Norman and Commissioner of Taxation [2004] AATA 1164; (2004) 57 ATR 1248; 2004 ATC 2328 (8 November 2004)

Last Updated: 29 September 2009

Administrative

Appeals

Tribunal

INTERIM DECISION AND REASONS FOR DECISION [2004] AATA 1164

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2003/414-417

TAXATION APPEALS DIVISION		)
	Re		ROSS ANDREW NORMAN

Applicant

And

COMMISSIONER OF TAXATION

Respondent

INTERIM DECISION

Tribunal

Senior Member K L Beddoe

Date 8 November 2004

Place Brisbane

Decision

The Tribunal decides that the applications for review are valid applications and directs that the matters be listed for a directions hearing with a view to hearing by a differently constituted Tribunal.

........[Sgd] .........
K L Beddoe
Senior Member

CATCHWORDS

INCOME TAX – objection to amended assessments – trust fund - deductions relating to an Employee Welfare Fund disallowed – as a result of disallowance of deductions, amounts of deductions treated as income in applicant’s hands as beneficiary of trust’s income – determination that the Employee Welfare Fund arrangement was a tax avoidance scheme – whether disallowed deductions are income of the trust or income of the applicant - whether amended assessments were made or authorised mala fides
Income Tax Assessment Act 1936, Part IVA

Tax Assessment Act 1953, s 14ZZK(b)
Secretary, Department of Social Security v Alvaro [1994] FCA 1124; (1994) 34 ALD 72

REASONS FOR DECISION

8 November 2004

Senior Member K L Beddoe

1. The applicant seeks review of objection decisions of the Commissioner of Taxation to disallow his objections to assessments (original or amended) for the 1999, 2000, 2001 and 2002 income years.
2. The application for review was heard by the Tribunal only as to whether the assessments were validly made on 7 and 8 June 2004. The applicant was represented by Mr Petroulias, a solicitor with the Professional Administration Centres. The respondent was represented by Mr Hack SC instructed by the Australian Government Solicitor. The Tribunal had before it the following documentary exhibits:
   • Exhibit A: Statement of the applicant dated 16 March 2004; and
   • Exhibit 1: Letter from Craig Marker Accounting Pty Limited, 21 May 2003.
3. The Tribunal also had before it the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, however these documents were not before the Tribunal as evidence of the assertions of fact contained therein but only as evidence of the existence of the documents.

BACKGROUND

4. The applicant is a director of Gemcrown Pty Ltd (“Gemcrown”). Gemcrown is the trustee of the Norman Family Investment Trust (“the Trust”), a discretionary trust established by Deed of Settlement dated 9 June 1987 (Exhibit A). The applicant is a beneficiary of the Trust and, during the 1999, 2000, 2001 and 2002 income years, he received distributions from the Trust.
5. On 7 May 1999, Gemcrown, as trustee of the Trust, resolved to establish an employee welfare plan. To give effect to such resolution it authorised the applicant to execute a specific power of attorney in favour of Peggy Chan or Jeff Todd to complete the necessary documentation required. The trustee also resolved that:

“all profits of the Trust be paid as remuneration in a way best suited to the needs of the employees and the Trustee hereby covenants that it will so pay these amounts”

And later

“...should the Commissioner of Taxation disallow any amount claimed under this welfare fund arrangement as a deduction, the income or capital, or include any amount in assessable income whatsoever of the trust, such amount or amounts are to be deemed not to be distributed but to be treated as retained income in the accounts of the trust and returned for income taxation purposes accordingly. This amendment shall be paramount to any subsequent minutes that will limit themselves to addressing amounts of income of the trust not including the amount referable to the contributions under this arrangement.” [Emphasis added]

