THE TRUSTEE FOR THE ESTATE OF THE LATE AW FURSE NO 5 WILL TRUST v FC of T
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Judgment date: Judgment handed down 27 November 1990
Hill J: The present application is an appeal against a decision of the Administrative Appeals Tribunal constituted by a Senior Member, Mr Roach, in relation to two years of income, the 1982 and 1983 years [reported as Case X1,
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The appeal was instituted in the name of the trustee for the estate of the late A.W. Furse No. 5 Will Trust (account of three named beneficiaries). The manner in which the appeal was instituted reflects the way the respondent, the Commissioner of Taxation, issued the three assessments which are involved in the appeal and which assessments were made pursuant to sec. 98 of the Income Tax Assessment Act 1936
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as amended (``the Act'') applying the provisions of Div. 6AA of Pt III of that Act.
It may first be noted that the Court Rules dealing with appeals from the Administrative Appeals Tribunal envisage that there shall be a party to the notice of appeal and that that party shall be named in it: see Form 58A. It may be thought to be not a compliance with the Rules if the proceedings are brought by a party who is described only by reference to an office which he holds, but who is not in fact named. That is a matter which can easily be corrected and I would grant the applicant leave to amend the notice of appeal to stipulate its name in the notice.
In this case, the way the proceedings were instituted appeared to disguise, however, a more fundamental problem.
The A.W. Furse No. 5 Will Trust arose from the provisions of a will made on 12 July 1974 by Anthony Wilfred Furse. Mr Furse subsequently died and probate of the will was duly granted. A number of trusts were created in that will and the provisions of one of them was given the name of the A.W. Furse No. 5 Will Trust. The trustee of that trust, the initial corpus of which was to be $1, was Furdel Pty. Ltd. On 21 October 1976 Furdel Pty. Ltd. appointed Delfur Pty. Ltd. as a new trustee and thereafter retired. From that day on, Delfur Pty. Ltd. acted as trustee. It borrowed $10 from Furdel Pty. Ltd. and proceeded to acquire (the details are presently irrelevant) five units in a unit trust known as the GSG Management Trust, the trustee of which performed services for a firm of solicitors, Gillis Delaney & Co., and derived income which it held in part for the trustee of the A.W. Furse No. 5 Will Trust. Pursuant to a discretion given to the trustee of the A.W. Furse No. 5 Will Trust, part of that income came to be held in the two years in question for three beneficiaries who are presently entitled to that income but under a legal disability as those words are used in sec. 98 of the Act. Hence the assessments which issued.
In the 1982 year the assessment was issued on 7 September 1983 and addressed to the estate A.W. Furse No. 5 Will Trust, a/c Tristan H. Delaney. I do not pause to determine whether that was a valid assessment in that it could perhaps be argued that it was not issued to a taxpayer. Be that as it may, the objection to the assessment was lodged by Gillis Delaney & Co., solicitors, in time. It made no reference to the name of the trustee for whom that firm apparently was acting.
That objection was disallowed on 7 August 1987 and a letter was then sent to the Commissioner, which letter was in the following form:
``Furdel Pty. Limited,
75-85 Elizabeth Street,
SYDNEY NSW 2000
15th September, 1987
Australian Taxation Office,
7-13 Hunter Street,
SYDNEY NSW 2000
RE: INCOME TAX RE ESTATE A.W. FURSE NO. 5 WILL TRUST ACCOUNT
- TRISTAN H. DELANEY
- YOUR REFERENCE 6/G/70-784 448/1/82
Receipt is acknowledged of your letter dated 7th August, 1987.This company is the trustee of the Estate A.W. Furse No. 5 Will Trust and is dissatisfied with the decision made by the Commissioner of Taxation in respect of the objection dated 4th November, 1983 against the assessment which issued in respect of the year ended 30th
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June, 1982 and hereby requests the Commissioner of Taxation to refer that decision to the Administrative Appeals Tribunal. The requisition fee in the sum of $200.00 is enclosed.
