FEDERAL COURT OF AUSTRALIA Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28 File number(s): NSD 54 of 2016 Judge(s): JAGOT J Date of judgment: 30 January 2017 Catchwords: TAXATION whether purported assessments valid - whether purported assessments tentative or provisional nature and source of Commissioner's power to assess trustees for income tax liability Legislation: Income Tax Assessment Act 1936 (Cth) ss 6, 95AAA, 96 97, 98 98B, 99, 99A, 100, 102, 161AA, 166, 167, 169, 170, 173 175A, 177, 254 Income Tax Assessment Act 1997 (Cth) ss 4-1, 4-10 4-15, 9-1, 960-100, 995-1 Income Tax Rates Act 1986 (Cth) ss 12, 28 Judiciary Act 1903 (Cth) s 39B Taxation Administration Act 1953 (Cth) Law Administration Practice Statement 2006/7 Cases cited: Cadbury-Fry-Pascall Pty Ltd v Commissioner of Taxation (1944) 70 CLR 362 Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 Commissioner of Taxation v Futuris Corp Ltd [2008] HCA 32; (2008) 237 CLR 146 Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39 Commissioner of Taxation v Stokes (1996) 72 FCR 160 Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 Futuris Corporation Ltd v Commissioner of Taxation [2007] FCAFC 93; (2007) 159 FCR 257 Howey v Commissioner of Taxation (1930) 44 CLR 289 Lever Bros Pty Ltd v Commissioner of Taxation (1948) 77 CLR 78 Prestige Motors Pty Ltd v Commissioner of Taxation
Date of hearing: 28 November 2016 (1993) 47 FCR 138 R v Deputy Federal Commissioner of Taxation (SA); ex parte Hooper (1926) 37 CLR 368 Richardson v Commissioner of Taxation (1932) 48 CLR 192 Syme v Commissioner of Taxes [1914] AC 1013 Trustees, Executors & Agency Co Ltd v Commissioner of Land Tax (1915) 20 CLR 21 William Kuhnel & Co Ltd v Deputy Commissioner of Taxation (SA) (1923) 33 CLR 349 Registry: Division: National Practice Area: Category: New South Wales General Division Taxation Catchwords Number of paragraphs: 95 Counsel for the Applicant: Solicitor for the Applicant: Counsel for the Respondent: Solicitor for the Respondent: Mr M L Robertson SC with Mr C Peadon Zafra Legal Mr S B Lloyd SC with M J O Meara and Ms J Davidson Australian Taxation Office
ORDERS NSD 54 of 2016 BETWEEN: THE WHITBY LAND COMPANY PTY LTD (ACN 115 233 193) AS TRUSTEE FOR THE WHITBY TRUST Applicant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGE: JAGOT J DATE OF ORDER: 30 JANUARY 2017 THE COURT ORDERS THAT: 1. The originating application be dismissed. 2. The applicant pay the respondent s costs, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT JAGOT J: The claims 1 This case concerns the liability of a trust to income tax. 2 The applicant, referred to below as Whitby, is the trustee of a discretionary trust, the beneficiaries of which are the five children of Whitby s director, Allen Carrati. One of the beneficiaries is a minor and thus subject to a legal disability. For the tax years 2011-2014 the respondent, referred to below as the Commissioner, notified Whitby that it was liable to pay tax assessed in two different amounts, calculated by two different methods. The socalled primary assessments for each year calculated under ss 98 and 99A respectively of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) were on the basis that the four adult beneficiaries were each presently entitled to equal shares totalling four fifths or 80% of the net income of the trust for each relevant year and the beneficiary who was a minor was presently entitled to a one fifth or 20% share of the net income of the trust but was subject to a legal disability. The so-called alternative assessments by reference to the same 80% and 20% proportions were on the basis that none of the beneficiaries were presently entitled to a share of the net income of the trust for each relevant year. 3 Whitby seeks declarations that the assessments, and consequential penalties imposed, are void on the ground that they are mere tentative or provisional assessments. 4 According to Whitby, because for each year the assessments impose two separate and different liabilities to income tax on it in its single capacity as a trustee, the assessments are tentative and not an assessment of the taxpayer s liability to an amount of tax within Pt IV of the 1936 Act (see para 19.1 of the statement of claim). This, it is said, follows from the reasoning in Commissioner of Taxation v Futuris Corp Ltd [2008] HCA 32; (2008) 237 CLR 146 and Commissioner of Taxation v Stokes (1996) 72 FCR 160. The penalties imposed are therefore void for the same reason, in that the Commissioner has not completed a valid assessment of liability to income tax and thus is incapable of determining Whitby s culpability for the purpose of imposition of a penalty (see paras 19.2 and 19.3 of the statement of claim).
