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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Income Tax - arrangement to avoid liability for tax - incidence of taxation after avoidance of arrangement - stripping of income of a trust - effectiveness in law of stripping documents - sham - fiscal nullity - whether interest payments by partnership allowable deductions - whether s.260 applied to trust stripping transactions and the interest payments to one lender.Income Tax Assessment Act 1936 ss.51, 190, 260.
HEARING
ADELAIDECounsel for the Appellant: Mr. D.A. Staff Q.C.
Solicitors: Bruce & Stewart, Turton
Counsel for the Respondent: Mr. P.R. Graham Q.C.
with Mr. S.W. Gibb and
Mr. A.J.P. ReynoldsSolicitors: Australian Government Solicitor
ORDER
G2301 of 1987The appellant's income tax assessment for the year of income ended 30 June 1980 be remitted to the Commissioner to be dealt with according to law.
The question of costs be reserved.
G2302 of 1987
The appeal be allowed.
The appellant's income tax assessment for the year of income ended 30 June 1981 be remitted to the Commissioner to be dealt with according to law.
The question of costs be reserved.
G2303 of 1987
The appeal be allowed.
The appellant's income tax assessment for the year of income ended 30 June 1983 be remitted to the Commissioner to be dealt with according to law.
The question of costs be reserved.
G2304 of 1987
The appeal be allowed.
The appellant's income tax assessment for the year of income ended 30 June 1984 be remitted to the Commissioner to be dealt with according to law.
The question of costs be reserved.Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
These are four appeals which come before this Court consequent upon their transfer from the Supreme Court of New South Wales pursuant to sub.s 4(3) of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987. Ronald Williams Evans ("Mr Evans") was dissatisfied with the disallowance by the Commissioner of Taxation for the Commonwealth of Australia ("the Commissioner") of each of his objections to amended or further amended assessments of income tax for the years of income ending 30 June 1980, 1981, 1983 and 1984 respectively. He requested the Commissioner to treat his objections as appeals and, in accordance with s.187 (b) of the Income Tax Assessment Act 1936 as it then provided, to forward the same to the Supreme Court of New South Wales. This was done and the objections were transmitted on 6 August 1986. Subsequent to 1 September 1987 the appeals were transferred to this Court pursuant to sub.s 4(3) as abovementioned, the hearing thereof not having begun before the Supreme Court.2. The taxpayer had duly lodged his return of income for the year ended 30 June 1980 wherein he claimed to deduct the sum of $22,034 as his share of a loss incurred by Mimong Station Partnership. The Commissioner on 26 May 1982 issued his notice of assessment whereby he adjusted the taxable income of Mr. Evans as returned only to disallow a donation of $300 to St. Vincent de Paul. Mr. Evans objected to this assessment as well as to an amount charged by the Commissioner by way of additional tax for late lodgment of the return. The late lodgment tax was subsequently remitted in full in an amended assessment and the deduction claimed by Mr. Evans for the donation was not pursued by him.
3. By a further amended assessment issued on 2 September 1985 the
Commissioner added to the taxable income of Mr. Evans for the year
ended 30
June 1980 the sum of $32,422 being his alleged share of income from the Evans
Mimong Trust and reduced the sum of $22,034
claimed as his share of a
partnership loss to $11,487. In the adjustment sheet annexed to the notice of
assessment he identified
these adjustments as follows:
"The following adjustments have been made to the taxable4. In consequence of these amendments the Commissioner assessed the tax payable by Mr. Evans as $39,966.12 which amount included $17,322.00 additional tax for an incorrect return. Counsel for the Commissioner stated at the hearing that this amount of additional tax related to the share of income of the Evans Mimong Trust which the Commissioner contended Mr. Evans had failed to include in his return.
income in respect of your return for the year ended 30
June 1980.
Taxable income as returned $ $
ADD 8,494
Share of income from Evans Mimong Trust
increased from $ nil to $32,422 in
accordance with the amended trust
distribution 32,422
Share of loss from Mimong Station
Partnership reduced from $22,034 to
$11,487 in accordance with amended
partnership distribution 10,547 42,969
Note (1):
The grounds on which this assessment
has been based are that the scheme
arrangements entered into by Evans Mimong
Trust are a sham and the defence of the
assessment may also include the basis
that the scheme arrangements are void
against the Commissioner by virtue of
Section 260 of the Income Tax Assessment
Act 1936, or alternatively, that the
doctrine of fiscal nullity applies.
Taxable income as shown in attached notice $51,463"
5. The return of income of the Mimong Station Partnership of which Mr. Evans
was a partner for the year of income ended 30 June 1980
returned a net loss of
$107,950 (of which Mr. Evans claimed to deduct the amount of $22,034
abovementioned) which the Commissioner
reduced to $57,439. In the partnership
adjustment sheet the Commissioner identified the adjustments which he had made
as follows:
"Deductions claimed for interest paid to AmericanMr. Evans lodged a notice of objection on 28 October 1985 both to the disallowance of his claim to deduct $22,034 and to the addition of $32,422. This objection was disallowed on 6 February 1986.
Overseas Finance Corporation ($40,000), China
Acceptance Co. Ltd. ($1,785) and Sparta Nominees Pty.
Ltd. ($8,726) disallowed."
6. In his return of income for the year ended 30 June 1981 Mr. Evans claimed to deduct the sum of $25,443 being his share of ans' taxable income as returned from $21,523 to $46,966. By the adjustment sheet annexed to the notice of assessment the Commissioner stated that the "loss from Mimong Station Partnership" was disallowed and he added an amount of $25,443 to Mr. Evans' taxable income.
7. The adjustment sheet issued to the Mimong Station Partnership disclosed that the net loss for the year ended 30 June 1981 had been returned as $127,215. However the Commissioner in that sheet indicated that he had disallowed the claim of the partnership to deduct interest paid to American Overseas Finance Corporation ("A.O.F.C.") ($79,679), China Acceptance Co. Ltd. ("China Acceptance") ($6,565) and Trans City Holdings Limited ("Trans City") ($39,789). The total amount of interest disallowed was $126,033 which reduced the net loss of the Mimong Station Partnership to $1,182.
8. Mr. Evans duly lodged a notice of objection to the disallowance of his share of the partnership loss on 1 June 1982 which objection was disallowed.
9. In his return of income for the year ended 30 June 1983 Mr. Evans claimed to deduct $33,864 as his share of the Mimong Station loss and in consequence returned his taxable income as $19,792. In the adjustment sheet which accompanied the notice of assessment issued on 23 September 1985 the Commissioner stated that his "share of loss from Mimong Station Partnership reduced from $33,864 to $1,937 in accordance with amended partnership distribution". The adjustment sheet issued in respect of the Mimong Station Partnership indicated that it had returned a net loss of $169,320. However the Commissioner disallowed deductions claimed for interest paid to A.O.F.C. ($105,026), China Acceptance ($13,234) and Trans City ($41,734). The disallowed deductions totalled $159,634 in consequence of which the loss of the Mimong Station Partnership was reduced to $9,686. An objection lodged by Mr. Evans on 28 October 1985 was disallowed by the Commissioner.
10. Mr. Evans lodged his return of income for the year of income ended 30
June 1984 wherein he claimed to deduct his share of loss
incurred by the
Mimong Station Partnership, namely $33,864. He subsequently requested that
this amount be increased to $35,216.
In the adjustment sheet annexed to his
notice of assessment issued on 2 September 1985 the Commissioner stated that
the "share of
loss from Mimong Station Partnership reduced from $33,864 to
$2,931 in accordance with amended Partnership Distribution". The adjustment
sheet for the Mimong Station Partnership indicated that the partnership
returned a net loss of $176,084 which by his adjustment sheet
the Commissioner
reduced to $14,907 stating -
"Deductions claimed for interest paid to AmericanMr. Evans forwarded an objection by letter dated 29 October 1985, which objection was disallowed.
Overseas Finance Corporation ($103,331) and Trans City
Holdings Limited ($57,846) disallowed".
11. It would appear from the papers that the partnership loss as returned for the year ended 30 June 1982 was also reduced by the Commissioner and that Mr. Evans lodged an objection. However there was no appeal before the Court in respect of that year.
12. In this matter the facts are exceedingly complex and will need eventually to be set out in some detail, at least in respect of certain of the matters in issue. At this stage it is sufficient to set out in general terms the facts which produced the contests.
13. However first I must make comment on what I consider as an unsatisfactory presentation of the issues in this matter, notwithstanding the existence of very adequate and comprehensive rules in this Court for dealing with tax appeals. Proper use of these rules will ensure that both the Court and the parties are fully informed prior to the hearing of the likely issues. Furthermore a great deal of hearing time will be avoided if what are in truth interlocutory matters are dealt with prior to the hearing of appeals. The following aspects prompt me to make these comments.
