FEDERAL COURT OF AUSTRALIA

Transcription

1 FEDERAL COURT OF AUSTRALIA Lewski v Commissioner of Taxation [2017] FCAFC 145 File number: VID 1496 of 2016 Judges: PERRAM, PAGONE AND MOSHINSKY JJ Date of judgment: 18 September 2017 Catchwords: TAXATION income tax deductions when loss or outgoing is incurred contracts for sale and purchase of land and for sale and purchase of aged care hostel business whether certain amounts were incurred by purchaser upon execution of contracts whether Tribunal erred in concluding that the amounts were not incurred upon execution of contracts TAXATION income tax taxation of trusts discretionary trust where trustee resolved to distribute income to particular beneficiary but also resolved to distribute the income to a different beneficiary if the Commissioner disallowed a deduction or included an additional amount in assessable income whether resolutions were valid whether variation resolution, if invalid, was severable whether first-mentioned beneficiary was presently entitled to a share of the income of the trust estate TAXATION review proceedings under Pt IVC of Taxation Administration Act 1953 (Cth) application by taxpayer to rely on grounds not in objection principles applicable TRUSTS AND TRUSTEES discretionary trust distribution of income where beneficiary executed deed of disclaimer whether disclaimer effective whether beneficiary had already accepted the distribution whether knowledge of beneficiary s agent should be imputed to beneficiary TRUSTS AND TRUSTEES discretionary trust resolution of trustee to distribute income where resolution expressed in terms of income of the trust where distribution power in trust deed expressed in terms of Net Income whether on its true construction the resolution related to Net Income of the trust

2 Legislation: Administrative Appeals Tribunal Act 1975 (Cth), s 44 Aged Care Act 1997 (Cth), Pts 2.1, 2.2 Income Tax Assessment Act 1936 (Cth), ss 51, 95, 97, 99A, 190 Income Tax Assessment Act 1997 (Cth), s 8-1 Taxation Administration Act 1953 (Cth), s 14ZZK Transfer of Land Act 1958 (Vic) Cases cited: Adderley v Dixon (1824) 1 Sim & St 607; 57 ER 239 ANZ Executors and Trustees Ltd v Humes Ltd [1990] VR 615 Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 Bank of New South Wales v Commonwealth (1948) 76 CLR 1 BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347 Byrnes v Kendle (2011) 243 CLR 253 Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402 City of Subiaco v Local Government Advisory Board (2011) 184 LGERA 200; [2011] WASC 322 Coles Myer Finance Ltd v Commissioner of Taxation (Cth) (1993) 176 CLR 640 Commissioner of Taxation (Cth) v Citylink Melbourne Ltd (2006) 228 CLR 1 Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 Dougan v Ley (1946) 71 CLR 142 Federal Commissioner of Taxation v Cornell (1946) 73 CLR 394 Federal Commissioner of Taxation v Malouf (2009) 174 FCR 581 Federal Commissioner of Taxation v Ramsden (2005) 58 ATR 485 Fell v Fell (1922) 31 CLR 268 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 Gilder v Federal Commissioner of Taxation (1991) 22 ATR 872 Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 Haritos v Federal Commissioner of Taxation (2015) 233

3 FCR 315 Harmer v Commissioner of Taxation (Cth) (1991) 173 CLR 264 Harrington v Lowe (1996) 190 CLR 311 House v The King (1936) 55 CLR 499 In re Baden s Deed Trusts [1969] 2 Ch 388 In the Will of Hamilton [1913] VLR 460 Inland Revenue Commissioners v McMullen [1981] AC 1 JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VR 891 Lady Naas v Westminster Bank Ltd [1940] AC 366 Langston v Langston (1834) 2 Cl & Fin 194; 6 ER 1128 Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60 Lighthouse Philatelics Pty Ltd v Commissioner of Taxation (1991) 32 FCR 148 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 McLean v Commissioner of Taxation (1996) 66 FCR 106 Meehan v Jones (1982) 149 CLR 571 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 Nemesis Australia Pty Ltd v Commissioner of Taxation (2005) 150 FCR 152 New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 NIML Ltd v Man Financial Australia Ltd (2006) 15 VR 156 Owners of the SS Kalibia v Wilson (1910) 11 CLR 689 Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146 Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146 Ramsden v Federal Commissioner of Taxation (2004) 56 ATR 42 Re Applicant and Federal Commissioner of Taxation (2008) 73 ATR 675 Re Cavill Hotels Pty Ltd [1998] 1 Qd R 396 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431 Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 Standing v Bowring (1885) 31 Ch D 282 Turner v Turner [1984] Ch 100 TVKS and Commissioner of Taxation [2016] AATA 1010

4 Date of hearing: 3, 4 May 2017 United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618 Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347 Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1995) 130 ALR 415 Whitlock v Brew (1968) 118 CLR 445 Registry: Division: National Practice Area: Category: Victoria General Division Taxation Catchwords Number of paragraphs: 153 Counsel for the Applicant: Solicitor for the Applicant: Counsel for the Respondent: Solicitor for the Respondent: Mr AT Broadfoot QC with Mr G Redenbach John Young Consulting Tax Lawyer Ms D Harding QC with Mr S Linden Australian Taxation Office

