Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation

• Jurisdiction: Australia Federal only
• Court: High Court
• Judge: Gleeson CJ,Gummow,Crennan JJ.,Kirby J.,Heydon J.
• Judgment Date: 22 May 2008
• Neutral Citation: 2008-0522 HCA B,[2008] HCA 21
• Docket Number: B39/2007
• Date: 22 May 2008

Raftland Pty Ltd as Trustee of the Raftland Trust

Appellant

and

Commissioner of Taxation

Respondent

[2008] HCA 21

Gleeson CJ, Gummow, Kirby, Heydon and Crennan JJ

B39/2007

HIGH COURT OF AUSTRALIA

Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation

Income tax — Trust income — Present entitlement — Trust deed provided that beneficiaries entitled under default provision had immediate and indefeasible vested interest in income — Income never paid to or demanded by appellant as trustee of Unit Trust — Whether appellant as trustee of Unit Trust presently entitled to trust income — Whether entitlement of appellant under default provision reflected legal entitlements intended by parties creating trusts — Application of parol evidence rule — Whether entitlement of appellant under default provision a ‘sham’.

Income tax — Trust income — Present entitlement — Reimbursement agreement — Income Tax Assessment Act 1936 (Cth), s 100A provided that beneficiary otherwise presently entitled to income of trust estate deemed not to be presently entitled where entitlement arose out of, or arose by reason of act, transaction or circumstance that occurred in connection with, ‘reimbursement agreement’ — Whether transactions between building companies and Development Trust ‘reimbursement agreement’ — Whether other income of Development Trust distributed to Raftland Trust but not derived from agreement between building companies and Development Trust arose out of, or arose by reason of act, transaction or circumstance that occurred in connection with, ‘reimbursement agreement’ — Whether, by operation of s 100A, appellant as trustee of Raftland Trust and not tertiary beneficiaries of Raftland Trust presently entitled to trust income.

Income tax — Avoidance or minimisation of liability to tax — Proper analysis of documents and actions of appellant and other persons — Suggestion that certain actions constitute a ‘sham’ — History and meaning of ‘sham’ for the purposes of Australian law — Utility for legal purposes of conclusion that transactions constitute a ‘sham’ — Whether in present case propounded documents expressed purposes and intentions of parties with legal consequences determined accordingly — Whether documents were a ‘sham’ and may be disregarded with legal obligations of parties determined otherwise — Whether primary judge erred in references to and conclusions of ‘sham’ — Whether Full Court erred in giving effect to different conclusion as to existence of ‘sham’.

Trusts — Trust income — Whether losses borne by capital in previous tax years must be recouped before trust income is available for distribution — Relevance of existence of successive interests, where interest in income followed by interest in capital — Relevance of Upton v Brown (1884) 26 Ch D 588.

Words and phrases — ‘present entitlement’, ‘reimbursement agreement’, ‘sham’.

Income Tax Assessment Act 1936 (Cth), ss 99A, 100A, 226H, 260, Pt IVA.

Representation

D G Russell QC with H L Alexander for the appellant (instructed by Tobin King Lateef)

A Robertson SC with J H Momsen and P A Looney for the respondent (instructed by Australian Government Solicitor)

ORDER

1. Appeal dismissed.

2. Special leave to cross-appeal granted.

3. Cross-appeal treated as instituted, heard instanter and allowed.

4. Set aside the orders made in paragraphs 2 and 3 of the order of the Full Court of the Federal Court of Australia made on 31 January 2007 and, in their place, order that the appeal to that Court in respect of the year ended 30 June 1996 be dismissed.

5. Appellant to pay the respondent's costs of the appeal and cross-appeal.

1 Gleeson CJ, Gummow and Crennan JJ. This appeal concerns assessments to income tax of the appellant, Raftland Pty Ltd (‘Raftland’) in its capacity as trustee of the Raftland Trust, for the years ended 30 June 1995, 30 June 1996, and 30 June 1997. Although the respondent at one time relied upon Pt IVA of the Income Tax Assessment Act 1936 (Cth) (‘the Act’), by the time of the hearing at first instance such reliance had been abandoned. The appeal turns upon the application of Div 6 of Pt III of the Act, and, in particular, ss 99A and 100A. The issue is whether, having regard to those provisions, the appellant has established that the assessments were excessive.

2 The appellant failed both at first instance in the Federal Court before Kiefel J 1 and (subject to one minor qualification) in the Full Court (Dowsett, Conti and Edmonds JJ) 2. The qualification concerns an amount of $57,973 relating to the year ended 30 June 1996. It is the subject of an application for special leave to cross-appeal. It is convenient to leave that application to one side until the conclusion of these reasons. Save for that, the questions to be determined are the same for each of the three years of income. It is unnecessary to deal separately with the second and third years, other than briefly to note the material facts.

3 There was a difference between the reasons for decision of Kiefel J and those of the Full Court, although ultimately they agreed that the net income derived by the appellant fell to be assessed pursuant to s 99A of the Act, which provides that in certain circumstances trust income is to be taxed in the hands of the trustee at a special rate. Section 100A affects the question of present entitlement to trust income. If s 100A(1) applies to a beneficiary, the beneficiary is deemed not to be presently entitled to income, thereby rendering the trustee liable under s 99A. Section 100A(3A) provides that, in certain circumstances, s 100A(1) does not apply. In order to give effect to ss 99A and 100A, it is necessary to identify the legal rights and liabilities arising from the facts, the decisive question being one concerning present entitlement to income of a trust estate, bearing in mind s 95A, which extends the concept of entitlement to cover the case of a beneficiary who has a vested and indefeasible interest (s 95A(2)).

4 There was also a matter of penalties under Pt VII of the Act. Kiefel J and the Full Court, having concluded that the appellant's challenge to the assessments had not been made out (subject to the minor qualification earlier mentioned), and that there was, therefore, a ‘tax shortfall’ as defined by s 222A, accepted that, in

the circumstances of the case, the shortfall was caused by recklessness within the meaning of s 226H. On the view of the case taken by Kiefel J, the reason for that conclusion was clear. On the other hand, the appellant strongly resists such a conclusion on the approach taken by the Full Court. The appellant also complains that the Full Court gave inadequate reasons for its decision on the point. This is a matter to which it will be necessary to return.

The statutory provisions

5 Division 6 of Pt III of the Act deals with trust income. Section 96 provides that, except as provided in the Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Where there is a beneficiary of a trust estate who is not under any legal disability and is presently entitled, s 97 provides that the beneficiary's share of the net income of the trust estate is part of the assessable income of the beneficiary. Later provisions deal with various circumstances in which the trustee will be liable to pay income tax on the income of the trust estate, or some part of it. Section 98 is one such provision. Section 99A relevantly provides:

‘(4A) Where there is a part of the net income of a resident trust estate:

• (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

• (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and

• (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.’

6 The rate referred to in s 99A(4A) is what was earlier described as the special rate. Section 100A includes the following:

the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.

the relevant trust income shall, for the purposes of this Act, be deemed not to have been paid to, or applied for the benefit of, the beneficiary.

…

(3A) Where:

• (a) apart from this section, a beneficiary (in this subsection referred to as the “trustee beneficiary”) of a trust estate is presently entitled to a share of the income of the trust estate in the capacity of a trustee of another trust estate (in this subsection referred to as the “interposed trust estate”);

• (b) apart from this subsection, the trustee beneficiary would, by virtue of subsection (1), be deemed not to be, and never to have been, presently entitled to that share or a part of that share of the income of the first-mentioned trust estate (which share or part is in this subsection referred to as the “relevant trust income”); and

• (c) apart from this section, a beneficiary of the interposed trust estate is or was, or beneficiaries of the interposed trust estate are or were, presently entitled, or deemed to be presently entitled, to any income of the interposed trust estate (in this subsection referred to as the “distributable trust income”) that is attributable to the relevant trust income;

subsection (1) does not apply, and shall be deemed never to have applied, in relation to the trustee beneficiary, in relation to any part of the relevant trust income to which the distributable trust income is attributable.

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