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Federal Court of Australia |
STATUTORY INTERPRETATION - Meaning of section 100A of the Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1936 (Cth) ss 80, 97, 98, 99A, 100A(1), 100A(7), 100A (8), 100A(13), 112A, 260
Australia and New Zealand Savings Bank Limited v Commissioner of Taxation [1993] FCA 282; (1993) 42 FCR 535
East Finchley Pty Ltd v FCT (1989) 90 ALR 457
FCT v Radilo Enterprises Pty Ltd [1997] HCA 34; (1997) 97 ATC 4,151
Traknew Holdings Pty Ltd v FCT (1991) 21 ATR 1478
PRESTIGE MOTORS PTY LTD as trustee of PRESTIGE TOYOTA TRUST v. COMMISSIONER OF TAXATION
No. NG 432-443 of 1992
EMMETT J
SYDNEY
13 MAY 1997
IN THE FEDERAL COURT OF AUSTRALIA BETWEEN: Applicant AND: Respondent
CORAM:
) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 432 - NG 443 of 1992 ) GENERAL DIVISION )
PRESTIGE MOTORS PTY LTD as trustee of PRESTIGE TOYOTA TRUST
COMMISSIONER OF TAXATION
EMMETT J PLACE: SYDNEY DATED: 13 May 1997
There are twelve applications before the Court. Each arises out of a request, given by the applicant ("the Taxpayer") to the respondent ("the Commissioner") pursuant to section 187(b) of the Income Tax Assessment Act 1936 (Cth), to refer to the Court the Commissioner's decision on an objection by the Taxpayer with respect to income taxation. The objections were lodged by the Taxpayer in its capacity as trustee of the Prestige Toyota trust ("the Trust"). The assessments in respect of which the objections were lodged were based on the application of section 100A of the Income Tax Assessment Act ("the Act"). In each case, the Commissioner disallowed the Taxpayer's objection.
THE RELEVANT PROVISIONS OF THE ACT
Division 6 of the Act is headed "Trust Income". Section 97 in Division 6 provides that, where a beneficiary of a trust estate who is not under legal disability is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary is to include that share of the net income of the trust estate. Under section 98, where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate is to be assessed as liable to pay tax in respect of that share of the income of the trust estate as if it were the income of an individual.
Section 99A(4), however, provides that where there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary of the trust estate pursuant to section 97 or in respect of which the trustee of the trust estate is assessed and liable to pay tax pursuant to section 98, the trustee is to be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of section 99A. In the relevant years of income, the rate was 61%, a rate which might be characterised as penal in so far as it was a higher rate than would have been applicable in respect of income to which sections 97 or 98 would apply.
Section 100A was inserted in the Act in 1979 by an amendment which provided that section 100A applied to assessments for the years ended 30 June 1978 and following. Section 100A(1) provides that, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate and the present entitlement of the beneficiary arose out of a reimbursement agreement (as defined), the beneficiary is, for the purposes of the Act, to be deemed not to be presently entitled to the relevant trust income. Thus, if 100A(1) is applicable, its effect is to attract the operation of section 99A in lieu of sections 97 or 98. A taxpayer who is otherwise entitled to the income of a trust estate is deemed to be not so entitled and, accordingly, the trustee would be assessable at the special rate fixed by the Parliament under section 99A.
Section 100A(7) provides that a reference in section 100A, in relation to a beneficiary of a trust estate, to a reimbursement agreement, is to be read as a reference to an agreement that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary. That definition is very far reaching. However, the subsequent provisions of section 100A cut down its effect in two respects.
First, under section 100A(8), an agreement is not to be treated as a reimbursement agreement if the agreement was not entered into for the purpose, or for purposes that included the purpose, which is set out in the subsection. The purpose set out is that of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of the year of income, would not be liable for income tax, or would be liable to pay less income tax than he would have been liable to pay, if the agreement had not been entered into. For the purposes of that provision, an agreement is to be taken to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. Thus, there is imposed upon a taxpayer, in effect, the burden of establishing a negative proposition as to the purpose for which an agreement is entered into.
Secondly, under section 100A(13), the term "agreement" is given, on the one hand, an extended definition so as to include any agreement arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings. However, the term "agreement" is not to include an agreement arrangement or understanding entered into in the course of ordinary family or commercial dealing. Thus, even though an agreement arrangement or understanding may be a reimbursement agreement within section 100A(7), it would be taken not to be a reimbursement agreement if it is entered into in the course of ordinary family or commercial dealing.
THE CONTENTIONS AND REASONING
There are three series of transactions each of which is said by the Commissioner to constitute or to include a separate reimbursement agreement. The first series of transactions ("the RLAV Transactions") occurred in 1979 and involved Ronald Lyon Australia (Vic) Pty Limited ("RLAV"). They raise questions which are quite distinct and separate from the questions raised in relation to the second and third series of transactions. The second and third are similar to each other and raise similar questions. They both involved National Mutual Life Association of Australasia Limited ("NMLA") and occurred in 1981 ("the 1981 NMLA Transactions") and 1984 ("the 1984 NMLA Transactions"). I shall deal with each series separately. The RLAV Transactions
For some years prior to 1979, the Taxpayer carried on a business in Perth as a wholesaler and retailer of Toyota motor vehicles ("the Business"). Mr Lloyd Stanley Perron ("Mr Perron") was the chairman and chief executive of the Perron group of companies which included the Taxpayer, Century Finance Pty Limited ("Century Finance") and Perron Investments Pty Limited ("Perron Investments"). Mr Geoffrey John Gadsdon ("Mr Gadsdon") was a director of the Taxpayer at all material times and was principally responsible for ensuring that the transactions the subject of these proceedings were implemented. Mr C. R.H. Fieldhouse was a solicitor retained on behalf of the Perron group to act in relation to the proposed transactions. Mr A.R. Briant ("Mr Briant") was the secretary and public officer of the Taxpayer.