5 ORDERS VID 1496 of 2016 BETWEEN: AND: ROSLYN LEWSKI Applicant COMMISSIONER OF TAXATION Respondent JUDGES: PERRAM, PAGONE AND MOSHINSKY JJ DATE OF ORDER: 18 SEPTEMBER 2017 THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The decision of the Administrative Appeals Tribunal made on 9 December 2016 at Melbourne be set aside and, in lieu thereof, it be ordered that: (a) the objection decision of the respondent with respect to the 2006 and 2007 years of income be set aside; and (b) the matter be remitted to the respondent for redetermination according to law. 3. Subject to paragraph 4, the respondent pay the applicant s costs of the appeal, to be taxed if not agreed. 4. If either party seeks a variation of the costs order in paragraph 3, the party shall give written notice to the Court and the other party within seven business days. Directions will then be made for the filing and service of written submissions on costs. Note: Entry of orders is dealt with in Rule of the Federal Court Rules 2011.

6 REASONS FOR JUDGMENT THE COURT: Introduction 1 The applicant was, at all material times, a beneficiary of two trusts, known as the ACE No 4 Trust (the ACE Trust) and the Arjod Trading Trust (the Arjod Trust). On 14 May 2013, the respondent (the Commissioner) issued amended assessments to the applicant with respect to the years of income ended 30 June 2006 and 30 June 2007 on the basis that she was assessable to a share of the net income of the ACE Trust (for the 2006 year) and the Arjod Trust (for the 2007 year) under s 97 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). On 5 July 2013, the applicant objected to the amended assessments. On 9 July 2015, the Commissioner decided to allow in part the applicant s objection in relation to the 2006 year, and to disallow in full her objection in relation to the 2007 year. 2 On 4 September 2015, the applicant applied to the Administrative Appeals Tribunal (the Tribunal) for review of the Commissioner s objection decision. On 9 December 2016, the Tribunal, constituted by a Deputy President, decided to affirm the Commissioner s decision. 3 The applicant appeals to this Court on a question of law pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). Although styled as an appeal, the proceeding is within the Court s original jurisdiction. In the circumstances of this case, that jurisdiction is being exercised by a Full Court: see s 44(3) of the Administrative Appeals Tribunal Act. 4 Although the amended assessments relate to the 2006 and 2007 years of income, some of the issues in this appeal concern the availability of carry forward losses from previous years. In particular, during the year ended 30 June 1999, the trustee of the ACE Trust, Australian Commercial Property Syndications Pty Ltd (ACPS), was a member of a property syndicate known as the Glendale Property Syndicate. The manager of that syndicate was Glendale RV Syndication Pty Ltd (Glendale). Glendale entered into two interrelated contracts on 30 June 1999: a contract of sale of real estate between Prime Life (Glendale Hostel) Pty Ltd as vendor and Glendale as purchaser (the Contract of Sale); and a sale and purchase of business agreement (the Purchase of Business Agreement) between Prime Life (Glendale Hostel) Pty Ltd, Glendale and Prime Life Corporation Limited (Prime Life Corporation). As described

7 - 2 - below, one of the issues concerns whether two amounts that were payable under those contracts were incurred on 30 June 1999, the date that the contracts were entered into. 5 The issues raised by the appeal (including those raised by a notice of contention filed by the Commissioner) can be summarised as follows: (a) whether the Tribunal erred in concluding that a settlement amount of $1.74 million (the Settlement Amount) payable under the Contract of Sale and the balance of the purchase price payable under the Purchase of Business Agreement (namely a balance of $5.51 million) were not incurred within the meaning of s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) on 30 June 1999 but were incurred later (the Incurred Issue); (b) (c) (d) (e) whether the Tribunal erred in concluding that the applicant was presently entitled, within the meaning of s 97(1) of the 1936 Act, to a share of the income of the trust estate of the ACE Trust for the 2006 year of income and the Arjod Trust for the 2007 year of income; among other things, this requires consideration of the validity and effect of resolutions made by ACPS (as trustee of the ACE Trust) for the 2006 year and Drewvale Investments Pty Ltd (Drewvale) (as trustee of the Arjod Trust) for the 2007 year, including a variation of income resolution made by each trustee (the Trust Resolutions Issue); whether the Tribunal failed to apply, or misapplied, the principles governing whether the applicant should be given leave under s 14ZZK of the Taxation Administration Act 1953 (Cth) (the TAA) to rely on grounds not in her objection (the Leave to Raise New Grounds Issue); whether the Tribunal erred in concluding that the applicant had not effectively disclaimed the relevant benefits and entitlements under the trusts by executing, on 15 December 2015, two deeds of disclaimer (the Deeds of Disclaimer) (the Disclaimers Issue); and whether the Tribunal erred in rejecting the applicant s contention that a resolution made by ACPS with respect to the 2006 year was ultra vires; the applicant had contended that the resolution, in purporting to appoint the income, rather than the Net Income, of the trust to the applicant was not authorised by the trust deed (the Ultra Vires Issue).