14. From the point of view of the Court there was in the appeal papers almost a complete lack of information as to the issues. The Court file comprised only the papers filed by the Commissioner when he referred the matter to the Court at the request of the taxpayer. Even these were inadequate in a crucial aspect in that the adjustment sheet, frequently the only indication to the Court of the grounds or the sections of the Act upon which the Commissioner was basing his defence of the assessments, was for the year of income ending 30 June 1980 omitted from those papers. Thus the fact that the Commissioner was placing reliance upon "sham, s.260 and fiscal nullity" was not revealed until questions were asked of the parties on the first day of hearing.
15. At the time when the matter was initially before the Supreme Court of New South Wales the taxpayer was directed to serve affidavits prior to 15 December 1986. Two affidavits with exhibits were duly served although not filed in the Court and thus copies did not appear in the Court file. The explanation given to me was that the practice was not to file affidavits because they were frequently mislaid in the Supreme Court Registry. Having been served there was no intimation by the Commissioner to the taxpayer's representatives during the intervening 16 months that they both were in unacceptable form and very substantial portions would at the hearing be objected to as inadmissable. The greater part of the first day of what had been and was again on that day presented as a 3 day case was taken up with argument as to how much of the affidavits could properly be read to the Court. Very substantial portions were successfully objected to as being presented in inadmissable form. The consequence was that the taxpayer's representatives, who appear to have proceeded on the basis that their client's case would be presented in chief on affidavit evidence and proofs of witnesses would not be required, had to recast their case. In the event the hearing of the appeals extended over 11 days with a two months' adjournment after the initial three days of hearing.
16. As between the parties very little if anything was done to ascertain the nature of the other side's case. No particulars the Commissioner provided them 8 weeks later and on the Friday of the week preceding the resumption of the hearing on the Monday. Thus the particulars were of little if any help to the taxpayer and were hardly touched upon. Likewise the Commissioner did not, probably because it was not sought, provide any information as to the grounds upon which he was relying for rejecting the taxpayer's claims to deduct partnership interest payments or the nature of the s.260 scheme which he alleged. Finally, neither side appeared to have perused the documents upon which the other contemplated relying. No application was made for discovery.
17. These circumstances unfortunately do not appear to be exceptional
although perhaps in this matter capable of explanation by virtue
of the
transition of appeals from the Supreme Court to this Court. I adopt as
illustrating my concern the words of Murphy J. when
hearing Myer Emporium Ltd
v Federal Commissioner of Taxation 85 ATC 4111 at p 4113 at first instance in
the Supreme Court of Victoria. He said in a paragraph which is equally
applicable to this matter
and which I fully endorse:
"All of this should in my opinion have been done before18. In regard to the particulars I refer only to those supplied by the Commissioner in respect of the alleged undertaking or scheme, namely:
the appeal came on for hearing. It would have avoided
a good deal of time wasting which occurred. It would
have enabled the parties to prepare their cases
confidently. The court would have been at the very
least informed as to the likely issues. It would also
have enabled Myer to seek further particulars, if those
delivered proved to be inadequate or to require any
elaboration. As it turned out, the particulars in fact
delivered were of little help and were not, I think,
referred to again."
"1. The scheme arrangements referred to include the19. Mimong Station is in Queensland and the pastoral business conducted thereon was essentially that of cattle fattening. Prior to 1977 it was owned by Dillingham Constructions Pty. Ltd., a company which was a subsidiary of Dillingham Corporation of Honolulu. Mr. Evans was at all relevant times a senior executive in the Dillingham Group with specific responsibility for the Mimong Station and Derry Bernard Hill ("Mr. Hill") was managing director in Australia. Russell John Bainton ("Mr. Bainton"), a senior Queen's Counsel specialising in revenue law in Sydney, held a retainer from the Dillingham Group. Each of these persons, together with David John Baffsky ("Mr. Baffsky") a Sydney solicitor and a senior partner in the firm "Simons and Baffsky" and Peter Wicks ("Mr. n the Mimong Station. They were all acquainted with each other and in some instances they enjoyed close ties of friendship. Prior to the relevant time the shares in Dillingham Constructions, the then owner of Mimong Station, were acquired by a United States company, Fat City Feed Lot Inc. and the former company changed its name to Reef Cattle Management Pty. Ltd.
following:-
(i) The appellant's consent to the variation of
the trust deed to remove the requirement of
his consent to variation of the trust deed;
(ii) The variation of the trust deed to remove
the requirements of the appellant's consent
to variation of the trust deed;
(iii) The purported removal of Messrs Bainton and
Baffsky as trustees of the trust and the
appointment of O.R. Arroja Pty Limited as
trustee;
(iv) The purported appointment of Obebody (sic)
Investment Pty Limited as an eligible
beneficiary and the purported distribution
of all the income to their (sic) company;
(v) The purported subscription by Orebody
Investment Pty Limited for shares in Vowell
Exploration Limited;
(vi) The purported making by Vowell Exploration
Limited of a gift of $303,350.00 to Gowdale
Investments Limited;
(vii) The transaction which resulted in the
stripped funds purportedly flowing from
Gowdale Investments Limited to American
Overseas Finance Corporation;
(viii) The purported loan agreement between
American Overseas Finance Corporation and
Mimong Station Partnership and the lending
of monies under their (sic) agreement; and
(ix) The continued exercise by Messrs Bainton and
Baffsky as trustees of the former trust of
control over the assets of the trust.
2. ...
3. ...
4. It is contended that the steps or transactions were
implemented to avoid tax and are not capable of
explanation by reference to ordinary business or
family dealing or the "choice" principle. In
particular, it is contended that the tax avoided
was the tax which the appellant was liable to pay
as the category A eligible beneficiary under the
trust deed."
20. In August 1979 Mr. Baffsky and Mr. Bainton went to California for the
purpose of negotiating a purchase of Mimong Station on
a walk-in walk-out
basis. Prior to their departure steps were taken to establish a trust for the
families of each of them, Mr. Evans,
Mr. Hill, Mr. Bainton, Mr. Baffsky and
Mr. Wicks (hereinafter together frequently called "the partners" even though
at times they
were also eligible beneficiaries under the trusts prior to
becoming partners). Trusts were also established for the families of
a Mr.
Carson, Mr. Yuncken and Mr. Smith. The trust deeds were all in similar form
and all bear date 14 August 1979, the date upon
which Mr. Bainton and Mr.
Baffsky left Sydney by air for California. Peter Roger Simons, a partner of
Mr. Baffsky in the firm Simons
& Baffsky, was in each instance the settlor and
the only difference between each of the deeds was in the names of the members
of
the particular family and the name of the settlement. The terms of the
settlements are of significance in these appeals and it is
necessary to set
out relevant portions thereof in full. Mr. Evans' settlement was as far as
necessary in the following terms:
"THIS DEED OF TRUST made at Sydney the 14th day of21. It is pertinent to note at this stage that of the five persons who eventually became partners in the running of Mimong Station, only Mr. Evans, the taxpayer, and Mr. Bainton gave evidence in this appeal. Mr. Evans had very little first hand knowledge of the setting up of the trusts and the establishment of the partnership. He left all these matters in the hands of Mr. Bainton. Mr. Bainton for his part was intimately involved in each of these matters as well as in the acquisition of the Mimong Station. However he did not have anything but a very general recollection of these happenings. In consequence there were very many gaps in the evidence and thus a substantial number of occasions when it was apparent that the Court was left in a state of uncertainty. This was particularly the case with respect to financial matters, including in particular the funding of the operations, which Mr. Bainton said had been left to Mr. Baffsky or Mr. Wicks, neither of whom gave evidence.
August one thousand nine hundred and seventy-nine
BETWEEN
PETER ROGER SIMONS of 139 Macquarie Street Sydney in
the State of New South Wales (hereinafter referred to
as "the Settlor") of the one part
AND:
DAVID ZALMON BAFFSKY of 139 Macquarie Street, Sydney
and RUSSELL JOHN BAINTON of 174 Phillip Street, Sydney
(hereinafter referred to as "the Trustee") of the other
part
WHEREAS the Settlor on the execution hereof intends to
pay to the Trustee the sum of Fifty dollars ($50.00) to
be held by the Trustee upon the trusts hereinafter
declared concerning the same as the Trustee does
acknowledge and agree to do
NOW THIS DEED WITNESSETH as follows
1. In this Deed the following expressions shall have
the following meanings:-
(a) "child" includes an infant legally adopted whether
before or after the execution of this Deed.
(b) "the eligible beneficiaries" means:-
CATEGORY A - RONALD WILLIAM EVANS
CATEGORY B - BARBARA EVANS, the wife of the said
Ronald William Evans
CATEGORY C - The children whether born before or
after the date hereof, of the said
Ronald William Evans
CATEGORY D - Any future spouse of the said Ronald
William Evans
CATEGORY E - The spouses born before the vesting
day, of the children of Ronald William
Evans
CATEGORY F - The grandchildren, born before the
vesting day, of the said Ronald William
Evans
(c) "the Trustee" means the said David Zalmon Baffsky
and the said Russell John Bainton or other the
trustee for the time being hereof.
(d) "the trust fund" means the said sum of Fifty
dollars ($50.00) all other sums or property
received by the Trustee to be held upon the trusts
hereof, all accumulation of the income of any such
property and the investments for the time being
representing the foregoing.
