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.