the s 95 net income allocated to MAPL. The franking credits were then allocated to MAPL as to the proportion necessary or sufficient to extinguish its tax liability otherwise arising and, as to all the balance of the franking credits, they were allocated to Mr Thomas. 516 The trustee allocated "franking credits" as if they were a floating pool of offsets (related, of course, to franked dividends received by the trust otherwise they would not exist at all) but entirely independent of the shares of the s 95 net income of the trust on the footing that they could be claimed by a corporate beneficiary as an offset simpliciter, and claimed by an individual in a way that entitled a refund of the excess offsets. The distribution of the franking credits did not operate as a proxy distribution of the franked dividends but rather as a proxy distribution of the offset entitlements as if they could be allocated free of the distribution of the franked dividends to which they remained stapled and in a way which failed to take into account what is now said to be a streaming of the franked dividends by the distribution of the franking credits, in working out each beneficiary's share of the s 95 net income. 517 There was no relevant nexus as required by s 207-55. The Commissioner correctly asserts that the approach adopted by the taxpayers represents an impermissible un-linking inconsistent with the legislation. 518 The trustee might have chosen to separately set aside the franked dividends in the books of account and records of the trust and might have allocated particular expenses against that income category. The trustee might then have resolved to apply the franked dividend income to Mr Thomas as to 90% and MAPL as to 10% (as the trustee suggests it did by operation of the franking credit distribution resolutions). Mr Thomas and MAPL would be unlikely to receive 90% and 10% respectively of the trust income referable to separately recorded franked dividends as the trustee would necessarily meet all trust law expenses incurred in relation to that income (deductible or not in a tax law sense). Those expenses might well very considerably reduce or almost extinguish the amount of the franked dividend receipt to the trust with the result that each beneficiary would actually receive very little of the streamed income. The trustee would then ordinarily determine the amount of the s 95 net income of the trust having regard to all income (franked dividends, unfranked dividends and other income) and all deductible expenses. It would then ordinarily distribute the s 95 net income in a way that took into account, in determining or working out each beneficiary's share of the s 95 net income, each beneficiary's share of the streamed franked dividends (whether or not each beneficiary actually received all of the quantum of the streamed franked dividends). There would need to be some demonstrated relativity or nexus between the shares of the streamed income category (franked dividends in this case) and the shares of the s 95 net income of the trust. If a 90% share of the streamed franked dividends is then shown (by various accounting methods) to have been taken into account in working out the s 95 net income share of Mr Thomas in each income year, he would be entitled to a 90% share of the franked dividend under s 207-55 and a share of the franking credit on the franked distribution under the s 207-57 formula. He would then have 90% of the franked dividends grossed-up in his assessable income under s 207-35(3) and he would be entitled under s 207-45 to a tax offset equal to his share of the franking credit on the distribution under the s 207-57 formula. 519 What cannot occur if the tax offset is to be preserved and available in conformity with the tax legislation is an allocation of the s 95 net income amongst beneficiaries on a particular basis and a distribution of the franking credits otherwise attached or stapled to the franked dividends on an entirely unrelated basis, amongst the same beneficiaries. That is what has occurred in each income year in this case: see the final question and answer (and the sequence) at [273]. 520 Since it is not possible to determine the beneficiary's notional share of the distribution for the purposes of s 207-55, it is not possible to determine the beneficiary's share of the franking credit on the franked distribution for the purposes of s 207-57 or apply the formula provided for in that section. Nor is it possible to then determine the amount to be included in the beneficiary's assessable income under s 207-35(3) nor the tax offset entitlement of the beneficiary under s 207-45. 521 It follows that Mr Thomas has been unable to demonstrate that the amended assessments issued to him are excessive or otherwise incorrect for the purposes of s 14ZZO of the TAA. 522 As to the question of whether the Court ought to give effect to the true intention of the taxpayers and not allow a deficiency of form to defeat the discernible substance of their intentions, I am not satisfied that the clear intention of the taxpayers is that contended for by them having regard to the intention informing the separate treatment of the distribution of the s 95 net income and the separate distribution of the franking credit benefit by the mechanism of the distribution of the franking credits. 523 Thus, the principle is simply not engaged. 524 Further, I am not able to rectify the resolutions to attribute to them a formulation the participants did not intend to achieve. 