The AAT has accepted the Commissioner’s changed position on the “present entitlement” of a taxpayer beneficiary and reduced tax assessments and penalty issued to him. The case concerned the 2007-08 financial year and, substantively, concerned whether the taxpayer was “presently entitled” to certain trust income during that year.
The taxpayer was a winemaker who used a number of related trusts to operate his business. He also held bank accounts for these trusts, as well as a bank account in his own name. On 29 June 2007, the taxpayer used a discretionary trust of which he was trustee for the purpose of purchasing business premises. The property had been leased by other parties who had assigned their option to purchase the premises to the discretionary trust for $730,000. The discretionary trust then sold the property to an unrelated third party on the same day for a profit of over $480,000. The proceeds from the sale were deposited into the taxpayer’s personal bank account.
After the taxpayer failed to lodge trust and personal tax returns, the Commissioner commenced an audit during which the taxpayer filed personal tax returns for the 2007-08 year showing a nil taxable income. The Commissioner then issued an assessment to include the $480,000 from the sale of the premises in his assessable income on the basis that it represented a revenue profit of the discretionary trust that the taxpayer was presently entitled to under either s 97 or s 101 of the ITAA 1936 by virtue of the proceeds from the sale being deposited into his bank account. The Commissioner also imposed a 75% tax shortfall penalty for intentional disregard of the law.
At first instance, the AAT found that the taxpayer was not assessable on the $480,000 profit on the basis of finding that the trust income was distributed to him in his capacity as the trustee of one of the other trusts related to his winemaking activities.
On appeal (FCT v Moignard [2015] FCA 143), the Federal Court allowed the Commissioner’s appeal and found that the taxpayer had failed to discharge the onus of proving that he was not “presently entitled” to a profit paid to him from the sale of a commercial property that the trust owned. The Court remitted the matter to the AAT for it to be heard afresh before another member of the Tribunal with the order that no further evidence be adduced unless cause was shown.
The AAT however allowed the taxpayer to adduce some further evidence while noting that, “significantly”, the Commissioner made a concession prior to the hearing that “no appointment or accumulation of trust income was validly made pursuant to the terms of the trust deed during the relevant period” and, as a result, by reason of the default clause (the so-called “default clause argument”), the taxpayer was presently entitled to one third of the income of the trust for the 2008 year, and thus one third of the net income of the trust was properly included in his assessable income for that year under ss 97(1) of the 1936 Act ie $160,158 (rather than the full $480,476 net profit amount).
After careful review, the Tribunal said it was not satisfied there was a valid distribution of the net income of the trust which was effective to avoid the operation of the default clause, and that the beneficiary’s entitlement disclaimer was not effective. The Tribunal concluded that:
- the taxpayer’s taxable income for the 2008 income year be reduced from $480,476 to one-third of the net profit on the property ie $160,158;
- the tax payable (plus Medicare levy and Medicare Levy Surcharge) be reduced from $207,826.10 to $55,675.05;
- the administrative penalty be reduced from $187,043.45 to $33,405.04 (comprised of a penalty of 50% on the tax shortfall of $27,837.53 and a 20% uplift of $5,567.51).
(Moignard and FCT [2017] AATA 1661, AAT, Bean DP, AAT File No: 2012/3591, 6 October 2017.)
[LTN 202, 23/10/17; TM Oct 2017]