5 According to the Commissioner, Whitby s case fails to recognise that, in the context of - 2 - liability to pay income tax, a trustee is in a different position from other taxpayers in that a trustee s liability is of a representative character. The relevant provisions under which a trustee is liable to income tax (relevantly to this case, ss 98 and 99A of the 1936 Act) envisage that a trustee might be liable to multiple assessments in respect of different beneficiaries entitlements to a share of the net income of the trust. As such, the assessments in the present case, on the primary basis that all beneficiaries are entitled to a present share of the net income of the trust (albeit with the beneficiary who is a minor subject to a legal disability) and the alternative basis that no beneficiaries are so entitled, are comparable to assessments to two or more taxpayers in relation to the same income in the same income year, which are not liable to be set aside as tentative or provisional (Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 188, 200-203, 216-220, 228-229, 237-238). Background 6 The impugned assessments were issued on 12 October 2015 for the 2011 2013 income years and 27 October 2015 for the 2014 income year. These assessments replaced earlier assessments for each income year. Whitby had challenged the earlier assessments including on the basis that the Commissioner s s 98 assessments were as to 20% of the net income and s 99A assessments were as to 100% of the net income. This challenge was dismissed by consent given that the Commissioner made the amended assessments which replaced the original assessments. Whitby commenced a fresh challenge under s 39B of the Judiciary Act 1903 (Cth) challenging the validity of the replacement assessments. 7 The Commissioner explained the replacement assessments for 2011 2013 in a letter to Whitby dated 12 October 2015 in these terms: Assessments for the 2011, 2012 and 2013 income years Following an audit of transactions undertaken by the Whitby Trust, we had issued assessments to you dated 17 April 2014 to include in your assessable income shares of the net income of the trust estate that would, on alternative bases disclosed by the available information and evidence, be correctly assessable to you. In what was described in our letter to you of that date as one of the primary assessments (hereafter referred to as the section 98 assessment ), we included 20% of the net income of the trust estate in your assessable income, on the postulate that the amount was correctly assessable to you as a beneficiary that was presently entitled to a share of trust income was under a legal disability. In another assessment (hereafter referred to as the section 99A assessment) we had included 100% of the
- 3 - net income of the trust estate in your assessable income, on the postulate that no beneficiary was presently entitled to the income of the trust estate. In proceedings commenced in the Federal Court, seeking relief under section 39B of the Judiciary Act 1903 (Cth), you have alleged that the assessments of 17 April 2014 are invalid as they are tentative and provisional. We continue to maintain that the assessments were both definitive and valid. However, to avoid a pointless argument the assessments that have been issued to you today amend or replace the assessments of 17 April 2014. If the assessments of 17 April 2014 were invalid, these are original assessments. If the assessments of 17 April 2014 were valid, these notices affirm or amend those assessments. On any view, these are valid assessments. Please note that it is irrelevant to the validity of an assessment whether it correctly describes itself as an amended or original assessment. In one assessment, that affirms or replaces the section 98 assessment, we have included 20% of the net income of the trust estate in your assessable income, on the postulate that that share of the net was correctly assessable to you because a beneficiary that was presently entitled to the share of trust income to which that net income corresponds was under a legal disability. In another assessment, that amends or replaces the section 99A assessment, we have included 80% of the net income of the trust estate in your assessable income, on the postulate that that share of the net income was correctly assessable to you as no beneficiary was presently entitled to the share of trust income to which that net income corresponds. These assessments are consistent with each other. The assessments that have been issued to you today make you liable to pay tax on separate parts of the net income of the trust estate, under the authority of subsections 98(1) and 99A(4) of the Income Tax Assessment Act 1936. You are required to make a payment in respect of the relevant amount of tax contained in the assessments issued to you. Amount payable For each of the relevant years, and for each of the assessments, the share of trust income and tax shortfall are set out in the tables below Replacement for section 99A assessment Year Share of Trust Tax Shortfall Medicare Levy Total Payable Income and Surcharges 2011 $2,071,533 $932,198.85 $31,072.99 $963,262.80 2012 $4,457,578 $2,005,910.10 $66,863.67 $2,072,773.75 2013 $11,374,118 $5,118,353.10 $170,611.77 $5,288,964.85 Replacement for section 98 assessment Year Share of Trust Tax Shortfall Medicare Levy Total Payable Income and Surcharges 2011 $517,883 $233,047.35 $12,947.07 $245,994.40 2012 $1,114,394 $501,477.30 $38,253.79 $539,731.05 2013 $2,843,529 $1,279,588.05 $85,305.86 $1,364,893.90 Your right to object In our opinion, the objections you have lodged against the assessments of 17 April