(e) "the vesting date" means the date upon which occurs
the first of the following events:-
(i) the expiration of eighty (80) years
from the execution of this Deed;
(ii) the death of the last survivor of all
of the lineal descendants male or
female of his late Majesty King George
the Sixth of England living at the
date of this Deed;
(iii) the execution by the Trustee of a
document declaring the date of the
execution of the same to be the
vesting date for the purposes of this
Deed.
(f) "year of income" shall mean the period of twelve
(12) months ending on the 30th June in each year
save that the periods between the execution hereof
and the following 30th June and the vesting date
and the preceding lst July in each year shall each
be a year of income.
2. ...
3. Until the vesting date the Trustee shall hold the
income of the trust fund derived during each year
of income thereof upon the following trusts:-
(a) To pay or apply the same to or for the benefit of
such one or more to the exclusion of the other or
others of the eligible beneficiaries living on the
last day of that year of income and in such shares
and proportions as the Trustee may not later than
the expiration of that year of income determine.
Any determination by the Trustee under this clause
shall be made in writing placed with the trust
papers and its effect recorded in the trust books.
If the Trustee fails to make any such determination
prior to or within the said period of one (1) month
then it shall hold such income:-
(i) upon trust for such of Category A of
the eligible beneficiaries as are
living on the last day of such year of
income if more than one equally among
them;
(ii) ...
(iii) ...
(iv) ...
(v) ...
(b) ...
(c) Notwithstanding the foregoing trusts of this clause
the Trustee may at any time during the life of the
Settlor or during such if any longer period as the
law may then allow determine to accumulate all or
any part of the income of any year of income. Such
accumulated income shall be added to and dealt with
as part of the corpus of the trust fund in all
respects in accordance with the terms and
conditions of this trust.
4. Upon and from the vesting date the Trustee shall
hold the corpus of the trust fund upon the
following trusts:-
(a) The corpus of the trust fund shall be held upon
trust for such one or more to the exclusion of the
other or others of the eligible beneficiaries then
living and in such shares and proportions as the
Trustee may within one (1) month before the vesting
date determine. Any determination made by the
Trustee under this clause shall be made in writing
and placed with the trust papers.
(b) If the Trustee fails to make any such determination
within one (1) month before the vesting date then
it shall hold the corpus of the trust fund:-
(i) upon trust for such of Category B of
the eligible beneficiaries as are
living upon the vesting date if more
than one equally among them.
(ii) ...
(iii) ...
(iv) ...
(v) ...
(vi) if there be no person taking under
clause (v) above then upon trust for
such public charitable purpose or
purposes as the trustee may select.
5. ...
6. ...
7. ...
8. ...
9. ...
10. At any time prior to the vesting date the Trustee
may but only during the lifetime of Ronald William Evans
with his prior written consent by deed under his hand
(or if a company under its common seal) vary any of the
trusts powers discretion or duties herein setforth in
any manner whatsoever including but without in any way
limiting the generality of the foregoing enlarging any
category of eligible beneficiaries and adding a further
class of eligible beneficiaries PROVIDED HOWEVER that no
exercise of this power of variation shall be capable of
conferring any interest in the trust fund upon the
Settlor and any alteration which would otherwise so do
shall to that extent be ineffective.
11. ...
12. ...
13. ...
14.(a) Any trustee may resign his trusteeship in
accordance with the powers in that behalf
conferred on trustees by the law which pursuant
to Clause 15 below the trusts hereof are then
to be administered.
(b) Ronald William Evans during his lifetime and
after his death his personal representative
(who may act immediately upon the death of
Ronald William Evans whether or not he applies
for probate of the Will of the said Ronald
William Evans) shall have power at any time and
from time to time to remove any trustee of this
settlement and to appoint any other trustee in
his place. Such removal and re-appointment
shall be under the hand of the said Ronald
William Evans or his personal representative as
may be and shall be placed with the trust
papers.
15. The Settlor declares that the proper law of this
settlement is that of New South Wales. The Settlor
further declares that at any time but during the
lifetime of Ronald William Evans only with his
prior written consent the Trustee for the time
being hereof may if he thinks fit resign and by
instrument in writing appoint as new trustee any
person or corporation residing or carrying on
business in any place outside of New South Wales
and may transfer to such trustee the whole of the
trust fund and any income accumulated under Clause
3(c) hereof. Upon the appointment of any such
trustee the trust find shall thereafter be
administered in accordance with the law of the
place where that trustee being a person resides or
being a body corporate carries on its main
business.
16. This settlement shall be known as The Evans Mimong
Trust.
IN WITNESS WHEREOF the parties hereto have hereunto set
their hands and affixed their seals on the day and year
first hereinbefore written.
SIGNED SEALED AND DELIVERED by )
the said PETER ROGER SIMONS in )
the presence of: ) P. Simons
C. House
SIGNED SEALED AND DELIVERED by )
the said DAVID ZALMON BAFFSKY )
in the presence of: ) D. Baffsky
C. House
SIGNED SEALED AND DELIVERED by )
the said RUSSELL JOHN BAINTON )
in the presence of: ) R. Bainton
R.A. Head"
22. Whilst in the United States in the month of August 1979 Mr. Baffsky and Mr. Bainton negotiated with a Mr. Breien on behalf of Reef Cattle Management concerning the purchase of the station property, its livestock plant and equipment. The crucial feature of the purchase was said by Mr. Bainton to be the number and price of the cattle. He was aware at the time of the probable number on the property and that that number exceeded the number in the books of Reef Cattle Management. The price agreed between the parties for the cattle was, Mr. Bainton said, below their anticipated market value. Eventually a price was agreed upon on a walk-in walk-out basis for the property, but with specified figures being allotted for each of the assets of the station business. However there was no written agreement evidencing the sale and purchase and no deposit was paid. Subsequently in an equally informal manner settlement took place in Sydney again without an agreement for sale and purchase and with Mr. Baffsky and Mr. Bainton as purchasers as trustees of the family trusts. At the time the title deeds to the Mimong property, which was leasehold, were in the name of members of the family named Buntine who held them as nominees for Reef Cattle Management and subsequently for Mr. Baffsky and Mr. Bainton. Documentary evidence indicated the purchase price as $1,175,724, the totality of which appears to have been borrowed as no contribution thereto was made by any person or out of the settled sums of $50. The accounts also disclosed that 4059 head of cattle were purchased from Reef Cattle Management for $836,500, 60 horses for $3,500, motor vehicles $13,565, plant and equipment including office equipment and furniture $14,817 and the property and improvements $307,342.
23. Mr. Bainton said that he and Mr. Baffsky entered into possession of the
property and conducted business operations thereon until
a somewhat indefinite
date in December 1979. During the time of these operations substantial sales
were made of cattle, which sales
produced a gross profit of $394,659.77 as
disclosed in the livestock trading account. An income tax return for what was
called "The
Mimong Partnership", but which related to the business operations
conducted by Mr. Baffsky and Mr. Bainton in their capacity as trustees
of the
five family trusts, disclosed in a profit and loss statement a net profit for
the period 24 August 1979 to 24 December 1979
of $322,713.39. This amount was
adjusted to $324,213.18 as the taxable income of the trusts. This taxable
income was stated to
have been distributed to the Baffsky, Bainton and Wicks
Mimong Trusts in the amount of $81,053 each, the Hill Mimong Trust in the
amount of $48,632 and the Evans Mimong Trust in the amount of $32,422. These
differing entitlements appear to arise, as indicated
in documents, from the
following circumstances. Initially eight trusts were said to have
participated in the purchase of the Station
in the following proportions as
"determined upon" by Messrs Baffsky and Bainton on 23 August 1979 as follows:
"The Trusts are: The Proportions are:24. Subsequently the Carson, Smith and Yuncken Mimong Trusts ceased to participate and the Evans Mimong Trust entitlement was increased to 10%, the Hill Mimong Trust to 15% and the Wicks Mimong Trust to 25%. These were the proportions in which the five trusts participated in the distribution of the sum of $324,213.18 mentioned above.
