FEDERAL COURT OF AUSTRALIA

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1 FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Moignard [2015] FCA 143 Citation: Commissioner of Taxation v Moignard [2015] FCA 143 Appeal from: Parties: Moignard and Commissioner of Taxation [2014] AATA 342 COMMISSIONER OF TAXATION v STEPHEN MOIGNARD File number: SAD 162 of 2014 Judge: WHITE J Date of judgment: 3 March 2015 Catchwords: TAXATION appeal from decision of Administrative Appeals Tribunal (AAT) that trust income was not part of taxpayer s assessable income pursuant to ss 97 and 101 of Income Tax Assessment Act 1936 (Cth) because taxpayer had not been presently entitled to that income whether AAT misconstrued or misapplied ss 97 and 101 whether AAT failed to address issues or make necessary findings of fact in determining present entitlement whether AAT erred in having reliance on subsequent conduct of trustee whether AAT misapplied or reversed onus of proof imposed on taxpayer by s 14ZZK of Taxation Administration Act 1953 (Cth) whether taxpayer bore burden of establishing actual tax liability before AAT ADMINISTRATIVE LAW Administrative Appeals Tribunal whether reasons sufficient Legislation: Administrative Appeals Tribunal Act 1975 (Cth) s 43(2B), 44 Income Tax Assessment Act 1936 (Cth) ss 97, 101, 166, 167, 170 Taxation Administration Act 1953 (Cth) ss 14ZV, 14ZZK Cases cited: Beringer Blass Wine Estates Ltd v Geographical Indications Committee [2002] FCAFC 295, (2002) 125 FCR 155 Carlisle Homes Pty Ltd v Barrett Property Group Pty Ltd [2009] FCAFC 31 Case V85 (1988) 1 ATC 589 Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298 Commissioner of Taxation v Bamford [2010] HCA 10;

2 - 2 - Date of hearing: 2 February 2015 (2010) 240 CLR 481 Commissioner of Taxation v Dalco (1990) 168 CLR 614 Copperart Pty Ltd v Federal Commissioner of Taxation (1993) 26 ATR 327 East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 Epov v Commissioner of Taxation [2007] FCAFC 139; (2007) 244 ALR 334 Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Limited (1994) 181 CLR 466 Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 Gauci v Commissioner of Taxation (1975) 135 CLR 81 George v Federal Commissioner of Taxation (1952) 86 CLR 183 Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 Hussain v Minister for Foreign Affairs [2008] FCAFC 128; (2008) 169 FCR 241 McCormack v Commissioner of Taxation (1979) 143 CLR 284 Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323 Mulherin v Commissioner of Taxation [2013] FCAFC 115 Repatriation Commission v Hill [2002] FCAFC 192; (2002) 69 ALD 581 Repatriation Commission v O Brien (1985) 155 CLR 422 Sullivan v Department of Transport (1978) 20 ALR 323 TelePacific Pty Ltd v Commissioner of Taxation [2005] FCA 158; (2005) 218 ALR 85 Place: Division: Category: Adelaide GENERAL DIVISION Catchwords Number of paragraphs: 112 Counsel for the Applicant: Solicitors for the Applicant: Counsel for the Respondent: Solicitors for the Respondent: S Maharaj QC with K Clark Australian Taxation Office MY Bearman with ML Baker Clayton Utz

3 IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 162 of 2014 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: AND: COMMISSIONER OF TAXATION Applicant STEPHEN MOIGNARD Respondent JUDGE: WHITE J DATE OF ORDER: 3 MARCH 2015 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The order of the Administrative Appeals Tribunal on 30 May 2014 be set aside. 3. The matter be remitted to the Administrative Appeals Tribunal for rehearing before another member of the Tribunal. 4. Unless proper cause is shown to the Tribunal, no further evidence is to be adduced at the rehearing. 5. The Applicant pay the Respondent s costs of the appeal to be taxed or agreed. Note: Entry of orders is dealt with in Rule of the Federal Court Rules 2011.

4 IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 162 of 2014 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: AND: COMMISSIONER OF TAXATION Applicant STEPHEN MOIGNARD Respondent JUDGE: WHITE J DATE: 3 MARCH 2015 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 This appeal on questions of law from the Administrative Appeals Tribunal (the AAT) concerns the assessment of the tax payable by the respondent (Mr Moignard) for the financial year. 2 The Commissioner s initial assessment, issued on 13 July 2010, was that no tax was payable. However, after an audit, on 4 April 2011 the Commissioner issued an amended assessment assessing Mr Moignard s tax liability at $243, This included tax on his assessable income of $195, and shortfall interest of $36, In addition, the Commissioner imposed a penalty of $187, (including an amount for aggravating factors) in respect of Mr Moignard s delayed lodgement of his tax return for the year. 3 The amended assessment was issued because the Commissioner included in Mr Moignard s assessable income the assessed profit of $480, made on the sale of a property in Rupert Street, Collingwood (the Collingwood Property). The Commissioner determined that Mr Moignard had received this amount as a beneficiary of a discretionary trust then known as the Rupert Street Trust but later renamed the Hundred of Comaum Trust (the RS/HoCT) which was the vendor of Collingwood Property. He considered that the amount of $480, was properly assessable as income of Mr Moignard in accordance with ss 97(1)(a) and 101 of the Income Tax Assessment Act 1936 (Cth) (the ITAA).