525 As to the estoppel by convention submission and the authorities relied upon at [155] to [158] to the effect that if the Court concludes, as a matter of construction of the trust deed, that the distributable income of the trust is not simply the s 95 net income the trustee and the beneficiaries have nevertheless conducted themselves during the relevant income years as if the deed provided for distributable income in terms only of the s 95 net income, the difficulty is this. None of the authorities establish that such an estoppel applies to a trust deed although the contractual analogue has some analytical force even though not shown to have been applied to trust deeds in any of the authorities. More particularly, however, it is not clear on the evidence what the understanding of the settlor was in the relevant income years or has been otherwise or is now looking back at those events. The trustee must act strictly according to the terms of the instrument properly construed. If the trustee and/or the beneficiaries propose to set up a set of facts which reveal a manner of application of the trust instrument by those entities which is inconsistent with the terms of the instrument, properly construed, it would be necessary to demonstrate that the settlor adopted or is bound in that course of conduct. 526 There is a second and distinct contention to the effect that the applicants do not need to go so far as establishing an estoppel in the sense described at [525]. It is sufficient, they say, to invoke a broader principle to the effect that since the beneficiaries have chosen not to challenge distributions by the trustee in the relevant income years (or at all for that matter), it is not open to the Commissioner to challenge that which the beneficiaries have themselves chosen not to challenge: see the authorities at [159]. 527 The applicants say that the distributable income of the trust is and has always been understood by them to be the same thing as the s 95 net income of the trust. The applicants say that the beneficiaries of the trust have not challenged that view. It is a view held by the trustee and it represents the submission to this Court by the applicants. Unlike the orders made by Applegarth J which construe particular resolutions having express regard to the 1997 Act, the question of whether the trustee and the beneficiaries inter se have treated the distributable income of the trust as the same thing as the s 95 net income of the trust (notwithstanding that that latter notion involves a concept deriving from the tax legislation of the Commonwealth), is truly a matter as between the trustee and the beneficiaries. 528 The Commissioner says that that view of the trust deed is incorrect. I accept that it is an incorrect view of the trust deed. Nevertheless, neither the trustee nor the beneficiaries inter se have challenged the notion that the distributable income of the trust is the same thing as the s 95 net income. I accept that it is not open to the Commissioner to propound a hypothesis which is inconsistent with a position never challenged by the trustee and the beneficiaries having regard to the principles identified in Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 and particularly at 341 per Mason J with Barwick CJ, Stephen, Jacobs and Aickin JJ agreeing; Federal Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445 per Edmonds, Jessup and Robertson JJ at [68] having regard to the discussion at [57] to [67]. Thus, it follows, it is said, that it is not open to the Commissioner to impose tax on any basis which does not accept that the distributable income of the trust is regarded as the s 95 net income. 529 However, the submissions made to the Court on this footing are simply inconsistent with the evidence. Ms Abbott gave evidence that she well understood the notion of a beneficiary being presently entitled and the distinction between distributable income and s 95 net income. Her evidence was that the net income distribution resolutions addressed only the s 95 net income, not that the s 95 net income was always regarded as the distributable income of the trust. In fact, her evidence was that she recognised, plainly enough, that there was "other income" and that the other income was distributed according to the journal entries in the same ratio as the s 95 net income which operated to maintain the proportionality required between s 97(1)(a) and s 95. Ms Abbott was most emphatic about her having made journal entries to deal with this other income. Thus, the principles in Cridland and FCT v Noza Holdings have no application because the foundation facts do not enliven the principles derived from those authorities including BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746 because it was not the position in the relevant income years that the trustee and Mr Thomas (acting on the advice of Ms Abbott) and the beneficiaries also acting on the advice of Ms Abbott regarded the distributable income of the trust as the s 95 net income. Otherwise, there would have been no need to make journal distributions in the same ratio of the other income. 530 As to the present entitlement of the beneficiaries, I am satisfied, in any event, that in each of the income years, the beneficiaries were presently entitled to the distributable income of the trust having regard to Ms Abbott's evidence of the journal entries she made so as to distribute "other income" of the trust in a way consistent with the way in which the s 95 net income had been distributed between Mr Thomas and MAPL. I am also satisfied that s 101 of the 1936 Act coupled with the payments made to Mr Thomas by the trustee in the 2009 year rendered him presently entitled to a share of the income of the trust estate for the purposes of s 97(1)(a) of the 1936 Act. The alternative assessment to the trustee for the 2009 income year must be set aside. 531 Finally, I am not satisfied that there is any discontinuity of operation as between the position confronting partners in a partnership and the beneficiaries of a trust (and the trustee) in the construction I have attributed to Div 207.