(1) The Baffsky Mimong Trust 25%
(2) The Bainton Mimong Trust 25%
(3) The Carson Mimong Trust 5%
(4) The Evans Mimong Trust 5%
(5) The Hill Mimong Trust 10%
(6) The Smith Mimong Trust 5%
(7) The Wicks Mimong Trust 20%
(8) The Yuncken Mimong Trust 5%"
25. During December 1979 the trustees sold the Mimong Station to a partnership comprising Messrs Evans, Baffsky, Bainton, Wicks and Hill as partners in equal shares. They signed a partnership agreement in standard form which need not be set out but which bore date 6 December 1979 and recited that the partnership commenced business on 1 December 1979. Mr. Bainton said that the sale to the partnership was prompted by the need to finance increased expenditure on improvements to the Mimong Station. There was evidence that substantial sums were spent by the partnership in this regard. Each of the partners contributed $10,000 as his contribution to partnership capital. Those of the original cattle which remained unsold together with additional cattle purchased by the trustees were sold to the partnership at valuation together with the other assets at the price paid by the trustees. The sale was implemented in a very informal manner with many short cuts taking place without any written agreement and with the purchasing partners accepting liability for the balance of the trustees' borrowings. Mr. Bainton said that Mr. Baffsky made all necessary financial arrangements and also made certain arrangements with a Mr. McNally which are later related in these reasons. He said in evidence, when speaking of funds, that as trustees "we had to have enough to put into the trusts, the balance of the purchase price, because I think by that stage David Baffsky had reached whatever the arrangements he did reach about them with McNally". In his affidavit Mr. Bainton said in this regard "the balance of $322,713 we retained as profits of the trust (sic) for the period of their operation". It is quite apparent that the arrangements that Mr. Baffsky was making with Mr. McNally concerned the trusts and the disposal of their net income. Each of the trusts had acquired at that time a substantial amount of taxable or at least assessable income. The "balance of $322,713" to which Mr. Bainton was referring can be identified as portion of an amount which was said to have been borrowed by the partners from A.O.F.C. under arrangements made by Mr. Baffsky to finance their purchase from the trustees of Mimong Station. This balance was retained by the trustees and represented the profits made by them during the period of their operations.
26. It was not disputed that what followed pursuant to Mr. Baffsky's
arrangements with Mr. McNally was an attempt to strip from each
of the trusts
its share of the taxable income in such a manner that the income would not be
subject to taxation at least in the hands
of the trustees or beneficiaries.
The steps were implemented by Mr. Evans for his part by executing certain
documents which were
followed in sequence by other documents. He did so at
the request of Mr. Bainton and did not remember what reasons he was given
for
the request. There was much examination of the circumstances in which he
signed the documents but in my view not much of significance
turns on this
evidence. Mr. Bainton's evidence was that the purpose of the documents was to
change the trustees and enable Mr. McNally's
client to obtain control of the
trust assets. This client, Mr. Orr Gray, he assumed would distribute the
income to an organization
which had accumulated losses. These documents are
crucial to a number of the challenges by the Commissioner in support of his
assessment
of Mr. Evans. They must not only be set out in full but because
certain portions of each are handwritten by various persons a photocopy
of
each is annexed to these reasons. The four documents which I hereafter call
"the stripping documents" and in which a number of
dates were not inserted are
as follows:
1. "I Ronald William Evans do hereby consent to the27. In consequence of this documentation Orebody Investments Pty. Ltd. was alleged to be the eligible beneficiary presently entitled to the income of the Evans Mimong Trust for the year ended 30 June 1980. The saga of this trust can be concluded by referring to a document called "Nomination of Distribution Date" which was in the following terms:
Trustee of the Evans Mimong Trust constituted by
the deed of settlement made on the 14th day of
August, 1979 by PETER ROGER SIMONS as Settlor and
DAVID ZALMON BAFFSKY and RUSSELL JOHN BAINTON as
trustees varying the trusts and powers of the said
settlement by deleting from clause 10 of the said
deed the words 'but only during the lifetime of
Ronald William Evans with his prior written
consent'.
DATED the 23rd day of December, 1979
SIGNED SEALED AND DELIVERED )
by the said Ronald William )
Evans in the presence of: ) R.W. Evans
R. Bainton"
2. "THIS DEED POLL is made the 23rd day of December,
1979 by DAVID ZALMON BAFFSKY and RUSSELL JOHN
BAINTON WHEREAS by a deed of settlement made on the
14th day of August, 1979 by PETER ROGER SIMONS as
Settlor and DAVID ZALMON BAFFSKY and RUSSELL JOHN
BAINTON as Trustees there was constituted a
settlement known as The Evans Mimong Trust
AND WHEREAS by an instrument under his hand made on
the day of December, 1979 Ronald William Evans
has consented to the variation of the trusts and
powers of the said settlement intended to be
effective by this Deed Poll
AND WHEREAS the said DAVID ZALMON BAFFSKY and the
said RUSSELL JOHN BAINTON are still the trustees of
the Evans Mimong Trust NOW THIS DEED POLL we the
said DAVID ZALMON BAFFSKY and RUSSELL JOHN BAINTON
do vary the trusts and powers of the said deed of
Ronald with his prior written consent'.
SIGNED SEALED AND DELIVERED )
on the day and year first )
abovementioned by the said )
DAVID ZALMON BAFFSKY in the ) D. Baffsky
presence of:
R. Bainton
SIGNED SEALED AND DELIVERED )
on the day and year first )
abovementioned by the said )
RUSSELL JOHN BAINTON in the )
presence of: ) R. Bainton
D.Z. Baffsky"
3. "I Ronald William Evans in exercise of the power
conferred upon me by Clause 14(b) of the deed of
settlement made on the 14th day of August, 1979
between PETER ROGER SIMONS as Settlor and DAVID
ZALMON BAFFSKY and RUSSELL JOHN BAINTON as Trustees
by which there was constituted the Evans Mimong
Trust do hereby remove each of the said DAVID
ZALMON BAFFSKY and RUSSELL JOHN BAINTON from his
office as trustee of the said Evans Mimong Trust
and do hereby appoint O.R. ARROJA PTY. LIMITED to
be the new Trustee thereof in lieu of the said
DAVID ZALMON BAFFSKY and the said RUSSELL JOHN
BAINTON the said removal and appointment to become
effective upon the execution of this instrument by
the said O.R. ARROJA PTY. LIMITED evidencing its
acceptance of the office of new trustee of the said
trust.
DATED the 24th day of December, 1979
R.W. Evans
O.R. ARROJA PTY. LIMITED does hereby accept the
office of the New Trustee of the said Evans Mimong
Trust
THE COMMON SEAL of the said ) L.S.
O.E. ARROJA PTY. LIMITED was )
hereunto affixed on the day ) Director
of December, 1979 pursuant to )
a resolution of its directors ) William O. Gray
in the presence of: ) Secretary
SIGNED for and on behalf of
A.T. BURGOINE & CO PTY. LTD.
William Purdie
Director"
4. "THIS DEED POLL is made the 30th day of December
1979 by O.R. ARROJA PTY LIMITED
WHEREAS by Deed of Settlement made on the 14th day
of August 1979 there was constituted a settlement
known as the Evans Mimong Trust and WHEREAS the
said O.R. Arroja Pty Limited is still the Trustee
of the said Evans Mimong Trust
NOW BY THIS DEED POLL the said Trustee does hereby
exercise its power pursuant to clause 10 of the
said Trust Deed by enlarging the category of
eligible beneficiaries and adding a further class
of eligible beneficiary and hereby stipulates
OREBODY INVESTMENT PTY LIMITED to be an eligible
beneficiary for the purposes of the said Trust and
hereby determines pursuant to clause 3 of the said
Trust that all of the income of the Trust Fund
derived to the date hereof be held upon trust for
Orebody Investment Pty Limited to the exclusion of
all other eligible beneficiaries of the said Trust.
SIGNED SEALED AND DELIVERED on )
the day first abovementioned ) L.S.
by the said O.R. Arroja Pty )
Limited in the presence of: )SIGNED for and on
behalf of A.T.
William O. Gray BURGOINE & CO
PTY. LTD.
William Purdie
Director "
"TO: The Beneficiaries THE EVANS MIMONG TRUST28. The Commissioner presented an immense amount of evidence directed towards establishing that the abovementioned sum of $322,713 was withdrawn from the trusts and ultimately, in one of three alternative ways, was returned to the partners or their family groups. An extremely complex depicturing of the alleged dealings with these moneys as well as associated moneys was presented by counsel for the Commissioner as part of his address. A copy of this "Offshore Round Robin of Funds Cash Flow" is also annexed to these reasons. Neither Mr. Evans nor Mr. Bainton could give any evidence in respect of these happenings and a witness Mr. Wales of the firm of P.N. Burke & Co appeared to be the only person with any direct involvement on behalf of the trustees or the partners. On 24 December 1979 he delivered a bank cheque for $322,713 payable to "Robert F. McNally & Associates Trust A/C" to that firm and received in exchange a bank cheque for $303,350. This latter amount represented the sum of $322,713 made payable to McNally & Associates less the amount of that firm's commission or fee. The cheque received in exchange was a bearer bank cheque payable to Gowdale Investments Ltd, a company in which Mr. Baffsky had much involvement and it was together with other amounts transferred by telegraphic transfer to London on 24 December 1979. The other associated amounts related to transactions apparently conducted simultaneously by P.N. Bourke & Associates in three companies - Walrus Pty. Ltd., Wamo Pty. Ltd., and T.A. Godfrey Holdings Pty. Ltd. - and were said to have relevance to the Commissioner's reliance upon s.260 of the Act.
TAKE NOTICE that O.R. ARROJA PTY. LTD. the Trustee of
THE EVANS MIMONG TRUST
pursuant to its powers as Trustee under the Trust Deed
to nominate a distribution date and terminate the Trust
HEREBY NOMINATES the 1st day of July, 1980 as the
distribution date for the purposes of the Trust Deed.