- 4-2014 are valid because those assessments are valid, and they will continue to apply to the assessments as amended or affirmed notified by these notices of assessment. No additional liability is imposed by these noticed. You need not, in our view, lodge further objections. The standard text regarding objections which appears below is inserted as a courtesy and for more abundant caution. If you choose to lodge fresh objections for more abundant caution, the existing objections and the fresh objections will be dealt with as one, as on any view there can be only one valid assessment in existence. Determination of the objections will occur in due course. Please note that favourable determination of either the objections may result in further or different assessments in respect of the net income of the trust estate, as the entirety of the net income must be assessed to someone. 8 The notices of assessment reflect the tables in this letter, with each notice concerning the socalled primary assessment (that is, based on the view that all beneficiaries are presently entitled to their share with the result that Whitby s liability relates only to the 20% share of the minor) addressed to: THE TRUSTEE FOR THE WHITBY TRUST A/C [MINOR S NAME] 9 By two letters to the trustee dated 27 October 2015, the Commissioner issued assessments for the 2014 tax year on the same primary and alternative basis as for the 2011-201 tax years. The assessment calculated under s 99A (on the basis that no beneficiary was presently entitled to a share of the net income of the trust) was as follows: Year Share of Trust Income Tax Shortfall Medicare Levy and Surcharges Total Payable 2014 $14,620,560 $6,798,560.40 $6,118,704.35 $12,917,264.75 10 The assessment calculated under s 98 (all beneficiaries being presently entitled to a share of the net income of the trust, one being a minor and thus subject to a legal disability) was as follows: Year [Minor s] Share Tax Shortfall Penalty Total Payable of Trust Income 2014 $3,655,140.00 $1,754,467.20 $1,579,020.45 $3,333,487.65 11 The assessments for the 2014 tax years reflect these tables, with the assessment calculated under s 98 of the 1936 Act again being addressed to: THE TRUSTEE FOR THE WHITBY TRUST A/C [MINOR S NAME]
12 The letters dated 27 October 2015 (in relation to all of the assessments) also said that the - 5 - Commissioner would apply Law Administration Practice Statement 2006/7 with respect to recovery where there are primary and alternative assessments, under which: The Commissioner intends to collect the relevant amount of tax with regard to the trust s net income [or omitted trust income in the case of the s 98 assessment ] as calculated by the Commissioner under the primary assessment, subject to the outcome of any dispute. 13 It is apparent from this that the Commissioner s long-standing practice has been to issue primary and alternative assessments to trustees in respect of the same income in the same year depending on the Commissioner s primary and alternative views of the relevant entitlements of beneficiaries under the trust (that is, whether they are presently entitled to the net income of the trust or not). In the reasons for decision dated 17 April 2014 in respect of the original assessments, Law Administration Practice Statement 2006/7 was described in these terms: Practice Law Administration 2006/7 Alternative Assessments 5.24 The Commissioner may in certain circumstances be obliged to issue two or more assessments to one or more taxpayers in respect of the same taxable income, benefit or transaction but may collect the relevant amount of tax only once. Such assessments are collectively referred to as alternative assessments (being the term derived from relevant case law). 5.25 PSLA 2006/7 employs the concept of primary assessment. A primary assessment is an assessment that is made in accordance with the preferred ATO view of how the tax law applies to facts as understood at the time of issued of the assessment. A primary assessment is, strictly speaking, one of two (or more) alternative assessments. However, this practice statement generally refers to an assessment as being an alternative assessment where it is an alternative to the primary assessments. That is, an alternative assessment is an assessment that is made in accordance with an alternative ATO view of how the law applies to the facts as understood. Both the primary assessment and the alternative assessment/s necessarily relate to the same taxable income, benefit or transaction. 14 This case, accordingly, raises an important issue of principle for the Commissioner s performance of functions under the taxation legislation in respect of the liability of trustees to income tax.
- 6 - Statutory provisions 1997 Act 15 Income tax is a kind of tax-related liability under s 4-15 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) for the purposes of the collection and recovery of tax-related liabilities of entities under the Taxation Administration Act 1953 (Cth) (the 1953 Act). 16 Section 960-100 of the 1997 Act defined an entity for taxation purposes in a manner that included a trust. 17 By s 960-100(2), the trustee of a trust was taken to be a tax entity. 18 By 960-100(3), a legal person can have a number of different capacities in which a person does things from time to time, and in each such capacity the person was taken to be a different tax entity. 19 By s 960-100(4), if a provision refers to an entity of a particular kind (e.g. as trustee), it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity (e.g. as an individual). 20 By s 4-1, income tax is payable by each individual and company, and by some other entities. Such entities include a trustee (s 9-1 item 11). Section 4-10 provides how the amount of income tax required to be paid is worked out. Section 4-15 provides how taxable income is worked out. Consistently with this, taxable income is defined in s 995-1(1) of the 1997 Act as having the meaning given by s 4-15. By s 4-10(4) of the 1997 Act, for some entities, income tax is worked out by reference to something other than taxable income for the year. Such entities include a trustee, whose income tax liability is worked out by reference to the net income of the trust for the income year by reference to ss 98, 99, 99A and 102 of the 1936 Act (see item 6 to the table in s 9-5(1) of the 1997 Act). 1936 Act 21 The provisions of the 1936 Act relating to assessment are different for the 2011 2013 assessments and the 2014 assessments, but it is not suggested that the differences are material to the outcome of this case. 2011 2013 assessments 1936 Act 22 At the relevant time for the 2011 2013 assessments, Assessment was defined in s 6(1) of the 1936 Act as:
- 7 - (a) The ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable); or (d) for any other taxpayer that is the trustee of a trust estate but excluding a taxpayer that is the trustee of a complying superannuation fund, a noncomplying superannuation fund, a complying approved deposit fund, a noncomplying approved deposit fund or a pooled superannuation trust the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax (or there is no net income in respect of which the trustee is so liable) and of the tax payable on that net income (or that no tax is payable); or. 23 Section 166 provided that: From the returns, and from any other information in the Commissioner s possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable). 2014 assessments 1936 Act 24 Assessment was defined in s 6(1) of the 1936 Act as: (a) the ascertainment: (i) (ii) (iii) of the amount of taxable income (or that there is no taxable income); and of the tax payable on that taxable income (or that no tax is payable); and of the total of a taxpayer's tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income); or (d) for a taxpayer that is the trustee of a trust estate (other than a trustee to which paragraph (b) or (c) applies or the trustee of a complying superannuation fund, a non-complying superannuation fund, a complying approved deposit fund, a non-complying approved deposit fund or a pooled superannuation trust) - the ascertainment: (i) (ii) (iii) of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax (or that there is no net income in respect of which the trustee is so liable); and of the tax payable on that net income (or that no tax is payable); and of the total of a taxpayer's tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income); or 25 Section 166 provided that:
- 8 - From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of: (a) (b) (c) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and the amount of the tax payable thereon (or that no tax is payable); and the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds). All assessments 1936 Act 26 Otherwise, there is no material difference between the provisions of the 1936 Act applying to the 2011 2013 assessments and the 2014 assessments. 27 By s 161 of the 1936 Act, every person must (if required) give to the Commissioner a return for a year of income. By s 161AA a full self-assessment taxpayer (defined in s 6 to include most trustees and all companies) must, in a return for a year of income, specify its taxable income or its net income for that year of income (or that it has no taxable income or net income for that year) and the amount of the tax payable on that taxable income or net income (or that no tax is payable), amongst other matters. 28 By s 167, if a person is in default in furnishing a return or the Commissioner is not satisfied with the return furnished, the Commissioner may make an assessment of the amount upon which in his or her judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166. 29 By s 169: Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable). 30 Section 170(1) permitted the Commissioner to amend assessments in nominated circumstances. 31 Section 173 provided that: Except as otherwise provided every amended assessment shall be an assessment for all the purposes of this Act. 32 Section 174 required the Commissioner to serve any notice of an assessment on the taxpayer, as soon as possible after the assessment was made. 33 Section 175 provided that:
- 9 - The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with. 34 Section 175A provided for objections to assessments. 35 Section 177 was an evidence provision which included sub-s (1), which had the effect that production of a notice of assessment was conclusive evidence of the due making of the assessment and, except in proceedings under Pt IVC of the 1953 Act (taxation objections), that the amount and all particulars of the assessment are correct. 36 Division 6 of Pt III of the 1936 Act applied to trust income. The simplified outline in s 95AAA explained that, generally: (a) (b) (c) [the Part] has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and it has the result of assessing the trustee directly on any residual net income; and as a collection mechanism, it has the result of assessing the trustee in respect of some beneficiaries, such as non-residents or those under a legal disability. 37 Section 95(1) contained definitions for the purpose of Div 6 of Pt III. These included: exempt income, in relation to a trust estate, means the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident. Note: See also Division 54 of the Income Tax Assessment Act 1997 (in particular, the provisions in section 54-70 about trusts), which provides a tax exemption for certain payments under structured settlements and structured orders. 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 taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus. 38 Section 96 provided that: Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. 39 Section 97 applied if a beneficiary of a trust estate was not under any legal disability and was presently entitled to a share of the income of the trust estate. In this event, by s 97(1)(a), the assessable income of the beneficiary included so much of that share of the net income of the trust estate as attributable to a period when the beneficiary was a resident and so much of that
- 10 - share of the net income of the trust estate as attributable to a period when the beneficiary was not a resident but the income was attributable to sources in Australia. 40 Section 98 applied if a beneficiary of a trust estate was under a legal disability and was presently entitled to a share of the income of the trust estate. In this event, by s 98(1), the trustee of the trust estate was to be assessed and was liable to pay tax in respect of so much of that share of the net income of the trust estate attributable to a period when the beneficiary was a resident and so much of that share of the net income of the trust estate attributable to a period when the beneficiary was not a resident but the income was attributable to sources in Australia. 41 Section 98(3) provided that: A trustee to whom this subsection applies in respect of an amount of net income is to be assessed and is liable to pay tax: (a) (b) if the beneficiary is not a company - in respect of the amount of net income as if it were the income of an individual and were not subject to any deduction; or if the beneficiary is a company - in respect of the amount of net income at the rate declared by the Parliament for the purposes of this paragraph. 