Section 357-60, Schedule 1 to the TAA and Taxation Ruling TR 92/13 532 By orders made on 23 July 2013, Martin Thomas was given leave under s 14ZZO of the TAA to raise a further ground of objection in support of his appeals based upon s 357-60, Sch 1 to the TAA. The ground of objection for each financial year is in these terms: Ground In the event that the proper operation of the tax law to the facts as found is not to confer on the applicants the benefit of the franking credits in the proportion claimed by the applicants, the Commissioner is obliged by s 257-60 in Schedule 1 TAA to administer the law on the basis claimed by the applicants. 533 Details of the ground are then provided. For the relevant years a public binding ruling - TR 92/13 - was in force and applied to the applicants. The applicants say that the public binding ruling set out the Commissioner's opinion on the tax law including his opinion that a trustee of a discretionary trust could selectively allocate franked dividend income among beneficiaries even after deducting trust expenses and that each beneficiary did not have to have the same ratio of dividend income as its respective share of the net income of the trust. 534 Section 357-60 of Sch 1 to the TAA is relevantly in these terms: 357-60 WHEN RULINGS ARE BINDING ON THE COMMISSIONER 357-60(1) A ruling binds the Commissioner in relation to you (whether or not you are aware of the ruling) if: (a) the ruling applies to you; and (b) you rely on the ruling by acting (or omitting to act) in accordance with the ruling. 535 Section 357-5 of Sch 1 to the TAA provides that the object of Pt 5-5 is to provide "a way for you to find out the Commissioner's view about how certain laws administered by the Commissioner apply to you so that the risks to you of uncertainty when you are self assessing or working out your tax obligations or entitlements are reduced". 536 The applicants say that in each of the income years in issue Ms Abbott acted upon the ruling and the applicant, Martin Thomas, acted in accordance with the ruling by lodging his income tax return as prepared by Ms Abbott in accordance with and reliance upon the ruling. 537 The parties agree in the statement of material facts that in 1992 the Commissioner issued draft ruling EDR 89 followed by a public binding ruling, Taxation Ruling 92/13 entitled: Income Tax: distribution by trustees of dividend income under the imputation system. The parties also agree in the statement of material facts that Taxation Rule 92/13 applied in the relevant income years. The version of TR 92/13 put before the Court jointly by the parties as the relevant instrument upon which Mr Thomas and Ms Abbott are said to have relied is the original TR 92/13 as at 5 November 1992 which I will describe as TR 92/13(OR). TR 92/13 was the subject of a further version on 29 November 2006 and 2 June 2010. It was withdrawn on 22 June 2011. The version of TR 92/13 as at 29 November 2006 observes that "[t]his ruling contains references to repealed provisions, some of which may have been rewritten. The ruling still has effect". TR 92/13(OR) as at 5 November 1992 does not contain that observation notwithstanding that Pt 3-6 of the 1997 Act took effect from 1 July 2002. Presumably, citizens were encouraged to rely upon the statements and observations in TR 92/13 in its various versions as an instrument having continuing effect until withdrawn. 538 TR 92/13(OR) recites that it is a ruling which considers, for the purposes of the dividend imputation provisions in Pt IIIAA of the 1936 Act, the circumstances in which trust income to which a beneficiary is presently entitled is regarded as attributable to a franked dividend included in the assessable income of the trust estate: para 1. Part IIIAA of the 1936 Act became inoperative by the introduction of the simplified imputation system contained within Pt 3-6 of the 1997 Act which took effect from 1 July 2002. The inoperative Pt IIIAA was then repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 (Cth): see Item 153 of Sch 1 of that Act. Nevertheless, TR 92/13 as at 29 November 2006 and 2 June 2010 continued to refer to Pt IIIAA of the 1936 Act. 539 By para 2, TR 92/13(OR) provides that a resident beneficiary of a trust estate (other than a company or trustee of another trust estate) is entitled to a franking rebate if a share of the net trust income is included in the assessable income of the beneficiary; and, some or all of that share of the net trust income is attributable to a franked dividend included in the assessable income of the trust estate. Paragraph 2 also provides that, for a beneficiary that is a resident company, a franking credit arises if the same conditions are satisfied. 540 TR 92/13(OR) provides that income distributed by a trustee of a discretionary trust estate retains the character it had when it was derived by the trustee unless a statute or the deed provides otherwise. 541 It provides that if a franked dividend is derived by a trustee during a particular year of income, the trust income for that income year distributed to beneficiaries will, to some extent, consist of franked dividend income: para 4. This will generally be so even after deducting trust expenses in the calculation of distributable income: para 4. 542 The ruling provides that the extent to which a particular beneficiary's share of the net trust income is attributable to, or consists of, specific dividend income depends on the extent to which the dividend income is allocated to the beneficiary by means of an express term in the trust instrument; or the exercise by the trustee of a discretion subject to any constraint imposed by the terms of the trust or by trust law generally; or the operation of any default provision of the trust instrument if the trustee fails to exercise the discretion to distribute: para 5. 543 The ruling also provides that notwithstanding wide discretionary powers being conferred on a trustee, a trustee's discretion to selectively allocate dividend income to a beneficiary to the exclusion of another may be fettered by the terms of the trust or by trust law in the relevant jurisdiction: para 6. 544 In each of the situations contemplated by para 5 above, the ruling provides that for the allocation of the entire amount of a dividend to one beneficiary to the exclusion of another to be effective for income tax purposes, accounting records of the trust need to be maintained so that each class of income derived by the trustee can be identified and traced, less expenses, into a share of the income of the trust distributed to the beneficiary. 545 Paragraph 2 of TR 92/13(OR) might perhaps correctly state the position prevailing under Pt IIIAA of the 1936 Act but it fails to correctly state the position under Div 207 of the 1997 Act. Under the latter Act, a resident beneficiary of a trust estate is not entitled to a franking rebate if a share of the net trust income is included in the assessable income of the beneficiary and some or all of that share of the net trust income is attributable to a franked dividend included in the assessable income of the trust estate. Under the 1997 Act, a resident beneficiary of a trust estate is entitled to a tax offset equal to its share of the franking credit on the distribution, assuming that the beneficiary enjoys a share of the franking credit on the distribution as that notion is understood for the purposes of s 207-45, s 207-55 and s 207-57 of the 1997 Act. Questions of a beneficiary having a share of the net income of the trust and an amount of assessable income attributable to the distribution go to the inclusion of so much of the franking credit amount (included in the assessable income of the trust) as is equal to the beneficiary's share of the franking credit on the distribution as the mechanism for the allocation to the beneficiary of an additional amount of assessable income under s 207-35(3). 546 A citizen reading para 2 of TR 92/13(OR) is apt to be led into thinking that so long as a resident beneficiary of a trust estate has a share of the s 95 net income included in its assessable income (Requirement 1) and at least some of that share (perhaps a very small share) is attributable to a franked dividend included in the assessable income of the trust estate (Requirement 2), the beneficiary will be entitled to a franking rebate of the tax otherwise payable by such a beneficiary. 547 Nevertheless, TR 92/13(OR) does not suggest that so long as a trustee causes a resident beneficiary of a trust estate to have a share of the s 95 net income (again, perhaps a very small share but at least a share) included in the beneficiary's assessable income and at least some of that share is attributable to a franked dividend included in the trust's assessable income, the trustee can then act independently of s 207-55, s 207-57 and 207-45 and separately allocate franking credit entitlements by the mechanism of separately allocating the franking credits related to the dividends in proportions different from the beneficiary's share of the franked distribution used to work out the beneficiary's share of the franking credit on the distribution. Thus, the difficulty identified at [513] to [517] of these reasons is not overcome by reliance upon TR 92/13(OR). I nevertheless accept that Ms Abbott relied upon TR 92/13(OR) although I do not accept that it goes so far as to provide a basis for the steps taken in the income years. I also take the view that TR 92/13(OR) remains a material consideration concerning the question of the penalty assessments.