DATED this 15th day of September, 1987
For and on behalf of Furdel Pty. Limited as trustee for Estate A.W. Furse No. 5 Will Trust
The second assessment in dispute was issued on 11 March 1985 to ``The Trustee for Estate late A.W. Furse No. 5 Will Trust A/C Jessica N. Delaney''. The notice of objection dated 9 May 1985 was an objection said to be signed ``for and on behalf of the taxpayer''. It purported to be an objection of Furdel Pty. Ltd. ``acting in its capacity as trustee of the estate late A.W. Furse No. 5 Will Trust''. In the body of the objection it referred to claims that the ``taxpayer'' was liable to be assessed in effect on the basis that Div. 6AA of the Act did not apply to the income in question. In the context, the only conclusion that could be reached is that the taxpayer referred to in the objection was Furdel Pty. Ltd. In due course, the objection was disallowed and an accountant wrote a letter to the Deputy Commissioner of Taxation dated 16 August 1985 requesting that the objection be referred to a Board of Review. The letter did not indicate the name of the taxpayer for whom the accountant acted.
The third assessment in dispute was also issued on 11 March 1985 to ``The Trustee for Estate late A.W. Furse No. 5 Will Trust A/C Skye Nea Delaney''. To that assessment Furdel Pty. Ltd. also objected, claiming to do so as trustee of the trust. The form of the objection and the manner in which it was signed were identical to the objection dealing with the second assessment. When the objection was disallowed, the same accountant requested it be referred to the Board of Review and it was dealt with, together with the disallowance of the second objection, in the one letter.
Section 185 of the Act, in force as at 9 May 1985, provided:
``A taxpayer dissatisfied with any assessment under this Act may, within 60 days after service of the notice of assessment, post to or lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds on which he relies...''
Section 187 of the Act, in force as at 15 September 1987, provided:
``A taxpayer who is dissatisfied with a decision under section 186 on an objection by the taxpayer may, within 60 days after service on the taxpayer of notice of the decision, lodge with the Commissioner, in writing, either -
- (a) a request to refer the decision to the Tribunal; or
- (b) a request to refer the decision to the Federal Court.''
Having regard to the fact that the objections to the 1983 assessments were on their face objections of Furdel Pty. Ltd. said to be acting in its capacity as trustee of the Estate of late A.W. Furse No. 5 Will Trust, and having regard to the fact that that company admittedly was not at any relevant time trustee of that trust, the provisions of sec. 185(1) on their face appeared unlikely to have been satisfied. Nor, on its face, would it appear that the requirements of sec. 187 were satisfied in respect of the 1982 assessment, that request appearing to be a request of Furdel Pty. Ltd. rather than Delfur Pty. Ltd.
The objection to the 1982 assessment could be assumed to have been duly posted to or lodged with the Commissioner, since prima facie at least, one might assume that the firm of Gillis Delaney & Co. acted for the party who was the real trustee of the trust, that is to say Delfur Pty. Ltd. The objection does not need to be signed by the taxpayer. It is sufficient for the purposes of sec. 185 of the Act if it be posted to or lodged with the Commissioner by the taxpayer or by some person as its agent.
No power existed in 1985 to extend the time for objection under sec. 185(1) of the Act. The time limited under that section was mandatory.
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Section 188 of the Act as presently in force, now permits a taxpayer, notwithstanding that the period referred to in sec. 185 has expired, to send the objection to the Commissioner together with an application in writing requesting the Commissioner to treat the objection as having been duly lodged. The Commissioner is required by sec. 188A(1) to consider the application and may grant or refuse it. If the application is refused, the taxpayer may apply to the Administrative Appeals Tribunal for review of the decision. However, the provisions of sec. 188, which were substituted for a previous section by Act No. 48 of 1986, do not apply in relation to an assessment if the period in which an objection could be lodged had expired prior to 1 July 1986: sec. 221 of Act No. 48 of 1986. A taxpayer may also now secure an extension of time in which to refer an objection decision to the Court or the Administrative Appeals Tribunal as the case may be: sec. 188B.
The matter proceeded through the Administrative Appeals Tribunal without either the parties or the Tribunal noting the problem to which I have adverted. Indeed the matter proceeded to hearing in this Court without the parties noticing it or, for that matter, without any reference to the problem being made to the Court.
Nevertheless, the Court cannot assume jurisdiction where on the face of the record that jurisdiction does not exist. The Administrative Appeals Tribunal only has jurisdiction if the provisions of sec. 185 and 187 of the Act are complied with. If the Tribunal had no jurisdiction then its decision is a nullity made in absence of jurisdiction. It is only if a valid decision made in exercise of jurisdiction by the Tribunal is challenged that this Court has jurisdiction under sec. 44(1) of the Administrative Appeals Tribunal Act 1975. The reference in that subsection to a ``decision'' of the Tribunal must mean, in my opinion, a decision of the Tribunal regularly made in exercise of jurisdiction. It does not refer to a decision of the Tribunal made in absence of jurisdiction.