42 Section 98A concerned the assessable income of a beneficiary where s 98(3) (liability of a trustee to tax where the beneficiary had a present entitlement to a share of the net income of the trust estate and was under a legal disability). Section 98A was in these terms: (1) Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3), the assessable income of the beneficiary who is presently entitled to that share of the income of the trust estate shall include: (a) (b) so much of the individual interest of the beneficiary in the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and so much of the individual interest of the beneficiary in 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. (2) Where the trustee of a trust estate is assessed and is liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(3): (a) there shall be deducted from the income tax assessed against the beneficiary the amount (in this subsection referred to as the relevant amount) of the tax paid by the trustee in respect of the beneficiary's interest in the net income of the trust estate; and
- 11 - (b) if the relevant amount is greater than the amount of the income tax assessed against the beneficiary - the Commissioner shall pay to the beneficiary an amount equal to the difference between those 2 amounts. 43 Section 99, concerning the liability of a trustee to be taxed at the same rate as an individual, could not apply if s 99A applies (see s 99(1)). 44 Section 99A, which the Commissioner applied in the alternative assessments, provides for certain trust income, including where all beneficiaries or a beneficiary has no present entitlement to the net income of a trust, to be taxed at a special rate. Subsections 99A(4) and (4A) thus provided that: (4) Where there is no part of the net income of a resident trust estate: (a) (b) (c) that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. (4A) Where there is a part of the net income of a resident trust estate: (a) (b) (c) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97; in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia; the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section. 45 Section 100 provided for the assessable income of a beneficiary presently entitled to any of the income of a trust estate who is a beneficiary under multiple trust estates, or has multiple sources of income, and is under a legal disability, to include trust income (where the beneficiary was a resident of Australia or, if not a resident, the income was attributable to sources in Australia), but s 100(2) provided for a deduction of the income tax assessed
- 12 - against such a beneficiary for the tax paid or payable by a trustee in respect of that beneficiary s interest in the net income of the trust estate. 46 Section 102 concerned revocable trusts. 47 The rates for the purposes of s 98 and 99A of the 1936 Act were declared in the Income Tax Rates Act 1986 (Cth), ss 12(9) and 28, and Schedule 10. 48 In this scheme, accordingly: (1) Section 96 excluded trustees from any liability to pay income tax upon the income of a trust estate except as provided for in the 1936 Act. (2) Section 97 concerned the liability to tax of beneficiaries not under any legal disability who are presently entitled to the net income of a trust. (3) Section 98 concerned the liability to tax of a trustee in respect of the share of the net income to which a beneficiary under a legal disability was presently entitled. (4) Section 98A concerned, relevantly, the assessable income of a beneficiary with a present entitlement to a share of the net income but subject to a legal disability (with the result that the trustee would be liable to pay tax in respect of that share under s 98). (5) Section 99 was excluded from operation if s 99 applied (which is the present case under the alternative assessments). (6) Section 99A concerned any net income of a trust estate in respect of which no beneficiary had a present entitlement, in which event the trustee was liable to pay tax in respect of that net income. 49 These provisions disclose that the issue the Commissioner has effectively hedged in the present case by issuing alternative assessments for each year is whether any of the beneficiaries are presently entitled to the net income of the trust in the relevant years. The hedge is thus as between present entitlement of all beneficiaries on one hand in which event Whitby s liability is only as to the 20% share of the minor (the beneficiaries otherwise being taxable on their shares under s 97) and no present entitlement of any beneficiary on the other, in which event the Commissioner had originally assessed Whitby under s 99A as to 100% of the net income of the trust and in the replacement assessments, in order to avoid an argument about double taxation, assessed Whitby as to 80% of the net income of the trusts.
- 13 - The competing cases Whitby s submissions 50 Whitby s case is disarmingly straightforward. 51 The Commissioner, Whitby submitted, had purported to assess it (in its capacity as trustee of the Whitby Trust) to tax twice on the net income of the Whitby Trust estate for each year in dispute, once under s 99A (no present entitlement of any beneficiary) and once under s 98 (all beneficiaries presently entitled but one beneficiary under a legal disability) of the 1936 Act. However, each assessment is conclusive evidence of Whitby s liability to tax for each year except in Pt IVC proceedings and each assessment separately enlivened a legal right to object against it. As a result, Whitby is left owing different debts in each relevant year in circumstances where payment of one does not abate the other, each debt is an independent debt owed to the Commonwealth and is payable to the Commissioner, and interest is accruing on each debt. 52 As Whitby put it: The process undertaken by the respondent has left the applicant (in its capacity as trustee of the Whitby Trust) owing two income tax debts in respect of each Relevant Year. That is not an assessment process contemplated by the ITAA 1936. The structure of the assessment process, and authority (FCT v Stokes (1996) 72 FCR 160 at 171E-F per Spender, Burchett and Hill JJ; Re Temples Wholesale Flower Supplies Pty Limited v C of T (1991) 29 FCR 93, per Wilcox, Burchett and O Loughlin JJ, at [98-99]), allow for only one income tax debt for one taxpayer (in one capacity) for one tax period, and for one recovery proceeding and one Part IVC challenge (If the respondent had alternative views as to which rate of tax was applicable to the net income, it was open to the respondent to assess the higher rate by one assessment and cast the onus on the applicant to prove that assessment was excessive (ss 14ZZK and 14ZZO TAA)). 