The penalty assessments 548 I have already noted that after a very intensive and detailed forensic analysis of the facts and circumstances relevant to the activities of the trustee, Mr Thomas, MAPL and Ms Abbott's role in the affairs of the trustee and the beneficiaries generally, and after a close examination of the application of the relevant taxation law, Senior Counsel for the applicants, experienced in questions concerning tax law, expressed the concerns and reservations at [7]. 549 I have also noted at [7] the observations of Senior Counsel for the Commissioner who is also an experienced Senior Counsel in tax law questions. 550 If, with all the benefit of this extensive investigation and the opportunity of closely examining the scope, operation and application of the relevant tax law of the Commonwealth, senior legal practitioners experienced in these matters have difficulty in precisely understanding each other's essential contentions on central questions going to the tax liability of the taxpayers, how is the citizen, acting reasonably and trying to comply with the law, to be criticised for the position adopted concerning the treatment of the franking credits and the proper and precise construction, operation and application of, in particular, ss 207-55, 207-57, 207-45, 207-50(3) and 207-35(3) apart from any other related provisions of Div 207. 551 The Commissioner has conceded (and thus does not oppose) the appeals concerning the penalty assessments issued to MAPL (QUD 285/2012) and the trustee (QUD 283/2012) nor does the Commissioner oppose the appeals in relation to a refusal to remit penalties. In the case of MAPL, that matter is Matter, AAT 2012/2453 and in the case of the trustee Matter, AAT 2012/2450. 552 However, no such concessions are made concerning the penalty assessments issued to Mr Thomas. The Commissioner asserts that statements made by Mr Thomas in his tax returns in each of the relevant years concerning franking credits, foreign tax credits, withholding credits (and FITO) (all called "credit entitlement statements") were false or misleading in a material particular which resulted in a "shortfall amount" for the purposes of s 284-80 of Sch 1 to the TAA (and all references are to Sch 1 of the TAA unless otherwise mentioned) and thus Mr Thomas, upon the making of the statements, became liable to an administrative penalty under s 284-75(1). 553 The Commissioner says that because Mr Thomas is an experienced and skilled businessman; did not approach the Commissioner for an opinion on any of the relevant issues; did not rely upon published advice of the Commissioner or any general administrative practice under a taxation law at the time of lodgement; the amount of tax was substantial; and the issues concern a number of tax years, it then necessarily follows that each of the shortfall amounts resulted from a failure by Mr Thomas or his agent to take reasonable care to comply with the tax laws of the Commonwealth. The Commissioner says that on that basis, what is now the former s 284-215(2) (repealed by Act No. 56 of 2010) has no application to this proceeding in relation to the relevant tax years. That section provided that for the purposes of determining whether a person is liable to an administrative penalty, such a person does not have a shortfall amount for the purposes of s 284-80 as a result of a statement that is false or misleading in a material particular, "to the extent that you and your agent (if any) took reasonable care in making the statement". 554 Having regard to those considerations, the Commissioner imposed a base penalty amount upon Mr Thomas in respect of the primary shortfall amounts for the income years 2006 to 2009 by reference to Item 3 in the table in s 284-90. That item provides that if the taxpayer has a shortfall amount as a result of a statement described in s 284-75(1) and the amount, or part of the amount, resulted from a failure by the taxpayer or his or her agent to take reasonable care to comply with a taxation law, the base penalty amount is 25% of the shortfall amount or part of the shortfall amount. 555 Section 284-75(2) provides, relevantly, that Mr Thomas is liable to an administrative penalty if he made a statement to the Commissioner and in that statement he treated an income tax law as applying to a matter in a particular way that was not reasonably arguable. The Commissioner took the position that the credit entitlement statements made by Mr Thomas treated the relevant provisions of the 1997 Act as applying in a way that was not reasonably arguable. The Commissioner contends that having regard to the relevant authorities, the Court ought to conclude that the position taken by Mr Thomas was "not about as likely to be correct as incorrect nor was it more likely to be correct than incorrect". 556 The Commissioner says that the proceedings in the Supreme Court of Queensland were commenced in 2010 significantly after the filing of the income tax returns for the years 2006 to 2009 and after the commencement of the audit by the Commissioner in May 2009. The Commissioner says that it follows that the findings made in the Supreme Court proceeding do not provide Mr Thomas with "a reasonably arguable position". 557 The Commissioner contends that the base penalty amount calculated under Item 3 of s 284-90(1) is not reduced by operation of s 284-225 or ought not to be reduced by operation of that section as none of the factors going to a reduction of the penalty are satisfied. 558 Mr Thomas challenges the penalty assessments issued to him on a number of grounds. He says that the penalty assessments for each of the four income years are invalid; if valid, the assessments are nevertheless wrong as to the amount; thus, the assessments should be set aside on each of the first two grounds; in any event, the assessments should be set aside; and, no further penalty assessments should be made. 559 As to the validity issue, Mr Thomas says that the assessments are rendered invalid by errors of law and must be set aside. Alternatively, constitutional writs might issue under s 39B of the Judiciary Act 1903 (Cth) to quash the assessments on the ground of jurisdictional error. 560 As to the errors in the amounts, Mr Thomas says that the penalty assessments must be set aside because there is no power to amend a penalty assessment. 561 As to the notion that the penalty assessments should be set aside in any event, Mr Thomas says that the penalty assessments ought to be set aside because Mr Thomas ought not to be "vexed with an accrual of interest on an old assessment in the circumstances of these proceedings". 