It was for that reason that I invited counsel to make submissions as to whether, in these circumstances, the Court had jurisdiction to determine the appeal. At the adjourned hearing, counsel for the applicant sought leave to adduce in this Court evidence going not to the subject matter of the appeal but to the jurisdictional issue. This is not a course envisaged by the Rules where appeals are heard from decisions of the Administrative Appeals Tribunal, and not surprisingly, since appeals from the Tribunal are appeals on and thus limited to matters of law rather than fact.
However, it seems to me that this Court should, in a case where its jurisdiction appears to be lacking, determine the jurisdictional facts upon which its jurisdiction, if there be jurisdiction, is based. In the rare case where such an issue arises, it must follow that the Court can receive evidence going to those jurisdictional facts. Accordingly, I would permit the evidence to be read.
The evidence consisted of an affidavit by Mr Delaney who was a director of Delfur Pty. Ltd. and a partner in Gillis Delaney & Co. The evidence was not objected to, nor was Mr Delaney cross-examined. His evidence must accordingly be accepted. The effect of this evidence was that he had signed the objections and the request for reference believing that he did so in his capacity as a director of Delfur Pty. Ltd. and that he caused the relevant documents to be lodged with the Commissioner and did so in the same capacity.
The requirements of both sec. 185 and 187 as in force at the relevant time, provided only that the taxpayer lodge with or post to the Commissioner the relevant document. On the facts as deposed that has happened in this case. While I feel some unease about the submission that an objection which on its face is an objection of a person not the taxpayer may be a sufficient compliance with the Act where it is in fact lodged with the Commissioner by or on behalf of the actual taxpayer, the Commissioner did not seek to argue that the objections and request for reference were incompetent and I have concluded that I should accept that the Court has jurisdiction to determine the appeal and accordingly I now turn to the substantive issues between the parties.
No oral evidence was adduced by the applicant before the Administrative Appeals Tribunal and the case proceeded solely upon documentary evidence that was put before the Tribunal.
The trust estate of which the applicant was trustee, arose, as I have already indicated, from
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a will made on 12 July 1974 by Anthony Wilfred Furse who died shortly afterwards on 14 September 1974. It is not necessary to detail those trusts. Suffice it to say that the will provided for the establishment of 12 trusts, five of which were in common terms. In respect of those five, which include the A.W. Furse No. 5 Will Trust, the testator directed that the sum of $1 was to be held by Furdel Pty. Ltd. upon trust to accumulate the income for a period of 21 years from the date of death of the testator (the accumulated income being added so as to form part of capital). As and from a distribution date which was defined in the will, the capital, including accumulated income, was to be held upon discretionary trusts for persons described as ``the beneficiaries'' and failing an exercise of discretion, upon trust for various named persons living at the distribution date, and if more than one, equally. There was power to apply income at the discretion of the trustee to the beneficiaries each year rather than accumulate it.
On 20 October 1976, the sum of $1 was paid to Furdel Pty. Ltd. as trustee of the A.W. Furse No. 5 Will Trust, and on the next day, as already indicated, Furdel Pty. Ltd. appointed Delfur Pty. Ltd. as a new trustee of the No. 5 Will Trust and itself retired.
On 27 October 1976 Delfur Pty. Ltd. borrowed the sum of $10 from Furdel Pty. Ltd. and on 29 October of the same year, an amount of $5 was deposited to the credit of a cheque account in the name of Delfur Pty. Ltd. No. 5 Account, the balance of money being held in a savings account.
On 28 July 1977 there was executed the trust deed of a trust which came to be known as the GSG Management Trust and of which the trustee was Vebo Pty. Ltd. The deed recorded that 10 units were to be issued initially, five of which were to be issued to Seegil No. 46 Pty. Ltd. acting in its capacity as trustee of the Gillis No. 1 Family Trust and five units to Delfur Pty. Ltd. acting in its capacity as trustee of the five will trusts which included the No. 5 Will Trust. So far as is presently relevant, Delfur Pty. Ltd. paid $1 to GSG Management Pty. Ltd. as trustee of the GSG Management Trust, on 9 August 1977. The initial 10 units were issued as contemplated.