RLAV was at all material times a wholly owned subsidiary of Ronald Lyon Holdings Limited (in Liq) ("RLH"). No member, shareholder or director of the Perron group of companies had any interest in either RLAV or RLH.
In late 1978 RLAV was insolvent and was under the administration of Mr Hartigan, chartered accountant, a receiver appointed by the liquidator of RLH. The assets of RLAV comprised a parcel of land in Melbourne with a market value of some $750,000 and a tax benefit in relation to its past losses. The liabilities of RLAV comprised $146,600 due to RLH, $713,662 due to Ronald Lyons Australia Limited ("RLA"), creditors and accruals of $511,589, and a debt of $8,171,791 due and secured by mortgage to RLH, which debt and mortgage were in turn charged by RLH to Keyser Ullmann Limited ("KUL").
Cholomondely Commercial & Equitable Estates (Singapore) Pte Limited ("Cholomondely") was a company incorporated in Singapore. The Perron group of companies had no power to control the directors of Cholomondely in the exercise of voting rights but it was hoped by Mr Perron and Mr Gadsdon that the directors "would act in accordance with the wishes of the Perron group from time to time". There is no evidence that that hope was misplaced.
By a series of payments, assignments and releases, the debts owing by RLAV were discharged, assigned and released such that on 23 February 1979 RLAV was indebted only to Cholomondely in the sum of approximately $8,000,000 and to Century Finance in the sum of $1,300,000, and had no assets other than its interest in the Melbourne land. That land was mortgaged to secure the debts owing to Century Finance and Cholomondely.
On 25 January, 1979 a deed of trust ("the Trust Deed") was executed whereby the Trust was established as a unit trust with L.S.P. Pty Limited as trustee. Under the trust Deed the trustee of the Trust had the power to issue 50 `A' class units and 2,000,200 `B' class units.
Between 26 February and 28 February, 1979, the following persons and companies ("the Unitholders") applied for the number and class of units in the Trust set opposite their respective names below:
Mr Perron 50 `A'
Mr Gadsdon 26,670 `B'
Beryl Patricia Black 26,670 `B'
James Edward Potts 20,002 `B'
Dorothy Ethel Potts 20,003 `B'
Brencolda Nominees Pty Limited 40,005 `B'
RLAV 1,866,850 `B'
On 28 February 1979, L.S.P. Pty Limited, as trustee of the Trust, entered into an agreement with the Taxpayer to purchase from the Taxpayer all the assets (including goodwill) of the Business for the sum of $1,915,383.56.
On 1 March, 1979:
(a) L.S.P. Pty Limited, as trustee of the Trust, issued to the Unitholders the number and class of units for which they had applied and the Unitholders paid $1.00 for each unit so issued.
(b) The moneys so paid were used by the trustee of the Trust, as to $1,915,383, to pay to the Taxpayer the purchase price for the Business.
(c) Completion of the purchase and sale of the Business took place.
(d) L.S.P. Pty Limited, as had been intended, retired as trustee of the Trust and appointed the Taxpayer as trustee in its place.
(e) Century Finance advanced to RLAV the sum of $1,866,850 on condition that the money be applied in subscribing for units in the Trust.
During the years of income ended 30 June 1979 to 1982 inclusive, the following distributions were made to RLAV by the Taxpayer as trustee of the Trust:
|
Date |
Amount of Distribution $ |
|
26.4.79 31.10.79 | 149,348
866,625 |
|
12.12.79 21.3.80 21.4.80 19.6.80 6.8.80 | 933,425
466,712 186,685 933,425 505,562 |
|
5.3.81 21.4.81 9.7.81 12.8.81 27.4.82 | 373,370
1,680,165 280,027 168,016 1,471,835 |
|
27.4.82 | 1,500,000 |
RLAV did not pay any income tax in respect of the distributions made to it by the Taxpayer because it was able to deduct prior years' losses pursuant to section 80 of the Act.
The distributions were made to a bank account of RLAV the signatories of which were Messrs Gadsdon and Perron. During the same period, RLAV paid from that bank account approximately $3.6 million as principal and interest to Century Finance and approximately $4.6 million as interest and withholding tax to or on account of Cholomondely. In April 1983, RLAV transferred all its assets, comprising the Melbourne land and its units in the Trust, to Perron Investments in consideration of Perron Investments covenanting to pay to Cholomondely the amount owing by RLAV to Cholomondely.
The Commissioner contends that there was, in relation to the RLAV Transactions, a reimbursement agreement ("the RLAV Reimbursement Agreement") comprising negotiations for an agreement on the implementation of the following steps:
(i) Settlement of the Trust;
(ii) Acquisition of effective control of RLAV by the arrangements referred to above;
(iii) Acquisition by Cholomondely of the debts owing by RLAV;
(iv) The sale of the Business by the Taxpayer to the trustee of the Trust;
(v) Issue of units in the Trust to RLAV and the provision of the subscription moneys by Century Finance;
(vi) Distributions of income to RLAV pursuant to the terms of the Trust Deed.
It is said that at least the following persons were parties to the RLAV Reimbursement Agreement:
(a) The Taxpayer, RLAV, Century Finance and Cholomondely.
(b) Messrs Perron, Gadsdon, Fieldhouse, Hartigan and Briant.
The RLAV Reimbursement Agreement
The Taxpayer's starting point was that section 100A is not a general anti-avoidance provision such as section 260 of the Act was and Part IVA of the Act is, and that section 100A should be construed by reference to the mischief which it was designed to cure (FCT v Radilo Enterprises Pty Limited [1997] HCA 34; (1997) 97 ATC 4,151 at 4,155 per Lee J.). Reference was made by the Taxpayer to extrinsic materials in support of the contention that section 100A must be construed as a specific anti-avoidance provision to deal with the practice of "trust-stripping". Those materials consisted primarily of the Treasurer's statement of 11 June 1978, the explanatory memorandum circulated by the Treasurer in respect of the Bill for the amending act which inserted section 100A and the Treasurer's speech on the second reading of that Bill.