5 4 Mr Moignard s objection to the amended assessment was disallowed on 27 April but his application for review by the AAT pursuant to s 14ZZ(1)(a)(i) of the Taxation Administration Act 1953 (Cth) (the TA Act) succeeded: Moignard and Commissioner of Taxation [2014] AATA 342. The Senior Member considered that the evidence indicated that the $480, was not assessable income of Mr Moignard in his personal capacity but instead of Mr Moignard in his capacity as trustee of another trust, the Wine Logistics Trust (the WLT). The Senior Member held that, even if those conclusions were wrong, Mr Moignard had in any event effectively disclaimed any entitlement to a distribution from the RS/HoCT. The order made by the Senior Member was to set aside the objection decision under review. 5 The Commissioner s notice of appeal contains six grounds, each of which was said to raise a separate question of law. In addition to complaints that the AAT misconstrued or misapplied provisions in the ITAA and the TA Act, the Commissioner contends that the AAT s reasons are insufficient; that the AAT failed to give effect to the onus of proof imposed on Mr Moignard by s 14ZZK of the TA Act; and that it failed to make a determination of Mr Moignard s tax liability. 6 Mr Moignard contends that several of the Commissioner s grounds of appeal do not raise questions of law at all. In addition to supporting the AAT decision, he contends, by Notice of Contention, that the decision should be affirmed on a further ground, namely that the assessment to which he objected had been issued pursuant to s 170, with the effect that s 14ZZK required him to show only that the sum of $480, had been incorrectly included in his assessable income for the year. 7 The principal matter agitated by the parties on the appeal was whether Mr Moignard was, in the terms of s 97(1) of the ITAA, presently entitled to a share in the RS/HoCT in the year so that share had to be included in his assessable income. Statutory provisions 8 Section 97(1) of the ITAA provides that the income of a trust estate to which a beneficiary is presently entitled is to be included in the assessable income of the beneficiary. 97 Beneficiary not under any legal disability (1) Subject to Division 6D, 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

6 - 3 - estate: (a) the assessable income of the beneficiary shall include: (i) (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and It was not suggested that Div 6D, to which subs (1) is made subject, had any relevance presently. 9 The term net income of the trust used in s 97(1)(a) is defined in s 95(1) of the ITAA to mean (relevantly): net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a tax payer in respect of that income and were a resident, less all allowable deductions, except In Commissioner of Taxation v Bamford [2010] HCA 10; (2010) 240 CLR 481, it was held that the term income of the trust estate takes its meaning from the general law of trusts. Generally, the income of a trust is to be calculated by reference to the terms of the relevant trust deed and to appropriate accounting provisions. 10 Section 101 deems a beneficiary to be presently entitled to the income of a trust in particular circumstances: 101 Discretionary trusts For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee s discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary s benefit by the trustee in the exercise of that discretion. 11 In the AAT, the Commissioner relied upon s 101 as he contended that there had been an exercise of discretion by Mr Moignard in his capacity as trustee of the RS/HoCT to distribute the net proceeds of the sale of the Collingwood Property to himself in his personal capacity. His position in the alternative was that, if there had been no exercise of the discretion, then the default provisions in cl 3(4) and (5) of the RS/HoCT trust deed governed

7 - 4 - the position, with the effect that the net profit from the sale of the Collingwood Property was to be regarded as distributed to Mr Moignard and his two children in equal shares. During the hearing of this appeal, the Commissioner indicated that he now considered that the default provisions governed this case. I will return to those provisions shortly. The factual circumstances 12 On 30 May 2005, a company known as Wares Printing and Mailhouse Pty Ltd (WPM) which was effectively controlled by (or at least associated with) Mr Moignard, took a lease of the Collingwood Property. The lease included an option for WPM to purchase the property for $750, At some time before 15 October 2006, WPM assigned the option to Mr Moignard for $730, The director and secretary of WPM was a Ms Leydon, who was described by the AAT as a business associate and personal assistant to Mr Moignard. 13 On 29 June 2007, Mr Moignard, as trustee for the RS/HoCT purchased the Collingwood Property for $730, Two months later, the Collingwood Property was sold for $1,315, to an unrelated party. Settlement occurred on 25 October The net proceeds from the sale were $902, Mr Moignard received one cheque from his conveyancer on 25 October 2007, made out to himself, in the sum of $822, and, on or before 2 November 2007, a cheque from his real estate agent in the sum of $79,774.15, being the balance remaining after the agent had deducted its own fees from the deposit of $131, On 25 October 2007, Mr Moignard established a Classic Banking account with NAB in his own name. He was the sole signatory. On 26 October 2007, he deposited the cheque of $822, into that account. 15 On 2 November 2007, Mr Moignard deposited the sum of $79, received from the real estate agent into a NAB Bank Account in the name of Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust). That account (the BTH Account) had been opened on 27 February 2004 and Mr Moignard was its sole signatory. Mr Moignard was the sole director and secretary of Bay Terrace Holdings Pty Ltd from 13 June 2007 to 29 October It has since been deregistered. 16 On 31 October 2007, Mr Moignard purchased the property at Lot 1, Comaum School Road, Comaum in South Australia (the Comaum Property) for $500, which (apparently) contained an established vineyard. The AAT noted (at [32]) that Mr Moignard