In June 1979 Delfur Pty. Ltd. transferred to itself, in its capacity as trustee of the No. 5 Trust, the units in the GSG Management Trust, previously held by it in its capacity as trustee of the trusts Nos 1-4, with the consequence that, as at 30 June 1979, that company as trustee of the No. 5 Trust, held five units in the GSG Management Trust. Cheques for $1 each were drawn from the cheque account of the No. 5 Trust and deposited to the accounts of the Nos 1-4 trusts effectively. The effectiveness of this transaction was not in dispute. The Commissioner accepted that the income from the five units in the GSG Management Trust was included in the ``net income'' of the No. 5 Trust Account.
At some unknown time, but prior to the commencement of the 1982 income tax year, an arrangement was reached between GSG Management Pty. Ltd. (formerly Vebo Pty. Ltd.), as trustee of the GSG Management Trust, to perform services for the firm Gillis Delaney & Co., a firm of solicitors practising in Sydney. In the 1982 and 1983 income tax years, the partners of that firm were Mr Gillis, Mr Delaney and Mrs Delaney. The directors and shareholders of GSG Management Pty. Ltd. were, at relevant times, Mrs Delaney and Mrs Gills. The directors and shareholders of Delfur Pty. Ltd. were Mr and Mrs Delaney.
The terms of the arrangement between the GSG Management Trust and Gillis Delaney were not the subject of any evidence. In the 1982 year, the trust derived gross income of $430,328.42, and it may be inferred that all of this income came from its arrangements with Gillis Delaney & Co. It incurred outgoings of $314,743, which included salary of $5,689 paid to Mrs Delaney and a corresponding salary paid to Mrs Gillis. Superannuation contributions were made to a superannuation fund which, it would seem, included in part a small contribution for each of Mrs Delaney and Mrs Gillis.
In the 1983 income tax year, the trust derived gross income of $493,824.65, and incurred outgoings of $415,177.51. Included among the outgoings were salaries paid to Mrs Delaney and Mrs Gillis, each of $5,798. The balance sheet of the trust, in each of the years in question, showed that the trust had been largely financed in its activities by loans in the order of $100,000 emanating in part from certain superannuation funds and in part from Mr Gillis and Furdel Pty. Ltd. It is evident
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from a perusal of the balance sheet and profit and loss account that these loans were made interest free.
In the 1982 year, the applicant trustee exercised its discretion with respect to income in favour of Tristan Hamish Delaney in the sum of $12,000. In the 1983 year, the discretion was exercised as to $5,000 in favour of each of Skye Nea Delaney and Jessica Naomi Delaney. Each of these beneficiaries was, at the time of the relevant distribution to them, under 18 years of age on the last day of the year of income, and was not an excepted person within the definition of that expression in sec. 102AC(2) of the Act. As such, each was a ``prescribed person'' for the purposes of Pt III Div. 6AA of the Act.
The Commissioner assessed the trustee of the A.W. Furse No. 5 Will Trust in respect of each of the three distributions on the basis that Div. 6AA applied to the whole of the share of the beneficiaries of the net income of the trust estate as was distributed to them having regard to the provisions of sec. 102AG of the Act. The consequence was that the trustee was assessed to tax in respect of each of the distributions at the rate of 46 cents in the dollar, rather than at the graduated rates of tax commonly applicable to individuals resident in Australia.
The sole issue between the parties in the Administrative Appeals Tribunal, was whether the distributions in each of the two years in question from GSG Management Trust, included in the net income of the A.W. Furse No. 5 Will Trust pursuant to sec. 97 of the Act, were ``excepted trust income'' in relation to each of the three beneficiaries, for the purposes of sec. 102AG(2). Section 102AG(2) and (3) provide relevantly as follows:
``102AG(2) Subject to this section, an amount included in the assessable income of a trust estate is excepted trust income in relation to a beneficiary of the trust estate to the extent to which the amount -
- (a) is assessable income of a trust estate that resulted from -
- (i) a will, codicil or an order of a court that varied or modified the provisions of a will or codicil; or
- (ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate;
102AG(3) Subject to sub-section (4), where assessable income is derived by a trustee, directly or indirectly, under or as a result of an agreement (whether entered into before or after the commencement of this sub-section) any 2 or more of the parties to which were not dealing with each other at arm's length in relation to the agreement and the amount of the assessable income so derived is greater than the amount (in this sub-section referred to as the `arm's length amount') of the assessable income that, in the opinion of the Commissioner, would have been derived by the trustee, directly or indirectly, under or as a result of that agreement if the parties to the agreement had dealt with each other at arm's length in relation to the agreement, sub-section (2) does not apply in relation to that assessable income to the extent to which the amount of the assessable income exceeds the arm's length amount.''