562 As to the contention that no further or varied penalty assessments should be made and issued to Mr Thomas, he says that there is no shortfall amount and in any event, he and Ms Abbott took reasonable care in applying the tax laws of the Commonwealth with the result that by operation of s 284-215(2), Mr Thomas did not have a shortfall amount. Mr Thomas also asserts that there is no culpability in him as his position was reasonably arguable because he relied upon TR 92/13(OR) and the Supreme Court proceedings resulted in a judgment which demonstrates that the position he adopted is at least reasonably arguable. He also says that he made voluntary disclosure to the Commissioner with the result that any penalty should be reduced under Div 284. 563 As earlier mentioned, s 284-75(1) renders a taxpayer liable to an administrative penalty if a statement is made to the Commissioner that is false or misleading in a material particular and s 284-75(2) renders a taxpayer liable to an administrative penalty if a statement is made to the Commissioner and in that statement the taxpayer treats an income tax law as applying to a matter in a particular way that was not reasonably arguable. A taxpayer has a shortfall amount according to the provisions of s 284-80. The amount of the penalty is determined by s 284-85. Section 284-85(1) requires a base penalty amount to be worked out under s 284-90. Section 284-85 also requires a determination to be made whether the base penalty amount is to be increased or reduced. Relevantly, Item 3 of s 284-90 determines the base penalty amount. 564 The question of whether the shortfall amount resulted from a failure by Mr Thomas or his agent to take reasonable care to comply with a taxation law (as contemplated by Item 3) or whether Mr Thomas treated an income tax law as applying to a matter in a particular way that was not reasonably arguable as contemplated by s 284-75(2), engages the operation of s 284-15 which addresses the question of when a matter is "reasonably arguable". 565 Relevantly, s 284-15 is in these terms: (1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. (2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with the law. (3) Without limiting subsection (1), these authorities are relevant: (a) a *taxation law; (b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901 (Cth); (c) a decision of a court (whether or not an Australian court), the *AAT or a Board of Review; (d) a *public ruling. 566 Apart from the question of whether Mr Thomas or his agent failed (or not) to take reasonable care and the separate question of whether Mr Thomas's treatment of the application of an income tax law was or was not reasonably arguable, s 284-215 which applied during the period of the income years in question was in these terms: (1) If, apart from this section, you would have a *shortfall amount or a *scheme shortfall amount for an accounting period and: (a) your shortfall amount or scheme shortfall amount, or part of it, was caused by you or your agent treating a *taxation law as applying in a particular way; and (b) that way agrees with: (i) advice given to you or your agent by or on behalf of the Commissioner; or (ii) general administrative practice under that law; or (iii) a statement in a publication approved in writing by the Commissioner; your shortfall amount or scheme shortfall amount is reduced to the extent that it was caused by that treatment. (2) For the purposes of determining whether you are liable to an administrative penalty, you do not have a *shortfall amount as a result of a statement that is false or misleading in a material particular to the extent that you and your agent (if any) took reasonable care in making the statement. 567 As to reductions in the base penalty amount, s 284-225(1) provides that the base penalty amount for a taxpayer's shortfall amount, or for his or her false or misleading statement, is reduced by 20% if the Commissioner tells the taxpayer that an examination is to be made of his or her affairs relating to a taxation law; and, after that time, the taxpayer voluntarily tells the Commissioner in an approved form about the shortfall or part of it or the false or misleading nature of the statement; and, telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the examination. 568 Section 284-225(2) provides that the base penalty amount for a taxpayer's shortfall amount or part of it is reduced under other subsections of s 284-225 if the taxpayer voluntarily tells the Commissioner in an approved form about the shortfall amount (or part of it) before the earlier of the day the Commissioner tells the taxpayer that a tax audit is to be conducted; or if the Commissioner makes a public statement requesting entities to make voluntary disclosure by a particular day about a relevant matter applying to the taxpayer's financial affairs - that day. Under s 284-225(3), the base penalty amount is to be reduced by 80% or alternatively reduced to nil in the circumstances set out in that subsection. Finally, s 284-225(5) provides that if the taxpayer voluntarily tells the Commissioner in an approved form about a shortfall amount (or part of it) or the false or misleading nature of a statement made by the taxpayer after the Commissioner tells the taxpayer that an examination is to be conducted of his or her affairs relating to a taxation law for a relevant period, the Commissioner may treat you as having done so before being told about the examination if the Commissioner considers it appropriate to do so in the circumstances. 569 As mentioned, s 284-15 provides that a matter is reasonably arguable if it would be concluded in the circumstances having regard to relevant authorities that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. As to the authorities, the Full Court in Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339 (2004) 58 ATR 210 at [108] adopted and approved the statements of principle contained in Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1 concerning the approach the Commissioner ought to adopt in imposing penalties. 570 The test of whether a matter is reasonably arguable is objective. 571 The decision-maker considering the penalty must first determine the argument of the taxpayer which is said to support the taxpayer's claim. The decision-maker is then required to compare the taxpayer's argument with the argument which is considered to be the correct argument. The decision-maker must then determine, by reason of the comparison, whether the taxpayer's argument, although considered incorrect, is about as likely as not correct when regard is had to the authorities. The relevant question for the decision-maker is whether it can be concluded, having regard to the relevant authorities, whether in the circumstances, that what is argued for is about as likely to be correct as incorrect or is more likely to be correct than incorrect. 