8 - 3-6 In brief summary, our conclusions in relation to these issues are as follows: (a) (b) (c) (d) (e) In relation to the Incurred Issue, the Tribunal effectively adopted a meaning of incurred in s 8-1(1) of the 1997 Act that was contrary to that which has been established by legal decisions. It follows that the Tribunal s decision, insofar as it concerned whether the Settlement Amount under the Contract of Sale and the balance of the purchase price under the Purchase of Business Agreement were incurred on 30 June 1999, is to be set aside. Both parties approached the matter on the basis that the issue would be reconsidered by this Court. We consider that both amounts were incurred upon execution of the contracts on 30 June In relation to the Trust Resolutions Issue, we incline to the view that, in each case, the variation of income resolution was authorised by the relevant trust deed. But, whether or not the variation of income resolution was authorised by the relevant trust deed, the result is the same: the applicant was not presently entitled to a share of the income of the trust estate of the ACE Trust for the 2006 year or the Arjod Trust for the 2007 year. In view of the conclusions we reach in relation to the Disclaimers Issue and the Ultra Vires Issue, it is unnecessary to determine whether the Tribunal erred in the exercise of the discretion in declining to permit the applicant to rely on grounds not in her objection. However, we make some observations, below, about the issue. In relation to the Disclaimers Issue, we reject the applicant s challenge to the Tribunal s conclusion. In relation to the Ultra Vires Issue, we reject the applicant s challenge to the Tribunal s conclusion. 7 It follows that the appeal is to be allowed. The decision of the Tribunal should be set aside and, in lieu thereof, orders made that the Commissioner s objection decision be set aside and the matter remitted to the Commissioner for redetermination according to law. Background facts 8 The following statement of background facts is based on the findings in the reasons of the Tribunal (TVKS and Commissioner of Taxation [2016] AATA 1010) (the Reasons) and the documents in the Application Book filed in this Court. It will be convenient to deal, first,

9 - 4 - with the facts relating to the ACE Trust (which are relevant for the 2006 year) and then, second, with the facts relating to the Arjod Trust (which are relevant for the 2007 year). The ACE Trust 9 The ACE Trust was established by a deed executed on 17 June By a deed executed on the following day, 18 June 1997, ACPS was appointed as trustee. The applicant was a General Beneficiary of the Trust. The applicant s husband, William Lewski (Mr Lewski), was the sole Specified Beneficiary. 10 By cl 2.1 of the trust deed, the Settlor declared that the Trustee would hold, and the Trustee declared that it held, the Trust Fund and any Income or gain accruing to the Trust Fund upon the trusts and with and subject to the powers and provisions contained in the trust deed. The Trust Fund was defined as meaning: the Settled Sum; all moneys, investments and property paid, transferred to, or accepted by the Trustee as additions to the Trust Fund; accumulations of Income directed or empowered to be made by the trust deed; all accretions and additions to the Trust Fund from any source; the investments and property from time to time representing the Settled Sum, money, investments, property, accumulations, accretions and additions; and any specific asset for the time being forming part of the Trust Fund. 11 Income was defined in cl 1.15 of the trust deed as including, but not being limited to, assessable Income as defined in the Tax Law. 12 Net Income was defined in cl 1.17 of the trust deed as follows: Net Income means the amount calculated as the net Income of the Trust Fund for an Accounting Period in accordance with section 95(1) of Tax Law including: any net capital gain included in the assessable Income of the Trust Fund by virtue of section 160ZO of Tax Law; and to the extent allowable, any taxation credits available to the Trustee under Tax Law including but not limited to: foreign tax credits; prescribed payment tax credits; and dividend imputation credits; unless the Trustee determines in respect of any Accounting Period that Net Income for that Accounting Period means the Income produced from the investment of the Trust Fund calculated in accordance with established accounting principles and trust law; 13 Clause 3 was headed Allocation of Income and cl 3.1 set out certain rules that applied for the purpose of ascertaining the Net Income of the Trust Fund. Clause provided that the

10 - 5 - Trustee must, in respect of each Accounting Period, collect, receive and get in all dividends, interest, rents and all classes of Income arising from the constituent investments and the Trust Fund, pay all costs and disbursements, commissions, fees, taxes, management charges and all other proper outgoings, losses and expenses. 14 Clauses 3.3 and 3.4 provided as follows: 3.3 The Trustee may at any time before the expiration of any Accounting Period with respect to all or any part or parts of the Net Income of the Trust Fund for such Accounting Period determine: to pay, apply or set aside the same to or for any one or more of the General Beneficiaries living or in existence at the time of the Determination; to apply the same for such charitable purposes as the Trustee may determine; to accumulate the same; in respect of any amount paid applied or Set Aside to or for any General Beneficiary to Set Aside a sum which, in the opinion of the Trustees, will be sufficient to meet the obligations of the Trustee for Income tax for that Accounting Period on that amount pursuant to any law which imposes Income tax on the Trustee and: to the extent that any sum so set aside is inadequate to meet the tax actually assessed, the Trustee may without prejudice to any other rights given to him by law or by this Deed resort to the Income of the Trust Fund for any subsequent Accounting Period or may recover the amount of such inadequacy from any money in their hands belonging to the Beneficiary in respect of whose Income the assessment is issued; if and whenever it shall appear to the Trustee that any provision so made was excessive, the amount of the excess shall be credited in the books of account of the Trust Fund to the Beneficiary in respect of whom the provision was made and shall be treated as though it had been set aside for that Beneficiary in the Accounting Period in which the provision was first made; provided that nothing in this clause shall oblige the Trustee to Set Aside any sum or affect any rights of the Trustee in the event of any assessment of tax being made against him in respect of any amount so paid, applied or Set Aside. 3.4 The Trustee may exercise the discretion contained in clause 3.3 after the expiration of the Accounting Period if the Commissioner of Taxation accepts that the Beneficiary in whose favour the Trustee has exercised the discretion is presently entitled to the Income in the Accounting Period to which the distribution relates. If not, the purported exercise of the discretion after the expiration of the Accounting Period is ineffective.