8 - 5 - had made a declaration of trust by which he declared that he had always held the Comaum Property since its acquisition in his fiduciary capacity as trustee of the trust. The AAT also noted that the declaration of trust had not been signed by Mr Moignard, nor witnessed or dated, and did not include the date upon which the Comaum Property was acquired. The AAT did not make any findings as to the circumstances in which the declaration of trust was brought into existence or as to its effect, but did note that the balance sheet for the RS/HoCT for the year income included land and buildings Hundred of Comaum at $551, The AAT did not make any finding as to when that balance sheet was prepared, but given the other evidence, it may well not have been until 2010 or In either 2006 or 2007, Mr Moignard had established a wine merchandising business called Wine Logistics. The business was conducted by the WLT of which Wine Logistics Pty Ltd was the trustee. Between 13 June 2007 and 29 October 2008, Mr Moignard was the director of Wine Logistics Pty Ltd. 18 The AAT found (at [82]) that the funds in the NAB Classic Banking Account and in the BTH Account had subsequently been paid to a variety of suppliers, other trusts and beneficiaries. It accepted (at [88]) that 82% of the funds deposited in the NAB Classic Banking Account had been disbursed, not for Mr Moignard s personal use, but for vineyard and wine-related purposes in the year and that 78% of the funds deposited in the BTH Account had been disbursed on vineyard and wine-related business expenses in the year. 19 In September 2010, Mr Moignard provided the Commissioner with a copy of a document dated 1 July 2007 entitled Asset Transfer Deed between Wine Logistics Pty Ltd (as trustee for the WLT (as vendor)) and himself (as trustee for the WLT (as purchaser)). Mr Moignard also provided the Commissioner with a copy of another document entitled Asset Transfer Deed and dated 1 July 2008 between Stephen Lionel Moignard (as trustee for the WLT (as vendor)) and Stephen Lionel Moignard (as trustee for the RS/HoCT (as purchaser)). The AAT did not make any finding as to when these documents were brought into existence, nor as to their effect. It did however note (at [50]) that Mr Moignard had not provided any other documentation to support his claim that business of Wine Logistics had been transferred from the WLT to the RS/HoCT on 1 January Mr Moignard did not lodge income tax returns for the RS/HoCT or for himself for the and years in a timely way. On 23 April 2010, after earlier issuing final

9 - 6 - notices and notices of intention to commence prosecution action, the Commissioner notified Mr Moignard that he had determined his liability for tax for the year pursuant to s 167 of the ITAA (the default assessment provision) and provided reasons for that determination. He determined that the tax payable was $363, comprised of tax of $207, and a penalty of $155, The Commissioner made the determination on the basis that Mr Moignard s personal income included the amount of $480, being the net proceeds from the sale of the Collingwood Property as calculated by the Commissioner. His letter informed Mr Moignard that, if he had not contacted the relevant tax officer by 5 May 2010, he would receive a notice of assessment and a notice of assessment of administrative penalty. 21 On 4 May 2010, Mr Moignard s tax agent requested the Commissioner to defer issuing a notice of assessment until 31 May 2010 on the basis that the outstanding taxation returns for both RS/HoCT and Mr Moignard would be lodged by that date. The Commissioner agreed to that deferral. The personal returns for the and years of income were lodged on 5 July 2010 as was a return for the RS/HoCT for the year. The personal return for the year of income reported a net capital loss of $8,000, and the return carried forward that same loss. A draft tax return for the RS/HoCT for the year was submitted on 31 May 2010, but it seems that a final return has still not been lodged. 22 On 13 July 2010, the Commissioner issued the assessment referred to at the beginning of these reasons which reflected Mr Moignard s self-assessment in the return lodged on 5 July 2010 that he had no taxable income in the year. 23 Following the issue of the initial assessment, the Commissioner s officers conducted further investigations, including by way of informal interview with Mr Moignard and his tax agent and by requests for further information. Mr Moignard claimed that the business of Wine Logistics had become the business of RS/HoCT from 1 January 2008, having been transferred to RS/HoCT when the latter acquired the Comaum Property. 24 On 9 February 2011, the Commissioner informed Mr Moignard that, following the audit of his return for the year, his views, as set out in the determination of 23 April 2010, remained unchanged. Subsequently, on 4 April 2011, the Commissioner issued the amended assessment for the year of income to which I referred at the commencement of these reasons.