572 In Walstern, Hill J said this at points 6 and 7 at [108] at p 26: 6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be "about as likely as not correct" when regard is has to the material constituting "the authorities"; and 7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved. 573 As to the reasonable care test, it calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations. The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount. One factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken: Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457. As to the amendment power, the Court in Aurora determined that the Commissioner has the power to amend a penalty assessment pursuant to both s 14ZY of the TAA and s 33(3) of the Acts Interpretation Act. 574 The contention of Mr Thomas that he ought not to be vexed with an accrual of interest on an old assessment in the circumstances of these proceedings derives from Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation (1946) 180 CLR 9 in which Starke J at pp 30-31 in the circumstances of that case observed that it appeared to his Honour "somewhat unfair and unjust that the appellant should have to pay heavy interest from a past date upon a sum ascertained for the first time by an assessment amended pursuant to the judgment of the Court". 575 In these proceedings, the contention is that it would be unfair and unjust to Mr Thomas to vex him with an accrual of interest on an assessment in the circumstances of the considerations going to the operation of the relevant provisions of the income tax law. 576 As to the issue of validity, Mr Thomas contends that the assessment process was a tentative one and thus no definitive determination was made and thus the assessments are not valid. Mr Thomas says that in any event errors were made in the process rendering the assessments a nullity. The Commissioner issued alternative assessments for penalty in respect of the same income to Mr Thomas, MAPL and the trustee. The contention seems to be that issuing alternative assessments to these three entities in respect of the same income renders the penalty assessment made to Mr Thomas invalid because it is simply one of three possible assessments and in that sense tentative and non-determinative. 577 In circumstances where the Commissioner found it necessary to issue three separate penalty assessments, it seems to be suggested by Mr Thomas that his position could not be said to: "not be reasonably arguable". That follows, he says, because at least two other entities were thought by the Commissioner to be susceptible of penalty assessments in respect of the same income. Mr Thomas contends that no true analytical assessment process was undertaken in the determination of the penalty assessments with the result that the Commissioner issued penalty assessments to all three entities and thus the assessments were necessarily merely tentative or speculative. 578 It is well established, however, that the making of alternative assessments by the Commissioner of primary tax to a number of taxpayers in respect of the same income year and including in the assessable income of each taxpayer the same amount of income does not render the primary assessments tentative. 579 The same position prevails in relation to penalty assessments. 580 In respect of the second contention that errors occurred in the process of making the penalty assessments issued to Mr Thomas and thus the assessments are rendered a nullity, Mr Thomas has failed to identify the content of the contended errors. 581 I accept the Commissioner's submission that Australian Machinery & Investment Co Ltd v Deputy Federal Commissioner of Taxation does not provide a basis for setting aside the penalty assessments. 582 The much more fundamental question is whether Mr Thomas acted reasonably and whether having regard to the relevant authorities that which is argued for is about as likely to be correct as incorrect or is more likely to be correct than incorrect. 583 I do not accept that simply because the judgment in the Supreme Court of Queensland proceedings came along later in time and after the moment in time when the tax returns were lodged by Mr Thomas in each income year that the Supreme Court proceedings are irrelevant to the question of what may or may not have been about as likely to be correct as incorrect at the time of lodging the tax returns. 584 Mr Thomas acted on the advice of Ms Abbott. 585 Mr Thomas and Ms Abbott took a position which was dependent upon a certain conception of franking credits and the way in which they might be treated. They were wrong about that. However, having regard to the views they formed; the position that was ultimately adopted by Applegarth J which was consistent with those views formed at the time by them; the difficulty each of the parties have had in coming to grips with their respective contentions about the structure, operation and application of the franking credits regime to the circumstances of the trustee, Mr Thomas and MAPL; and the statements in TR 92/13(OR) which are at least confusing (and not surprisingly withdrawn), I am satisfied that Mr Thomas acted reasonably and that in all the circumstances the position Mr Thomas and the trustee adopted was reasonably arguable. 586 The penalty assessments addressed to Mr Thomas are to be set aside and no further penalties imposed. 587 I propose to direct each of the parties to submit proposed final orders in disposition of each of the Federal Court matters. Similar orders will be made in the Administrative Appeals Tribunal concerning the matters before the AAT. 588 The Tribunal is to convene immediately after these Federal Court proceedings. I certify that the preceding five hundred and eighty-eight (588) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