DATED the 1st day of July, 1980
William O. Gray
for O.R. ARROJA P/L
Trustee of THE EVANS
MIMONG TRUST"
29. The Commissioner sought to establish that the amount of taxable income of
the trusts either came back to the partners as portion
of a composite sum
being the loan monies borrowed from A.O.F.C. on 24 December 1979 or found its
way to Hong Kong where a portion
was held on behalf of Mr. Evans or his
family. Mr. Evans said in the final paragraph of his affidavit as follows:
"14. Before I signed the document dated 23 DecemberMr Bainton in his affidavit confirms this understanding of Mr Evans stating -
1979, a photocopy whereof is marked 'L', Russell
Bainton told me that the income of the Evans Mimong
Trust, less charges and expenses, would ultimately end
up in a Hong Kong blind trust which would be
administered by Peter Wong in whom he said he had
complete trust. Russell Bainton subsequently told me
that that had happened. I did not ask him how, and he
did not offer any explanation. I have since personally
spoken with Peter Wong and he confirmed what I had been
told. I have made to Peter Wong certain suggestions as
to the investment of that trust fund which I believe he
has followed. I have not received any part of the fund
or any of its earnings since it was constituted."
"My understanding was that 94% of $322,713 would end up30. The abovementioned proportions represent the same proportions as the five trusts had earlier participated in the profits earned by Mr. Bainton and Mr. Baffsky when as trustees they carried on business on Mimong Station. Neither Mr. Evans nor Mr. Bainton denied that they or their families had or could ultimately have a beneficial interest in the blind trusts. Such trusts are explained in Jacobs' Law of Trusts in Australia 5th edition p 62 para.319 as trusts wherein an obligation is imposed on the trustee to keep secret from his cestui qui trust all (or some) details of the state of the trust's investments and of their value.
in Hong Kong as the corpus of five trusts settled there
in the proportions 25, 25, 25, 15 and 10 and that each
of those trusts would be what is commonly known as a
'blind trust'. Sometime later Peter Wong told me that
the money had so arrived and had been settled on five
such trusts."
31. That, stated briefly, was the evidence upon which the Commissioner relied to support his contentions of sham, s.260 of the Act and that the doctrine of fiscal nullity applied to the taxable income of the trusts. The Commissioner also contended that s.260 should be applied to the borrowings the partners allegedly made from A.O.F.C. on 24 December 1979.
32. Further issues concerned the deductions claimed by the Mimong Station partnership, as earlier identified in the adjustment sheets, for interest it said it had paid on its borrowings. These borrowings were in respect of loan monies from time to time obtained from China Acceptance, Sparta Nominees Pty. Ltd. ("Sparta Nominees"), and Trans City. Mr. Baffsky, who Mr. Bainton said looked after the borrowings, did not give evidence and Mr. Bainton was most vague in his recollection. Moreover, in most instances only the annual accounts of the partnership were before the Court for the purpose of establishing the existence of the borrowings, the terms thereof, the fact that interest was paid and for what purpose. Mr. Evans, whose evidence limited though it was I accept without hesitation, stated that he left all these matters in the hands of others. He said that he checked the accounts each year but primarily relied on the fact that they were prepared by a firm of accountants of which firm Mr. Wicks was the senior partner. This firm was also employed to pay the accounts and bills for expenditure incurred by the partnership. Mr. Bainton was unable to produce the primary records of the partnership such as the cash book, ledger and journal although he said they had been in his possession both at the time of preparation of his affidavit and shortly after he gave evidence on 29 April 1988. When the matter resumed on 4 July 1988 he said that notwithstanding extensive enquiries these records could not be located.
33. The Commissioner's contention was that Mr. Evans, in accordance with the obligation cast upon him by sub.s.190 (b) of the Act, could not discharge the onus of establishing his entitlement to claim a deduction of his share of interest or more correctly of the particular partnership losses. It will be necessary to consider the evidence on this topic in greater detail subsequently.
34. By his further amended assessment issued on 2 September 1985 in respect of the year of income ended 30 June 1980 the Commissioner increased, inter alia, the taxable income of Mr. Evans as returned by $32,422. He described this amount as being Mr. Evans "share of income from Evans Mimong Trust increased from $ nil to $32,422 in accordance with the amended trust distribution". As appears earlier in these reasons this amount of $32,422 represented the 10% share of the Evans Mimong trust of the profit made by Mr. Baffsky and Mr. Bainton in their capacity as trustees of the various family trusts. In his notes to the adjustment sheet the Commissioner stated that he based his assessment on the ground that "the scheme arrangements entered into by Evans Mimong Trust are a sham". He also indicated reliance upon s.260 of the Act and the doctrine of fiscal nullity. Counsel for the Commissioner contended that the stripping documents constituted sham transactions and in addition were not effective for a number of reasons based on trust law. His submissions on fiscal nullity were presented only formally, in the light of the reasons of the Full Court of this Court in Oakey Abbatoir Pty. Ltd v Federal Commissioner of Taxation 84 ATC 4718 at p 4730, for the purpose of keeping the point open in the event of further appeals. I will not consider further this submission.
35. Counsel contended that the transactions allegedly effected by the stripping of documents were a sham, constituting only window dressing. He argued that they were brought into existence for the purpose of creating an appearance of a change in legal entitlements to the Evans Mimong Trust when none was in fact intended. There was no intention to achieve what the documents on the face of them attempted to achieve, namely that Orebody Investments should enjoy a distribution of income from the five trusts of $322,713. For this reason and on those grounds he argued that they should be treated as of no legal effect. The consequence was, he said, that Messrs Baffsky and Bainton remained as trustees and, in default of a determination by them under the trust deed, Mr. Evans was entitled under paragraph 3(a)(i) thereof to the income of his family trust.
36. The meaning of the word "sham" as applied to a scheme was considered by
Windeyer J. in Scott v Federal Commissioner of Taxation
(No. 2) (1966) 40 ALJR
265 at 279:
"On the other hand if the scheme, including the deed was37. As Diplock L.J. (as he then was) stated at the end of the classic paragraph in Snook v London & West Riding Investments Ltd. (1967) 2 QB 786 at 802:
intended to be a mere facade behind which activities
might be carried on which were not to be really
directed to the stated purposes but to other ends, the
words of the deed should be disregarded."
"But one thing, I think, is clear in legal principle,38. I cannot accept the contention of the Commissioner that the transactions were a sham. In my opinion the parties thereto intended to create the state of affairs evidenced by the documents. The trusts no longer served any useful purpose in the current scheme of things in that the parties had decided that thereafter the Mimong Station would be owned and run by a partnership. The trusts had indeed served a very useful purpose during the period of live stock trading by Messrs Baffsky and Bainton in that substantial profits had been achieved in the short term by the trusts and not by the persons who ultimately became partners. As Mr. Bainton said, substantial capital expenditure had become necessary and over the period of 4 months the number of cattle had been greatly reduced by profitable sales. There was less likelihood of such substantial profits in the immediate future. The trusts, and in particular Mr. Evans' trust, had achieved substantial profits, $324,220 and $32,422 respectively, which were liable to be subjected to income tax payable by his family or out of the trust assets by the trustees. A convenient resolution of this situation was to distribute the income to a beneficiary prepared for one reason or another to acquire an entitlement thereto for consideration. Such a situation was on the face of these documents effected and in my opinion intended to be effected. It is nothing to the point to say that the transactions may for one reason or another not have achieved the intended end result. The fact that that result was intended means in my opinion that the transactions were not a sham.
morality and the authorities... that for acts or
documents to be a 'sham'... all the parties thereto
must have a common intention that the acts or documents
are not to create the legal rights and obligations
which they give the appearance of creating."
39. The Commissioner argued in the alternative that the stripping documents were as a matter of law on a number of grounds ineffective to achieve the changes intended. As a consequence the true position was, he said, that Messrs Baffsky & Bainton remained as trustees, Orebody Investments was not validly added as an additional beneficiary, the purported exercise of discretion by the then trustee in its favour was ineffective and Mr. Evans became entitled on 30 June 1980 to the income of that year in default of an exercise by Messrs Baffsky and Bainton of their discretion in favour of other categories of beneficiaries.
40. Counsel for the Commissioner's first submission was that clause 10 of the Evans Mimong Trust Deed empowering the trustee to vary the trusts did not confer a power to affect the beneficial interests of the existing beneficiaries. He cited Chapman v Chapman [1954] UKHL 1; (1954) AC 429 in support of this proposition. However the House of Lords decision in that matter has no bearing upon the construction of the Evans Mimong Trust Deed. The question before the House concerned the extent of the powers of the Court of Chancery when asked to sanction a re-arrangement of the trusts of a settlement for the purpose of securing a revenue benefit. It had nothing to do with the validity of powers vested by a settlor in the trustees of a settlement.
41. The powers of the trustee to vary the Evans Mimong Trust expressly include a power to enlarge any category of eligible beneficiaries and to add a further class of eligible beneficiaries. The exercise of this power could inevitably affect the beneficial interests of the existing beneficiaries.