10 Also on 4 April 2011, Mr Moignard executed documents, including a document entitled Deed of Disclaimer by which he disclaimed the distribution to him in his personal capacity of the proceeds of sale of the Collingwood Property and a resolution by which he purported to distribute the net income of the RS/HoCT for the year to the WLT. The AAT s decision concerning Mr Moignard s present entitlement 26 In the AAT, the Commissioner argued that the deposit by Mr Moignard of the sum of $822, in the NAB Classic Account in his own name amounted to, or evidenced, an exercise of his discretion as trustee of the RS/HoCT to pay the trust income to himself as a specified beneficiary of the trust, with the effect that the deeming provision in s 101 applied. In relation to the sum of $79, paid into the BTH Account, the Commissioner argued that, as that company was controlled by Mr Moignard, that deposit also amounted to, or evidenced, an exercise of Mr Moignard s discretion as trustee of the RS/HoCT to apply part of the settlement proceeds to his own benefit. The Commissioner argued that formal declarations or resolutions by Mr Moignard to these effects were unnecessary in order for there to be an exercise of the discretion to which s 101 referred. 27 The Senior Member rejected these submissions for a number of reasons: (a) (b) (c) (d) The mere payment of trust monies into an account in Mr Moignard s own name did not of itself activate the application of s 101 as that application depended on there being an allocation of funds (at [76], [86]); The deposit of $822, into a bank account in Mr Moignard s own name was not evidence that the sale proceeds had been received by him in his personal capacity (at [77]-[78]) and was explicable because there was no bank account in the name of the RS/HoCT in existence at the time: at [86]; Even in the absence of any other plausible reason for the sum of $79, being deposited in the BTH Account, the circumstance that Mr Moignard controlled Bay Terrace Holdings Pty Ltd was not evidence that Mr Moignard had received that money in his personal capacity; Mr Moignard had sufficiently demonstrated that the [WLT], rather than [Mr Moignard] in his personal capacity, was beneficially entitled to the distributable income of the [RS/HoCT] for the year of income. (at [80]);

11 - 8 - (e) (f) (g) The discrepancy between the trust law income and the cheque for the sum of $79, made it difficult to understand how the Commissioner had determined that that amount was part of the trust law income of the RS/HoCT: at [84]; The conveyancer in the sale of the Collingwood Property had mistakenly failed to ensure that the cheque for the settlement proceeds showed the correct details, namely, Mr Moignard acting as trustee for the RS/HoCT so that (inferentially) no inference adverse to Mr Moignard could be drawn in that respect: at [86]. In any event, as the cheque had not been drawn by Mr Moignard, it could not be regarded as evidence of his intention as trustee in relation to the distribution of the funds: at [87]; The funds in the NAB Classic Bank Account had in fact been treated as trust funds: at [86]. 28 Although reaching these conclusions, the AAT did not make any finding as to whether Mr Moignard had made a determination during the year as to the distribution of the trust income. 29 The Senior Member went on to hold that, in the event that his conclusion regarding the operation of ss 97 and 101 of the ITAA was incorrect, Mr Moignard s disclaimer on 4 April 2011 of any distribution from the RS/HoCT in the year had been effective. The adequacy of the AAT reasons 30 The Commissioner contended that the AAT s reasons failed to comply with s 43(2B) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) because they did not include findings of fact material to its decision and [contained] insufficient reasoning to enable the parties to understand the basis for the decision and [did] not enable the [Commissioner] to correctly reassess the Respondent s income in accordance with the decision. Counsel contended that the reasons failed to address, or to address adequately, the following matters: (1) The terms of the trust deed for the RS/HoCT, in particular who was entitled to benefit under the deed in the circumstances in which, for trust law purposes, a beneficiary would become presently entitled to income of the RS/HoCT; (2) The quantum of the net income of the RS/HoCT; (3) Whether the RS/HoCT made any determination (written or oral) during the income year with respect to the distribution of the income of the RS/HoCT;

12 - 9 - (4) The relevance and effectiveness (or otherwise) of the written resolution made in April 2011 by Mr Moignard, as trustee of the RS/HoCT by which he resolved that the net income of the trust for the year be applied for the benefit of the WLT. The resolution identified the amount the net income as $384, and indicated that that amount was 100% of the net income of the RS/HoCT for the year; (5) How Mr Moignard s use of certain amounts in the NAB Classic Banking Account was to be reconciled with his finding that the amounts were held on trust and, in particular, whether the disbursal of the funds for personal purposes was a payment, application or setting aside of income as contemplated by the RS/HoCT trust deed; (6) Whether the default beneficiary clause in the trust deed (cl 3(4)) was engaged because Mr Moignard had failed to make an effective determination with respect to some or all of the income of the trust available for distribution by year end such that he had, at the least, a present entitlement to one-third of the undistributed/unaccumulated income; (7) Whether Mr Moignard was aware of his entitlement to income from the RS/HoCT prior to the Commissioner s decision on 4 April 2011 on his objection; (8) The nature of the purported disclaimer of 4 April 2011; (9) The underlying facts found by the AAT to support its conclusion that the sum of $480,476.00, or some portion of it, was properly assessable to Mr Moignard as trustee of the WLT. 31 The Commissioner s overall submission was that the perceived shortcomings in the reasons made it difficult for him to determine with any certainty whether the Tribunal correctly applied ss 97 and 101 and to determine whether the Tribunal s judgment is consistent with the taxpayer being properly assessable on some of the net income of the [RS/HoCT], such as by reason of amounts of the income of the trust having been applied to meet personal expenses of the taxpayer. 32 Subject to certain qualifications which are not presently pertinent, the AAT is required to give reasons, either orally or in writing, for its decision (AAT Act s 43(2)). Section 43(2B) contains a stipulation as to the content of written reasons: (2B) Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based.