11 15 The word Pay was defined as including transfer, convey and assign. The words Set Aside, in relation to a Beneficiary, were defined as including placing sums to the credit of such Beneficiary in the books of account of the Trust Fund. The term Determination was defined in cl 1.9 of the trust deed as meaning a determination made in any of the ways listed in cl 7.1. The definition also provided that a Determination may be revocable or irrevocable but if not stated, the Determination shall be revocable. Clause provided that, in the case of a corporate Trustee, a Determination in the exercise of any power, discretion or authority conferred on the Trustee by the trust deed could be made in the manner set out in cl 7.2. Clause 7.2 provided: 7.2 A corporate trustee may exercise or concur in exercising any discretion or power conferred on the Trustee by a resolution of the company or of its directors or governing body or (not being a sole Trustee) by its representative appointed for the purpose of attending meetings of the Trustee. 16 Clause 3.5 of the trust deed provided that if the Trustee did not exercise the discretion contained in clauses 3.3 and 3.4, or to the extent to which the Trustee did not exercise or did not effectively exercise the discretion, the Trustee holds the Net Income for the Accounting Period upon trust for the Specified Beneficiaries living on the last day of the Accounting Period. 17 Clause 3.6 set out certain provisions that applied to any Determination made pursuant to cl 3.3. These included that: if at the end of any Accounting Period the amounts in respect of which Determinations have been made pursuant to clause 3.3 shall exceed the Net Income of the Trust Fund for such Accounting Period, the amount of such excess shall be deducted from the amounts which the Trustee has determined to accumulate and only the balance of such amounts (if any) shall be accumulated and if any deficiency shall remain then the Trustee shall, to the extent of the deficiency, be deemed to have applied the capital of the Trust fund pursuant to clause 4; a Determination to pay, apply or Set Aside any amount to or for the benefit of any Beneficiary shall be irrevocable and may be effectually made and satisfied (inter alia) by a resolution of the Trustee that a sum out of or portion of the Net Income of the Trust Fund for the Accounting Period or a sum out of or portion of the Net Income of the trust estate of the Trust Fund for the Accounting Period be allocated to that Beneficiary or otherwise dealt with for the benefit of that Beneficiary or by placing such amount to the credit of such Beneficiary in the books of account of the Trust Fund or by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such Beneficiary or by paying the same over to or for the benefit of such Beneficiary in such manner and to such person on behalf of such Beneficiary as the Trustee shall think fit;

12 18 Clauses 3.8 and 3.9 of the trust deed provided: The Trustee shall hold so much of the Net Income of the Trust Fund for each Accounting Period as shall not be the subject of a Determination effectually made in relation to such Accounting Period in trust successively for the same persons and in the same proportions as the Trustee would hold the corpus of the Trust Fund pursuant to clause 4 as if the last day of that Accounting Period were the Vesting Day Any amount set aside for any Beneficiary and any amount held by the Trustee in trust for any person pursuant to clause 3.8 shall cease to form part of the Trust Fund and at that time or upon becoming subject to such trust (as the case may be) shall be held by the Trustee on a separate trust for such person absolutely with power to the Trustee pending payment over thereof to such person to invest or apply or deal with such fund or any resulting Income of the fund or any part thereof in the manner provided for in clause 10 provided that to the extent that the Trustee as Trustee of such fund does not expressly invest, apply or deal with such fund in the manner provided for in clause Under cl 4, as from the Vesting Day, the trust was to be held for such charitable purposes, or for such of the Beneficiaries for their benefit, maintenance, advancement and education, as the Trustee should appoint, but insofar as it had not been disposed of, it was to be held for the Specified Beneficiary. 20 Clause 3.10 contained certain provisions that applied to any Determination made under cl 3. These included: A Determination to pay, apply or Set Aside any part of the Net Income may be effectually made and satisfied by: a resolution of the Trustee that a sum out of or portion of the Net Income or the whole of Net Income for the Accounting Period be paid, applied or set aside to or for the Beneficiary or otherwise dealt with for the benefit of the Beneficiary specified in the resolution; or Any resolution of the Trustee under clause is irrevocable and the Net Income must be dealt with as required by that resolution. 21 During the year ended 30 June 1999, ACPS as trustee of the ACE Trust was a member of a syndicate known as the Glendale Property Syndicate. The syndicate was managed by Glendale. As manager of the syndicate, Glendale entered into two contracts relating to an aged care facility known as the Glendale Aged Care Hostel situated in Glendale Court, Werribee, Victoria. The two contracts were:

13 (a) (b) the Contract of Sale, between Prime Life (Glendale Hostel) Pty Ltd as vendor and Glendale as purchaser; and the Purchase of Business Agreement, between Prime Life (Glendale Hostel) Pty Ltd as vendor, Glendale as purchaser, and Prime Life Corporation. 22 Under the Contract of Sale, Prime Life (Glendale Hostel) Pty Ltd agreed to sell, and Glendale agreed to purchase, the real property on which the aged care facility was located. Prime Life (Glendale Hostel) Pty Ltd also agreed to make improvements to the existing buildings, cause a new hostel to be built, and procure the granting of 100 Approved Places in connection with the new hostel. 23 The Price, as defined in the Contract of Sale, comprised: (a) (b) (c) the Settlement Amount; the First Post Settlement Amount; and the Final Post Settlement Amount (as may be adjusted). 24 The Settlement Amount, as defined in the Contract of Sale, was $1.74 million. 25 The First Post Settlement Amount, as defined in the Contract of Sale, was $2.5 million. 26 The Final Post Settlement Amount was defined as meaning the sum of $12 million subject to any adjustment pursuant to special condition The sum of the three amounts (putting to one side any adjustment) was $16.24 million. 28 Payment of the Price was dealt with in special condition 8.1, which provided that Glendale was to pay the Price in the following manner: by payment of the Settlement Amount on the Settlement Date; by payment of the First Post Settlement Amount on 1 July 2000 or the date of issue of the Planning Permit whichever is the later date; by payment of the Final Post Settlement Amount on the Date of Completion. 29 The Settlement Date under the Contract of Sale was 31 October 1999 or such other date upon which settlement occurs. 30 The Contract of Sale also referred, on the page headed Particulars of Sale, to a deposit of $1 million. Given the definition of Price (referred to above), it appears that this amount was merely a deposit, rather than being an additional amount due under the contract. It was common ground before the Tribunal (as reflected in the parties statements of facts, issues

14 - 9 - and contentions) that the deposit of $1 million was paid on 30 June 1999 and that it was incurred by Glendale on that date. It is not clear, on the basis of the materials before the Court, whether the deposit is to be treated as part of the Settlement Amount, the First Post Settlement Amount or the Final Post Settlement Amount (or as part of more than one of these amounts). 31 It is convenient to note at this point that, insofar as the issues before the Tribunal concerned the incurrence of outgoings under the Contract of Sale, the only outgoing in dispute was the Settlement Amount. There was no issue concerning the First Post Settlement Amount or the Final Post Settlement Amount (cf Reasons, [213]-[214]). The applicant accepted that these amounts were not incurred on 30 June 1999, but were incurred later (see the applicant s amended statement of facts, issues and contentions, [18A]). 32 Special condition 6 of the Contract of Sale was headed Interdependence and provided in part as follows: 6.1 The Vendor and the Purchaser agree that this Contract is interdependent with the Sale and Purchase of Business Agreement and that Settlement of this Contract will take place contemporaneously with completion occurring under the Sale and Purchase of Business Agreement. 6.2 Without in any way limiting the provisions of special condition 6.1 the Vendor and Purchaser agree that: a breach of any provision of this Contract by the Purchaser shall be deemed to constitute a breach by the Purchaser of the Sale and Purchase of Business Agreement; a breach of any provision of the Sale and Purchase of Business Agreement on the part of the Purchaser shall be deemed to constitute a breach by the Purchaser of this Contract; in the event that the Vendor is entitled to terminate or rescind the Sale and Purchase of Business Agreement then the Vendor shall be entitled to terminate or rescind this Contract; 33 Special condition 8.2 provided that Settlement of the contract would take place contemporaneously with completion under the Sale and Purchase of Business Agreement. The term Settlement was defined as meaning payment of the Settlement Amount by the Purchaser to the Vendor at which time the Vendor will transfer title to the Property to the Purchaser. 34 Special condition 8.3 of the Contract of Sale provided: 8.3 The parties agree that the value of the Property at the date of this Contract is equivalent to the Settlement Amount (less the sum of $500,000 which the Vendor is required to spend on improvements to the Hostel under special