42. It was also said that there was no power to add a further category, namely a specified corporation, on the ground that one beneficiary could not comprise a class. In this regard Pearks v Moseley (1880) 5 App Cas 714 was cited as supporting the proposition that a gift to a "class" entailed a gift to a number of persons within a collective description who take in proportionate shares. Notwithstanding the uncertainty engendered by the expressions "enlarging a category" and "adding a further class" in close proximity I am not prepared to find that the addition of Orebody Investments as an eligible beneficiary was beyond power. The draftsman has gone to considerable lengths to indicate the ambit of the power to vary the trust by indicating that it may be "in any manner whatsoever" and then specifying the particular power to enlarge or add. I conclude that one named person can be included as an additional beneficiary in that that person or body can constitute a class. It may not amount to a "class gift" as that technical expression is used in Pearks v Moseley at p 723, but the power to vary the trust is in my opinion sufficiently wide to permit the addition of one further person as an eligible beneficiary. One person answering a particular designation can in some circumstances take as a class (Re Harvey (1893) 1 Ch 567).
43. However, counsel said, even if a single named person could constitute a class, there was no power to add an artificial person as distinct from a natural person as an eligible beneficiary. A corporation, for example, was not the type of additional beneficiary contemplated as entitled to be the object of the trustee's determination because the power to distribute income was to "such of the eligible beneficiaries living on the last day of the year of income". It follows, it was argued, that only natural persons, who might not be living at that time, could answer the description of persons in whose favour the trustee might pay or apply income. I am however not sufficiently convinced by this submission to limit the power to add beneficiaries in such a way as to exclude an artificial person.
44. On the assumption that the purported addition of Orebody Investments as
an eligible beneficiary was prima facie an effective
exercise of power under
clause 10 counsel contended that that clause was void for uncertainty. He
described the clause as conferring
a power which was a "hybrid or intermediate
power" and was administratively unworkable. He cited McPhail v Doulton [1970] UKHL 1; (1971)
AC 424 especially at p 457 and Re Hay's Settlement Trusts (1982) 1 WLR 202 at
213 as authority for this proposition. A contrary authority is Re Manisty's
Settlement (1974) Ch 17 a decision of Templeman J. as he then was, which
counsel for the Commissioner contended was either distinguishable or ought
not
to be followed in Australia. In that matter his Lordship had to consider
a power to add to the class of beneficiaries which was
said to be an
intermediate power and wider than any special power as it was practically
unlimited. Thus it was contended that the
power was too wide, uncertain and
invalid. However he declined to apply the requirement of class certainty to
mere powers as opposed
to trust powers. This case and its reasoning has been
approved in Australia by the authors of Jacobs' Law of Trusts in Australia
Fifth Edit. p 345 para.258 and by Professor R.P. Austin in an article entitled
"A survey of Recent Cases in the Law of Trusts".
Likewise Megarry V.C.
applied Re Manisty's Settlement in Re Hay's Settlement Trusts. On page 212 the
Vice-Chancellor said:
"Nor do I see how the power in the present case could beIt is my opinion that I should refrain from declaring clause 10 void for uncertainty in these proceedings as sought by the Commissioner not only because I find in his favour on this aspect of the appeals on another ground but also because the matter was not argued in depth. Furthermore any such finding could have an impact upon persons not before the Court, even though they would not be bound by the finding. I am not considering the matter as a court of construction and hearing all parties interested in various possible interpretations.
invalidated as being too vague, a possible ground of
invalidity considered in In re Manisty's Settlement,
at p 24. Of course, if there is some real vice in a
power, and there are real problems of administration or
execution, the court may have to hold the power
invalid: but I think that the court should be slow to
do this. Dispositions ought if possible to be
upheld,and the court ought not to be astute to find
grounds upon which a power can be invalidated.
Naturally, if it is shown that a power offends against
some rule of law or equity, then it will be held to be
void: but a power should not be held void upon a
peradventure. In my judgment, the power conferred by
clause 4 of the settlement is valid."
45. Counsel for the Commissioner also contended that upon the true construction of clause 3(a) of the Trust Deed there was no power in the trustee to exercise the discretion to apply income other than in respect of a full year of income. Therefore the determination of O.R. Arroja Pty. Ltd. on 30 December 1979 in favour of Orebody Investments was an invalid exercise of the power. This again is certainly arguable although there is no express provision of the Deed which prohibits the trustees making a distribution on account of income for the year in question or exercising the discretion prior to the end of that year. There is of course the requirement that the selected beneficiary be living at the end of the year of income which speaks in favour of the Commissioner's argument. However in the events that happened in this matter the income distributed comprised the totality of the income for the year in question and the beneficiary selected was unlikely to be affected by that particular contingency. The default provisions in respect of distribution of corpus set out in clause 4 and in particular the reference to public charitable purposes in 4(b)(vi) may have some relevance on this aspect.
46. The final ground was to the effect that O.R. Arroja Pty. Ltd. had not been effectively appointed the new trustee and thus ner in which the transactions were documented but this also is not a ground upon which I would decide this aspect of the appeal in favour of the Commissioner.
47. The Commissioner's contentions based upon the application of s.260 of the Act are less contentious and fraught with fewer obvious difficulties.
48. There is on this occasion no need to traverse the complex areas of the law relating to the applicability or otherwise of s.260 of the Act to multifarious transactions. Counsel for the taxpayer expressly conceded that there was plainly an "arrangement", to which Mr. Evans must be taken to be a party, to save the payment of tax or a liability therefor, by Messrs Baffsky and Bainton as trustees of the Evans Mimong Trust by one or more of the discretionary beneficiaries. I am therefore relieved from assessing the artificiality of the arrangement and whether it can be maintained as an ordinary business or family dealing or as an exercise of choice. I have earlier set out the transactions comprising the scheme arrangements identified by the Commissioner in his particulars of 1 July 1988. Counsel for the Commissioner in his final address identified three alternative series of transactions as the arrangements to which Mr. Evans was a party. The first set of transactions comprise what I would describe as the trust strip operation and include the stripping documents and Mr. Evans' participation therein together with the exchange of cheques by Mr. Wales with Robert F. McNally & Co. It is to my mind unnecessary to take the happenings further than this to establish an arrangement to which s.260 is applicable. The Commissioner's alternative propositions traced the stripped funds through to Gowdale Investments and back to the members of the partnership either by way of a loan from A.O.F.C. or to Hong Kong as investments in blind trusts. I do not find it necessary to rely upon either of these latter two alternatives as the arrangement to which, subject to consideration of Mr. Evans' contrary contentions, he was a party. I am however reasonably satisfied that if required, I would accept as established the second of the Commissioner's latter two alternative propositions, namely that a relevant portion of the stripped amount less McNally's fee is available in Hong Kong to the use of Mr. Evans or his family.
49. The contrary contentions of Mr. Evans' counsel denying the applicability of s.260 are three in number and each must be considered separately. It is pertinent to indicate that none of them were argued in depth but rather in very general terms, in effect as self-evident propositions. It was said that there was no evidence that in fact Orebody Pty. Ltd. was not liable to tax on the trustee's distribution to it. Counsel contended that this was a significant matter which was peculiarly within the knowledge of the Commissioner. He had failed to call evidence on the topic. It was also said that the arrangement to which Mr. Evans was a party was not one the objective purpose of which was to avoid the incidence of tax upon him because, as a matter of probability or near certainty, no distribution would have been made to Mr. Evans. In these circumstances Mr. Evans could not be brought to tax. Finally he argued that no identifiable sum of money or capital asset could be found to have come to Mr. Evans as capital in his hands in substitution for the income he would otherwise have received. In relation to the lastmentioned submission counsel cited particular passages in the landmark decisions in this area, namely Bell's case (1953) 87 CLR 548 at pp 573-4, Newton's case [1958] UKPCHCA 1; (1958) 98 CLR 1 at p 10, Hancock's case [1961] HCA 90; (1961) 108 CLR 258 at pp 281-2 & 291-2, F.C.T. v Ellers Motor Sales Pty. Ltd. [1972] HCA 17; (1972) 128 CLR 602 at p 620, F.C.T. v Gregrhon Investments Pty. Ltd. & Ors. (1987) 76 ALR 586 at pp 597 & 599.
50. The relevance of the first contention was said to be that the Commissioner could not apply s.260 if in fact Orebody had paid tax on the distribution of the net income of the trust. In this regard counsel contended that the Commissioner had not established a crucial fact, namely that Orebody had not paid tax on this income. The second contention, namely that as a matter of near certainty Mr. Evans would not have received a distribution if the scheme had not been enacted was also sufficient to deny the Commissioner's assessment of him. In my opinion neither of those arguments deny the application of the section in this matter.
51. It is not correct to say that the Commissioner can not apply the section unless he can establish that there has been an actual avoidance of tax or that the taxpayer would in the absence of the arrangement have derived or almost certainly would have derived the relevant assessable income. In this present matter Mr. Evans had prior to the implementation of the scheme a vested interest in the net income of the trust which interest was only liable to be divested if the trustees expressly exercised their power under paragraph 3(a) to apply the income in favour of other eligible beneficiaries or under paragraph 3(c) to accumulate the income. He participated to the extent necessary in transactions for the purpose of preventing an assessment of tax on himself, the members of his family or the trustees if the income had been distributed or otherwise dealt with in the normal way. In so doing he was a party to an arrangement which had the effect or purported effect of avoiding or at least altering the incidence of tax in the particular year.