Associate: Dated: 31 August 2015 SCHEDULE 1 STATUTORY PROVISIONS Income Tax Assessment Act 1936 (Cth) Section 6(1) In this Act, unless the contrary intention appears: … distribution, when used in a franking context, has the same meaning as in the Income Tax Assessment Act 1997. … frankable distribution has the same meaning as in the Income Tax Assessment Act 1997. franked part of a distribution has the same meaning as in the Income Tax Assessment Act 1997. franking credit has the same meaning as in the Income Tax Assessment Act 1997. 6B Income beneficially derived (1) For the purposes of this Act, an amount of income derived by a person, not being a dividend paid by a company to the person as a shareholder in the company, shall be deemed to be attributable to a dividend: (a) if the person derived the amount of income by reason of being the beneficial owner of the share in respect of which the dividend was paid; or (b) if the person derived the amount of income as a beneficiary in a trust estate and the amount of income can be attributed, directly or indirectly, to the dividend or to an amount that is deemed, by any application or successive applications of this subsection, to be an amount of income attributable to the dividend. Division 6 - Trust income 95 Interpretation (1) In this Division: … net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 16C or Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus. A trust may be required to work out its net income in a special way by Division 266 or 267 of Schedule 2F. … (2) For the purposes of this Division, a trust estate shall be taken to be a resident trust estate in relation to a year of income if: (a) a trustee of the trust estate was a resident at any time during the year of income; or (b) the central management and control of the trust estate was in Australia at any time during the year of income. … 95A Special provisions relating to present entitlement (1) For the purposes of this Act, where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for the benefit of, the beneficiary. (2) For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate. 96 Trustees Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. 97 Beneficiary not under any legal disability (1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a) the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and … (2) A reference in this section to income of a trust estate to which a beneficiary is presently entitled shall be read as not including a reference to income of a trust estate: (a) to which a beneficiary is deemed to be presently entitled by virtue of the operation of subsection 95A(2) where the beneficiary: (i) is a natural person; (ii) is a resident at the end of the year of income; (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate; and (iv) is not a beneficiary to whom subsection 97A(1) or (1A) applies in relation to the year of income; or (b) to which a beneficiary is presently entitled where the beneficiary: (i) is a non-resident at the end of the year of income; (ii) is not a beneficiary to whom subsection (3) of this section or subsection 97A(1) or (1A) applies in relation to the year of income; and (iii) is not, in respect of that income, a beneficiary in the capacity of a trustee of another trust estate. 99A Certain trust income to be taxed at special rate … (4) Where there is no part of the net income of a resident trust estate: (a) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or (c) that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. Note: If the trust estate's net income includes a net capital gain, Subdivision 1115-C of the Income Tax Assessment Act 1997 affects the assessment of the trustee. (4A) Where there is a part of the net income of a resident trust estate: (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. Note: If the trust estate's net income includes a net capital gain, Subdivision 115-C of the Income Tax Assessment Act 1997 affects the assessment of the trustee. 101 Discretionary trusts For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion. Income Tax Assessment Act 1997 (Cth) Division 207 - Effect of receiving a franked distribution … Guide to Division 207 … 207-5 Overview (1) If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule: (a) an amount equal to the franking credit on the distribution is included in the member's assessable income; and (b) the member is entitled to a tax offset equal to the same amount. (2) In some cases a residency requirement must be satisfied for the general rule to apply. (3) If a franked distribution is made to a member that is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member's assessable income as mentioned in paragraph (1)(a). (4) However, a tax offset in relation to that distribution is only available to an entity (who may be a partner, beneficiary or a trustee) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. The tax offset is equal to its share of the franking credit on the distribution. Note: That share is a notional amount and the entity can have that share without actually receiving any of that franking credit or distribution. … Operative provisions 207-15 Applying the general rule (1) This Subdivision sets out, as a general rule, the tax effect of receiving a *franked distribution. (2) This Subdivision does not apply to: (a) a partnership or trustee to whom a *franked distribution is made (except a partnership or trustee that is a *corporate tax entity, or a trustee of a trust that is a *complying superannuation entity or *FHSA trust, when the distribution is made); or (b) an entity to whom a franked distribution *flows indirectly. Note: Subject to the other provisions in this Division, Subdivision 207-B applies to an entity excluded from the application of this Subdivision because of this subsection. … 207-20 General rule - gross-up and tax offset (1) If an entity makes a *franked distribution to another entity, the assessable income of the receiving entity, for the income year in which the distribution is made, includes the amount of the *franking credit on the distribution. This is in addition to any other amount included in the receiving entity's assessable income in relation to the distribution under any other provision of this Act. (2) The receiving entity is entitled to a *tax offset for the income year in which the distribution is made. The tax offset is equal to the *franking credit on the distribution. Subdivision 207-B - Franked distribution received through certain partnerships and trustees Guide to Subdivision 207-B 207-25 What this Subdivision is about This Subdivision deals with an entity that receives a benefit of a franked distribution where: (a) the distribution is made to a partnership or the trustee of a trust; and (b) the benefit is received either directly or through other interposed partnerships or trusts. The distribution is regarded as flowing indirectly to the entity under this Subdivision. On the basis of a notional amount of the entity's share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under this Subdivision.