13 In Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323, the High Court considered the effect of s 430 of the Migration Act 1958 (Cth), a counterpart provision to s 43(2B). McHugh, Gummow and Hayne JJ, with whose reasons Gleeson CJ agreed, rejected the submission that s 430 imposed an obligation on the Refugee Review Tribunal to make findings on any and every matter of fact objectively material to the decision which it was required to make: [68] In its terms, [s 430] it requires no more than that the Tribunal set out the findings which it did make. Neither expressly nor impliedly does this section require the Tribunal to make, and then set out, some findings additional to those which it actually made. But it is not right to read "material" as providing an objective or external standard of materiality. A requirement to set out findings and reasons focuses upon the subjective thought processes of the decision-maker. All that s 430(1)(c) obliges the Tribunal to do is set out its findings on those questions of fact which it considered to be material to the decision which it made and to the reasons it had for reaching that decision. (Emphasis in the original and citations omitted) 34 Following the decision of Yusuf, s 43(2B) has been held as imposing an obligation on the AAT to set out only its findings on those questions of fact which it considers to be material for the decision it makes and to its reasons for reaching that decision: TelePacific Pty Ltd v Commissioner of Taxation [2005] FCA 158, (2005) 218 ALR 85 at [52]; Beringer Blass Wine Estates Ltd v Geographical Indications Committee [2002] FCAFC 295, (2002) 125 FCR 155 at [102]-[103]. 35 The circumstance that the AAT does not make findings about particular matters may have a number of possible consequences including: supporting an inference that any matter not mentioned was not considered by the AAT to be material and thereby providing a basis for judicial review; indicating an incorrect application of the law to the facts; and jurisdictional error: see Yusuf at [69]. A failure altogether to comply with the obligation imposed by s 43(2B) is an error of law warranting this Court s intervention on an appeal under s 44(1) of the AAT Act. 36 In the present case, although counsel for the Commissioner contended that the AAT s reasons did not satisfy the obligation imposed by s 43(2B), she did not develop a submission to that effect, for example, by referring to the relevant authorities. I did not understand counsel to be contending that the identified shortcomings in the AAT s reasons amounted of themselves to an error of law or that, by themselves, they warranted this Court s intervention.

14 Rather, the submissions seemed to be that the identified shortcomings, or at least some of them, supported the conclusion that the AAT had erred in the ways identified in the other grounds of appeal. I propose to consider and determine the appeal on this basis. The issue of present entitlement 37 The Commissioner submitted that the AAT had erred in a number of respects in its determination of this issue. 38 As already noted, s 97(1) of the ITAA has the effect that, in order for a share of the income of a trust to be assessable in the hands of a beneficiary, the beneficiary must be presently entitled by the end of the relevant financial year to that share. The meaning of the term presently entitled in this context is settled. In Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271, the High Court said: The parties are agreed that the cases establish that a beneficiary is presently entitled to share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. That question must be answered as at the time when the interest was derived, that is to say, during the tax years. (Citations omitted) See also Bamford at [37]. 39 It is also established that the integers of a present entitlement for the purposes of s 97(1) are to be determined by reference to the general law of trusts, including the terms of the particular trust in question: Bamford at [36]-[39]; Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16, (2011) 192 FCR 298 at [26]-[27], [37]-[38]. 40 Section 101 of the ITAA, quoted earlier in these reasons, deems a beneficiary to have a present entitlement when a trustee with a discretion to pay or apply income of a trust estate for the benefit of specified beneficiaries exercises that discretion in favour of that beneficiary. 41 The RS/HoCT was established on 17 April 2007 as a discretionary trust with Mr Moignard as the sole trustee. Clause 3 of the trust deed provides for the treatment of trust income: (1) The Trustees 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

15 such Accounting Period determine: (a) (b) To pay apply or set aside the same for any one or more of the General Beneficiaries living or in existence; To accumulate the same; PROVIDED that nothing in this paragraph shall oblige the Trustees to set aside any sum 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. (2) The following provisions shall apply to any determination pursuant to sub-clause (1) of this clause: (c) (f) 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 or to the credit of a beneficiaries control account in the books of account of the Trust Fund or by drawing any cheques 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 providing that all amounts paid applied or set aside shall be paid applied or set aside in Australia; Without limiting the ability of the Trustees to make a determination by other means the Trustees may effect a determination for the purposes of this clause by oral declaration or by written statement whether or not published to any person and a certificate by the Trustees as to any determination shall be prima facie evidence that such determination was made as and when set out in such certificate and any determination or determinations in an accounting period may be made in respect of one or more types of income (gross or net) for one or more beneficiaries or class of beneficiaries. (4) The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a valid determination effectually made in relation to such Accounting Period by 9.30pm Eastern Standard Time on the last day of that Accounting Period in trust successively for the persons described in sub-clauses (1) (2) (3) and (4) of clause 4 hereof as and from that time in 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 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.