6. On 5 June 2003, the respondent disallowed the following deductions claimed by Gemcrown as trustee of the Trust (T71-T72):
   • $112,256 in the 1999 income year (T30, folio 142);
   • $6,350 in the 2000 income year (T50, folio 235);
   • $5,750 in the 2001 income year (T55, folio 253); and
   • $5,865 in the 2002 income year (T66, folio 304).
7. In respect of each year of income, the disallowed claimed deductions related to contributions and payments said to be in relation to the Trust’s employee welfare fund. As a result of the disallowance of these claimed deductions, the respondent issued notices of amended assessment to the applicant increasing his assessable income in each of the relevant income years by the amount of the disallowed deduction, the additional amount being treated as income by way of distribution from the Trust.
8. The decision to treat the adjusted net income as assessable income in the applicant’s hands was made after the respondent received minutes of meetings of the directors of Gemcrown in relation to the relevant income years. Those minutes formed part of Exhibit 1. In each relevant year of income, the directors of Gemcrown resolved that its income be distributed by way of specific distributions to named beneficiaries (other than the applicant) and that the balance of the Trust’s income for each year be distributed to the applicant.
9. On the basis of these minutes, the respondent contended that the amounts of the disallowed deductions increased the net income of the Trust, which was then deemed to be distributed to the applicant pursuant to the resolutions of the directors of Gemcrown to the effect that the balance of its income in each year of income be distributed to the applicant.
10. The applicant contends that the amounts of the deductions did not become income in his hands, by way of distribution from the Trust, as the resolution of the directors of the trustee company of 7 May 1999 is paramount and provides that any such disallowed deductions would remain accumulated income of the Trust and not be distributed pursuant to any later resolutions of the trustee.
11. In a letter to Gemcrown dated 5 June 2003, the respondent advised that the Commissioner was of the view that the transactions entered into by the Trust in the Employee Welfare Fund arrangement were part of a scheme to which Part IVA of the Income Tax Assessment Act 1936 (“the Act”) applies. Determinations pursuant to section 177F of Part IVA of the Act were annexed to the letter (T72, folios 323-326).
12. A letter was sent to the applicant on the same date advising, in effect, that adjustments had been made to his income tax returns for the relevant years of income, in that the adjustment amounts of Gemcrown’s net income were added to his assessable income for each year of income. The letter further stated that the Commissioner was of the view that the tax shortfall was caused by recklessness, and advised that additional tax has been imposed at the rate of 50% for each relevant year of income on the basis of various provisions in the income tax legislation (as set out in that letter at T71, folio 319).
13. On 24 July 2003, the applicant objected to the amended assessments in relation to the 1999, 2000, 2001 and 2002 years of income (T84, folios 348-359. On 11 September 2003, the respondent disallowed the applicant’s objections (T85, folios 360-362) and, on 17 December 2003, the applicant sought review of the respondent’s decision by this Tribunal.

EVIDENCE OF THE APPLICANT

14. The applicant provided a statement dated 16 March 2004 (Exhibit A) and gave evidence at the hearing. In his statement, the applicant explains that the Trust operates a dental services business and employs skilled dental surgeons, semi-skilled dental assistants and administrative staff. The applicant states he made inquiries with the staff of the business to see if they would be motivated into remaining with the business if they were provided with some sort of reward mechanism such as a welfare fund or incentive fund. After those discussions, he formed the view that such an arrangement would be in the best interests of the business of the Trust. He states he wanted a reward mechanism that would remunerate staff in accordance with their relative contributions to the profits of the business.
15. He states he approached Harts accounting firm for advice in relation to the establishment of such a fund, and was advised that the Commissioner of Taxation widely accepted the use of employee welfare funds and other analogous employee incentive arrangements.

