05 Mar 15 Present entitlement of trust beneficiary - Moignard
The Federal Court has allowed the Commissioner’s appeal from the decision of the Administrative Appeals Tribunal in the Moignard case, because the proceedings in the Tribunal miscarried by reason of its failure to address the issues properly arising for its determination. The matter was remitted to be reheard by the Tribunal.
The Tribunal had found that the Commissioner was incorrect in including in a taxpayer’s assessable income a sum representing the proceeds of a sale of property, as a share of the net income of a trust estate to which the taxpayer was deemed to be presently entitled. Rather, there was evidence that the sum, or a part of it, was properly assessable to the taxpayer in the relevant year of income in his capacity as trustee of a trust. This in turn meant that the Commissioner was incorrect to impose a penalty: Re Moignard and FCT  AATA 342.
The taxpayer was a company director and trustee of a number of trusts. As trustee for a particular trust (HoCT/RST), which was described as a discretionary investment trust, the taxpayer exercised an option to purchase a commercial property and quickly sold it for a profit. The net proceeds of sale were deposited in two bank accounts, one being a newly-opened personal account in the taxpayer’s name and the other an account in the name of a corporate trustee of which the taxpayer was the sole director.
The Commissioner issued an amended assessment to the taxpayer including the net profit on the sale of the property in his assessable income, on the basis that the amount was the taxpayer’s share of the net income of a trust estate to which he was presently entitled, pursuant to s 97 and s 101 of the Income Tax Assessment Act 1936. The Commissioner also imposed an administrative penalty.
The Commissioner argued that the taxpayer exercised his discretion as trustee of the HoCT/RST by directing or causing the net proceeds derived upon the settlement of the property to be deposited into his personal bank account and the bank account of a company controlled by him. Therefore, the taxpayer was deemed to be presently entitled to the income/profit derived on the sale of the property, pursuant to s 101 of the ITAA 1936. The Commissioner argued that the taxpayer could be deemed to be presently entitled to the sum if the trustee of the HoCT/RST paid or applied an amount to the taxpayer’s benefit, even if the trustee had not made a declaration, resolution or other act to distribute an amount to the applicant, provided that an amount had been paid to the taxpayer or for his benefit.
On the evidence, the Tribunal was satisfied that the amount in dispute was not assessable income of the taxpayer under s 97 of the ITAA 1936 for the relevant year of income. There was sufficient evidence to show that the sum (or some portion of the sum) was properly assessable to the taxpayer for the year of income, as trustee of another trust. The Tribunal noted that the payment of trust income into a bank account which might be controlled by a trustee where the account bears the same name as a particular beneficiary does not establish that the beneficiary is presently entitled. In this regard, the payment into the taxpayer’s account was made at a time when the HoCT/RST had no bank account in its name and it appeared to have been opened in the same name as the settlement cheque, for simplicity. Even though the taxpayer’s account was missing the suffix “as trustee for the RST”, in reality this is how it was treated in the various settlement documents. Moreover, it seemed clear that the funds in the account were treated as trust funds, with transactions into and out of the account recorded as such.
The Commissioner appealed to the Federal Court on several grounds, each of which was said to raise a separate question of law. In addition to complaints that the Tribunal misconstrued or misapplied provisions in the ITAA 1936 and the Taxation Administration Act 1953 (TAA), the Commissioner contended that the Tribunal’s reasons were insufficient; that the Tribunal failed to give effect to the onus of proof imposed on the taxpayer by s 14ZZK of the TAA; and that it failed to make a determination of the taxpayer’s tax liability.
The court held that the Tribunal had not addressed the issues arising for its determination on the review. In particular, it determined the issue of “present entitlement” without recourse to the trust deed and without addressing, and making the necessary findings of fact concerning, the question of whether the taxpayer had, in the 2007-2008 year, made a determination or determinations with respect to the payment, application or setting aside of the net income of the RS/HoCT. This meant by itself that the appeal should be allowed.
On the question whether the taxpayer had discharged his burden of proof under s 14ZZK of the TAA, the court found that the Tribunal erred in law by failing to determine whether the taxpayer had discharged the burden imposed on him of establishing that his assessed tax liability in respect of the 2007-2008 year was excessive because it did not consider whether there had been a determination in respect of the whole of the income of the RS/HoCT in that year.
The court remitted the matter to the Tribunal, with a direction that the taxpayer’s application be heard afresh by another member of the Tribunal on the basis that, unless proper cause be shown to the Tribunal, no further evidence should be adduced.
FCT v Moignard  FCA 143 (White J, 3 March 2015).