16 The Accounting Period to which cl 3 refers is defined in cl 1(1) of the trust deed to mean (relevantly) each period of 12 months ending on the 30 th day of June in each year. 43 Clause 4 of the trust deed to which cl 3(4) refers, is wrongly numbered in the trust deed as a second cl 3. Subject to that correction, cl 4(2) provides for a class of beneficiary described as a special beneficiary. These are three specified beneficiaries, namely, Mr Moignard and his two children. Accordingly, the effect of cll 3(4), 3(5) and 4(2) is that, in the absence of a timely valid determination relating to the net income of the trust, the trustee (Mr Moignard) would hold the net income on a separate trust for each of himself and his two children as the default beneficiaries. 44 In short, the RS/HoCT is a discretionary trust by which the trustee may pay, apply or set aside the net income of the trust for any one or more of the general beneficiaries or may accumulate that income. If the trustee does not make a valid determination as to the net income of the trust fund by the end of each accounting period, then the trustee holds that income on a separate trust for each of the named default beneficiaries, who include Mr Moignard. 45 Against that additional background, I turn to the Commissioner s particular contentions concerning the AAT s determination of the issue of present entitlement. A requirement for allocation? 46 At the AAT hearing, the Commissioner contended that s 101 of the ITAA applied so as to deem Mr Moignard to have a present entitlement to the amount of $480, He contended that the deposit of monies in a personal bank account of Mr Moignard and in the bank account of a company controlled by him amounted to an exercise of his discretion as trustee to pay or apply trust income to or for his own benefit as a specified beneficiary of the RS/HoCT. 47 The AAT rejected that submission, saying at [76]: The respondent has incorrectly interpreted the operation of s 101. There must be evidence of the exercise of the trustee s discretion for s 101 to operate, and the mere receipt of funds by a discretionary beneficiary may activate s 101, but only if that receipt is allocated. As the applicant has correctly submitted, in my view, the only basis for the application of s 101 is allocation and taxation of beneficiary income on a receipts-basis must be rejected.

17 The Commissioner submitted that the AAT was in error in considering that the operation of s 101 imposed some process of allocation. 49 In my opinion, the AAT s reference to allocation does not indicate that it was imposing an unwarranted additional condition on the operation of s 101. Instead, the AAT was addressing a submission which the Senior Member attributed to the Commissioner to the effect that s 101 would apply to deem Mr Moignard to be presently entitled to an amount even if the trustee of the RS/HoCT had not made a declaration, resolution or other act to distribute that amount to him, providing that an amount had been paid to Mr Moignard s benefit see [68(a)] of the AAT reasons. (It is not clear that counsel for the Commissioner had made that submission in those terms, but nothing turns on that for present purposes). 50 The submission of Mr Moignard which the AAT accepted in the quoted passage from [76] was based on a passage in the reasons in Case V85 (1988) 1 ATC 589 at [47]. The AAT in that case, over which Spender J presided, said: The situation where the trustee allocates and pays the share of the net income during the year of income, and the situation where the trustee allocates during the year of income but pays after the close of the year of income, are not to be distinguished. In each case, present entitlement arises on the allocation of the net income and Div. 6 operates accordingly. (Emphasis added) 51 Relying on this passage in Case V85, Mr Moignard had submitted to the Commissioner: [A]llocation is a necessary step in determining present entitlement. The discretion of the trustee must be exercised in order to invoke the operation of s 101. The exercise of the discretion of the trustee is not being deemed by the provision, but the present entitlement of the beneficiary. In this context, it is apparent that the AAT used the word allocation and its cognate as a shorthand description of the exercise of a trustee s discretion to pay or apply income of a trust estate for the benefit of a specified beneficiary. It is such an exercise of discretion on which the operation of s 101 turns. Understood in this way, the AAT was not introducing an additional requirement into the operation of s The reliance on s 101 of the ITAA in the AAT may have been a distraction. It is not at all clear that there was any scope in this case for the application of the deeming effect for