The applicant submitted that the Tribunal had erred in law in a number of different respects. In summary the applicant's submissions can be stated as follows:
- (1) The Tribunal found, contrary to the facts, that the trustee of the GSG Management Trust referred to in the Tribunal's reasons as the ``Firm Trust'' held all the units in a further trust which was a trading trust referred to in the reasons as the ``Serve Trust'' and that it was this trust which provided the services to Gillis Delaney & Co. It was conceded by the Commissioner that this finding was incorrect and that it was not open to the Tribunal so to find.
- (2) The Tribunal found, contrary to the facts, that GSG Management Pty. Ltd., the trustee of the GSG Management Trust, was ``effectively controlled by the two partners in the firm'', whereas it was the fact that the directors and shareholders of GSG Management Pty. Ltd. were Mrs Delaney and Mrs Gillis and not their respective husbands. It was agreed by the parties that at all relevant times the partners in the firm
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were Mr Delaney, Mr Gillis and Mrs Delaney. Mrs Gillis was not a partner in the firm.
- (3) The Tribunal found that the partners in the firm were content to so arrange the affairs of the firm and have it enter into dealings with GSG Management Trust ``but only to the extent to which the advantages so forgone by the partners as partners would pass... in equal shares to entities which served respectively the family interests of each partner''. It was said that this finding, as to purpose, was contrary to the facts and was not open to the Tribunal.
- (4) The Tribunal found that assessable income was derived by Delfur Pty. Ltd., directly or indirectly, under or as a result of an agreement for the purposes of sec. 102AG(3) of the Act, but did not identify the agreement, the parties to it or the terms of the agreement. Its failure so to do vitiated, it was said, the Tribunal's findings.
- (5) The Tribunal found the parties to the agreement, which was not identified, were not dealing with each other at arm's length. In so finding, the Tribunal misunderstood the test that should be applied under sec. 102AG(3), which was not whether the parties to the relevant agreement were at arm's length with each other, but whether, in relation to the relevant agreement, they were dealing with each other at arm's length. By applying the wrong test, the Tribunal erred in law.
- (6) Associated with the preceding submission, it was also submitted that in finding, as the Tribunal did, that the Commissioner was correctly of the opinion that the income derived pursuant to the agreement was greater than it would have been if the parties had dealt with each other at arm's length, the Tribunal erred in law by not making an antecedent finding as to what was, in its opinion, the level of arm's length income and comparing the one with the other.
- (7) Finally, it was argued that it had been conceded below that the Commissioner himself had not formed an opinion under sec. 102AG(3) as to what would have been derived by the trustee, directly or indirectly, under or as a result of the relevant agreement if the parties to that agreement had dealt with each other at arm's length, and that the Tribunal having exercised its opinion wrongly, for the reasons already indicated, no exercise of discretion had been made under subsec. (3) with the consequence that the taxpayer must succeed.
I shall deal with each of these submissions in turn, so far as ultimately they are relevant to the view I have formed.
As already indicated, it was conceded that the Tribunal erred in holding that there was a further trust referred to in its reasons as the ``Serve Trust'', when in fact no such trust existed. For the Commissioner, however, it was submitted that this error did not vitiate the Tribunal's reasons because it was immaterial. On the whole I think this submission is correct. While there are at least two passages in the judgment which refer to ``Serve Trust'' and a number which refer to ``Firm Trust'' in circumstances where it is difficult to know whether the Tribunal intended to refer to ``Firm Trust'' or ``Serve Trust'', I do not think that this matter alone would have justified referring the matter back to the Tribunal to decide the matter again. A perusal of the reasons indicates that nothing appeared to turn upon the existence of ``Serve Trust'' and it does not seem to me that the reasons would justify the conclusion that the decision reached depended upon the mistake made by the Tribunal in identifying the existence of a trading trust ``Serve Trust'' separate from the unit trust referred to in its reasons as ``Firm Trust'' (the GSG Management Trust).
The finding that the GSG Management Trust was effectively controlled by two partners in the firm, again clearly a finding as to which there was no evidence, is a more difficult one. There are two issues, relevant to the present problem, to be determined under sec. 102AG(3). The first is whether the parties to the relevant agreement were dealing with each other at arm's length in relation to that agreement. The second is whether the amount of the relevant assessable income is greater than the amount referred to in the subsection as the ``arm's length amount''.