53 Whitby submitted that the reasoning in Futuris supports its case in that only an assessment within the statutory description constitutes an assessment which engages s 175 of the 1936 Act. Tentative or provisional assessments, as Whitby characterised the present purported assessments, are not an assessment within the meaning of the 1936 Act and, accordingly, are liable to be declared void. 54 Whitby also submitted that the only power of the Commissioner to make an assessment of its liability to tax is in s 166 of the 1936 Act, modified as appropriate for a trustee. By analogy to an individual taxpayer the Commissioner is required, from the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, to make an assessment of:
- 14 - (a) (b) (c) the amount of the net income of the trust estate under s 95; and the amount of the tax payable thereon (or that no tax is payable), (including whether it is reasonable that the s 99A rate rather than the s 99 rate be applied); and the total of the taxpayer s tax offsets. 55 According to Whitby: determining the s 95 Net Income [(a)] and selecting the rate of tax [(b)] are each only parts of the one process [(a), (b) and (c)] leading to the imposition of a single tax liability. As Isaacs and Rich JJ in Kuhnel & Co Ltd v Deputy Commissioner of Taxation (South Australia) (1923) 33 CLR 349 observed (at [362]) in the context of an assessment of the liability of a trustee, although the calculation may require a consideration of diverse factors (including whether the beneficiaries are or are not under a legal disability), the amount of tax is single. 56 This, said Whitby, reflects the general statutory scheme of the income tax legislation that there is one income, one taxpayer, one tax (Richardson v Commissioner of Taxation (1932) 48 CLR 192 at 212 per Evatt J; see also Trustees, Executors & Agency Co Ltd v Commissioner of Land Tax (1915) 20 CLR 21 at 41, R v Deputy Federal Commissioner of Taxation (SA); ex parte Hooper (1926) 37 CLR 368 at 372 to 373, Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39 at 54-55, Stokes at 167F-168A and 168D-169F). 57 The Commissioner s contrary contentions should be rejected because: 58 As such: [a]n examination of all the provisions of the income tax statutes, which compromise four stages: substantive liability provisions, assessment provisions, collection provisions, and objections and appeals, yields for the trustee of a trust estate the same answer as the Federal Court decided in Stokes (and as illustrated by Futuris) that it yields for a personal taxpayer, being that a proper process of assessing how the substantive provisions apply to a trustee can only result at any one point in time to one income tax debt to the Commonwealth for one tax year, which debt can be collected by the Commissioner out of the trust estate pending ultimate judicial review of its correctness. (footnotes removed) the Commissioner must first determine the total share of the net income that the trustee is [liable] to pay tax on (i.e. apply sections 98, 99 and 99A together), then he must work out the initial tax liability attributable to each share (by determining the rates applicable to each year). And then, in respect of that total liability, he must assess the tax offsets to which the trustee in its single capacity is entitled that reduce that initial liability to reach a final single amount. That amount, not any other amount, is to be notified to the trustee as its liability for the year. In short, Division 6 in Part III merely contains some of the substantive provisions that the Commissioner must assess in determining a trustee s ultimate liability to income tax for an income year that leads, upon notification, to a debt collectible by the Commissioner and a
- 15 - right of judicial review if the trustee is dissatisfied with that assessment. 59 The Commissioner s approach, of treating ss 98 and 99A of the 1936 Act as sources of a power to assess tax liability, is misconceived (see Howey v Commissioner of Taxation (1930) 44 CLR 289). Division 6 of Pt 3 of the 1936 Act is not a source of power to make an assessment. It is a source of liability of a trustee to tax in a certain amount and at a certain rate. The applicant, Whitby, has only one relevant capacity, as trustee. It is liable to pay tax in that capacity. It is not acting in different capacities as the representative of different beneficiaries. Separate assessment processes are antithetical to the definition of assessment and the scheme of all the provisions under the relevant statutes. The provisions relating to tax offsets demonstrate the inconsistency. In Whitby s words: Are the tax offsets applied arbitrarily based on the order in which the Commissioner issues the notices of assessment and wasted accordingly, bearing in mind that a trustee is not entitled to any refundable tax offsets? If not, how are the tax offsets apportioned? Notably, the single assessment process does not provide for this and the obvious explanation for that omission is that apportionment is not necessary when one appreciates that the process contemplates a single definitive tax liability being notified to the trustee of a trust estate in a single notice of assessment for an income year. 60 Whitby provided examples of the differences in the liability to tax depending on the different tax offsets that would apply based on its construction of the 1936 Act compared to that of the Commissioner. 61 Further, it is apparent that where s 98 applies, the beneficiary may be assessed as well under s 98A or s 100. Sections 98B and 100 each provide for a deduction from the beneficiary s assessed liability of the tax paid or payable by the trustee. There is no equivalent provision in respect of tax assessed and for which the trustee is liable under s 99A. This, said Whitby explodes the respondent s submission that the trustee is to be assessed really as a representative of each beneficiary in the sense of being assessed on behalf of each beneficiary (contrary to Syme v Commissioner of Taxes [1914] AC 1013 at 1020 in which the notion of secondary liability of a trustee to tax was rejected). 62 The Commissioner s approach is said to be unsupported by authority and, indeed, contrary to the reasoning in Howey, relating to the predecessor provisions to Div 6 of Pt III of the 1936 Act. References in decisions to trustees being taxed in a representative capacity are to be understood in light of the limitation on a trustee s liability under s 254 of the 1936 Act (to the extent of the trust assets). Thus, submitted Whitby: The observations that a trustee is taxed in a representative capacity are made to