18 which it provides. Gummow J made an observation to this effect in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 552: Section 101 of the Act has the result, with regard to discretionary trusts, that where the power in question is vested in the trustee and the trustee exercises the discretion in favour of an object of the power, then that person is deemed to be presently entitled to the amount paid to him or applied to his benefit. In the case of objects of the power who were sui juris, s 101 would, in such cases, add little to what would already be done by s 97 of the Act. 53 Similarly, in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 at 477, Hill J said: A discretionary trust deed may provide a discretion in the trustee to determine, in respect of the income of a particular year, who among a class of beneficiaries is to be entitled. If that determination were made prior to 30 June in a year of income and was irrevocable the consequence would be under s 98 that there would be as at the end of the year of income (that being the relevant time to determine the issue) present entitlement under s 97. There would be no need to have any deemed present entitlement in such a class of case assuming, for present purposes, that there had been no payment of any amount to the beneficiary. In the class of case where there had been a payment, then s 95A(1) would deem the beneficiary to continue to be presently entitled to the income and thus keep s 97 of the Act applicable Where on the other hand a discretionary trust deed provides that the trustee has a discretion to pay or apply income of the trust estate to or for the benefit of beneficiaries at his discretion and where there has been a payment there would not (at least in the absence of s 95A(1) which was introduced in 1979) be present entitlement at the end of the year of income, nor in the event that income had been applied in favour of a beneficiary would there have been such present entitlement because, looking at the matter as at the end of the year of income, there would have been no right in the beneficiary to sue the trustee for his share of income, that right having been satisfied by the payment or application already made under s 101. Thus it doubtful that s 101 was intended to cover the entire field. For almost all purposes (and perhaps indeed for all purposes) it will be irrelevant whether a beneficiary is presently entitled under s 97 or 98 or merely deemed to be presently entitled by force of s For these reasons, the focus on s 101 in the AAT may, as I have said, have been a distraction, but the AAT did not make the error which the Commissioner attributed to it. Determining present entitlement and the trust deed 55 The Commissioner submitted that the AAT had misconstrued and misapplied ss 97 and 101 of the ITAA by determining the existence or otherwise of Mr Moignard s present entitlement to the trust income without reference to the trust deed and without making the findings of fact on the issues to which its provisions gave rise. As counsel s submission developed, it seemed that this was not so much a submission that the AAT had misconstrued

19 the two provisions but that it had failed to address the matters they required to be determined. This was particularly so given that s 14ZZK of the TA Act cast on Mr Moignard the burden of proving that the assessment of 4 April 2011 was excessive. 56 The AAT understood that the question of whether the $480, was to be included in Mr Moignard s assessable income for the year turned on whether he had a present entitlement to that sum by 30 June It also referred, appropriately, to the elements of a present entitlement identified in Harmer. However, the AAT did not refer at all to the provisions in the RS/HoCT trust deed by which a present entitlement may accrue to a beneficiary of that trust. Indeed, the AAT s reasons contain only two references to provisions in the deed. The first was in [17] in which the AAT recorded some formal details relating to the establishment of the RS/HoCT. The second was in [68(b)] in which the AAT summarised the Commissioner s alternative submission that, if no determination as to the distribution of the trust income had been made before 30 June 2008, it was to be taken to have been distributed to the default beneficiaries. In that context, the AAT referred to subcll 3(4) and (5) and subcll 4(1) and (2). 57 Having regard to the burden of proof on Mr Moignard, the elements of present entitlement for the purposes of s 97, and the provisions in the trust deed, it was necessary for Mr Moignard to satisfy the AAT that: (a) (b) he had not made a determination of the kind contemplated by cl 3 before the end of the year to pay, apply or set aside the income of the RS/HoCT for his own benefit; he had before the end of the year made a valid determination as to the payment, application or setting aside of the trust income to some other beneficiary (so that the default provision in cl 3(4) of the trust deed which would have resulted in him having one-third of the net income was inapplicable). These involved matters of mixed law and fact: Mulherin v Commissioner of Taxation [2013] FCAFC 115 at [38]. 58 The AAT reasons do not anywhere indicate that it had identified those issues and, subject to some qualifications, do not contain findings of fact concerning them. It is implicit in the AAT s conclusion that, for the purposes of s 101, there must be an allocation, that it proceeded on the basis that there must be an exercise of discretion by the trustee, and to that

20 extent, the AAT can be seen to have addressed in part the first of the two identified issues. Similarly, the AAT statement at [80] that the resolution, whether written or otherwise must be made before the end of the financial year is in part a recognition of the first issue. But the AAT does not address the questions of whether and how any resolution had in fact been made. It did not refer to cl 3(2)(f) of the trust deed which was relevant to that question. That clause provided that, without limiting other means by which the trustee could make a determination, the trustee may effect a determination by oral declaration or by written statement and went on to provide that a certificate of the trustee was to be prima facie evidence of such a determination. 59 Instead of identifying and making findings of fact regarding those questions, the AAT s reasons are expressed in terms of ultimate conclusion. This is evident from the following paragraphs in particular. [80] In my view, the applicant did not have a vested and indefeasible interest in that share of the net income of the [RS/HoCT] in the 2007/2008 year of income. On the evidence, I am satisfied that the applicant has sufficiently demonstrated that the Wine Logistics Trust, rather than the applicant in his personal capacity, was beneficially entitled to the distributable income of the [RS/HoCT] for the 2007/2008 year of income. [89] The respondent has submitted that the applicant has not discharged his burden of proving that the amended assessment for the 2007/2008 is excessive (s 14ZZK(b) of the Taxation Administration Act 1953). On the material before me, this submission cannot be maintained. In my view, there is evidence (which I have outlined above) to show that the amended assessment is excessive. As was said by Brennan J in Federal Cmr of Taxation v Dalco: The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point [90] Having reviewed it further, the evidence before me shows that the sum of $480,476, which was derived on the sale of the Rupert Street property and transferred to the applicant s NAB Classic Banking account and to the bank account in the name of Bay Terrace Holdings, was not assessable income of the applicant under s 97 of the ITAA for the 2007/2008 year of income. I am satisfied that there is sufficient evidence to show that the sum (or some portion of the sum) was properly assessable to the applicant for the 2007/2008 year of income, as trustee of the Wine Logistics Trust. (Citations omitted and emphasis added)