ISSUES BEFORE THE TRIBUNAL

16. The respondent contends that the onus of proof in relation to this matter rests with the applicant pursuant to section 14ZZK(b) of the Taxation Administration Act 1953. The respondent further contends that the applicant has failed to discharge this onus and, alternatively, that:

(a) the transactions were a sham, in that:

• Gemcrown did not incur liability for the amounts allegedly contributed to the Employee Welfare Fund because the loan purported to be made by United Overseas Credit Limited (“UOCL”) was not real;
• UOCL was not what it purported to be;
• Gemcrown’s controller and UOCL only purported to enter into a borrower-creditor relationship;
• Gemcrown did not make contributions using its own funds;
• there were not documents such as a loan application, loan agreement or guarantee documents;
• there was no evidence of any interest payments, repayment terms or supporting security;
• no stamp duty was paid on any agreement entered into in connection with the scheme; and
• all of the purported arrangements lacked legal effect; or

(b) the amounts claimed as deductions were not losses or outgoings; or

(c) the amounts claimed by Gemcrown were not incurred in gaining or producing assessable income, nor were they necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income (pursuant to section 8-1 of the Income Tax Assessment Act 1997); or

(d) the payments in respect of the welfare fund were not capital or capital in nature; or

(e) for the purposes of Part IVA of the Act, the schemes within the meaning of section 177A were entered into by the applicant in the 1999-2002 income years and the applicant obtained or would, but for the operation of section 177F, have obtained a tax benefit in relation to these schemes.

17. The applicant contends that the amount of the disallowed deductions should not be treated as net income distributed to him by the Trust. He states that the resolution of the trustee of 7 May 1999 overrides any later resolutions as to distribution of income in so far as that income relates to a disallowed deduction in relation to the Employee Welfare Fund. He argues the amount of the disallowed deductions should be treated as accumulated income of the Trust. The applicant also relies on his joint deed of 7 May 1999 (Exhibit A) whereby he disavowed his interest in the income etc appointed to him by the trustee in respect of the years ended 30 June 1998 to 30 June 2000.
18. The applicant further contends that the decision to disallow his objection to the amended assessments was made on the basis of irrelevant considerations and insufficient evidence, and that the decision was made in bad faith and for improper purposes, as evidenced, he contends, by:

(a) the fact the applicant has been treated differently to other participants in employee benefits arrangements challenged by the respondent, in that he has been investigated by a different division of the Tax Office and has been subjected to extreme and unreasonable levels of penalty, merely by virtue of the arrangement having been designed by Steve Hart; and

(b) the fact his circumstances have not been taken into account but instead the respondent has decided the issues on what it considers is the practice in relation to other participants in the scheme.

19. Document T25 is a copy of minutes of meeting of Gemcrown, as trustee, dated 30 June 1999. The applicant and his wife were in attendance as directors of the trustee. The company directors passed the following resolutions:

“It was resolved that the income of the trust for the year ended 30 June 1999 be distributed as follows:
The first $643 to SOPHIE NORMAN
The next $643 to JAMES NORMAN
The next $643 to PATRICK NORMAN
The balance to ROSS ANDREW NORMAN
It was further resolved that the income hereby paid and applied for the benefit of the aforesaid beneficiaries be entered into the books of the trust as having been so distributed and at the same be held by the trustee absolutely on behalf of each beneficiary in accordance with the terms of the trust deed.
It was further resolved that the company, as Trustees may in its absolute discretion in accordance with the Trust Deed reinvest the same by way of loan or loans on behalf of each beneficiary to the trust and such loan or loans being interest free and repayable on demand.
It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income the Trust such amount or amounts are to be deemed to be distributed during the period 30 June 1999 as follows:
In accordance with the above resolution.”

20. The income tax return for the Trust for the year ended 30 June 1999 showed the net income as $4,989 said to be distributed to beneficiaries as follows:

JULIEANNE NORMAN $643

JAMES ANDREW NORMAN $643

PATRICK JOHN FREDERICK NORMAN $643

ROSS ANDREW NORMAN $3,071

21. In the applicant’s return of income for the year ended 30 June 1999 the applicant disclosed a distribution from a trust of $3,505. I do not understand why the discrepancy between amounts but assume the applicant also derived income from another trust.
22. Document T48 is a copy of minutes of meeting of the directors of Gemcrown as trustee dated 12 June 2001 relating to the year ended 30 June 2000. The resolution was in the same terms as the resolution set out above in relation to the 1999 year, except that the appointment of income to beneficiaries differed.
23. The Trust’s income tax return for the year ended 30 June 2000 shows the following distribution of the net income of the Trust:

JULIEANNE NORMAN NIL

SOPHIE ALISON NORMAN $643

JAMES ANDREW NORMAN $643

PATRICK JOHN FREDERICK NORMAN $643

ROSS ANDREW NORMAN $33,578

24. In his return of income for the 2000 year the applicant disclosed distribution from trusts as $33,663.
25. Document T53 is a copy of minutes of meeting of the directors of Gemcrown as trustee dated 14 September 2001 relating to the year ended 30 June 2001. The resolution was in the same terms as the earlier annual resolutions except that once again the appointment of income varied so that a distribution of $200 was appointed to the Trustee.
26. In its income tax return for the year ended 30 June 2001 the Trustee disclosed the distribution of net income to be as follows:

JULIEANNE NORMAN $643

JAMES ANDREW NORMAN $643

PATRICK JOHN FREDERICK NORMAN $643

GENCROWN PTY LTD $200

ROSS ANDREW NORMAN $29,532

27. The applicant’s income tax return for the year ended 30 June 2001 disclosed distribution from trusts as $29,532.
28. Document T58 is the minutes of Meeting of the Directors of the Trustee dated 30 June 2002. The resolutions are in the same terms as the resolutions for the previous year. The income return of the Trust shows the same distributions of income except that the amount distributed to the applicant is $31,310 and that amount is shown as assessable income in the applicant’s 2001 income tax return.

CONSIDERATION

29. Two main issues arise in this case at this stage. The first issue for consideration is whether the applicant is the correct taxpayer. The second is whether the decision is issue amended assessments were authorised or made mala fides.
30. Extensive evidence was lead about what an employee of the Australian Taxation Office said to the applicant after the amended assessments in issue were made and notified. That officer gave evidence before the Tribunal. His evidence satisfies me that while he apparently did enter into exchanges with the applicant which justifiably caused the applicant concern none of those exchanges suggested that the amended assessments in issue were made other than in good faith.
31. Even if it were the fact that the amended assessments were made mala fides it is now for this Tribunal to decide whether those amended assessments are excessive either because the applicant did not derive the subject income, or he derived some lesser amount or the amended assessments were not authorised by the Act. If it were the fact (I do not suggest it is) that there was an excess of jurisdiction in the making of the amended assessments this Tribunal’s jurisdiction is to determine what is the correct or preferable objection decision in each year of income.
32. My understanding of the law is found in the judgment of Von Doussa J in Secretary, Department of Social Security v Alvaro [1994] FCA 1124; (1994) 34 ALD 72 at 78-9 as follows:

“In the hierarchy of reviews from original decision-maker to the AAT it was not necessary that there be at the outset an original decision that was in all respects validly made, and at each level of review thereafter another decision that was in all respects validly made. The person or tribunal to whom application for each of the reviews was made had jurisdiction to undertake that review so long as the preceding decision-maker had made what purported to be a decision in exercise of powers conferred by the Act affecting the interests of the person seeking review. It mattered not whether the ground of complaint made about the preceding decision was merely that it is wrong on the merits, or that in law it was not an effective decision because it was made by someone without authority, or in excess of authority or for improper purposes, or was vitiated through procedural irregularity such as a failure to accord natural justice.”

Spender and French JJ agreed with the judgment of Von Doussa J.

33. I am satisfied there are valid reviewable decisions before the Tribunal.
34. Taking all the material before me into account but relying in particular on the annual resolutions of the Trustee referred to earlier I am satisfied, prima facie, that the applicant is the person presently entitled to net income of the Trust as adjusted and subject to the specific appointments of income.

I certify that the 34 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member K L Beddoe

Signed: .....................................................................................

Associate

Date/s of Hearing 7 & 8 June2004

Date of Decision 8 November 2004

Solicitor for the Applicant Mr Petroulias

Counsel for the Respondent Mr Hack SC

Solicitor for the Respondent Australian Government Solicitor