The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is
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rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection. The distinction was pointed out by Davies J. in connection with similar words used in sec. 26AAA(4) of the Act in
Barnsdall v. F.C. of T. 88 ATC 4565 at p. 4568, in a passage which with respect I agree:
``However, sec. 26AAA(4) used the expression `not dealing with each other at arm's length'. That term should not be read as if the words `dealing with' were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion.''
What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.
Whatever the relevant agreement may be (a matter to be discussed subsequently) to the extent that it was an agreement which included as a party GSG Management Pty. Ltd. and concerned the partners of Gillis Delaney & Co., it is clear that, subject to the position of Mrs Delaney, the sole directors and shareholders of GSG Management Pty. Ltd., Mrs Delaney and Mrs Gillis, were not the same persons as the partners in the firm and that there was no evidence as such from which it could be concluded that GSG Management Trust was ``effectively controlled'' by two partners in the firm. Of course, it is clear that Mrs Delaney and Mrs Gillis were not as such at arm's length from the partners in the firm in that Mrs Delaney was a partner and Mrs Gillis was the wife of another partner.
It was no doubt open to the Tribunal to conclude, no oral evidence being given, that the applicant trustee had not satisfied the burden of showing that in dealing with the partners in the firm, Mrs Delaney and Mrs Gillis did deal with each other at arm's length in relation to the agreement. But the Tribunal does not appear to have made its finding by reference to the issue of onus of proof, but rather appears to have reached its conclusion by misstating a factual matter. For this reason, it seems to me that the applicant has demonstrated, in the relevant sense, an error of law in the Tribunal's reasons.
The third submission seems to me to be without substance. It was open to the Tribunal to conclude, in the absence of evidence to the contrary, that the partners in the firm were content to arrange the firm's affairs in such a way as to diminish the taxable income of the firm and to ensure that some part of the firm's profit would pass to the family interests of its partners. Indeed, having regard to the facts here present, sparse though they were, it seems to me that no other conclusion but this would follow. In my view the applicant has not demonstrated any error of law in this regard.
The fourth submission does have some weight. It is difficult to see how a reasoned analysis of the issues to be determined under sec. 102AG(3) of the Act can proceed without an initial identification of the agreement to which the subsection refers. This is not to say that a tribunal must necessarily spell out explicitly what the agreement is, who its parties are and what its terms are. It may be sufficient if it is clear from the reasons as a whole what the agreement was that the Tribunal has found. The existence of the agreement is obviously a factual matter with respect to which the Tribunal must make a finding.
The expression ``agreement'' as used in the subsection is defined widely in sec. 102AA(1) as meaning:
``any agreement, arrangement, under-standing or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.''
It was submitted for the Commissioner that the relevant agreement, in the defined sense, was an arrangement, the parties of which were GSG Management Pty. Ltd. (presumably
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through its directors Mrs Delaney and Mrs Gillis), the partners of the firm and the trustee of the A.W. Furse No. 5 Will Trust, Delfur Pty. Ltd. (presumably acting through its directors Mr and Mrs Delaney). Certainly it would be open to the Tribunal, in the absence of any oral evidence being called on behalf of the applicant, to find that an agreement of that kind existed. Even if one concentrated only upon legally enforceable agreements then there was one between GSG Management Pty. Ltd. and the firm and another between Delfur Pty. Ltd. and GSG Management Pty. Ltd. The difficulty is that without identifying the agreement with some precision, it is difficult to test whether the elements required under sec. 102AG(3) have been satisfied, viz. that the agreement was one whereby Delfur Pty. Ltd., directly or indirectly, derived assessable income, whether it was one in which the parties were not dealing with each other at arm's length in relation to the agreement, and one in respect of which the income so derived was greater than the arm's length amount as defined in sec. 102AG(3). By failing to identify the agreement, the Tribunal obscured its process of reasoning to a point where it is difficult to test its conclusions against the evidence advanced before it. It is not necessary in the present case to finally determine whether a failure to identify the agreement constituted an error of law. I am inclined to think in the present circumstances, however, that it did.