- 16 - illustrate that it is not taxed in its personal capacity, and only liable to the extent of the trust assets: s 254. They do not support the respondent s submissions that the trustee is the representative of each beneficiary in the sense of paying tax on behalf of the beneficiary. Nor can they, having regard to sections 98A, s 100 and the fact that sections 99 and 99A apply where there is no beneficiary who the trustee represents. 63 The Commissioner s reliance on the legislative history of the provisions does not displace the clear meaning of the statutory text (Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 at [39]). In any event, the legislative history supports Whitby s case. 64 Given that the Commissioner purported to issue two assessments to the one taxpayer for the same income year, setting out two separate and different liabilities to tax, it necessarily follows that the Commissioner, as Whitby put it: formed only a tentative view of that taxpayer s liability to tax. The respondent has not specified one definite amount but has impermissibly broken up his method of calculation of tax into two tax liabilities for the one year in respect of the one taxpayer. The respondent has confused the assessing power s 169 ITAA36 with the provisions that give rise to the amounts that together with other diverse factors give rise to the one liability (sections 98 and 99A ITAA36). 65 According to Whitby, the Commissioner s splitting up of the net income into an 80% and a 20% component in the replacement assessments the subject of this proceeding does not make any difference to the fundamental problem. There is no proper single assessment as required. The reasoning in Cadbury-Fry-Pascall Pty Ltd v Commissioner of Taxation (1944) 70 CLR 362 and Lever Bros Pty Ltd v Commissioner of Taxation (1948) 77 CLR 78 is inapplicable for the same reasons that the Full Court distinguished those cases in Stokes. No provision of the Act in Stokes or in this case authorises the issuing of multiple notices of assessment to a trustee in different amounts in the same year. 66 Whitby also said this: Finally, and importantly, the first set of twin assessments were not capable of standing together: one was in respect of 100% of the net income and the other was in respect of 20%, giving rise tax on 120% of the net income. That is why they were amended or replaced. The respondent must concede that those assessments did not meet the statutory definition in s 6(1). Without altering that flawed process, he has reduced one of the twin assessments to 80% which, with the other 20% assessment, comes to 100%. So the twin assessments have a superficial life. But they cannot survive scrutiny as soon as the implications of the objection and appeal procedure, which might commence with one or both of them and in different forums, is considered[.]
- 17-67 On Whitby s case, the invalidity of the purported assessments also means that the penalties imposed cannot stand. Commissioner s submissions 68 The Commissioner s case is that the assessments of Whitby s liability to tax are valid having regard to the representative character of the tax liability under s 98, the purpose of that section and the scheme of Div 6 of Pt III of the 1936 Act. submission: In the Commissioner s The current s 98 Assessments made the applicant liable to tax on one fifth of the net income of the trust estate, on the postulate that a beneficiary presently entitled to the share of the trust income to which that income corresponded was under a legal disability in the relevant income year. The current s 99A Assessments made the applicant liable to tax on four fifths of the net income of the trust estate, on the postulate that no beneficiary was presently entitled to the share of trust income to which that net income corresponded. (footnotes removed) 69 The Commissioner contends that assessment of a trustee under Div 6 of Pt III of the 1936 Act is made under s 169 of the 1936 Act (Stokes at 166) and the scheme of Div 6 of Pt III of the 1936 Act permits multiple trustee assessments (such that a trustee is made liable to tax on a particular share of the net income of a trust estate under more than one assessment), providing the assessments are made in respect of different capacities. 70 Futuris does not suggest that the assessments are tentative or provisional. In the Full Court s decision, [2007] FCAFC 93; (2007) 159 FCR 257 at [47], the argument of double counting (by reason of a first and second assessment in which the latter involved quantitative overlap of amounts used in calculating the taxpayer s taxable income) was rejected on the basis of the reasoning of McHugh J in Richard Walter at 237 that the second assessment specified that a fixed sum is definitely and not provisionally payable by a particular person. In the High Court in Futuris, as explained by the Commissioner: the plurality (Gummow, Hayne, Heydon and Crennan JJ) held that the decision of the Full Court that the second amended assessment was neither tentative nor provisional was plainly correct : Futuris at [52]. Their Honours quoted FCT v Stokes at first instance, stating that the essential consideration pointing to a tentative and provisional assessment is a failure to specify what is the amount of the taxable income which has been assessed and what is the tax payable thereon. (footnotes removed) 71 In the present case, there is nothing tentative or provisional about the assessments, either the primary or alternative assessments. In the Commissioner s words: There is no failure to specify the amount of taxable income which has been assessed