15 condition 7.1) and that the First Post Settlement Amount and the Final Post Settlement Amount are payments in respect of the Vendor s obligations to construct the New Hostel and to procure the granting of the Approved Places to the Purchaser to be used at the New Hostel. 35 General condition 9.1 of the Contract of Sale incorporated general condition 12 in Table A of the Seventh Schedule to the Transfer of Land Act 1958 (Vic) (Table A) into the Contract of Sale. That condition provided that [u]pon payment of all purchase and other moneys payable by the purchaser under the contract the vendor shall deliver to the purchaser such registrable instrument or instruments of transfer of the land sold as will enable the purchaser to become registered as proprietor of the land sold. For completeness, we note that special condition 2 of the Contract of Sale provided that general conditions 3 and 13.1 did not apply to the contract. General condition 3 is not presently relevant. General condition 13.1 (which did not apply by virtue of special condition 2) stated that [t]he purchaser must provide the instrument of transfer required by General Condition 12 of Table A, or the assurance required by the Third Schedule (as the case may be), to the vendor or the vendor s solicitor at least 10 days prior to the settlement date. 36 Turning then to the Purchase of Business Agreement, this was an agreement for the sale and purchase of the business conducted by Prime Life (Glendale Hostel) Pty Ltd in connection with the Glendale Aged Care Hostel. It was stated in recital C to the agreement that, as an inducement to Glendale entering into the agreement, Prime Life Corporation had agreed to enter into certain covenants set out in the agreement. These covenants related to the transfer of 127 Approved Places (in connection with the hostel) to Glendale. 37 The agreement for the sale and purchase of the business was dealt with in cl 2.1. Clause 2.2 provided for payment of the Purchase Price (which was defined as meaning the sum of $7.26 million) as follows: (a) (b) by payment of a deposit of $1.75 million on the execution of the agreement; and by payment of the balance of the Purchase Price, subject to any adjustments under the agreement, on the Completion Date. 38 The Completion Date, as defined in the Purchase of Business Agreement, was 31 October 1999, or such other date as agreed between the Vendor and the Purchaser. Completion was defined as meaning completion of the sale and purchase of the business as contemplated by the agreement.

16 It was common ground before the Tribunal that the deposit of $1.75 million, which was paid by Glendale on 30 June 1999, was incurred on that date. The issue concerned the balance of the purchase price (an amount of $5.51 million, putting to one side any adjustment). The applicant contended that this amount was incurred on 30 June 1999; the Commissioner contended that it was not incurred until the Completion Date, 31 October Clause 3 of the Purchase of Business Agreement dealt with the transfer of the 127 Approved Places. Prime Life Corporation (defined as Prime Life in the Purchase of Business Agreement) held these places. Clause 3 was in the following terms: 3.1 As soon as practicable after the execution of this Agreement the Purchaser will apply to the Department and seek to be granted status as an Approved Provider. 3.2 From the date of this Agreement until Completion, and after Completion the parties will seek and use their best endeavours to have the Department grant the Approval. 3.3 Prime Life will complete and execute the Application and cause it to be lodged with the Department as soon as practicable after the execution of this Agreement. 3.4 The Purchaser agrees to complete and execute the Application and an application to become an Approved Provider and lodge it with the Department as soon as practicable after the execution of this Agreement. 3.5 Prime Life agrees that subject to the Approval taking place, Prime Life will transfer the Approved Places to the Purchaser free from any Encumbrance Subject to clause 3.6.2, if the Department has not granted the Purchaser status as an Approved Provider by the Completion Date Prime Life agrees to hold the Approved Places on trust for the Purchaser until such time as the Purchaser is granted status as an Approved provider and the Department grants the Approval at which time Prime Life will transfer the Approved Places to the Purchaser in accordance with clause The Purchaser acknowledges and agrees that Prime Life is only required to hold the Approved Places on behalf of the Purchaser in accordance with clause for a period of 12 months from the Completion Date. If the Approval has not been granted in this period of time the Purchaser must immediately take action to dispose of the Property, Assets and the Approved Places to a third party who is an Approved Provider subject to that third party: being acceptable to Prime Life which acceptance shall not be unreasonably withheld where that third party is a respectable and solvent person; not being a competitor of Prime Life; signing any documentation the vendor may require in relation to the transfer of the Property, Assets and Approved Places to the third party;

17 assuming any of the surviving obligations of the Purchaser under the Contract of Sale, PLC Management Deed or this Agreement; Prime Life must, if requested to do so, execute a declaration of trust setting out the terms contained in clauses and as soon as practicable after being requested to do so by the Purchaser The parties and Prime Life agree to sign any document which may be required to effect any of the matters contemplated by this clause 3.6. The Department was defined in cl 1.12 to mean the Department of Health and Aged Care (the Department). Approval was defined in cl 1.3 to mean the written approval by the Department to the transfer of the Approved Places from Prime Life to the Purchaser. Approved Provider was defined in cl 1.5 to mean an approved provider as set out in Part 2.1 of the Aged Care Act Clause 6 of the Purchase of Business Agreement dealt with completion. Completion was to take place on the Completion Date (cl 6.1). Clause 6.3 provided that, on Completion, the Purchaser shall do and execute all such other acts and documents as are required by this Agreement to be done or executed by the Purchaser at Completion. Clause 6.4 set out certain documents and things required to be delivered by the Vendor to the Purchaser on Completion. 42 Clause 8.2 provided that the title to the Business and the Assets and the benefit of the Goodwill would pass to the Purchaser upon payment by the Purchaser of the balance of the Purchase Price. 43 Clause 11.1 of the Purchase of Business Agreement provided that the agreement was interdependent with the Contract of Sale. Clause 11.2 was in the following terms: 11.2 Without limiting the generality of the foregoing: Completion of this Agreement will take place contemporaneously with settlement of the Contract of Sale; a breach of any provision of this Agreement on the part of the Purchaser shall constitute a breach by the Purchaser of the Contract of Sale; a breach of any provision of this Agreement on the part of the Vendor shall constitute a breach by the Vendor of the Contract of Sale; a breach of any provision of the Contract of Sale on the part of the Purchaser shall be deemed to constitute a breach by the Purchaser of this Agreement; a breach of any provision of the Contract of Sale on the part of the