The next submission broaches in essence similar issues to those which I have discussed above in connection with the second submission. The Tribunal did not elaborate upon its view of the appropriate test to be applied under sec. 102AG(3) in determining whether the parties to the relevant agreement were dealing with each other at arm's length in respect of that agreement. The Tribunal expressed the view that it was clear ``that the parties to the agreement [unidentified] were not dealing with each other at arm's length''. In so doing the Tribunal referred by way of comparison to the decision in Australian Trade
Commission v. W.A. Meat Exports Pty. Ltd. (1987) 75 A.L.R. 287. That case was concerned with a test which applied where one person was ``not at arm's length'' with another. The words under consideration made it clear that the statute was concerned with a relationship between parties rather than the quality of the dealing between them. To the extent that the reference to the decision was intended by the Tribunal to define the test to be adopted in sec. 102AG(3) it is clear the Tribunal misunderstood the issue before it and accordingly erred in law.
The next submission concerned the definition of the ``arm's length amount''. Under sec. 102AG(3) the Commissioner, in making the assessment, and the Tribunal, in exercising the powers of the Commissioner for the purposes of the review, are required to determine whether the parties to an agreement have not dealt with each other at arm's length in relation to it and the quantum of assessable income that would have been derived by the trustee directly or indirectly under or as a result of the agreement, if an arm's length relationship in the dealing had existed.
The Tribunal does not appear to have undertaken any such task. It concluded that the Commissioner was correctly of the opinion that the income derived pursuant to the agreement was greater than it would have been if the parties had dealt with each other at arm's length. In fact, as the applicant pointed out, the Commissioner formed no such opinion at all. In reaching this conclusion, the Tribunal said at p. 105:
``I reach the latter conclusion upon recognising that, although the testator had established the trust and had conferred upon the trustee wide-ranging powers such as could make the trust a convenient income-earning vehicle for the grandchildren, that alone was not enough to generate any income, let alone a substantial income. Whether any substantial income would ever be generated depended not only upon the willingness of the trustee under the direction of the parents to embark upon agreements such as those generating the income in this case, but also more particularly, upon finding third parties who would be willing to would be willing to enter into agreements with the trustee which would confer substantial benefits upon the trustee and its beneficiaries without such a return to the other party as would be expected upon an arm's length transaction. That being so, in my view, the cause of the applicant must fail.''
It would seem in this passage that the relevant agreement to which the Tribunal was
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drawing attention was, or included, the agreement between GSG Management Trust and Gillis Delaney & Co. This is so although the reference to ``third parties'' in regard to the remaining part of the judgment is somewhat obscure.
I do not accept the applicant's submission that it will in all cases be necessary for a tribunal, in exercising the discretion under sec. 102AG(3), to make an antecedent finding of what an arm's length income would be. There may be some cases where the income derived under the relevant agreement is so much in excess of an arm's length income that there is no need for an antecedent finding. The present case is not so clearly such a case. In the 1982 year the not income of $115,585.42 was achieved after expenditure of $314,743 and in the 1983 year, the net income of $78,647.14 was achieved after total outgoings of $415,177.51.
No doubt it was open to the Tribunal to form an opinion that the income derived pursuant to the relevant agreement was greater than the arm's length amount, but it is far from clear that the Tribunal in fact made such a finding having regard to its statement that the Commissioner himself had made such a finding, which statement was admittedly erroneous. Having regard, however, to the other errors of law to which references have already been made, it is unnecessary to deal further with this submission.
The final submission does not really arise having regard to my view that the Tribunal erred in law in reaching the conclusion it did, unless at least I were to be of the view that the errors of law were sufficiently immaterial or that the decision was so clear that the matter should not be remitted to the Tribunal for further consideration.
The matter has not been fully argued. However, as presently advised, I am of the view that the submission misconceives the function of the Tribunal.
The Tribunal inter alia exists to review the Commissioner's objection decisions. In so doing, the Tribunal has the powers of the Commissioner. In reaching a decision to affirm an objection decision, the Tribunal is empowered itself therefore to exercise the discretion under sec. 102AG(3). Where it does so, its decision takes the place of that of the Commissioner. In the case where the Commissioner has not formed the relevant opinion and where the Tribunal has properly found that the parties were not dealing with each other at arm's length in relation to the relevant agreement, it will be the duty of the Tribunal to exercise the discretion for itself under sec. 102AG(3) and to form a view as to the relation between the assessable income derived under the agreement and the arm's length amount. In a case where the Commissioner has formed the relevant opinion as to the quantum of the arm's length amount, the Tribunal may agree with the Commissioner's opinion, but in so doing it is substituting its opinion for that of the Commissioner, so that the Commissioner's opinion becomes irrelevant. Where, as here, the Commissioner has formed no such opinion, it will be for the Tribunal to exercise its own discretion afresh in forming a view as to the quantum of the arm's length amount. Cf
B.O.A. Pty. Ltd. v. F.C. of T. 81 ATC 4028 and 4492.