52. Section 260 has been construed by the courts in a number of ways, not all
of which are necessarily consistent. As Taylor J. said in his dissenting
judgment in Newton v Commissioner of Taxation (1957) 96 CLR 578 at p 665 in
analysing the section:
"And, since it is clear that the real work of theThis passage from Bell's case was also cited with approval by Fullagar J. who gave one of the judgments of the majority of the Court.
section is intended to be done in cases where the
disputed item of income has not in fact or in law been
derived by the taxpayer, the section must be taken to
contemplate that, even before income has been derived,
a taxpayer may, by a legally effective contract,
agreement or arrangement avoid a liability to income
tax on future income. But, it already appears, it is a
condition precedent to the liability of a taxpayer that
he must derive income and it is difficult to understand
how, except in a loose sense, a person can be said to
avoid liability to tax where he will neither in fact
nor in law, derive future income. Nevertheless in an
attempt to give some intelligible meaning to the
section the view has been taken that there may be, on
the part of a taxpayer, an avoidance of liability to
tax, within the meaning of the section, in respect of
income before that income has been derived. In Bell's
case (supra at pp 573-574) it was said:
'Section 260(c) postulates a duty or a liability imposed
on a person by the Act, but this refers not to a
liability to pay a particular amount of tax (which
would be a liability imposed by a taxing Act), but to a
liability such as s.17 of the Act imposed on Bell, to
pay tax in respect of his taxable income ascertained by
including in his assessable income his proportion of
the Papuan Company's profits if and when he should
participate in the distribution of them'."
I have added the emphasis to the word "if".
53. In my opinion it is nothing to the point that there may not have been any
reduction of the tax applicable to the net income of
the trust nor that Mr.
Evans might never have participated in the distribution thereof. In Federal
Commissioner of Taxation v Gulland
[1985] HCA 83; (1985) 62 ALR 545 Gibbs C.J. said on page
556:
"On the other hand, the arrangement if effective againstI refer also to Dawson J. on page 585.
the Commissioner, would have increased rather than
reduced Dr. Gulland's income in the relevant income
year, because the unit trust made a loss during that
year. It does not follow that the arrangement did not
have one of the purposes or effects described in s.260.
Viewed as an arrangement intended to operate in future
years, the objective purpose of the arrangement can be
seen to be an attempt to avoid tax. Further, the
arrangement had the purpose and effect of altering the
incidence of tax in the relevant income year."
54. Counsel for the taxpayer acknowledged that these contentions were novel and he did not identify any authority in support of his submission. He did however contend that an essential feature of Hancock's case Mayfield v Commissioner of Taxation [1961] HCA 57; (1961) 108 CLR 303 and Ellers Motor Sales (No.1) [1969] HCA 60; (1988) 121 CLR 665 was that a distribution was made to a company which had made a loss or had a different liability to tax. Assuming this to be the case, there was evidence in the matter that Orebody Investments had in its return of income claimed losses which it could set off against the net income of the Evans trust and that it claimed it had no taxable income in the relevant year. Furthermore I am not satisfied that this circumstance of a different liability to tax relied upon by counsel was an essential feature of the reasoning in the cases mentioned by him.
55. Counsel's final point was that no identifiable sum of money or other
capital asset can be shown to have come to Mr. Evans. In
my opinion this
contention can be rejected on the facts. The position was that the net
profits of the trusts' trading activities,
of which the net income of Mr.
Evans' family trust formed portion, comprised cash in the bank. A cheque for
this amount was paid
by Mr. Wales on behalf of the trustees to Robert F.
McNally and Associates who deducted therefrom an agreed fee. A cheque for the
net amount was handed on the same occasion to Mr. Wales. He paid it to the
credit of a company Gowdale Investments Ltd. However
in my opinion this
latter aspect can be seen as immaterial, being an attempt to disguise the true
character of the amount which he
received and dealt with on behalf of or with
the concurrence of the trustees. The following memorandum dated 30 December
1979 from
Robert F. McNally & Associates sets out that firm's understanding
and explanation of the happenings:
"MEMO TO: W. ORR GRAY56. Reliance was placed by the Commissioner upon the words of the Privy Council in Newton's case [1958] UKPCHCA 1; (1958) 98 CLR 1 at p 10 namely:
FROM: R. ARNOLD
RE: MIMONG TRUST SETTLEMENTS 24 DECEMBER 1979
The above trusts are a follow on from Reef Cattle. As
I understand it five trusts took over the business
formerly operated by Reef Cattle and during the current
year have generated assessable income. The five trusts
are described as the Baffsky/Mimong Trust, the
Bainton/Mimong Trust, the Wicks/Mimong Trust, the
Hill/Mimong Trust and the Evans/Mimong Trust. The five
trusts operated the business in partnership and
enclosed is a draft partnership return covering the
period of operations from 24 August 1979 to 24 December
1979. You will see from the draft return that the
taxable income is $324,213. This is $1,500 greater
than the amount paid over at settlement and arises
because of $1,500 legal expenses not deductible.
Transactions at settlement were as follows.
1. Robert F McNally & Associates Trust Account drew a
bank cheque on behalf of Vowell Exploration Ltd for
2. A bank cheque was received in favour of R.F.
McNally & Assoc. Trust Account for $322,713
representing the assets of the trusts.
The agreed discount of 8% on $322,713 would be $25,817
and it is acknowledged that a further $6454 is to be
paid to Orebody as well as a further 8% of the $1,500
dollars non dedutible legal expenses. The above
transactions of course will need to be recorded in the
books of Orebody and Vowell and in addition Orebody
will need to subscribe for a small number of shares at
a premium in Vowell to generate in the Norfolk company
a reserve from which the gift can be made.
As regards the draft tax return we have further
requested details to be lodged with the first return
and also details relating to the purchase of the
business. It would appear the rest of the information
provided is adequate.
As regards the five trusts, we are presently being
provided with the Deed of the Bainton/Mimong Trust with
advice that the other four trusts are identical except
of course for the name of the parties. Clause 10 of
the Deed enables additional beneficiaries to be
nominated and we have requested that appropriate
documentation be prepared to nominate Orebody. We have
also advised that the incoming trustee for each trust
will be O.R. Arroja Pty. Limited which was the trust
company for thirty trusts taken over last June as part
of the overall arrangements with Baffsky.
Assuming the $322,713 paid into our trust account is to
be treated as the net assets of the trusts placed on
deposit with Orebody, then there will need to be a
further transaction which can of course again be
processed through our trust account making an actual
distribution of income to Orebody. Although the
original transaction on settlement could probably be
treated this way, it may be preferable to have the
appointment of new trustee and new beneficiary properly
documented before this is done, but of course before
Mr. Howard's impending announcement. At present the
surplus funds of $19,363 are on deposit with
Partnership Pacific Limited and these can be disbursed
with interest at a later date."
"But the ignoring of the transactions - or the57. It can however be accepted that it is sufficient if, in the words of s.19 of the Act, the income alleged to be derived although not actually paid over has as happened here been "reinvested... or otherwise dealt with on his behalf or as he directs."
annihilation of them, does not itself create a
liability to tax. In order to make the taxpayers
liable the Commissioner must show that monies have come
into the hands of the taxpayers which the Commissioner
is entitled to treat as income derived by them."
58. In this instance Mr. Wales was dealing with the profits being the net income of the trusts on behalf of or at the direction of the trustees and with the concurrence of Mr. Evans when he paid a cheque to Robert F. McNally & Associates and received a cheque in exchange. Alternatively it is in the circumstances open to the Court to draw the inference that the monies in the blind trust in Hong Kong are held on behalf of Mr. Evans or his family and are being dealt with as he directs. There was no evidence to the contrary from Mr. Evans or Mr. Bainton and I would rely on the facts in their respective affidavits and on Mr. Bainton's oral evidence.
59. In this regard I gain some support from the statement of the Chief
Justice in Hancock's case at pp 281-282 of his reasons, namely
"When the purpose is to assess a taxpayer who has60. The Commissioner also contended that the borrowings from A.O.F.C. were inextricably involved in the s.260 scheme and thus n must be rejected. I am not prepared to find that the lending of the sum of $595,614 borrowed by A.O.F.C. included the amount of $303,350. But even if it did I do not see this inclusion as being such an essential feature of the s.260 scheme that the total borrowings and interest paid thereon must be set aside and the deduction otherwise allowable for interest denied. Thus I accept the submissions of the Commissioner's counsel that s.260 applies in respect of the income of the Evans Mimong Trust but reject his contention that that section applies to the A.O.F.C. borrowings and the interest paid thereon.
reached a situation which but for a scheme swept away
by s.260 would or might spell liability to tax, it does
not appear to me to be necessary to trace the identity
of moneys as if one were seeking to identify in an
investment trust funds that had been misapplied... But
it seems to me that what matters must be the resulting
financial situation, one of change if not invariably of
betterment, and the factors which would but for the
void scheme have made it taxable... It is the result
that exposes the taxpayer to liability: a result
necessarily involving the employment by the taxpayer of
a distribution of the profit fund."