18 Vendor shall be deemed to constitute a breach by the Vendor of this Agreement; in the event that the Vendor is entitled to terminate or rescind the Contract of Sale then the Vendor shall be entitled to terminate or rescind this Agreement; in the event that the Purchaser is entitled to terminate or rescind the Contract of Sale then the Purchaser shall be entitled to terminate or rescind this Agreement; termination of this Agreement under this clause will not affect any right or claim in respect of this Agreement which arose before termination of this Agreement. 44 In addition to entering into the two contracts, on 30 June 1999 Glendale paid a syndication fee of $3 million in connection with the Glendale Aged Care Hostel. It was common ground before the Tribunal that this outgoing was incurred by Glendale on 30 June On 22 December 2003, ACPS (as trustee of the ACE Trust) and the Commissioner entered into a deed of settlement in relation to ACPS s tax liability in respect of the Glendale Property Syndicate. The Commissioner accepted that, as at 30 June 1999, ACPS had a 40% interest in the Glendale Property Syndicate. In the following years, up to the year ended 30 June 2006, ACPS had a 2% interest in the syndicate. 46 On 30 June 2006, Mr Lewski, as the sole director of ACPS, executed a document headed Resolution of Sole Director. The document comprised four resolutions of ACPS as trustee of the ACE Trust. The relevant resolutions were as follows: Income of the trust fund: Distribution of trust income: In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2006 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust. It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2006 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: Beneficiary Roslyn Lewski Amount 100% of income Variation of income: It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed

19 to be distributed on 30 June 2006 in the following manner: Beneficiary Australian Commercial Underwriting Pty Ltd Amount 100% of income 47 As at 30 June 2006, the financial statements for the ACE Trust showed a profit of $10,374,993. This amount was also shown as a distribution to beneficiaries. The Arjod Trust 48 The Arjod Trust was established by a deed executed on 19 May On 29 March 1989, the initial trustee retired and was replaced by Drewvale. The trust was varied by a further deed executed on 5 December Although the trust deed generally refers to Trustees (plural), for ease of expression in circumstances where there was a single trustee we will refer to the provisions as though they referred to the Trustee (singular). 49 The applicant was a General Beneficiary under the trust. Mr Lewski, the applicant s husband, was one of the Specified Beneficiaries. 50 Clause 3(1) of the trust deed provided that the Trustee could, prior to the Vesting Day, at any time and from time to time, during any Accounting Period, with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period, determine: (a) to pay apply or set aside the same for any one or more of the General Beneficiaries living or in existence at the time of the determination PROVIDED THAT any payment application or setting aside in favour of a General Beneficiary described in clause 1(3)(c) hereof shall on the first occasion on which a payment application or setting aside is made to or for that General Beneficiary be subject to clause 36 hereof; (c) in respect of any amount paid applied or set aside to or for any General Beneficiary to provide and hold or retain a sum which in the opinion of the Trustees will be sufficient to meet the obligations of the Trustees for income tax for that Accounting Period on that amount pursuant to any law which imposes income tax on the Trustees and - (i) (ii) to the extent that any sum so held or retained is inadequate to meet the tax actually assessed the Trustees may without prejudice to any other rights given to them by law or by this Deed resort to the income of the Trust Fund for any subsequent Accounting Period or may recover the amount of such inadequacy from any money in their hands belonging to the beneficiary in respect of whose income the assessment is issued; if and whenever it shall appear to the Trustees that any provision so

20 made was excessive the amount of the excess shall be held for the beneficiary for whom it was set aside absolutely; PROVIDED THAT nothing in this paragraph shall oblige the Trustees to set aside any sum as aforesaid or affect any rights of the Trustees in the event of any assessment of tax being made against them in respect of any amount so paid applied or set aside. The word pay was defined in the trust deed to include transfer, convey and assign. The words set aside, in relation to a beneficiary, were defined to include placing sums to the credit of such a beneficiary in the books of account kept by the Trustee in relation to the Trust Fund. 51 Clause 3(2) of the trust deed set out certain provisions that applied to any determination made pursuant to cl 3(1). These provisions included that: (b) (c) (d) if at the end of any Accounting Period the amounts in respect of which determinations have been made pursuant to sub-clause (1) of this clause shall exceed the net income of the Trust Fund for such Accounting Period the amount of such excess shall be deducted from the amounts which the Trustees have determined to accumulate and only the balance of such amounts (if any) shall be accumulated and if any deficiency shall remain then the Trustees shall be deemed to have applied the capital of the Trust Fund pursuant to clause 6(1) hereof to the extent of the deficiency; a determination may be made by specifying a proportion of net income of the Trust Fund or by specifying an amount; a determination to pay apply or set aside any amount to or for the benefit of any beneficiary may be effectually made and satisfied (inter alia) by placing such amount to the credit of such beneficiary in the books of account of the Trust Fund or by drawing any cheque payable on that date in respect of such amount made payable to or for the credit or benefit of such beneficiary or by paying the same over to or for the benefit of such beneficiary in such manner and to such person on behalf of such beneficiary as the Trustees shall think fit; 52 The expression Free Net Income was defined in cl 1(27) of the trust deed as follows: Free Net Income in relation to a particular Accounting Period means so much of the net income of the Trust Fund for such Accounting Period as shall not at the expiry of such Accounting Period be the subject of a valid and effective determination by the Trustees during that Accounting Period under any of subclauses (1), (2) or (3) of clause 3 of this Deed and includes where the Trustees have purported to make a determination to accumulate the income of the Trust Fund of that Accounting Period or any part or parts of such income and such determination is wholly or partially invalid or ineffective by reason of the law applying to any disposition of property to the Trustees to hold on the trusts of this Settlement or by reason of the law applying to the vesting of any part of the Trust Fund in a new trustee or new trustees hereof upon any change in the trustees of this Settlement the amount of such income or part which is the subject of such invalid or ineffective determination or the subject of the invalid or ineffective part of such determination PROVIDED THAT if prior to the end of such Accounting Period that income has been made the subject of a later valid and effective determination by the Trustees