The final question for determination in relation to the applicant's submissions is whether the errors of law, which I have identified, require that the matter be remitted to the Tribunal for consideration. In my view they do.
First, the decision whether or not the parties to the relevant agreement were dealing with each other in relation to the agreement at arm's length is a question of fact for the Tribunal to find. That question was, as I have indicated, vitiated by error. It is not for the Court in determining an appeal on a question of law to find the facts upon which that question of law may depend. More importantly, however, the determination of the arm's length amount is a matter entrusted to the opinion of the Commissioner or, in proceedings before the Tribunal, to the Tribunal. It is not a matter entrusted to this Court. The Court cannot itself form an opinion in a case where the Tribunal has not either formed the opinion at all or where the Tribunal's opinion is vitiated by error. The Court's function in relation to opinions is one of judicial review only, that is to say the Court will review the exercise of discretion to determine whether or not that exercise of discretion has been vitiated by error:
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360.
91 ATC 4018
For these reasons I am of the view that the applicant must succeed in its appeal and that the matter should be remitted to the Tribunal for further consideration.
The Commissioner filed a notice of contention in the proceedings going to the issue whether on the facts of the present case the provisions of sec. 102AG(2)(a) were satisfied. It was the Commissioner's submission that, on the present facts, the amount included in the assessable income of the trustee of the A.W. Furse No. 5 Will Trust was not assessable income of a trust estate that resulted from a will.
The Tribunal held that upon its true construction sec. 102AG(2)(a)(i) merely required that the trust estate should arise under or by virtue of a will. It was submitted for the Commissioner, however, that for the subsection to operate, it was necessary that the assessable income of the trust estate itself be sourced in the will or property of the deceased. With respect, I do not accept the Commissioner's submission. It requires that the words in sec. 102AG(2)(a) ``that resulted from'' refer to the assessable income rather than to the words in subpara. (i) ``a will'' etc. or in subpara. (ii) ``an intestacy'' etc. In my opinion all that is necessary to fall within sec. 102AG(2)(a) is that the assessable income be assessable income of the trust estate, that trust estate being one of the forms of trust estate referred to in sec. 102AG(2)(a)(i) or (ii) (that is to say not an inter vivos trust).
It is not clear what is meant by the notion that the assessable income be ``sourced'' in the will or the property of the deceased. Presumably the contention is that it is only income from assets already held by the deceased at the time of his death which will be exempted from the provision of Div. 6AA. Such a view is too narrow. Clearly the legislature must have contemplated the case where the will assets were sold and the proceeds reinvested. What happened in the present case is that the trustee borrowed funds and used the borrowed funds to invest in such a way as to derive assessable income from the investment. In my view the consequence of such an investment was that assessable income was derived by the trust estate so that that income was ``assessable income of the trust estate'' and clearly enough the trust estate was one that resulted from the will of the late Mr Furse.
There remains the question of costs. The applicant has succeeded in its appeal. Prima facie therefore it is entitled to costs. As to the issue whether the appeal was competent at all, it seems to me that both the applicant and the respondent were responsible for the problem that has arisen; the applicant by not lodging an appeal in the name of Delfur Pty. Ltd., the respondent by failing to raise the question and perhaps also by issuing the assessment in the way it did. I am accordingly of the view that in respect of the additional hearing days devoted to the question of jurisdiction, each party should bear its own costs. So far as the substantive part of the appeal is concerned, it is possible that much of the difficulty which the Tribunal experienced arose by virtue of the fact that the applicant relied upon a documentary case without calling oral evidence. It may be said that by so doing the applicant contributed to the Tribunal falling into error. On the other hand it seems clear that the Tribunal found facts, which on the documentary evidence were not open to be found and misconceived the tests to be applied under the section. For these reasons I would order that the respondent pay the applicant's costs of the appeal and of the hearing of it, limited to the costs of the substantive hearing on 5 November 1990.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The matter be remitted to the Administrative Appeals Tribunal to be heard and decided again, either with or without the hearing of further evidence at the discretion of the Tribunal in accordance with law.
3. The respondent pay the applicant's costs of the appeal, limited so far as the hearing is concerned to the costs of substantive hearing on 5 November 1990.