I have added the emphasis to the word "might".
61. Turning to the Commissioner's disallowance wholly or in part of Mr.
Evans' claim in each of the years of income to deduct e excessive.
Sub-section 190(b) casts this burden upon him and he must establish that the
partnership was entitled pursuant to sub.s 51(1) of
the Act to deduct the
amounts of interest referred to in the various adjustment sheets. The onus
which he is required to satisfy
is of course not proof beyond reasonable doubt
but on the balance of probabilities. As Gibbs J. said in Jacob v Federal
Commissioner
of Taxation 71 ATC 4192 at 4194
"The appellant has not satisfied me that it is more62. In this present matter Mr. Evans in order to succeed must satisfy me that, it is more probable than not that, in the words of sub.s 51(1), the partnership necessarily incurred outgoings, namely the particular amounts of interest, in carrying on its business which outgoings were not of a capital, private or domestic nature.
probable than not that he bought the shares in
Endurance Tin for the purpose of holding them as an
investment rather than for the purpose of reselling
them at a profit. It follows that he has failed to
discharge the onus of proving that the assessment is
excessive."
63. In the adjustment sheets issued to the partnership the Commissioner disallowed the claim for interest allegedly paid to A.O.F.C. in each of the years of income, the claim in respect of Sparta Nominees in respect of the first year of income, the claim in respect of China Acceptance in respect of the first, second and third years of income under consideration and the claim in respect of Trans City in respect of the second, third and fourth years of income. It is necessary to consider in turn the evidence in respect of each of these alleged loans. Mr. Evans might have been expected to call Mr. Baffsky as the partner who, on the evidence, made the arrangements for the partnership borrowings but he did not do so. The failure to call Mr. Baffsky as a witness was unexplained and leads to an inference in the circumstances of this matter that his evidence would not have helped Mr Evans' case: Jones v Dunkel [1959] HCA 8; (1958-59) 101 CLR 298 at pages 320-1. In respect of the deductions claimed of interest paid to A.O.F.C. the Commissioner conceded that if his arguments, based on s.260 and fiscal nullity, failed in respect of A.O.F.C. the deductions claimed were allowable. This issue having been resolved in favour of Mr. Evans his objections must in respect of interest paid by the partnership to A.O.F.C. be allowed.
64. In respect of the other borrowings and the claims to deduct interest payments thereon the Commissioner said that he put the taxpayer to "strict proof". Such an approach he said was justified because of what he called the understandable suspicion which in the circumstances he claimed attached to the activities of the partnership particularly in that Mr. Baffsky appeared to have an interest in or an association with a number of the lending companies. Counsel for the Commissioner went so far as to call in question and cast doubt upon the purchase by Mr. Bainton and Mr. Baffsky of the Mimong Station from Reef Cattle Management Pty. Ltd. and the subsequent sale to the partnership. However this approach based upon suspicion should not, in my view, deter me from determining whether it is "more probable than not" that the borrowings were made and the interest payments were necessarily incurred in the conduct of the partnership business. A requirement of "strict proof" goes beyond what is required of a taxpayer under s.190(b). The appropriate manner in which to approach the claims to deduct interest is to accept as the starting point that the trustees and the partnership did carry on business on Mimong Station which was acquired and the business conducted almost exclusively with borrowed money. It might be said that it is more probable than not that interest would be payable on such borrowings.
65. In respect of the claim to deduct $8,726 being interest paid to Sparta Nominees by the partnership in the year of income ended 30 June 1980 the evidence, documentary and oral, was that it arose in the following circumstances.
66. Mr. Baffsky and Mr. Bainton as trustees did not provide any of their own funds or the trust funds for the purchase of Mimong Station. The totality of these funds, namely $1,113,035 was borrowed from Sparta Nominees and the trustees claimed and were allowed a deduction of the interest paid to that company. At the time of the sale to the partnership the trustees owed to Sparta Nominees $418,738.45, having applied monies obtained from sale of cattle in reduction of the amount initially borrowed. Mr. Bainton gave evidence that the partners borrowed $595,614 (being the equivalent of $US660,000) from A.O.F.C. to finance their purchase. This amount was paid to the trustees on account of the purchase price and they retained $322,713 being the trusts' profits and applied the balance, namely $272,901, in further reduction of their borrowings from Sparta Nominees. The balance of these borrowings, namely $145,837 were "taken over" by the partnership, thereby reducing the amount of the purchase price payable by them and $145,837 was shown in the balance sheet of the partnership as a current liability due to Sparta Nominees. The probability that the partners accepted liability for the balance of the monies owing to Spartan Nominees was confirmed by the manner in which the accounts reveal they financed their purchase. The purchase price was shown by the accounts to be $819,444 of which $595,614 was paid by the borrowings from A.O.F.C. and $145,837 as a liability to Sparta Nominees. These two latter "payments" reduced the purchase price owing to $77,993.
67. Counsel for the Commissioner contended that I should not be prepared to find that by this evidence Mr. Evans had discharged the onus cast on him by sub.s 190(b). He drew attention to the fact that Sparta Nominees was a company of which Mr. Baffsky and Mr. Bainton were sole directors and shareholders and that it was described in the balance sheet attached to its annual return as being a nominee company with assets of only $4 being its share capital. Furthermore he drew attention to the fact that there was no document evidencing the loan and its terms and no oral evidence to the effect that interest had been paid and at what rate. I also note the failure of Mr. Baffsky to give evidence and the fact that in each of the years in question the total amount of interest claimed by the partnership was just sufficient to ensure a partnership loss. Each of these things the Commissioner said justified his suspicion. However notwithstanding these matters, all of which I take into account in addition to noting the manner in which short-cuts were taken in implementing most informally the various arrangements, I am satisfied that it is more probable than not that the partnership did incur an obligation to pay the amount of interest claimed to Sparta Nominees and that it was necessarily incurred in terms of sub.s 51(1). I therefore allow Mr. Evans' objection in this regard.
68. The Commissioner also disallowed the partnership's claim to deduct interest paid in that year of income to China Acceptance and in the succeeding two years under consideration. The accounts at 30 June 1980 showed an amount of $71,500 as owing to that company and also of interest totalling $1,785 as having been paid. The partnership ledger records three amounts totalling $71,500 as having been received on March 10, March 25 and June 30 1980 and the amount of $71,500 as outstanding at the end of that year.
69. This amount of $71,500 appears to have been repaid during the next year of income ending 30 June 1981, but an amount of interest totalling $6,565 is claimed as deductible as paid on that borrowing. Also interest was shown as paid in an amount of $13,234 in the year of income ended 30 June 1983 to China Acceptance. There was absolutely no evidence of the purpose for which any of these borrowings were made nor in respect of the latter year any evidence of the amount of the borrowing upon which the interest was paid. I am not satisfied with the evidence on this aspect of the case. Mr. Bainton's evidence was that he did not recollect when or why the borrowings from China Acceptance were made. Furthermore Mr. Baffsky and Mr. Wicks were not called notwithstanding Mr. Bainton's statement that they arranged the necessary borrowings. There is no ground upon which I can find in favour of Mr. Evans on the probabilities and thus there is a failure in my opinion to discharge the onus of proving that in this respect the objections should be upheld.
70. The remaining disputed claims to deduct interest relate to Trans City the indebtedness to which company is shown as a current liability in the balance sheet of the partnership as a line of credit for the year ended 30 June 1981 and a borrowing during that year. Mr. Bainton in his affidavit deposed to the circumstances in which sums totalling this amount were borrowed at a time when the partnership required additional working capital to finance the business at Mimong Station. In particular he said that this money was used primarily to purchase cattle. The terms and conditions of the loan were recorded in writing and the relevant ledger sheet of the partnership identified the three occasions during that year when monies were received from Trans City. I am satisfied that the probabilities are that the interest payments on this loan were necessarily incurred and should be allowed as a deduction in the second, third and fourth year of income under consideration.
71. As a result, I allow all the deductions claimed by the partnership for interest other than the interest claimed as paid to China Acceptance.
72. The end result is that Mr. Evans' objections are upheld in each of the years to the extent that they relate to partnership losses except in respect of interest paid to China Acceptance. His objection to the assessment for the year ended 30 June 1980 whereby his taxable income was increased by adding thereto income from the Evans Mimong Trust must be dismissed. As the additional tax imposed by way of penalty related only to the inclusion by the Commissioner of the income from that trust there is no reason why this penalty should not stand.
73. Mr. Evans' assessment or amended assessment for each of the years in question must be remitted to the Commissioner to be dealt with according to law.
74. On the question of costs I am of opinion that because each party has been partially successful the appropriate order is that there should be no order as to costs. However I am prepared to accept submissions in writing on the question of costs within 14 days from delivery of these reasons.
75. I extend the time for any appeals so that that time commences to run when I enter final judgment upon the question of costs.
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