21 The circumstance that the AAT did not refer to the relevant elements of cl 3, and address these elements which were relevant to the issue of present entitlement, together with the statements of generalised conclusion, gives rise to the apprehension that it did not address itself appropriately to the issues to be determined on the application for review. 61 In [89] of the reasons, the AAT referred to the observation of Brennan J in Dalco that when the Commissioner and a taxpayer had agreed to confine an appeal to a specific point of law, the taxpayer may not have to do more than show that he or she is entitled to succeed on that point. That suggests an apprehension by the AAT that it was required to determine only a single issue, namely, whether the respective deposits into the NAB Classic Banking Account and the BTH Account amounted to a distribution to Mr Moignard personally. 62 However, this was not a case in which the Commissioner and Mr Moignard had agreed to confine the appeal to a single issue. By [4] of the preamble to the Commissioner s Statement of Facts, Issues and Contentions, the Commissioner stated his reliance on s 14ZZK of the TA Act and said save for any facts expressly agreed or admitted in writing, [he] puts the applicant to proof of all facts upon the applicant seeks to rely to establish that the assessments, the subject of these proceedings, are excessive. Further, counsel for the Commissioner submitted expressly that, if it was found that Mr Moignard had not made a distribution to himself personally, then the Commissioner relied upon the default distribution provision in cl 3(4) and (5) of the trust deed. Accordingly, the terms in which the AAT expressed itself in [89] also suggest that the AAT did not appreciate all the issues arising for its determination. 63 I am not overlooking in this respect the agreement of the parties, mentioned for the first time in a supplementary written submission provided by leave after the hearing, that there had been an implied agreement to confine the question to be determined on the review. I will return to that implied agreement later in these reasons. 64 The impression that the AAT did not appreciate the task required of it is also strengthened by its acknowledgment in [90] that some only of the sum of $480, may be assessable to Mr Moignard in his capacity as trustee of the WLT. If only some of that amount was assessable to the WLT, then the AAT had to be satisfied (by Mr Moignard) that none of the balance was assessable to him personally. That question arose acutely because of the AAT s acceptance that, in the year of income, 82% of the funds in the NAB Classic Banking Account and 78% of the $79, deposited in the BTH Account had been

22 expended for vineyard and wine related purposes (which the AAT seems to have assumed meant the business of WLT). That meant that 18% and 22% respectively of those amounts had not, prima facie, been disbursed for the purposes of the WLT. Further, the bank statements for the Classic Banking Account suggested that a number of withdrawals had been made for purposes personal to Mr Moignard. These included payments to private schools, periodic payments to cleaners and gardeners, payments for home renovations, cable TV payments and payments of utilities. The circumstance that the AAT did not address the question of whether these payments at least constituted, or evidenced, a distribution of the trust income to Mr Moignard personally tends to confirm that the AAT misunderstood the task required of it. 65 On the appeal, counsel for Mr Moignard sought to avoid this conclusion being drawn from [90] of the AAT s reasons by submitting, first, that the AAT had determined that none of the sum of $480, was assessable to Mr Moignard personally by its finding in the first sentence. I am not satisfied that that is so as the AAT appears to be referring in that sentence only to the total sum of $480, regarded by the AAT as having been deposited into the NAB Classic Banking Account and in the BTH Account. Further, the AAT does not in that context refer at all, let alone make findings about, the apparent personal nature of the expenditure to which I have just referred. 66 Secondly, counsel submitted that Mr Moignard had believed that the whole of the money in the NAB Classic Banking Account had been distributed to the WLT, even if some of the amount so distributed had later been distributed by it for some private purposes. The difficulty with this submission is that the AAT s reasons cannot reasonably be understood as including a finding to that effect. 67 As already noted, the appeal to this Court lies on a question of law only. This Court is not required, nor authorised, to review conclusions of fact by the AAT or even conclusions of mixed law and fact: Hussain v Minister for Foreign Affairs [2008] FCAFC 128; (2008) 169 FCR 241 at [31]-[32]. Ordinarily, that makes it unnecessary and inappropriate for the Court to review the evidence before the AAT. However, in this case, a review does assist in the assessment of whether the AAT did address the issues arising for its determination. Had the AAT understood that it had to determine whether Mr Moignard had made any determination with respect to the net income of the RS/HoCT (and not just a determination in his own favour), it seems improbable that it would have overlooked the following matters: