The Commissioner has been successful in an appeal to the Federal Court against an AAT decision that an individual taxpayer was not assessable on sales proceeds deposited into his personal bank account. In that decision (reported at 2014 ATC ¶10-364), the AAT was satisfied that the sales proceeds were received in the taxpayer’s capacity as a trustee.

Facts – The taxpayer had acquired a commercial property in June 2007 in his capacity as the trustee of a trust (RS Trust). In August 2007, that property was sold for id=”mce_marker”.315m. Approximately $823,000 of the sale proceeds were deposited into a bank account in the taxpayer’s name. The balance of the sale proceeds was deposited into a bank account held by the trustee of another trust, for which the taxpayer was also the sole director and secretary.

The sale proceeds were subsequently transferred into other bank accounts, including one held by the taxpayer as trustee of a third trading trust, involved in a wine merchandising business. The majority of the sale proceeds were ultimately disbursed on vineyard and wine-related business expenses. After accounting for additional expenses, the Commissioner calculated the assessable profit on the sale of the property to be $480,476.

The Commissioner argued that the transfer of all of the proceeds from the sale of the property amounted to an exercise of the taxpayer’s discretion as trustee of the RS Trust to pay or apply trust income for the purposes of s101 of ITAA 1936. Accordingly, the Commissioner submitted that it was correct to assess the taxpayer in his personal capacity under s 97(1) on the $480,476 profit derived from the sale.

First instance decision – The AAT held that the taxpayer was not assessable under s 97(1) in his personal capacity on the $480,746 profit.

The AAT said there must be evidence of the exercise of a trustee’s discretion for s101 to operate, and the mere receipt of funds by a discretionary beneficiary only activates s101 if the receipt is “allocated”. The evidence demonstrated that the $480,746 profit was not allocated to the taxpayer in his personal capacity and so he was not presently entitled to it in that capacity. Instead, the evidence demonstrated that the profit (or a portion of it) was assessable to the taxpayer as trustee of the trading trust.

Even though some of the sale proceeds were deposited into a bank account in the taxpayer’s name, the funds had nevertheless been treated as trust funds.

Even if the above findings were incorrect, the AAT accepted that the taxpayer had made an effective disclaimer within a reasonable period by executing a deed by which he disclaimed any entitlement to a distribution of the funds arising from the sale of the property.

The Commissioner appealed to the Federal Court.

Federal Court decision – On appeal, the Commissioner contended that the AAT misconstrued relevant provisions in ITAA 1936 and the TAA 1953 because it determined the existence of the taxpayer’s present entitlement to the trust income without reference to the terms of the RS Trust’s trust deed and without making findings of fact on the issues arising from those terms. The Commissioner also contended that the AAT failed to give effect to the onus on the taxpayer to prove that the Commissioner’s assessment was excessive.

The Federal Court found that the AAT did not address the issues arising for its determination on the review. It failed to refer to the provisions in the relevant trust deed by which a present entitlement may accrue to a beneficiary of the trust.

It was necessary for the taxpayer to have satisfied the AAT that:

(i)      he had not made a determination to pay or set aside income of the RS Trust for his own benefit, and

(ii)     he had, before the income year end, made a valid determination as to the application of the trust income to a beneficiary (failing which a default provision in the trust deed meant he would have one-third of the net income of the RS Trust). 

The court considered that the AAT’s reasons did not indicate it had identified these issues or made findings of facts in relation to them. The AAT also did not refer to certain personal expenditure made by the taxpayer out of the sales proceeds.

The Federal Court also held that the burden was on the taxpayer to establish that he did not, at year-end, have a present entitlement to any of the trust income of RS Trust for the relevant year.

It accepted the Commissioner’s contention that the AAT erred in law by failing to determine whether the taxpayer had discharged his burden of establishing that his assessed liability was excessive.

The AAT had not considered whether there had been a determination in respect of the whole of the income of the RS Trust in the income year.

The Commissioner’s appeal was allowed and the first instance decision set aside. The court ordered that the matter be remitted and reheard before another member of the tribunal.

Court ref: [2015] FCA 143, White J, 3 March 2015, Adelaide.

[IT 4/3/15] [LTN 43, 5/3/15]