… Gross-up and tax offset … 207-35 Gross-up - distribution made to, or flows indirectly through, a partnership or trustee Additional amount of assessable income (1) If: (a) a *franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust; and (b) the entity is not a *corporate tax entity when the distribution is made; and (c) if the entity is the trustee of a trust - the trust is not a *complying superannuation entity or *FHSA trust when the distribution is made; the assessable income of the partnership or trust for that income year includes the amount of the *franking credit on the distribution. (2) The amount is in addition to any other amount included in that assessable income in relation to the distribution under any other provision of this Act. Note: The amount will affect the income tax liability of a partner in the partnership, or a beneficiary or the trustee of the trust: see Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936. Allocation of the additional amount of assessable income (3) Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, if: (a) a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and (b) the assessable income of the partnership or trust for that year includes an amount (the franking credit amount) that is all or part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and (c) the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or that trustee of the trust; and (d) the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution; then, the entity's assessable income for that year also includes so much of the franking credit amount as is equal to its *share of the *franking credit on the distribution. Example: A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust's assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year. There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust's income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income. The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207-55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P's assessable income also includes the full amount of the franking credit (as P's share of the franking credit on the distribution is $30 under section 207-57). Q's share of the net income therefore does not include any of the franking credit. 207-45 Tax offset - distribution flows indirectly to an entity An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is: (a) An individual; or … Key concepts 207-50 When a franked distribution flows indirectly to or through an entity (1) For the purposes of this Subdivision, this section sets out the only circumstances in which a *franked distribution: (a) flows indirectly to an entity (subsection (2), (3) or (4)); or (b) flows indirectly through an entity (subsection (5)). ... Beneficiaries (3) A *franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and (b) the beneficiary has this amount for that income year (the share amount): (i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or (ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act; (whether or not the share amount becomes assessable income in the hands of the beneficiary); and (c) the beneficiary's *share of the distribution under section 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share). … 207-55 Share of a franked distribution Object of section (1) The object of this section is to ensure that: (a) the amount of a *franked distribution made to a partnership or the trustee of a trust is allocated notionally amongst entities who *derive benefits from that distribution; and (b) that allocation corresponds with the way in which those benefits were derived. Note: An entity can derive a benefit from the distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207-50. (2) An entity's share of a *franked distribution is an amount notionally allocated to the entity as its share of the distribution, whether or not the entity actually receives any of that distribution. (3) That amount is equal to an entity's share of the distribution as the focal entity in column 3 of an item of the table. Note: An entity's share of the distribution is based on the share of the distribution of each preceding intermediary entity through which the distribution flows, starting from the intermediary entity to whom the distribution is made. This means that in some cases (see items 2 and 4), more than one item of the table will need to be applied to work out the share of the distribution of an ultimate recipient of the distribution. Share of a franked distribution Item Column 1 Column 2 Column 3 For this intermediary entity and this focal entity: The intermediary entity's share of the franked distribution is: The focal entity's share of the franked distribution is:

1 … … …

2 … … …

3 the trustee of a trust is the intermediary entity and the trustee or a beneficiary of the trust is the focal entity if: (a) if the trust has a positive amount of *net income for that year - the amount of the franked distribution; or so much of the amount worked out under column 2 of this item as is taken into account in working out that share amount (a) a *franked distribution is made to the trustee; and (b) otherwise - nil (b) the trustee or beneficiary has, in respect of the trust, a share amount mentioned in subsection 207-50(3) or (4)

4 … … …

207-57 Share of the franking credit on a franked distribution (1) An entity's share of a *franking credit on a *franked distribution is an amount notionally allocated to the entity as its share of that credit, whether or not the entity actually receives any of that credit or distribution. (2) Work out that amount as follows: Entity's *share of the *franked distribution Amount of the *franking credit x Amount of the *franked distribution on the *franked distribution

[Note: The presence of an * in the text denotes a reference to a defined term in the relevant legislation.]