21 under any of sub-clauses (1), (2) or (3) of clause 3 of this Deed or is included in general words of a valid and effective determination made earlier in relation to that Accounting Period under any of those sub-clauses which effectively deals with that income it shall not be or form part of the Free Net Income; 53 Clauses 3(4) and 3(5) of the trust deed provided: (4) The Trustees shall hold as a separate Trust Fund the Free Net Income of each Accounting Period at the expiry of that Accounting Period in trust absolutely for the same persons and in the same proportions as the Trustees would hold corpus of the Trust Fund the subject of and pursuant to the provisions of subclauses (2), (3) and (4) of clause 4 hereof if the Vesting Day were the same date as the date of expiry of that Accounting Period. (5) Any amount set aside for any beneficiary and any amount held by the Trustees in trust for any person pursuant to sub-clause (4) of this clause shall cease to form part of the Trust Fund and upon such setting aside or becoming subject to such trust (as the case may be) shall thenceforth be held by the Trustees on a separate trust for such person absolutely with power to the Trustees pending payment over thereof to such person to invest or apply or deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in clause 6(5) hereof. 54 Clause 26 of the trust deed dealt with the Trustee s mode of acting. Clause 26(2) provided that, in the case of a sole corporate trustee, any exercise by the Trustee of any power or discretion conferred on it by the trust deed could be made in the manner set out in cl 26(4). That clause relevantly provided that every Trustee which is a corporation may exercise any discretion or power conferred on the Trustee by a resolution of such corporation or by a resolution of its Board of Directors or governing body. 55 On 30 June 2007, a meeting of the Board of Directors of Drewvale took place. Present were Mr Lewski and David Lewski. Mr Lewski chaired the meeting. The Board made four resolutions, as recorded in the minutes of the meeting. The relevant resolutions as recorded in the minutes were as follows: Income of the trust fund: Distribution of trust income: In accordance with the trust deed it was resolved to determine that for the year ended 30 June 2007 income of the trust includes all amounts (including capital gains) taken into account in calculating the net income of the trust. It was resolved to pay, apply and set aside the income of the trust, as defined in the deed, for the year ending 30 June 2007 to or for the benefit of the beneficiaries in the manner and of the type as allowed under the deed such that the assessable income for taxation purposes of each beneficiary (and the class of assessable income from which their respective entitlements are appointed) is: Australian Investment Securities Pty Ltd First $3,500,000 Roslyn Lewski The balance

22 Variation of income: It was resolved that should the Commissioner of Taxation disallow any amount as a deduction or include any amount in the assessable income of the trust, and not distribute that amount so disallowed as a deduction, or so include in the assessable income in accordance with the above appropriation, such amount or amounts are to be deemed to be distributed on 30 June 2007 in the following manner: Australian Investment Securities Pty Ltd 100% 56 As at 30 June 2007, the financial statements for the Arjod Trust showed a profit of $6,643,498. The financial statements showed a distribution to beneficiaries of $6,643,199. Tax returns 57 The applicant lodged her tax return for the 2006 year on 20 December She declared assessable income of $9,000. She did not return any amount as a distribution from a trust. On 25 January 2007, the Commissioner assessed the applicant s income tax on the basis that her taxable income was $9, ACPS, as trustee of the ACE Trust, lodged its tax return for the 2006 year on 16 May It did so on the basis that it had net income of $676,209 and carry forward losses of $11,053, By letter dated 14 October 2009, Mr Lewski requested on behalf of ACPS that its tax return for the 2006 year be amended so that, among other things, its net income was $10,108,621 instead of $676, The applicant lodged her tax return for the 2007 year on 30 January She returned $9,500 as assessable income. She did not return any amount as a trust distribution. On 22 February 2008, the Commissioner assessed the applicant s income tax liability on the basis that her taxable income was $9, On 27 March 2008, the applicant lodged an amended tax return for the 2007 year. In it she declared an additional amount of $40,083 as assessable income from franked dividends with franking credits of $12,000. The total assessable income returned was $61,832. She did not return any amount as a trust distribution. 62 For the 2007 year, Drewvale as trustee of the Arjod Trust lodged its tax return on 12 March It did so on the basis that it had net income of $6,643,498 and carry forward losses of $2,143,060, resulting in a net taxable income of $4,500,438.