- 18 - nor the tax which is payable thereon. Nor does any correspondence touch the definitiveness of the liability imposed by the notices of the current assessments. As noted above, the applicant was advised in a letter dated 27 October 2015 that it was not required to pay the amount of tax contained in the s 99A assessment in respect of the 2015 income year. That advice is comparable to the letter in Futuris indicating that the position of the Commissioner was not to seek payment referable to the Div 19A amount, which did not alter this Court or the High Court s conclusion as to the second amended assessment not being tentative or provisional. 72 It follows, said the Commissioner, that: The applicant s argument must fail if, as the Commissioner contends, multiple trustee assessments are permissible under Div 6 of Pt III of the 1936 Act so long as the assessments are made in respect of different capacities. 73 Multiple trustee assessments under Div 6 of Pt III of the 1936 Act in different capacities are permissible, submitted the Commissioner, for a number of reasons. For one thing, trustee assessments differ from ordinary assessments of taxable income in that the liability created by s 98 is of a representative character, such that the assessment for liability should be regarded as in substance made in respect of the beneficiary rather than the trustee. For another: s 98 itself envisages that a trustee is liable to tax in different representative capacities: each of subsections (1), (2), (2A) and (4) impose liability on the trustee on behalf of distinct beneficiaries. 74 The Commissioner also relied on the enactment history of s 98. The Commissioner explained the relevance of this history as follows: The predecessor provision to s 98 was s 31(2) of the Income Tax Assessment Act 1922 (Cth) (1922 Act). The Explanatory Memorandum to the Income Tax Assessment Bill 1935 explained the alterations to consolidate and amend the 1922 Act, which saw s 31(2) become ss 98 and 99 (those sections have since been amended, but the point of the amendment remains evident). Section 31(2) of the 1922 Act provided: A trustee shall be separately assessed and liable to pay tax in respect of that part of the income of the trust estate which if the trustee were liable to pay tax in respect of the income of the trust estate, would have been the income of the trust estate remaining after allowing all the deductions under this Act, except the deduction under section twenty-four, and (a) (b) which is proportionate to the interest in the trust estate of any beneficiary who is under a legal disability; or to which no other person is presently entitled and in actual receipt thereof and liable as a taxpayer in respect thereof. In Howey v Federal Commissioner of Taxation (1930) 44 CLR 289 (Howey), the High Court found that s 31(2) did not provide for individual taxpayer rates to apply in respect of income assessed to the trustee, despite the funds being applied for the benefit of the individual beneficiaries under a legal disability. Justices Rich and
- 19 - Dixon explained the limitation as follows (at 293-294): Even if the assumption be correct which both the Commissioner and the appellant make, that sec. 31(2) governs the matter, it could not, in our opinion, result in separate assessments upon him in respect of each beneficiary. We think sec. 31(2) means that that part of the income of the trust estate should be included in the one assessment which falls under para (a) or para (b) of the sub-section, or partly under one para and partly under the other. This assessment should be made upon the trustee separately. We do not think the word separately in sub-sec. (2) requires a discrimination between portions of that part of the income of the trust estate which answers the alternative description contained in paras (a) and (b). The separation which it contemplates is a separation between the assessment of the taxpayer in respect of such income in his capacity of trustee, and assessments made upon him otherwise. The Ferguson Royal Commission [Commonwealth of Australia, Third Report of the Royal Commission on Taxation (1934) at 122-3 [712]] recommended that s 31(2) be amended to overcome the effect of this reasoning in Howey, stating (emphasis added): Where the beneficiary is presently entitled but subject to a legal disability he is not generally in a position to receive the income or to compel the trustee to pay it to him. His share of the income should therefore be taxed in the hands of the trustee; but as the amount of his share is definitely ascertainable, it should be taxed at the rate appropriate to the share, so that if there is other income of the estate held in trust for other beneficiaries, or to which no one is presently entitled, the share in question should, for the purposes of assessment, be treated as severed from that other income. This appears to have been the Commonwealth practice under the present Section till recently but expressions in the judgment of two Judges in Howey s case (44 CLR 289) would indicate that the separation of such a share for the purposes of assessment is not justified under the Section as presently framed. We recommend that it should be clearly provided that such interests be separated, and the tax on each interest assessed to the trustee. This recommendation was adopted. As originally enacted, ss 98 and 99 were as follows: 98. Where any beneficiary is presently entitled to a share of the income of a trust estate but is under a legal disability, the trustee shall be assessed and liable to pay tax in respect of that share of the net income of the trust estate as if it were the income of an individual, and were not subject to any deduction other than the concessional deductions which would have been allowable to the beneficiary if he had been assessed in respect of that share, and the statutory exemption. 99. Where there is no beneficiary presently entitled to any part of the income of a trust estate, or where there is a part of that income to which no beneficiary is so entitled, the trustee shall be assessed and liable to pay tax on the net income of the trust estate, or on that part of that net income as the case may be, as if it were the income of an individual, and were not subject to any deduction other than the statutory exemption. Section 98 as amended made it clear that the trustee could be assessed in respect of each share of the s 95 net income of the trust estate referable to a beneficiary under