The extrinsic materials demonstrate clearly that section 100A was intended as a specific anti-avoidance provision introduced to deal with the mischief of "trust-stripping" (see Traknew Holdings Pty Limited v FCT (1991) 21 ATR 1478 at 1492). Thus, the explanatory memorandum contains the following:
".....it is proposed to overcome certain tax avoidance arrangements designed to enable trading profits and other income derived by trusts to escape tax completely."
......The particular tax avoidance arrangements rely on a nominal "beneficiary" being introduced into the trust and being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangement that the introduced beneficiary also escapes tax by one means or another, eg., as a tax-exempt body or organisation. This "beneficiary" retains only a minor portion of the trust income, while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted (sic) to form the corpus of a further trust for the group's benefit.
The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust."
The Taxpayer contends that observations such as those would justify any reading of section 100A which would limit its operation to a tax avoidance arrangement of the character described, in preference to a reading which would enable section 100A to be applied to any tax avoidance arrangement involving, inter alia, a trust. Support for the Taxpayer's contention as to the mischief intended to be covered by the provision is to be found in other extrinsic material. Section 100A was foreshadowed in a statement issued by the Treasurer on 11 June 1978. The following was included in that statement:
"A feature of several of the schemes is a very wide power given to the trustee under the terms of the trust instrument as to the distribution or application of trust income. In reliance on this power, the trustee agrees to distribute or apply the bulk of the trust income - either directly or through an interposed trust - for the apparent benefit of specially introduced beneficiaries who do not pay any, or any substantial, amount of tax on the amount distributed or applied.
In some cases the nominal beneficiaries selected is a tax-exempt body, such as a charitable institution or sporting association. In other cases it is a company, set up for the purpose by the promoters of the scheme, that by one means or another escapes payment of tax on the income. One technique is to set artificially-created paper "losses" off against the income received from the trust. Another technique is to strip assets from the recipient company so that tax assessed on the income cannot be collected......
The essential element common to the scheme is that, while the income concerned is effectively freed from tax in the hands of the nominal beneficiary, the terms of the underlying arrangement ensure that the beneficiary does not enjoy anything like the full use or benefit of the income. Instead, the arrangement requires a broadly equivalent capital sum - but reduced by the promoter's fee and a modest reward for the services of any participating exempt body - to be directed to persons intended all along as the real beneficiaries of the trust."
In his speech on the second reading of the Bill for the amending Act, the Treasurer also said the following:
"As explained in my earlier statement, there are several variants of the schemes but, for the most part, they rely on a nominal beneficiary being introduced into a trust and being made presently entitled to income, thus relieving the trustee of any tax liability in respect of the income. It is, however, a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another ....."
The Treasurer's references to "settlements on other trusts" for the benefit of the real beneficiaries or their families and "collapsible loans", being those that effectively do not have to be repaid, are said to be indicia of the kind of agreement intended to be affected. The types of transaction described all have an element of artificiality about them indicating that they are not ordinary family or commercial dealings. It was argued that assistance in identifying the arrangements which the section is designed to deal with can be derived from the terms of the definition of the word "agreement" in section 100A(13).
That definition excluded an agreement entered into in the course of ordinary family or commercial dealing. Examples of the kind of transactions which would not qualify as such are, it was said, to be found in the extrinsic materials referred to above. All of those transactions have, as an essential indicium, the enjoyment by a beneficiary of the major portion of the beneficiary's income in a tax free or capital form. That was not the case in the circumstances under consideration.
The Taxpayer contends that further assistance when construing section 100A is given by the use of the word "reimbursement". Thus, it is said that that word confines the payment of money or transfers of property etc. referred to in section 100A(7) to payments of money or transfers of property etc, the effect of which is to reimburse, in relation to the relevant beneficiary. The reimbursement need not be made by the relevant beneficiary, but the relevant beneficiary must, at least, be party to the reimbursement (see East Finchley Pty Limited v FCT (1989) 90 ALR 457 at 475).
Reliance was placed upon relevant definitions in the Oxford English Dictionary, 2nd Ed., (Oxford University Press, Oxford, 1989) as following:
"reimburse": 1. to repay or make up to one (a sum expended);
2. to repay, recompense (a person).
"reimbursement": the act of reimbursing, repayment.
It was said that, in the present case, there is no element of reimbursement of the Taxpayer in its own right in respect of the income which was to be foregone by reason of the implementation of the RLAV Transactions. The payment to the Taxpayer was not by way of reimbursement of income foregone but of the price for the Business.
That is certainly the case in relation to the RLAV Transactions. However, I do not consider that the use of the word "reimbursement" in the section can be given quite such significance. That use is simply part of the definition contained in section 100A(7). Any other expression could have been used to indicate that it is not every "agreement", as defined in section 100A(13), which was intended to be referred to in section 100A(1). It is only those which fit the description in section 100A(7) which will be relevant to section 100A(1). Nevertheless, it is every agreement that fits that description, irrespective of whether there is a "reimbursement" as defined in a dictionary. The position would be quite different, of course, if section 100A(7) had been omitted altogether.
The Taxpayer ultimately contends that, having regard to the mischief intended to be dealt with by section 100A, sections 100A(1) and 100A(7) should be given a restricted interpretation, such that, when section 100A(1) refers to a beneficiary of a trust estate being presently entitled to income, the reference should be limited to a trust estate which is existing at the time when the relevant reimbursement agreement is made. The reimbursement agreement must involve the beneficiary becoming a beneficiary or being introduced into the trust estate. I consider that there is substance in that contention.
The Trust was not in existence when the reimbursement agreement relied upon by the Commissioner was made because, by definition, the settlement of the Trust was a step to be implemented in pursuance of the reimbursement agreement. The Taxpayer complains that the Commissioner is, by the assessments in question, seeking to obtain what is in substance a fortuitous advantage by reason of the language used in section 100A, being an advantage which was never intended by the Parliament.
The arrangements which the Commissioner contends constitute the RLAV Reimbursement Agreement exhibit certain of the characteristics which the Treasurer attributes to the mischief sought to be dealt with by the introduction of section 100A. Thus, the beneficiary in question, RLAV, was in a position to escape liability for tax in respect of distributions made to it. It had accumulated losses from past trading which could be set off against any distributions received from the trust. The arrangements whereby Cholomondely was paid interest by RLAV in respect of the indebtedness assigned to Cholomondely ensured that the funds distributed to RLAV remained under the control of interests associated with Mr Perron.
On the other hand, to the extent that there has been any tax advantage by reason of the reimbursement agreement relied on by the Commissioner, that advantage was not received by the Taxpayer in its capacity as trustee of the Trust. Nor was it received by any beneficiary of that Trust in its capacity as beneficiary.
The trust stripping device and mischief to which section 100A is directed would result in an advantage to a specific taxpayer who was a beneficiary and who had a potential liability to be assessed under section 97 in respect of income which had been derived or which was expected to be derived. Alternatively, it would result in an advantage to a trustee who had a potential liability to be assessed under section 98 or section 99A in respect of such income. In the present instance, no question arises of a beneficiary under, or of a trustee of, a trust estate not receiving income which the trustee or beneficiary would otherwise have received in that capacity. Rather, advantage was taken of section 80 of the Act which permitted the losses of RLAV in previous years to be deducted from assessable income in the subsequent years in question.
The Taxpayer, in its own right, divested itself of an income earning asset, namely the Business. It ceased thereafter to have derive income from the Business. But for the RLAV Transactions, the Taxpayer may have derived income from the carrying on of the Business. However, if it had done so, it would have derived that income in its own right, not as trustee of the Trust. Further, none of the beneficiaries under the Trust would have derived any of the income in question if the Trust had not been established.
It can probably safely be assumed that the funds distributed to RLAV, which were then utilised in payments to Cholomondely, ultimately found their way back to entities associated with Mr Perron. The tax advantage which was thereby gained, however, was gained by reason of the applicability of section 80 of the Act. It was not gained by reason of the ability to distribute income to a beneficiary introduced into a trust.
Section 100A(8) makes clear that the concept of a reimbursement agreement is to be qualified to the extent that it can be shown that an agreement was not entered into for a relevant purpose. That provision is an indication as to the manner in which section 100A should be construed. When section 100A(8) refers to a purpose of securing that a person who would have been liable to pay income tax would not be liable to pay income tax, it refers, in my opinion, to a person who has some connection with an existing trust estate, such as the trustee or an existing beneficiary.
That is not the case under consideration. Rather, the effect of the RLAV Transactions is that a structure was created whereby advantage could be taken of section 80 of the Act. The Taxpayer would never have received, as a beneficiary under the Trust, the income which was distributed to RLAV. Nor would the Taxpayer have received that income in its capacity as trustee of the Trust, except for the operation of section 100A itself.
It is clear that the sale by the Taxpayer of the Business to the trustee of the Trust was effective to divest the Taxpayer of that income producing asset. There is no suggestion of sham in relation to that transaction. The Commissioner's contentions involve a consequence, in relation to that transaction, which appears to be much more far reaching than could have been achieved by section 260 of the Act. Section 260 would not have been attracted to a mere sale of an income producing asset, notwithstanding that that may affect the incidence of income tax in respect of the income produced by that asset and that it may have been intended to do so.
Whether or not the Taxpayer, if the Business had not been disposed of, would have been liable to pay income tax in respect of the years of income subsequent to the disposition cannot be known. The Taxpayer might have sold the Business to some other entity with the consequence that it would not have been liable to pay income tax in respect of the subsequent periods. It might have entered into some other arrangement which would have had the effect of avoiding any liability for income tax in the relevant years. It is a matter of pure speculation as to what might have happened if the Taxpayer, in its own right, had not sold the Business to the trustee of the Trust.
Such considerations are also relevant to the construction of section 100A as a whole. The language of section 100A(8) indicates that the Parliament intended that the Section 100A would apply when a particular purpose was present. That purpose is the purpose of securing that a person who, if the reimbursement agreement is not entered into, would have a potential liability to pay income tax in respect of a year of income, would not be liable. That is to say, unless something happens as a consequence of the reimbursement agreement, a liability would arise: but for some further juridical act or acts, being the reimbursement agreement, a liability for tax would arise in relation to that income that has been derived or is expected to be derived.
Such a notion is consistent with section 100A(1) if that provision is read as referring to a trust estate which exists outside and independently of the reimbursement agreement. It is a somewhat forced notion to speak of the present entitlement of a beneficiary of a trust estate arising out of a reimbursement agreement or arising by reason of an act, transaction or circumstance that occurred in connection with or as a result of a reimbursement agreement, in circumstances where the trust estate itself exists only as a consequence of implementing the reimbursement agreement. The language of section 100A(1) is less strained when the reference to a trust estate is read as a reference to a trust estate which exists before and independently of the reimbursement agreement out of which, or as a result of which, the present entitlement of the beneficiary under that trust estate arises.
Another indication that section 100A(1) should be so read may be found in the language of section 100A(7). The scheme of section 100A requires that a reimbursement agreement be identified "in relation to a beneficiary of a trust estate". That requirement arises from the criterion for a reimbursement agreement that it must involve a payment of money or the transfer of property to or the provision of benefits for, a person or persons other than the beneficiary. It is strained to speak of an agreement in relation to a beneficiary of a trust estate, in circumstances where the trust estate does not exist when the agreement is entered into and only comes into existence as a result of the performance of the agreement.
I consider, therefore, that, having regard to the language of sections 100A(1) and 100A(8), the construction contended for by the Taxpayer is open. Those provisions are capable of being read as having the limited function described by the Treasurer. Once it is accepted that such a reading of section 100A(1) is open, that reading is reinforced by reference to the extrinsic materials which indicate the mischief to which it is directed. That is to say, the provisions must be read as being specific anti-avoidance provisions. It is not difficult, in my opinion, to conclude that arrangements such as those in question were not in the contemplation of the Treasurer when he made the observations set out above. Nor were they envisaged by the references in the explanatory memorandum.
For those reasons, I conclude that section 100A(1) has no application to any present entitlement of RLAV to any share of the income of the Trust.
The 1981 NMLA Transactions
The second series of transactions relied on by the Commissioner began with an approach made by Mr Perron to NMLA on 20 May 1981. The approach involved an offer of investment in "D" class units in the Trust which was put to and accepted by NMLA as an investment yielding a return of 18% per annum, over and above the capital invested.
After that approach, by deed made 2 September, 1981, the Trust Deed was amended in a number of respects. First, the 1,866,700 "B" class units held by RLAV were reclassified as "C" class units. Next, the trustee of the Trust was given power to issue 6,400,000 "D" class units having the right to receive the distributions of net income of the Trust as follows:
(v) "D" class units shall entitle the holders thereof in priority to holders of all other classes of units other than the holders of "B" class units to receive the following distributions from the net income during the periods specified hereunder:
(A) firstly, six distributions of one million four hundred and twenty five thousand dollars ($1,425,000) each .....
(B) secondly, nine distributions of three thousand dollars ($3,000) each ...
The effect was that holder of the "D" class units was entitled to the following distributions:
Year Ended Distribution
30.6.1982 $2,850,000
30.6.1983 2,850,000
30.6.1984 2,850,000
30.6.1985 6,000
30.6.1986 6,000
30.6.1987 6,000
30.6.1988 6,000
30.6.1989 3,000
The "D" class units carried the right to receive those distributions of income but the right to receive only $10 in respect of each unit on redemption at the expiration of the period during which they carried the entitlement to receive income. The "D" class units did not entitle the holders thereof to any voting rights, nor to any surplus of the Trust beyond the amount of $10 payable on redemption.
On 7 September, 1981, NMLA applied for 6,400,000 "D" class units in the Trust for which it paid the sum of $6,400,000 and 6,400,000 "D" class units were issued to NMLA. The right of NMLA to receive the distributions of income under the "D" class units was secured by guarantees from Mr Perron and from five members of the Perron Group of companies and by registered mortgages over real property owned by those five members of the Perron Group.
The distributions to which NMLA was entitled as holder of the "D" class units were subsequently made by the Taxpayer. Those distributions were treated by NMLA and the Commissioner as exempt from income tax pursuant to section 112A of the Act. That section excludes income from the assets included in the statutory fund of a life assurance company.
The second reimbursement agreement ("the 1981 Reimbursement Agreement") was said to be an agreement that the following steps would occur:
(i) Alteration of the Trust Deed to reduce the rights of RLAV and create new units to be issued to NMLA;
(ii) Grant of security to NMLA for its entitlements under those units;
(iii) Subscription of the sum of $6,400,000 by NMLA to the Taxpayer as trustee of the Trust;
(iv) Issue of "D" class units to NMLA;
(v) Payment of distributions to NMLA in accordance with the rights attached to the units.
The Commissioner contends that the parties to the 1981 Reimbursement Agreement were the Taxpayer, RLAV, NMLA, Cholomondely, Messrs Perron, Gadsdon and Fieldhouse and officers of NMLA who were not identified.
The 1981 Reimbursement Agreement
The 1981 Reimbursement Agreement is said to be an agreement to implement the various steps described above. Although the parties to the transactions comprising those steps were companies, the Commissioner contended that the parties to the 1981 Reimbursement Agreement included professional advisers and officers of the parties to the transactions.
However, companies can only act through the agency of a natural person. The professional advisers and officers of the companies which were parties to those transactions were involved only as agents of the companies. They were not parties to the transactions. There may be some doubt, in those circumstances, as to whether they were parties to an agreement, arrangement or understanding that the transactions be carried out.
On the other hand, the steps in question did not occur at random. They were clearly carried out as part of a pre-determined plan. It is easy to draw the inference that if there had been no understanding that NMLA would subscribe for units which would carry the right to the distribution of the income from the Business, Perron Investments would not have acquired the "D" class units from RLAV and the Trust Deed would not have been amended in the way in which it was amended. The parties to that plan appear to have been at least Messrs Perron and Gadsdon who were necessarily involved in the conduct of the Taxpayer.
There can be no doubt that a purpose of certain of the individuals was to secure that RLAV would not be liable to pay income tax in respect of the profits of the Business which would otherwise be distributed to it by reason of the "B" class units which it held in the Trust. That is to say, they had the purpose of securing that a person who might have been liable to pay income tax in respect of at least the year of income ended 30 June 1982 would not be liable to pay income tax in respect of that year of income.
Thus, the 1981 Reimbursement Agreement provided for the payment of money by NMLA to the Taxpayer, as trustee of the Trust, being a person other than NMLA, the beneficiary, as contemplated by section 100A(7). In addition, the 1981 Reimbursement Agreement identified by the Commissioner was entered into for purposes that included the purpose of securing that RLAV, who would have been liable to pay income tax in respect of the relevant years of income, would not be liable to pay income tax in respect of those years.
In any event, the purpose of the individuals would be the purpose of the companies on whose behalf they acted and there must be attributed to the companies the purpose of the individuals concerned. Accordingly, I have little difficulty in imputing the purpose of the individuals to at least the Taxpayer, who was a party to the agreement, arrangement or understanding that the steps be carried out. Accordingly, no comfort is afforded to the Taxpayer by section 100A(8).
It is clear that the 1981 Reimbursement Agreement, as contended for by the Commissioner, is different in character from the RLAV Reimbursement Agreement relied upon by the Commissioner. The Trust was certainly in existence when the 1981 Reimbursement Agreement was made. Thus, the relevant trust estate exists outside and independently of the 1984 Reimbursement Agreement. NMLA came to an existing trust estate. It acquired a present entitlement to a share of income of that trust estate because of its holding of the "D" class units. That present entitlement arose by reason of the 1981 NMLA Transactions which occurred as a result of the 1981 Reimbursement Agreement identified by the Commissioner, as contemplated by section 100A(1)(b) of the Act.
In East Finchley Pty Limited v FCT (1989) 90 ALR 457 at 472, Hill J referred in the following terms to the type of arrangement to which section 100A was directed:
"...The simplest form of trust stripping to which the legislation clearly was intended to apply was that involving a unit trust where, for example, a beneficiary whose income was exempt from tax might subscribe for units in the unit trust carrying the right to all of the income of the year of income that beneficiary paying therefor a capital amount somewhat less than the total of the income and receiving thereby a distribution of the year's income. On such an arrangement the units would be such as not to entitle the exempt body beneficiary to any further distribution once the year's distribution had been made. In this form the beneficiaries of the unit trust would become entitled to the corpus of the trust (the capital sum), the obligations of the trustee to distribute would have been satisfied and the exempt body not being liable to tax would have made a small profit being the difference between the amounts subscribed and the income distributed...."
The Commissioner contended that, apart from the fact that the arrangement relied upon extended over more than one year and involved payment in advance, compensated for by an increase in the income distributed, the 1981 NMLA Transactions fit the description given by Hill J precisely.
However, there may be another significant distinction. From the point of view of NMLA, the arrangement may be capable of being characterised as an appropriate investment for its statutory fund. The investment involved the outlay of a sum of money in respect of which there was, over the period of the distributions, a return at the rate of 18% which was secured by mortgage over real property. The example suggested by Hill J appears to contemplate a "small profit" for the holder of the unit, being the difference between the amounts subscribed and the income distributed. That return would probably not be characterised as interest because it would not be calculated by reference to the time during which the holder of the units was out of pocket in respect of the funds subscribed.
Nevertheless, I consider that the arrangement to give effect to the 1981 NMLA Transactions is an arrangement that provided for the payment of money to the Taxpayer, being a person other than NMLA, and that the entitlement of NMLA to the income distributed to it arose out of that arrangement within the meaning of section 100A(1).
The final question in relation to the 1981 NMLA Transactions, therefore, concerns the operation of section 100A(13) in so far as that subsection provides that "agreement" when used in section 100A(7) does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing. The issue is whether the 1981 Reimbursement Agreement could be said to have been entered into in the course of ordinary commercial dealing.
The Taxpayer contends that the arrangement between the Taxpayer and NMLA involved a most appropriate investment for the capital guarantee fund of NMLA and, in relation to the Taxpayer as trustee of the Trust, a means of raising capital for the business purposes of the Trust. The lengthy history of the use of annuities as a means of finance was adverted to. That history was summarised by Hill J in Australia and New Zealand Savings Bank Limited v Commissioner of Taxation [1993] FCA 282; (1993) 42 FCR 535 at 555-6. It illustrates that an arrangement whereby a lump sum is paid in exchange for an obligation to pay an annuity, which might be for a fixed term, is a means whereby, for some centuries, moneys have been raised by way of finance. The Taxpayer contends that there are many ways of raising capital and it is not for the Commissioner to dictate one rather than the other by reference to the income tax consequences which flow from the way chosen by a taxpayer.
Be that as it may, however, that is not an end of the matter. It is necessary to determine whether the arrangement was in fact a way of raising capital by the Taxpayer before it could be concluded that the 1981 Reimbursement Agreement was entered into in the course of ordinary commercial dealing. That requires a consideration as to whether the arrangement was genuinely a raising of funds in a way in which had favourable tax consequences or whether it was an agreement the implementation of which would result in avoidance of liability for tax which might otherwise arise and which, incidentally, would result in a capital sum being received in exchange for an obligation to make periodical payments.
The Commissioner points to the fact that by the time when the 1981 NMLA Transactions were entered into, the available losses of RLAV had been "used up" in the sense that they had been applied as deductions against income derived by way of distributions from the Trust. The Commissioner also points to the fact that the 1981 NMLA Transactions involved the elimination of RLAV's entitlement to receive further distributions and the introduction of NMLA as the holder of a new class of units which carried an entitlement to regular periodical payments.
The RLAV Transactions had been entered into with the intention of obtaining a taxation benefit by the operation of section 80 of the Act, in the context of the losses carried forward by RLAV. When losses were no longer available as deductions against the income which might be distributed to RLAV by reason of its units in the Trust, the units were transferred by RLAV to Perron Investments and the rights attached to them were altered to ensure that they would no longer carry the right to distribution of any of the income generated by the conduct of the Business by the Taxpayer as trustee of the Trust. There can be little doubt, in my opinion, that at least a substantial purpose of those involved in implementing the 1981 NMLA Transactions was to obtain taxation advantages.
The Taxpayer relied upon the evidence of Mr Gadsdon who said, in an affidavit, that the funds raised by the Taxpayer from the issue of the new units to NMLA were used as working capital of the Trust and, "in particular to finance the purchase of Toyota vehicles and to repay debts associated therewith". In cross-examination, Mr Gadsdon agreed that the sum of $6,400,000 which was received from NMLA did not go "to paying down liabilities of the group". He agreed that the sum went to making an unsecured loan to another member of the Perron group. In response to a suggestion made to him that the moneys did not go to financing the purchase of Toyota vehicles he said:
"With respect it was loaned - probably loaned to the wholesale company or through other companies in the group to end up with the wholesale company to one of them to purchase motor vehicle stock, new motor vehicle stock."
Mr Gadsdon was asked whether, if there be a sudden increase in the level of stock to the extent of $6,400,000, it would be expected that there would be a dramatic increase in the trading pattern of the trust business. The response was:
"Not necessarily. It would depend on the amount of stock that we were instructed to carry. It might be one month, it might be three months of new stock."
When it was suggested to Mr Gadsdon that a reason for acquiring money from NMLA was not to increase stock levels but rather to get the benefits of the tax advantage which flowed from the taxable income going to NMLA and being replaced by capital sum, he responded:
"It was used - it was used in fact for repayment of a loan to subsidiaries or companies associated with the Toyota trust in order for them to repay debt and finance the purchase of motor vehicles."
When asked which was the wholesale company in the group, Mr Gadsdon said:
"I think it's called SD Wholesale. It's related to sales tax and I unfortunately can't explain that to you because I don't understand it myself."
He agreed that there was nothing in the material in his affidavit which would enable one to test what he said.
That evidence causes me to be very sceptical as to the reason asserted by Mr Gadsdon in his affidavit for raising a capital sum by the issue of units to NMLA. The Taxpayer has the onus of establishing that the assessments are excessive. It is incumbent upon the Taxpayer to demonstrate by some reasonably cogent evidence that the arrangements in question were entered into in the course of ordinary commercial dealing.
The fact that a particular transaction may be curious or less common than some other forms of transaction will not necessarily detract from its commerciality. Nevertheless, having regard to the context in which the 1981 NMLA Transactions were entered into, one would expect that there would be evidence from an officer of the Taxpayer familiar with its arrangements which would demonstrate that there was good commercial reasons for the Taxpayer, as trustee of the Trust, to borrow $6,400,000. Even if it was considered desirable in the interest of the Trust for other members of the Perron group to have the use of the funds raised, I would expect evidence as to why and how the lump sum would be of use to the Perron group in 1981.
Yet there was no direct evidence as to the way in which the funds were employed or as to why the funds were employed in that way. All that was apparent was that the moneys were lent unsecured to other entities associated with Mr Perron. It is possible that the Business was benefited by those loans. That, however, is pure speculation. On the evidence before me, the Trust obtained no advantage by the making of interest free loans with the funds subscribed by NMLA and there was no specific evidence as to how or why any other company benefited from the receipt of the funds from NMLA.
In the light of my conclusion as to the purpose of the 1981 NMLA Transactions, and having regard to the absence of any cogent evidence as to the commercial justification for the Taxpayer's raising moneys from NMLA as trustee of the Trust and lending the moneys free of interest to other members of the Perron Group, I do not consider that the arrangements were entered into in the course of ordinary commercial dealing. It follows that the exclusionary part of section 100A(13) does not assist the Taxpayer.
The 1984 NMLA Transactions
The third series of transactions relied on by the Commissioner began when Mr Perron wrote to NMLA once again. Investment in "E" class units of the Trust was put to and accepted by NMLA as an investment yielding a return of 17% per annum, plus the capital invested.
Subsequently, by deed made on 12 May 1983, the Trust Deed was further amended in a number of respects, including, inter alia, giving the trustee of the Trust power to issue 10,000,000 "E" class units with the right to receive such annual or other distributions of the net income of the Trust as the trustee should determine upon the issue of such units.
On 26 June 1984, NMLA applied for 5,000,000 "E" class units in the Trust for which it paid the sum of $50,000 in part payment. On 2 July, 1984, 5,000,000 "E" class units in the Trust were issued to NMLA. On 18 July 1984, NMLA paid the further sum of $4,950,000 in full payment for the 5,000,000 "E" class units.
The "E" class units carried the right to receive the following distributions of net income of the Trust:
Year Ended Right to Income Distribution
30.6.1985 $1,950,000
30.6.1986 1,950,000
30.6.1987 1,950,000
30.6.1988 978,000
30.6.1989 6,000
30.6.1990 6,000
30.6.1991 6,000
30.6.1992 3,000
The "E" class units carried the right to receive only $10 on redemption at the expiration of the period during which they carried that entitlement to receive income and did not entitle the holders thereof to any voting rights, nor to any surplus of the Trust beyond the amount of $10 payable on their redemption. The rights of NMLA to receive the distributions of income were secured by guarantees from Mr Perron and five members of the Perron Group of companies and by registered mortgages over real property owned by those five members of the Perron group.
The distributions to which the NMLA was entitled as the holder of the "E" class units were all subsequently made. The distributions made were also treated by NMLA and the Commissioner as exempt from income tax pursuant to section 112A of the Act.
The third reimbursement agreement ("the 1984 Reimbursement Agreement") was said to be an agreement that the following steps would occur:
(i) Alteration of the Trust Deed to make provision for a new class of units to be issued to NMLA with rights as fixed by the trustee of the Trust;
(ii) The grant of security to NMLA for its entitlements under such units;
(iii) The issue of "E" Class units to NMLA carrying special rights to income;
(iv) Subscription of the sum of $5,000,000 by NMLA to the Taxpayer;
(v) Payment of seven distribution instalments of $975,000 and eight instalments of $3,000 to NMLA.
The Commissioner contends that the parties to the 1984 Reimbursement Agreement were the Taxpayer, NMLA, Perron Investments, Messrs Perron, Gadsdon and Fieldhouse and unidentified officers of NMLA.
The 1984 Reimbursement Agreement
The analysis applied above to the arrangements in relation to the 1991 NMLA transactions applies with equal force to the arrangements in relation to the 1984 NMLA transactions, except as to two matters. The first is the question of the purpose under section 100A(8) and the second is the question as to whether the arrangements were entered into in the course of ordinary commercial dealing.
If the "E" class units had not been created, it would have been necessary, in order to avoid liability tax under section 99A, for income of the Trust to be distributed to holders of the "B" class units since the "D" class units carried insufficient entitlement to income. It is easy to draw the inference, therefore, that a purpose of the individuals concerned in relation to the 1984 NMLA Transactions was to secure that those unit holders, or alternatively the Taxpayer as Trustee of the Trust, would not be liable to pay income tax in respect of subsequent years or would be liable to pay less income tax than they would otherwise have been liable to pay.
The next question, therefore, is whether the 1984 NMLA Transactions were entered into in the course of ordinary commercial dealing. In his affidavit, Mr Gadsdon said that the funds raised by the Taxpayer by the issue of the "E" Class units to NMLA were used to acquire two properties for the Trust, namely:
(a) 169 Aberdeen Street, Perth; and
(b) 16 Miles Road, Kewdale
The evidence before me demonstrated that there was in fact an acquisition by the Taxpayer in its capacity as trustee of the Trust of those two properties. It acquired them from itself as beneficial owner. Mr Gadsdon said in cross examination:
The Miles Road, Kewdale is the yard space, storage space, pre-delivery with a rail spur line to receive stocks of motor vehicles, and the land and buildings at Aberdeen Street are our Service Division.
He agreed that the two properties had been owned by the Taxpayer, in its own right, since the 1960's. They had been used by the Taxpayer in connection with the Business since then. The properties continued to be used by the Taxpayer, in its capacity as trustee of the Trust, in carrying on the Business after its acquisition in early 1979. It appears that since that time the Taxpayer, in its capacity as trustee, had had the use of properties without charge.
The purchase price payable for the properties was paid from the moneys received by the Taxpayer from NMLA for the "E" class units. The result is that there was an inflow of funds from NMLA to the Trust by way of capital receipt in exchange for which the Taxpayer incurred the obligation, under the terms on which the "E" class units were issued, to make periodical payments to NMLA as described above. However, there was no evidence as to the ultimate destination of the funds which the Taxpayer received in payment of the price payable for the properties it sold which might indicate that there was some need of funds on the part of the Taxpayer or other members of the Perron group.
There was no evidence as to the deliberation, if any, given by the Taxpayer, in its capacity as trustee, to any proposal for the purchase of the properties. Nor was there any evidence as to the consideration, if any, given by the Taxpayer, in its own right, to the desirability of raising funds by the sale of the properties. No commercial rationale was advanced as to why it was considered appropriate to alter the arrangements which had been in place for some five years.
Clearly, a decision made by the Taxpayer, as trustee, to purchase the properties on which it carried on the Business might be justified from a commercial point of view. Real commercial advantages might flow to the trustee of a trust from the security of owning its business premises. However, there was no evidence as to any perceived future benefit for the Trust in owning the properties. There was no immediate commercial benefit, in money terms, so far as the Trust was concerned: a substantial sum had to borrowed to pay the price and substantial distributions of income had to be made, in the form of the annuity payments to NMLA, to service the borrowing.
Nor was there evidence that the Taxpayer, as trustee, was, in fact, any more secure than it had been before the transfer of the properties. That is to say, the Trust had the use of the properties beforehand without any apparent obligation to pay rent and there was nothing to suggest that the Taxpayer, as owner in its own right of the properties, had made any threat of dispossession.
I consider, therefore, in the light of those considerations and the conclusion which I reached above as to the purpose of the 1984 NMLA Transactions, that the 1984 NMLA Transactions were not entered into in the course of ordinary commercial dealing.
CONCLUSION
It should not be thought that I have concluded that financing transactions involving the sale of annuities could not, in appropriate circumstances, be regarded as having been entered into in the course of ordinary commercial dealing. However, the considerations to which I have referred, coupled with the acute awareness of the tax consequences of the transactions involving NMLA, at least on the part of Mr Gadsdon, lead me to the conclusion that, whereas the arrangements entered into with NMLA were such as might have been entered into in the course of ordinary commercial dealing, they were not, so far as the Trust and the members of the Perron group were concerned, in fact so entered into.
Each of the twelve applications before me relates to a different year of income. The three reimbursement agreements relied upon by the Commissioner would have consequences variously in some and not others of those years. My conclusion is that, in so far as assessments had been based upon treatment of the RLAV Transactions as a reimbursement agreement, the assessments should be set aside. However, in so far as the assessments are based upon the 1981 and 1984 NMLA Transactions, the assessments should be confirmed.
In the circumstances, it would be appropriate for the parties to bring in short minutes of the orders which would follow from the conclusions which I have reached.
It would also be appropriate for me to hear the parties as to the appropriate orders for costs in light of the circumstances that both parties have been successful in part.
I certify that this and the preceding thirty six pages are a true copy of the Reasons for Judgment of his Honour Justice Emmett
Associate:
Dated: 13 May 1997
Appearances:
Counsel for the applicant: D.H. Bloom QC
R.F. Edmonds SC
A. Payne
Solicitor for the applicant: C. R. Fieldhouse
Counsel for the respondent: A.H. Slater QC
J.W. Durack SC
Solicitor for the respondent: Australian Government Solicitor
Heard: 14 and 15 April, 1997
Place: Sydney
Decision: 13 May 1997
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