FEDERAL COURT OF AUSTRALIA

Trustee for the Michael Hayes Family Trust v Commissioner of Taxation

[2019] FCA 426

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The Respondent’s objection decision dated 9 June 2017 be set aside.

3.    In lieu thereof, the Applicant’s objection to its income tax assessments for the income years ended 30 June 2010 to 2014 be allowed in full.

4.    The matter be remitted to the Respondent for the purpose of issuing consequential amended assessments.

5.    The Respondent pay the Applicant’s costs of and incidental to the appeal, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

LOGAN J:

1    On 21 December 2016, following the completion of an audit into the taxation affairs of the applicant, Michael Hayes Family Pty Ltd (Hayes), in its capacity as the trustee of the Michael Hayes Family Trust (MHFT), the respondent Commissioner of Taxation issued Notices of Assessment (the Assessments) to Hayes in respect of the 2010 to 2014 income years (Relevant Years). The effect of the original Assessments in respect of the Relevant Years may be summarised as follows:

2    An objection by Hayes against the Assessments was allowed in part in respect of the 2011 income year but otherwise disallowed. The position after objection may be summarised as follows:

3    The present proceeding is a taxation appeal, instituted by Hayes in the Court’s original jurisdiction under Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA), against the Commissioner’s objection decision.

4    The Commissioner has cast the Assessments on the footing that, in each of the Relevant Years, Hayes was presently entitled to any income of two trusts, the MJH Trading Trust and the MJH Fixed Trust and assessable pursuant to s 99A of the Income Tax Assessment Act 1936 (Cth) (ITAA 36). His more detailed rationale for that present entitlement and consequential application of s 99A is set out below. Hayes denies that alleged present entitlement. It seeks to prove that the Assessments are excessive on one or the other of these grounds:

(a)    the MJH Trading Trust was, in each income year, a “public trading trust” within Div 6C of Pt III of the ITAA 36, with the consequence that neither Hayes nor the MJH Fixed Trust was presently entitled to any income of the MJH Trading Trust; and

(b)    alternatively, the trustee of the MJH Trading Trust exercised a power to accumulate its income in the relevant income years, so that neither the MJH Fixed Trust nor Hayes was presently entitled to any of its income.

5    In the course of the trial, a further issue emerged. It arose in this way. The Trust Deed in respect of the MJH Fixed Trust provides that the Second Absolute Beneficiary is “GRAWLEX PTY LTD ACN 080 401 092 as trustee of the MJH Superannuation Fund.” It emerged that Ragem Pty Ltd (Ragem), not Grawlex Pty Ltd (Grawlex), was the trustee of the MJH Superannuation Fund (Superfund) during the Relevant Years. Hayes contended that the Second Absolute Beneficiary of the MJH Fixed Trust is and at all material times should be taken to be Ragem in its capacity as trustee of the Superfund. That was said to be on one or the other of these bases:

(a)    as a matter of construction of the MJH Fixed Trust Deed; or

(b)    because of a deed titled “Deed of Rectification”, entered into on 5 June 2018 (Deed of Rectification).

6    The relevant facts, as opposed to their taxation consequences, are not controversial.

7    Grawlex became trustee of the Superfund on 31 March 2000. The terms governing the Superfund were varied by deed on 30 June 2004. On 1 July 2007, Ragem replaced Grawlex as the trustee of the Superfund.

8    On 27 June 2007, the MHFT was settled by trust deed (the MJH Family Trust Deed).

9    Hayes was the trustee of the MHFT during the Relevant Years. Mr Michael Hayes is and was its sole director.

10    Under the MJH Family Trust Deed, Mr Hayes and his wife, Mrs Julie Hayes are the specified beneficiaries of the MHFT (the Specified Beneficiaries). The General Beneficiaries specified in that deed are their children, Sarah Hayes, Lisa Travis (née Hayes) and Damian Hayes (the General Beneficiaries).

11    Materially, the MJH Family Trust Deed provides:

3.4    The Trustee shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made in relation to such Accounting Period in trust successively for the persons described in subclauses 4.1 and 4.2 hereof.

…

4.    … As from the Vesting Day the Trustee shall stand possessed of the Trust Fund and the income thereof:

…

4.2    Insofar as any part of the Trust Fund shall not have been disposed of in accordance with sub-clause 4.1 then in trust for the children of the Specified Beneficiaries as are living on the Vesting Day and if more than one as tenants in common in equal shares absolutely provided always that if a child of any Specified Beneficiary dies before the Vesting Day leaving children living on the Vesting Day then such children shall take and if more than one as tenants in common in equal shares the share which such deceased child would otherwise have been entitled had he or she survived to the Vesting Day and in turn the descendants living on the Vesting Day of any such children of such deceased child who die before the Vesting Day shall take proportionally among themselves the share which such deceased children would have taken.

12    A separate trust, the MJH Fixed Trust, was established by deed (the MJH Fixed Trust Deed) on 24 February 2010. Under the MJH Fixed Trust Deed, Hayes was appointed as, and remains, the trustee of the MJH Fixed Trust.

13    As drafted and executed, the MJH Fixed Trust Deed provides that the “Absolute Beneficiaries” of the MJH Fixed Trust are:

(a)    Hayes, as trustee of the MHFT – 95%; and

(b)    as noted above, Grawlex as trustee for the Superfund – 5%.

14    On 5 June 2018, Mr John Ioannou as settlor of the MJH Fixed Trust and Hayes, in its capacity as trustee of that trust, entered into a deed by which it was provided that the MJH Fixed Trust Deed was rectified by substituting Ragem as trustee for the Superfund as the named Second Absolute Beneficiary in lieu of Grawlex as trustee for the Superfund, with effect from the date of the establishment of the MJH Fixed Trust. That document was tendered and should be admitted into evidence. That it was duly executed was not controversial. What is highly controversial is its effect, if any, in law, especially given that it post-dates the Relevant Years. That question is addressed below.

15    Under cl 2.4 of the MJH Fixed Trust Deed, Hayes, as trustee MJH Fixed Trust, holds the Trust Fund as a bare trustee for the Absolute Beneficiaries in proportion to the Share of each Absolute Beneficiary. Further, under cl 2.5, an Absolute Beneficiary has the right to the possession of and to call for full title to their Share of any property forming part of Trust Fund.

16    “Absolute Beneficiary” is defined in cl 1.1 of the MJH Fixed Trust Deed as the persons specified as such in Part 6 of the Schedule. “Share” is defined in cl 1.9 of that trust deed as the percentage specified in Part 6 of the Schedule. Part 6 of the Schedule states that the first Absolute Beneficiary is Hayes as trustee for MHFT whose Share is 95% and the Second Absolute Beneficiary is Grawlex Pty Ltd as trustee for the Superfund (materially giving rise to the Grawlex or Ragem controversy) whose Share is 5%.

17    Under cl 3.3 of the MJH Fixed Trust Deed, at the end of each year, the trustee holds the net income of the Trust Fund for the absolute benefit of the Absolute Beneficiaries in proportion to their Shares. Under cl 20.1, the Second Absolute Beneficiary has an option to purchase any asset forming part of the Trust Fund. Under cl 20.2, this option may be exercised by the giving of a notice in writing identifying the asset it is exercised. The meaning of this clause is controversial. If the option is exercised, cl 20.3 provides for the transfer of the Asset in consideration for the amount equal to the market value of the asset payable to the trustee.

18    Also on 24 February 2010, the MJH Trading Trust was established by deed (the MJH Trading Trust Deed). The trustee of the MJH Trading Trust was, and remains MJH Trading Pty Ltd. Mr Hayes is, and was, the sole director of MJH Trading Pty Ltd. It is not in dispute that the MJH Trading Trust is a unit trust.

19    Having regard to the terms of the MJH Trading Trust Deed, the trust falls within that class of trusts in which, “the beneficial interest in the trust fund is divided into units, which when created or issued are to be held by the persons for whom the trustee maintains and administers the trust estate”: ElecNet (Aust) Pty Ltd v Commissioner of Taxation (2016) 259 CLR 73, at 90, [56] (ElecNet v Commissioner of Taxation).Though there is reference to s 102P in ElecNet v Commissioner of Taxation, the precise points which arise in this case concerning that section did not arise in that case.

20    Units in the MJH Trading Trust were allocated as follows:

(a)    80 units to Hayes as trustee for the MHFT; and

(b)    20 units to Hayes as trustee for the MJH Fixed Trust.

21    Clause 14 of the MJH Trading Trust Deed deals with “Distributions of Income”. It provides, materially:

14.3    Clauses 14.4 to 14.6 are intended to take precedence over the other provisions of the Deed and, in the event of conflict between those clauses and the other provisions of the Deed, Clauses 14.4 to 14.6 shall prevail.

14.4    For each year that the Trust is a Public Trading Trust:

14.4.1.    The net profit (or loss), after taking into account any income tax liability of the Trust shall be credited (debited) to the Retained Profits Account.

14.4.2    The Unitholders shall not be entitled to a share of the profits of the Trust except:

14.4.2.1    To the extent that a distribution has been made to the Unitholders in accordance with Clause 14.4.6; or

14.4.2.2    Upon termination of the Trust.

…

14.5    If in any year the Trust becomes or cease to be a Public Trading Trust, for each period in that year that the Trust is a Public Trading Trust, the provisions of Clause 14.4 shall apply as if that period were a year, and for each period in that year that the Trust is not a Public Trading Trust, the provisions in Clause 14.6 shall apply as if each such period were a year.

14.6    Where in any year the Trust is not a Public Trading Trust, and not otherwise, the following provisions of this Clause 14 shall apply.

…

14.9    Subject to Clause 14.3, 14.4. 14.5, 14.6 and 14.14, if the Trustee shall not by the Thirtieth day of June each year have exercised its discretion to pay, apply, set aside or accumulate the whole of the net income and the whole of the additional tax income (if any) then the Trustee shall hold such net income and such additional tax income (if any) not so paid, set aside or accumulated for the holders of ordinary units in proportion to their respective holdings.

…

14.11    Any amount set aside for the Discretionary Beneficiaries or for the Unitholders or held for the Unitholders pursuant to Clause 14.9 shall not form part of the Trust Fund but shall upon such setting aside or upon the said Thirtieth day of June be immediately held by the Trustee as a separate Trust Fund upon trust for the relevant Discretionary Beneficiaries or for the Unitholders absolutely with power to the Trustee pending payment over thereof to the Discretionary Beneficiaries or to the Unitholders to invest (which investment shall for the purpose of the statute governing trusts and trustees in the state or territory of the applicable law governing this Deed be a prudent investment) or apply for the benefit of the Discretionary Beneficiaries or the Unitholders or deal with such fund or any resulting income or any part in the manner provided for in this Deed in relation to the Trust Fund. The Trustee may mix such separate trust funds with each other and with the Trust Fund.

14.12    It is declared that each of the Discretionary Beneficiaries and the Unitholders in whose favour the Trustee shall pay, apply or set aside or who shall be entitled under Clause 14.9 to the whole or a part of the net income or the whole or a part of the additional tax income of the Trust Fund for that year shall have an immediate and indefeasible vested interest in that part of the net income or additional tax income for that year to which that Discretionary Beneficiary or Unitholder is entitled, it being the express intention of the parties that such of the Discretionary Beneficiaries and Unitholders in whose favour the Trustee shall pay, apply or set aside the net income or the additional tax income or who shall be entitled to share in the amount of such net income or additional tax income shall be presently entitled to his or her share of such net income or additional tax income.

22    Yet further on 24 February 2010, the MJH Rural Unit Trust was established by deed. By that deed, Hayes was appointed as, and remains, the trustee of the MJH Rural Unit Trust.

23    MJH Trading Pty Ltd, as trustee of the MJH Trading Trust, holds all (10 units) of the units in the MJH Rural Unit Trust.

24    Hayes, as trustee of the MJH Rural Unit Trust, is one of four equal partners in a partnership (the MJBP Hayes Rural Partnership) that carried on the business of farming. There is no written partnership agreement.

25    The entities and inter-relationships just described may be represented diagrammatically. I append such a diagram as Annexure A to these reasons for judgement.

26    The tax returns of the MJH Trading Trust for each of the Relevant Years were prepared and lodged on the basis that it was a public trading trust.

27    During the Relevant Years, the MJH Trading Trust received income comprising:

(a)    dividends;

(b)    distributions from other trusts;

(c)    interest.

28    The net income of the MJH Trading Trust in each of the relevant years was:

29    In the year ended 30 June 2011, the MJH Trading Trust made a franked distribution to Mr Michael Hayes of $100,000. Otherwise, in each of the Relevant Years, MJH Trading Pty Ltd, as trustee of the MJH Trading Trust, did not exercise its discretion to pay, apply, set aside or accumulate any of the net income of the MJH Trading Trust.

30    In each of the Relevant Years, Hayes, as trustee of the MHFT, did not, in its absolute discretion, determine to pay, apply, set aside or accumulate any part or parts of the net income of the MHFT.

31    On 8 December 2015, each of the General Beneficiaries entered into Deeds of Renunciation (Deeds of Renunciation). Materially, each of the Deeds of Renunciation provided:

1.    The Beneficiary forever renounces all the Beneficiary’s rights, interests and expectancies under and in respect of the Trust and the property the subject of the Trust (“the Trust Fund”);

1.1    as a default beneficiary from any rights, interests and expectancies under and in respect of the Trust and the Trust Fund pursuant to Clause 3.4 and Clause 4.2 of the Deed; and otherwise

1.2    as General Beneficiary of the Trust.

2.    The Beneficiary acknowledges that the Trustee may plead this Deed of Renunciation in bar to any claim by the Beneficiary in respect of the Trust Fund.

3.    For the purposes of the Deed of Renunciation, “claim” includes any suit, cause, proceedings, account, demand, claim, costs and expenses whether in respect of a debt, interest in property, damages or otherwise

The Assessments assume, and the parties conducted the appeal on the basis, that the effect of the Deeds of Renunciation is as stated in cl 1, 2 and 3, set out above, i.e. that the General Beneficiaries were not presently entitled to the net income of the MHFT for the Relevant Years.

32    Hayes’ more particular contention is that –

(a)    the MJH Trading Trust is a “public unit trust” under s 102P(2)(a) because a complying superannuation fund held an express option to acquire 20 units (amounting to 20%) in the MJH Trading Trust;

(b)    alternatively, the MJH Trading Trust is a public unit trust by virtue of s 102P(10) deeming the superannuation fund to be treated as though it owned the 20 units in the MJH Trading Trust;

(c)    the MJH Trading Trust is a “trading trust” within s 102N(1)(b) because its trustee owned 100% of the MJH Rural Trust, which carried on a business of primary production; and

(d)    in any event, MHFT was not presently entitled to any income of the MJH Fixed Trust or the MJH Trading Trust, because the trustee of the MJH Trading Trust accumulated its income in each relevant year of income.

33    On the other hand, the Commissioner’s detailed rationale for the Assessments is as follows. In each of the Relevant Years, Hayes, as trustee for MFT, was presently entitled to:

(a)    80% of the net income of the MJH Trading Trust; and

(b)    95% of the 20% share of the net income of the MJH Fixed Trust.

Clauses 3.4 and 4.2 of the MJH Family Trust Deed provide in effect that any net income that was not the subject of a determination shall be held on trust for the children of the Specified Beneficiaries, taking in equal shares. The children of the Specified Beneficiaries are the General Beneficiaries. Hayes did not determine to pay, apply, set aside or accumulate, in relation to the net income of the Michael Hayes Family Trust, for any of the relevant years. Accordingly, so the Commissioner reasoned and submitted, pursuant to the MJH Family Trust Deed, the General Beneficiaries would be presently entitled to the net income of the MHFT for each of the relevant years. However, as already mentioned, the General Beneficiaries executed effective Deeds of Renunciation. The result, according to the Commissioner, is that no beneficiary was presently entitled to the net income of the MHFT for the Relevant Years. Hence, pursuant to s 99A(4A) of the ITAA 36, Hayes, as the trustee of that trust, is liable to pay tax on the net income of the MHFT in each of the Relevant Years and has been correctly assessed accordingly.

34    I shall now address, in turn, each of Hayes’ contentions as to why the Assessments are excessive.

Is the MJH Trading Trust a “public trading trust”?

35    Section 102R(1)(b) of Div 6C of the ITAA 36 provides that in order to be a public trading trust in a year of income, a trust must be –

    a resident unit trust;

    a public unit trust; and

    a “trading trust”;

in relation to that year of income.

36    As noted above, that the MJH Trading Trust is a unit trust is not in dispute. Having regard to s 102Q of the ITAA 36, the MJH Trading Trust is a resident unit trust. That is because, during the Relevant Years, the property of the trust was in Australia and the central management and control of the trust was in Australia.

37    It is controversial as to whether the MJH Trading Trust is a “public unit trust”.

38    Section s 102P of the ITAA 36 defines a “public unit trust”. By s 102P(2)(a), a public unit trust includes a unit trust if:

at any time during the year of income, an exempt entity or exempt entities held, or had the right to acquire, or become the holder or holders of, a unit or units in the unit trust that entitled the holder or holders to not less than 20% of:

(i)    the beneficial interests in the income of the unit trust; or

(ii)    the beneficial interests in the property of the unit trust;

39    In the Relevant Years, s 102MD, as it then stood, provided that Div 6C of the ITAA 36 applied to the trustee of a complying superannuation fund, complying approved deposit fund or a pooled superannuation trust in the same way that it applied to an exempt entity.

40    At the hearing of the appeal, the Commissioner initially sought to make the question of whether the Superfund was a complying superannuation fund controversial. It is necessary to put matters that way because, both as originally filed and as later amended, the Commissioner expressly conceded in his appeal statement in respect of Grawlex (then thought by each of the parties to be the trustee) that, “the Commissioner accepts [it] was an exempt entity during the relevant years”.

41    That was the position at the time when case management directions were made fixing the trial dates and providing for the related prior filing of evidence and other pre-trial evidentiary steps (notably preparation of a casebook, later tendered and admitted into evidence without objection at trial ) and remained so as at the time of compliance with these directions. Hayes prepared its evidentiary case accordingly. In the course of the trial, the Commissioner sought further to amend his appeal statement so as to withdraw the concession earlier made. Some of the related arguments entailed pure points of law. These are dealt with below. One of the Commissioner’s proposed arguments in relation to s 102P(2)(a) of the ITAA 36 did not entail a pure point of law. It was that even if (which was not accepted) cl 20 of the MJH Fixed Trust Deed purported to provide an option to the trustee of the Superfund, the exercise of that option “might well” be prohibited by the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). This did not entail a pure point of law but also sought, for the first time, to raise an evidentiary controversy as to the sufficiency of the evidence before the Court to establish that an exercise of that option at any time during each of the Relevant Years would not be a breach of the in house asset requirements specified by and under the SIS Act.

42    While, pursuant to s 14ZZO of the TAA, the onus of proving the Assessments to be excessive falls on Hayes, that statutory prescription is not a licence for the Court to permit the Commissioner to respond to a taxation appeal in a procedurally unfair way. The reasons which I gave in Pacific Exchange Corporation Pty Ltd v Commissioner of Taxation (2009) 180 FCR 300, at [31] to [53], remain pertinent under the Court’s current taxation appeals practice. To have permitted at such a late stage the raising of such an evidentiary controversy would have been procedurally unfair. Upon reflection, the Commissioner did not seek to press an amendment of his appeal statement and sought further to amend his appeal statement so as to abandon the endeavour to raise this controversy. That stance was appropriate.

43    Hayes accepted, and the fact is, that the Superfund did not directly own any units in the MJH Trading Trust. However, subject to the controversy about the impact of the reference to Grawlex, the trustee of the Superfund does have a 5% interest as an Absolute Beneficiary of the MJH Fixed Trust. Hayes submitted that that indirect interest satisfied the requirement that it held, or had the right to acquire, 20% of the beneficial interests in income or property of the MJH Trading Trust.

Was there a right to acquire 20% of the units?

44    In the first instance, this right to acquire was said to follow from the following. Under cl 20 of the MJH Fixed Trust Deed, the Superfund has an option to acquire any asset forming part of the Trust Fund of the MJH Fixed Trust. The Trust Fund includes 20 units in the MJH Trading Trust, which constitutes 20% of the beneficial interest in its income and capital. Therefore, so Hayes’ submission went, the Superfund, in each relevant year of income, had a right to acquire units in the MJH Trading Trust, entitling it to 20% of the beneficial interests in the income and capital of the MJH Trading Trust and so satisfied the s 102P(2)(a) limb of the definition of “public unit trust”.

45    Clause 20 of the MJH Fixed Trust Deed is entitled “ABSOLUTE BENEFICIARY’S OPTION”. On closer examination, that option is granted to the “Second Absolute Beneficiary”. That is apparent from cl 20.1, which provides:

20.1    Option to Purchase Property

The Second Absolute Beneficiary has an option to purchase any asset forming part of the Trust Fund in accordance with this clause 20 (“the Beneficiary’s Option”).

Once again subject to the controversy about the impact of the reference to Grawlex, the “Second Absolute Beneficiary” is the trustee of the Superfund.

46    Clause 20.2 of the MJH Fixed Trust Deed states:

20.2    Exercise of Option

The Beneficiary’s Option may be exercised by giving notice in writing identifying the asset in respect of which the Beneficiary’s Option is exercised (“the Asset”) signed by the Absolute Beneficiary or by the Absolute Beneficiary’s solicitors and delivering or posting by prepaid ordinary mail such notice to the Trustee.

47    With reference to cl 20.2, the Commissioner submitted that it required written notice to be given by the “Absolute Beneficiary”. He then referred to the MJH Fixed Trust Deed’s definition clause, cl 1.1 wherein the singular “Absolute Beneficiary” is defined to mean the persons (plural) specified in Part 6 of the Schedule. The consequence, applying that definition, the Commissioner submitted, was that written notice to exercise the option required both the First and Second Absolute Beneficiaries to sign the written option notice. He submitted that there was no ambiguity in such a construction of the deed, because a consequence of the exercise of the option by the Second Absolute Beneficiary to purchase any asset forming part of the Trust Fund, which was held, so the Commissioner submitted, by the trustee of the MJH Fixed Trust as bare trustee for each of the Absolute Beneficiaries.

48    I do not accept this submission. Clause 20.1 confers what it terms the Beneficiary’s Option on the Second Absolute Beneficiary and only on the Second Absolute Beneficiary. Any impact of the definitions clause aside, the natural meaning of the reference in cl 20.2 to “the Absolute Beneficiary” is to the Absolute Beneficiary to whom the Beneficiary’s Option is granted. That is the Second Absolute Beneficiary. It is an odd construction to construe cl 20.2 as requiring that an option granted to but one of the Absolute Beneficiaries to be exercised by a notice signed by each of them. It is also a construction which is at odds with cl 20.3.1, which states:

In the event of the Beneficiary’s Option being exercised, the Trustee shall transfer to the Absolute Beneficiary the Asset in consideration for an amount equal to the market value of the Asset payable to the Trustee.

It is a natural construction of this clause, and one consistent with the like construction of cl 20.2, to construe the reference to the “Absolute Beneficiary” as the person to whom the Beneficiary’s Option is granted, the Second Absolute Beneficiary. Once again, it would be odd to require the trustee to transfer to each of the Absolute Beneficiaries an asset in respect of which an option to purchase had been granted to but one.

49    Definitions of expressions do not apply if the context indicates otherwise: Prenn v Simmonds [1971] 1 WLR 1381, at 1388-1389. Having regard to the context in which “Absolute Beneficiary” is employed within cl 20, this is such a case. The conclusion as to its meaning follows as a matter of construction and without any need for rectification: Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715, at 740, [19]-[23]; 759, [94]; and 797, [192].

50    On the basis of his submission that the Trust Fund was held only as a bare trustee, the Commissioner submitted that the trustee had no interest in the trust fund property. He submitted that, in the absence of the agreement of the First Absolute Beneficiary to the sale of the units in which it had an interest, it could not properly be said that there existed any right to acquire such units for the purposes of s 102P(2) of the ITAA 36.

51    These submissions also should not be accepted. By cl 2.2 of the MJH Fixed Trust Deed, the trustee of the MJH Fixed Trust holds “the Trust Fund upon the trusts and with and subject to the powers and provisions contained in this Trust Deed”. “Trust Fund” is defined at cl 1.12 to mean, materially:

cl. 1.12.2 any further or additional property which any person company or corporation may donate to assign to transfer to or vest in or cause to be vested in the Trustee to be held upon the trusts and subject to the powers and provisions of this Trust;

cl. 1.12.3 any other property which may from time to time be held by the Trustee upon and subject to the trusts herein contained; …

In turn, by cl 1.7, “Property” is defined at to mean, “real, personal, movable or immovable of any description and wheresoever situate including (without limiting the generality hereof) policies of insurance or endowment, cash and choses in action.”

52    The option to purchase granted to the Second Absolute Beneficiary by cl 20.1 is comprehensive – “any asset forming part of the Trust Fund”. Further, the MJH Fixed Trust Deed confers a correspondingly comprehensive power of sale on the trustee. By virtue of cl 8, the trustee of the MJH Fixed Trust has the “power to make or vary or sell any investment and to engage in any transaction or dealing on behalf of the Trust Fund as it could do if it were the beneficial owner of the Trust Fund absolutely entitled to it.” The units in the MJH Trading Trust form part of the “Trust Fund” until such time as an Absolute Beneficiary exercises its rights under cl 2.5 (which did not occur in the Relevant Years). It necessarily follows, as Hayes submitted, that it is within the powers of the trustee of the MJH Fixed Trust to deal with these units by selling them in compliance with the exercise of the option.

53    Another flaw in the Commissioner’s submission is that the First Absolute Beneficiary’s rights in relation to the Trust Fund are necessarily subject to and governed by the terms of the MJH Fixed Trust Deed, which materially include cl 20. If the Beneficiary’s Option is exercised under cl 20.2 the value of the units held in the “Trust Fund” is required to be “exchanged” for market value consideration (e.g. cash) transferred to the trustee (cl 20.3 and cl 20.4). That consideration would form part of the Trust Fund. The value of the First Absolute Beneficiary’s interest in the Trust Fund would therefore be unchanged by an exercise of the option granted to the Second Absolute Beneficiary.

What is the meaning and effect of the Deed of Rectification?

54    But who, for the purposes of the MJH Fixed Trust, is the “Second Absolute Beneficiary”?

55    Hayes approached the answering of this question in its submissions by reference to cases concerning the construction of commercial contracts. That there is an affinity as between the rules for the construction of contracts and those governing trusts, notwithstanding the distinction between contract and trusts may be accepted: Byrnes v Kendle (2011) 243 CLR 253, at 275, [59] and 286, [102], a case to which I was helpfully referred by the Commissioner.

56    The Commissioner submitted that there was no ambiguity present in the MJH Fixed Trust Deed. His submission was that the Second Absolute Beneficiary (cl 1.8) means the person described as such in Part 6 of the Schedule and that description is “GRAWLEX PTY LTD ACN 080 401 092 as trustee of the MJH Superannuation Fund”. I agree that there is no patent ambiguity present but there is another category of ambiguity, latent ambiguity, long recognised in trust law.

57    In the current (19th, 2015) edition of Lewin on Trusts, the authors offer, at p 248, [6-013], this pithy and accurate description of a latent ambiguity in a trust instrument, “These are ambiguities or equivocations that are not apparent from a reading of the settlement, but appear only when the words of the settlement come to be applied to the circumstances that exist.” That is this case.

58    The Commissioner submitted that regard might be had to surrounding circumstances only if there were an ambiguity present but, with consummate fairness, acknowledged that there was intermediate appellate authority to the effect that ambiguity might be found by reference to surrounding circumstances. The authority concerned is Cherry v Steele-Park (2017) 96 NSWLR 548, which was a contract, not a trust, case but is nonetheless presently instructive. In that case, at 566, [76], Leeming JA (Gleeson JA agreeing) stated:

There is now a deal of authority for the proposition that whether there is in truth a constructional choice available to a written contract cannot be determined without first at least considering evidence of surrounding circumstances.

This statement is followed by a comprehensive survey of authority which, in my respectful view, does indeed support the statement made by Leeming JA.

59    The relevant circumstances surrounding the execution of the MJH Fixed Trust Deed were events already recited but now desirably collated:

(a)    the MJH Fixed Trust Deed was executed on 24 February 2010 between Mr John Ioannou as settlor and Hayes;

(b)    on that same day, 24 February 2010, two further trusts were established:

(i)    the MJH Trading Trust, of which MJH Trading Pty Ltd was trustee; and

(ii)    the MJH Rural Unit Trust, of which Hayes is trustee.

60    Also as at 24 February 2010, there was a superannuation fund known as the “MJH Superannuation Fund” constituted, but its trustee, once Grawlex, no longer acted in that capacity, another corporation, Ragem then so acted.

61    Against this background, Hayes submitted that “the commercial purpose and object of the business structure was to ensure that the MJH Trading Trust would be a public trading trust, which required the MJH Superannuation Fund to hold an interest in the MJH Trading Trust through the MJH Fixed Trust”. Better put, in my view, is that the events of 24 February 2010 were not coincidental and the surrounding circumstances mentioned disclose an ambiguity in the MJH Fixed Trust Deed and the existence of a related “constructional choice”. Is it the reference to Grawlex or the capacity as trustee of the Superfund which is to be preferred? For the reason submitted by Hayes, the reference in the MJH Fixed Trust Deed to Grawlex as “Second Absolute Beneficiary” made no sense, unless it did indeed, as at 24 February 2010, act in the capacity as trustee of the Superfund. At the time of execution it was that capacity which was critical. The meaning to give to the nomination in Part 6 of the Schedule to the MJH Fixed Trust Deed as to who is the “Second Absolute Beneficiary” is therefore “the trustee for the time being of the MJH Superannuation Fund”.

62    I reach that conclusion with some diffidence. That diffidence flows from Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 (Simic v New South Wales Land and Housing Corporation). The pertinent background facts of that case are accurately recited in the headnote:

A statutory corporation entered into a construction contract with a builder. A term of the contract required the builder to provide the corporation with instruments issued by a bank in the form of an unconditional promise to pay the corporation, as security for the purpose of ensuring the due and proper performance of the contract. The builder obtained two such instruments from a bank and provided them to the corporation. Both the builder and the bank had misstated the corporation’s name and other information such that the amount in each instrument was expressed to be payable in favour of a named “Principal” that did not exist. The corporation made a demand for payment under each instrument. The bank refused to pay on the basis that the corporation was not the Principal named as payee in each instrument.

63    Against this background and reversing the New South Wales Court of Appeal, the High Court held that the Principal named in each instrument could not be construed as referring to the corporation instead of the named non-existent entity. The High Court’s conclusion was that the demand did not comply with the instrument, and the discrepancies and errors were not minor or merely typographical. It followed that, consistent with the principle of strict compliance, it was not possible for the bank to accept a demand from the corporation. Instead, the Court ordered that the instruments should be rectified so that each referred to the corporation. That was on the basis that the actual common intention of the builder and the bank was that the instruments should operate in favour of the builder’s counterparty to the construction contract, to provide security for the purpose of ensuring the builder’s compliance with the construction contract.

64    The High Court’s refusal in Simic v New South Wales Land and Housing Corporation to countenance the approach to and outcome of the construction of the instrument in question was heavily dependent on the principle of strict compliance, flowing from their commercial purpose (virtually equivalent to cash), which governs the legal effect and operation of performance bonds. That same feature does not attend the deed of trust in question here.

65    Simic v New South Wales Land and Housing Corporation is, in any event, of relevance for the observations made by French CJ as to the distinction, albeit not unrelated in practical operation, between permissible construction of a contract (or, one might add, deed of trust) and rectification of the same. French CJ stated, at 95-96, [18] and [20]:

18.    At a conceptual level, construction and rectification of a contract are different processes. The first involves determination of the meaning of the words of the contract defined by reference to its text, context and purpose. Resort to extrinsic circumstances and things external to the contract may be necessary to identify its purpose and in determining the proper construction where there is a constructional choice. The question for constructional purposes is not about the real intentions of the parties, not what the parties meant to say, but what they actually said.

…

20.    There is a conceptual distinction between construction and rectification but that does not mean that there is not a close connection in their practical operation. Professor Carter has pointed to the close relationship between construction and rectification and the pragmatic view that the fundamental difference between them lies in the ability to use the prior negotiations of the parties. However, he has properly acknowledged the difference of principle between mistakes which can be corrected by construction and those for which a formal order is required, commenting that:

The fact that rectification is a remedy informed by matters such as the prevention of unconscionable conduct must still have some relevance. (Footnote omitted.)

As to that, it may be added that the relevance is considerable given the historical and doctrinal bases upon which rectification is granted.

[Footnote references omitted]

66    Assuming, though, that resort to the surrounding circumstances is not permissible to reach the foregoing conclusion as a matter of construction, what is the effect of the Deed of Rectification?

67    On its face, the Deed of Rectification states (cl 1.2.3) that “the “Second Absolute Beneficiary” as described in Item 6 of the schedule of the [MJH Fixed Trust Deed] was described incorrectly”. The Deed of Rectification at least purports to rectify the trust deed, as and from the establishment of the MJH Fixed Trust such that the reference in the schedule is to Ragem as trustee for the Superfund (cl 1.1.3 and cl 2.1).

68    Hayes did not seek the rectification of the MJH Fixed Trust Deed by a State Supreme Court in the exercise of a general jurisdiction in equity. Neither did it make any application to this Court for such an order as an incident of the allowing of its taxation appeal. That was first and foremost because of its primary contention, which I have upheld, as to the true construction the MJH Fixed Trust Deed. It was also because it submitted, contrary to the submission made by the Commissioner, that an order for rectification was unnecessary. Hayes submitted that the result for which it contended was achieved by the Deed of Rectification.

69    Support for Hayes’ position is, it submitted, to be found in observations made by Hill J in Davis v Commissioner of Taxation (2000) 171 ALR 654 at [57] (Davis v Commissioner of Taxation). These must, necessarily, be read in the context of his Honour’s preceding observations, at [55] – [56]:

55    Counsel for Mr McLeod submitted that the sales tax law had to be seen against the background of the general law: cf MacFarlane v FCT (1986) 86 ATC 4477 at 4486 and Zobory v FCT (1995) 129 ALR 484 at 486-7. So much may be accepted. But that does not mean that the Commissioner is bound by the legal position “as accepted by the parties” as was then submitted. The parties to an agreement can not effect a change to an agreement retrospectively so that the agreement between them is altered as against the rest of the world. The parties can, no doubt, enter into an agreement, binding as between them, that a prior agreement they have entered into will be construed in a particular way from the moment the prior agreement was entered into. But the original agreement will, so far as the Commissioner is concerned, govern their relationship until the time of its amendment. For example A and B may enter into an agreement which provides, inter alia, that certain income will, for the term of the agreement, be held by A in trust for B. Later the parties may as between them agree to alter the arrangement ab initio to provide that that income will not be held in trust for B, but will always be treated as belonging to A beneficially. The agreement will be binding inter partes, but for income tax purposes the income will, until the date of the agreement, still be treated as beneficially the income of B.

56    The example above noted should be distinguished from the case where parties have entered into an agreement under the mutual mistake that the document they have executed records the terms of their bargain when it does not. In such a case an application could be made to a court for rectification of the written document. But even where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they have mistakenly executed, but what they in truth agreed upon.

57    As an alternative to an order of rectification the parties could execute a deed rectifying their prior writing. That deed, if truly operating to record that the parties were under a mutual mistake, and also setting out what the parties acknowledge to be the true agreement between them would not, any more than a court order, actually alter the position as between the parties. It would merely record that agreement as it always was. Whether by court order or by deed, rectification requires that there be a mutual mistake, that is to say what is required is that there be a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had: cf Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd 95 ATC 4620. Mistake as to the revenue consequences of the agreement would not bring about the same result: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384.

70    The points made by Hill J in Davis v Commissioner of Taxation, at [55] – [56], exactly correspond with some earlier observations made at trial and expressly approved on the later appeal to the Court of Appeal by Peter Gibson LJ (with whom Kennedy LJ and Sir Iain Glidewell agreed) in Racal Group Services Ltd v Ashmore [1995] STC 1151, at 1157 (Racal Group Services v Ashmore):

In my judgement, the principle…is that the court will make an order for rectification of a document if satisfied that it does not give effect to the true agreement or arrangement between the parties, or to the true intention of a grantor or covenantor and if satisfied that there is an issue, capable of being contested, between the parties or between the covenantor or a grantor and the person he intended to benefit, it being irrelevant first that rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences. On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.

71    I take the position to be as follows.

72    Rectification will only be ordered by a court of there is evidence of a mistaken expression of the true agreement between the parties. If there is such evidence, rectification will be ordered so as to bring that deed into conformity with the intention of the parties at the time it was executed: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374, at 384-385 (Baird v BCE Holdings); Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 (Commissioner of Stamp Duties (NSW) v Carlenka); Simic v New South Wales Land and Housing Corporation, at 117, [103]. To be persuasive, the evidence would have to be sufficiently precise and specific to displace the hypothesis arising from execution of the document that it expressed the true intention: Simic v New South Wales Land and Housing Corporation, at 102, [41].

73    Simic v New South Wales Land and Housing Corporation, which was a New South Wales case, was decided against the background of an exercise of original jurisdiction in which a like evidentiary provision to s 140 of the Evidence Act 1995 (Cth) (Evidence Act) was applicable. As did its State equivalent in Simic v New South Wales Land and Housing Corporation, s 140(1) of that Act dictates that it is the civil standard of proof which is applicable in this proceeding. The observations made in Simic v New South Wales Land and Housing Corporation as to the clarity of proof required in order to order rectification, which draw upon authorities which preceded such statutory provision in respect of the applicable standard of proof, must be regarded as exemplifying the need, now flowing from s 140(2)(a) of the Evidence Act, to take into account the nature of the cause of action and the presumption that the written terms of a contract or settlement are the repository of what the parties thereto intended.

74    A mutual mistake by the parties as to revenue law consequences of the terms of a document which they had executed would not provide a basis upon which to order rectification: Baird v BCE Holdings; Davis v Commissioner of Taxation; Racal Group Services v Ashmore and, to like effect on this point, Baxter v Commissioner of Taxation (2002) 196 ALR 519 at [25]-[26]. It is not though a bar to rectification otherwise warranted on the evidence that a fiscal benefit will attend the legal consequence that a document as rectified will have effect from the date execution.

75    Neither of the cases cited by Hill J in Davis v Commissioner of Taxation, Baird v BCE Holdings and Commissioner of Stamp Duties (NSW) v Carlenka, was concerned with the effectiveness, without an order by a court for rectification, of a deed such as the Deed of Rectification. Yet it is plain enough from his Honour’s observation that Hill J did not regard the practice of rectification by deed as uncommon. That the practice is not uncommon is confirmed not just by Baxter v Commissioner of Taxation but also by reference to the passage quoted from Racal Group Services Ltd v Ashmore and to a discussion in that case, at 1155-1157, by Peter Gibson LJ of earlier English authorities.

76    In relation to that practice, it seems to me that the position is that, if a deed of rectification has quelled any doubt or contest about an earlier instrument’s intended meaning, there is no occasion for a court of equity to exercise its jurisdiction to order rectification. The requisite doubt or controversy need not be raised by a party to or person taking under the earlier instrument. The requisite doubt or controversy can be raised via a third party such as the Commissioner or HMRC. The Commissioner’s disposition to regard the deed of Rectification as inefficacious is not an Australian idiosyncrasy.

77    A later United Kingdom case, Ashcroft v Barnsdale [2010] STC 2544; [2010] EWHC 1948 (Ashcroft v Barnsdale) offers assistance in relation to the practice exemplified by the Deed of Rectification and whether an order of rectification is both possible and appropriate.

78    The facts in Ashcroft v Barnsdale were as follows.

79    Charlotte Ashcroft (the deceased) died on 14 April 2006 leaving a Will under which she appointed her husband, David, and her brother, Andrew Barnsdale, as her executors and trustees. By cl 3 of her Will she left David “free of all duty and taxes payable at my death (a) the sum of TEN THOUSAND POUNDS and (b) All my freehold property situated in Surrey or Hampshire and occupied or farmed by me or me and my husband.” By cl 4 and cl 5, the deceased gave the residue of her estate on trust for her two children (Helen and Richard) absolutely. Clause 6 contained an extended power of investment.

80    Charlotte’s estate was worth approximately £1.7 million. The principal assets were farmland in Surrey worth about £585,000; shares and other investments worth about £995,000 and a share in a farming business worth about £80,000.

81    The Will was not efficient for tax purposes as the agricultural property was passing to the surviving spouse and the chargeable assets were falling into residue for the chargeable beneficiaries thus wasting Agricultural Property Relief at 100%. The estate’s accountants suggested that a Deed of Variation be prepared in which David exchanged the farmland for part of the share portfolio. A Deed of Variation was prepared by the estate’s solicitors on 24 August 2006 which provided that cl 3, 4 and 6 of the Will be deleted and the following clause be inserted:

2.1(a)    I GIVE the sum of £410,000 FOUR HUNDRED AND TEN THOUSAND DOLLARS to such of my children as shall be living at the date of my death and if more than one in equal shares.

2.1(b)    I GIVE to my children as shall be living at the date of my death my agricultural farmland known as Great Holt Farm Dockenfield Farnham Surrey and if more than one in equal share.

3     I GIVE DEVISE and BEQUEATH all my estate both realty and personalty whatsoever and wheresoever not otherwise disposed of by this my said will to my husband David Arnold Ashcroft.

82    There was no cl 3 in the Deed but by cl 4, which was headed “Executor’s Undertaking”, the executors undertook to administer the estate in accordance with the variation made by the Deed. Clause 5 of the Deed included the notices to Her Majesty’s Revenue and Customs (HMRC) under s 142 of the Inheritance Tax Act 1984 (UK) and s 62 of the Taxation of Chargeable Gains Act 1992 (UK).

83    The Deed of Variation was mistaken in a number of ways:

(a)    there was no cl 3 – the draftsman having apparently confused the new cl 3 of the Will with cl 3 of the Deed;

(b)    the deletion of cl 3, 4 and 6 was wrong because the residuary gift to the children was actually contained in cl 5 of the original Will;

(c)    the Deed left a sum of £410,000 to the children although the letter from the estate’s accountant had suggested the sum should be £410,772; and

(d)    on submission of the Inheritance Tax Account (Form IHT 200) to HMRC, it became apparent that the gift to the children had to be treated as ‘free of tax’ since there was no indication to the contrary and therefore had to be grossed up causing a further £33,000 of inheritance tax to be due, which reduced the residuary estate.

84    Initially, the parties sought to correct the mistake by executing a deed of rectification dated 20 September 2007 which was submitted to HMRC under cover of a letter dated the same date. In that letter, the estate’s solicitors asked HMRC to revise the inheritance tax position. HMRC refused to do this, stating that the parties would need to apply to the court for rectification. HMRC said they would not seek to be joined as a party to the application and would be bound by the court’s decision.

85    Against this background, an application was made to the Chancery Division of the High Court of England and Wales for rectification. It was heard and determined by his Honour Judge Hodge QC, sitting as a judge of that court. His Honour offered, at 2552, [15], what, in my respectful view is an attractive and accurate summary of what is and is not the function of rectification. It is, “to enable the court to put the record straight by correcting a mistake in the way in which the parties have chosen to record their transaction; it does not empower the court to change the substance of that transaction or to correct an error in the transaction itself”. If a rectification order is made, the instrument as rectified takes effect from the time of its execution. There is no “taxable fact” which is altered. The effect of rectification is to confirm that the instrument as rectified has been ever thus.

86    In Ashcroft v Barnsdale, none of the parties to the deed of variation which was the subject of the later deed of rectification contested the application for rectification. The deed of rectification was in evidence, as is its equivalent in the present case. As to the deed of rectification, Judge Hodge QC observed, at 2553, [19], “the recitals to the 2007 deed of rectification afford hearsay evidence of the parties’ true intentions”.

87    It being in evidence, I consider that, were rectification sought and necessary, I could and should make like use of the Deed of Rectification in this case. Even though Mr Hayes has not given evidence on this point and Mr Ioannou has given neither oral nor affidavit evidence, each has subscribed to the Deed of Rectification. Considered against the background of the other instruments executed on 24 February 2010 and the original and then identity of the trustee of the Superfund, the statements in the Deed of Rectification as to “error” (background, cl C), “should have been, from the date the Trust was established, [Ragem as trustee for the Superfund]” (cl 1.1.3) and “described incorrectly” (cl 1.2.3) are, applying the requisite standard of proof, consistent only with a conclusion that the reference in the MJH Fixed Trust Deed to Grawlex was the result of a mutual mistake as to the identity of the trustee of the Superfund as at 24 February 2010. I do not accept the Commissioner’s submission to the contrary.

88    As to the granting of relief by way of an order for rectification, in Ashcroft v Barnsdale Judge Hodge QC was satisfied, at 2554, [22], that the existence of the deed of rectification was not a bar to making of such an order, “there still remains an issue, capable of being contested between the parties, which will be addressed by an order for rectification. HMRC's letter of 19 October 2007 makes it clear that HMRC cannot accept the deed of rectification as having any effect for inheritance tax purposes unless the parties obtain a court order rectifying the deed of rectification” (it is apparent, elsewhere in [22] that the latter reference to the “deed of rectification” was inadvertent and ought to have been to the deed of variation).

89    Thus, in this case, the existence of the Deed of Rectification would not offer an obstacle to rectification. Utility in the making of an order would be demonstrated by the stance of the Commissioner. Further, as in Ashcroft v Barnsdale but unlike in Baird v BCE Holdings; Davis v Commissioner of Taxation and Baxter v Commissioner of Taxation, the mistake was not as to fiscal consequences. To the contrary, the existence of fiscal consequences serves in this case to confirm that the mistake was only ever as to identity. The present case is not, in my view, amenable to the criticisms recently voiced by Dr Simon Douglas of Jesus College, Oxford University in his article, “Misuse of Rectification in the Law of Trusts” (2018) 134 LQR 138, of some recent English cases where rectification has been ordered, seemingly in relation to what is in form and substance nothing more than a tax planning error.

90    Thus, were my conclusion as to the permissible construction of the MJH Fixed Trust Deed in error, I would have been prepared to order rectification as to correct the erroneous reference to Grawlex. In the circumstances prevailing in Simic v New South Wales Land and Housing Corporation, such an order was made as a sequel to the conclusion reached as to the impermissibility of the construction adopted in the judgment under appeal.

91    For completeness, I add that, in my view, the subject of rectification of the MJH Fixed Trust Deed was, for the purposes of s 32 of the Federal Court of Australia Act 1976 (Cth), associated with the jurisdiction invoked by the filing of the taxation appeal. The Court would possess jurisdiction to order rectification. In my respectful view, the references made by Hill J in Davis v Commissioner of Taxation at [57] in relation to the alternative of a deed of rectification refer to the efficacy inter partes of such a deed. Where the fiscal efficacy of rectification said to have been effected by deed is questioned, as for example by a revenue authority, it is necessary to apply for and prove an entitlement to an order for rectification. In that proceeding, the revenue authority should be joined, unless, as in Ashcroft v Barnsdale, it has signified that it will abide the order of the court. If the revenue authority chooses actively to contest rectification but rectification is ordered, one might expect that, in the ordinary course, costs would be awarded against it. Alternatively, as in in Ashcroft v Barnsdale, a revenue authority might choose to abide the order of the court in which rectification is sought, thereby not exposing itself to the prospect of an adverse costs order.

92    Thus, under the MJH Fixed Trust Deed, as a matter of construction, the “Second Absolute Beneficiary” is Ragem. If that construction is not permissible, that same result would permissibly (and should) be achieved by an order for the rectification of the MJH Fixed Trust Deed.

93    What follows from this is that, under cl 20 of the MJH Fixed Trust Deed, Ragem as trustee of the Superfund, had an option to acquire any asset forming part of the Trust Fund of the MJH Fixed Trust. That Trust Fund includes 20 units in the MJH Trading Trust, which constitutes 20% of the beneficial interest in its income and capital. Therefore, in each of the Relevant Years, Ragem, as trustee of the Superfund, had a right to acquire units in the MJH Trading Trust entitling it to 20% of the beneficial interests in the income and capital of the MJH Trading Trust.

Does s 102P(10) deem the Superfund to own 20% of the MJH Trading Trust?

94    As noted above, Hayes raised an alternative contention based on the contended operation of s 102P(10) of the ITAA 36. Materially, s 102P(10) provides:

For the purposes of this section, where any units in a unit trust … are held by the trustee of another trust estate, a person who has a beneficial interest in property of that other trust estate that consists of those units (whether or not that beneficial interest is deemed to be held by virtue of the application of this subsection) shall be deemed to hold those units.

95    Hayes submitted that s 102P(10) applied in this way:

    The relevant unit trust is the MJH Trading Trust.

    The “other trust estate” is the MJH Fixed Trust, the trustee of which holds 20 units in the MJH Trading Trust.

    The “person” who has the beneficial interest in the property of the MJH Fixed Trust is the trustee of the Superfund, which has a beneficial interest in 5% of the property of the MJH Fixed Trust, including its 20 units in the MJH Trading Trust.

    Because the trustee of the Superfund has a 5% interest in each one of the MJH Fixed Trust’s units in the MJH Trading Trust, it is deemed to hold those units.

96    As to the third of these propositions, as a company, Ragem, the trustee during the Relevant Years of the Superfund, is a “person”: s 6(1), ITAA 36 definition of “person”.

97    In respect of the fourth proposition, the Commissioner submitted that its acceptance would create “an artificial increase in the interest said to be held by the [Superfund]”. The Commissioner submitted that, “[p]roperly construed, the provision provides for the tracing of the actual beneficial interest in those units through ‘another trust’.” According to the Commissioner, s 102P(10) “allows the beneficial interest in relevant units to be recognised and traced through one or more trusts, but not to artificially inflate the extent of such beneficial interest”. The result in the present case, he submitted, was that “the effect of s 102P(10) is that the trustee of the Superfund is deemed to hold only 5% of the 20 units held in the Trading Trust (i.e. it holds 1% of the units in the MJH Trading Trust).” [Footnote omitted].

98    A difficulty in the Commissioner’s submission, and it appears to me to be a fatal one, flowing from the text of s 102P(10), is that the subsection states, “a beneficial interest in property of that other trust estate that consists of those units” (my emphasis). The subsection uses the indefinite article. Ragem, the trustee of the Superfund has a beneficial interest, namely a beneficial interest in 5% of the property of the MJH Fixed Trust, including its 20 units in the MJH Trading Trust. According to the text of s 102P(10), the specified deeming that follows is comprehensive, not proportionate.

99    Hayes submitted that, if the Commissioner’s construction were correct it would, “frustrate the apparent purpose of s 102P(10), which is to enable holdings of units by “exempt entities” to be traced through interposed trusts”. As s 102MD of the ITAA 36 stood in the Relevant Years, “exempt entities” included complying superannuation funds. The Superfund was such a fund. Hayes’ further submission was that, “[i]f the tracing did not stop with the complying superannuation fund but continued through the fund to the beneficiaries, it would defeat the purpose of s 102P(10), which was to extend the reach of s 102P(2)”. These submissions, which accord with the text, context and apparent purpose of s 102P(10), should be accepted. The Commissioner made reference to the relevant Explanatory Memorandum in an endeavour to support his construction. That confirms that s 102P was intended to have the character of a tracing provision. It is the text of the legislation, not that of the Explanatory Memorandum which must be construed. Hayes’ construction is not at odds with this. In the present circumstances, application of that construction of s 102P(10) traces the ownership of the MJH Trading Trust through the MJH Fixed Trust, back to the relevant exempt entity, the trustee of the Superfund.

100    In Ralph v Repatriation Commission (2016) 248 FCR 438, at 452 [56], the Full Court expressly approved the following observations made by Pincus J in Gauntlett v Repatriation Commission (1991) 32 FCR 73 at 77:

[T]his is not the first time in which the respondent Commission has implied in argument that provisions of this sort could not possibly have been intended to produce such anomalies as, literally read, seem to follow from them; but it is the constitutional function of Parliament, and not that of the judges, to correct any anomalies thought to arise from applying the plain language of legislation.

Those observations are just as apt in respect of the submissions concerning s 102P(10) made by the Commissioner in the present case. Amendments made to s 102MD since the Relevant Years mean that the Superfund would no longer be taken to be an exempt entity by virtue of that section. If, however, the text of s 102P(10) is still considered by Parliament to lead to anomalous results, it is within the remit of Parliament to amend it.

101    For these reasons, I conclude that the MJH Trading Trust was a public unit trust during the Relevant Years, in accordance with s 102P.

Is the MJH Trading Trust a “trading trust” within s 102N?

102    The final limb in Hayes’ 102R contentions was that the MJH Trading Trust was also a trading trust. Whether or not a unit trust is a trading trust for the purposes of Div 6C is governed by s 102N. Materially, s 102N(1) provided:

(1)    For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a)    carried on a trading business; or

(b)    controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

103    To succeed, Hayes must prove that the alternative criterion found in s 102N(1) applied to the trustee of the MJH Trading Trust. However, it was conceded by Hayes that the trustee of the MJH Trading Trust did not itself carry on a trading business. It did control, or was able to control, the affairs or operations of the MJH Rural Trust, because it owned all the units in the MJH Rural Trust.

104    Once again, it is essential to take heed of and apply the text of the relevant provision; here, s 102N(1)(b). The focus of the control test posited by the text of that provision is “the affairs or operations of another person in respect of the carrying on by that other person of a trading business”, not control of the business per se. Given that focus, and contrary to the Commissioner’s submission, it is nothing to the point that, as but one of four partners in the MJBP Hayes Rural Partnership, Hayes, as the trustee of the MJH Rural Trust, was not, on the evidence, able to control that partnership. In the absence of any express provision to the contrary in a partnership agreement, each of the partners is equal. That accords with Mr Hayes’ evidence as to how, in practice, the affairs of the partnership in the conduct of the farming business were conducted. He and each of his brothers had an equal say.

105    But the business is, nonetheless, carried on by that partnership, not Hayes, as the trustee of the MJH Rural Trust in its own right. Does this, as the Commissioner submitted, mean that, even if it otherwise met the criteria in s 102R, no unit trust the trustee of which was a partner in a partnership which carried on a trading business could be a public trading trust?

106    That, with respect, is an odd submission for the Commissioner to advance. Its acceptance would lead to an anomalous result in relation to the application of s 102N, which looks to be an integrity measure. The application of Div 6C to what would otherwise be a public trading trust could be avoided just by ensuring that the trustee of what would otherwise be taken by s 102N to be a trading trust carried on business in partnership rather than alone. The apparent purpose of s 102N, confirmed by regard to the Explanatory Memorandum, is, as Hayes correctly submitted, “to prevent a unit trust from avoiding Div 6C by placing activities that would constitute a trading business in an associated entity and channelling the income from that trading business through the unit trust so that tax is paid at the unitholder level”. In the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 4) 1985 (Cth), at p 81, it is stated in respect of what became s 102N(1)(b):

Paragraph (b) of section 102N is a safeguarding provision against arrangements to circumvent the operation of Division 6C by having activities that would constitute a trading business of a public unit trust carried on by an associated entity. By taking income from the associate in the form of eligible investment income, the trustee could otherwise ensure that the relevant trust did not qualify as a trading business and so avoid the operation of Division 6C.

By paragraph (b), a unit trust will be a trading trust in a year of income if, at any time during the year, the trustee of the unit trust was in a position to control the affairs or operations of another person (i.e., the associated entity) in respect of the carrying on by that person of a trading business.

107    It does not do violence to the text of s 102N(1)(b) of the ITAA 36, or to the law of partnership, to regard Hayes, as the trustee of the MJH Rural Trust, as carrying on a trading business even though it did so in common with other partners during the Relevant Years.

108    On the evidence and referencing the applicable provisions of the Partnership Act 1891 (Qld) (Partnership Act), Hayes, as the trustee of the MJH Rural Trust:

(a)    carried on a primary production business in common with a view of profit (s 5, Partnership Act);

(b)    received a share of the profits of the business carried on by the MJBP Hayes Rural Partnership (s 6(1), Partnership Act);

(c)    was able to bind the other partners of the MJBP Hayes Rural Partnership and that partnership (s 8(1), Partnership Act); and

(d)    was jointly liable for the debts and obligations of the MJBP Hayes Rural Partnership (s 12(1), Partnership Act).

In conjunction with the fact that the business was not an “eligible investment business” and therefore excluded from the definition of “trading business” in s 102M, these features are sufficient, in my view, to conclude that, in terms of s 102N(1)(b) of the ITAA 36, Hayes, as the trustee of the MJH Rural Trust, was carrying on a trading business during the Relevant Years.

109    What of the “in a position to control” aspect of s 102N(1)(b)?

110    There is no particular control test in or specified for the purposes of s 102N. As a general proposition, an entity may be said to control the affairs or operations of another if that entity has a presently existing power of control, or an enforceable and immediately exercisable right enabling it to control another: WP Keighery Pty Ltd v Commissioner of Taxation (1959) 100 CLR 66. It is the kind of control described by Viscount Simon LC (Lords Atkin, Thankerton, Russell of Killowen and Porter concurring) in British American Tobacco Co Ltd v Inland Revenue Commissioners [1943] AC 335, at 339-340:

I agree with the interpretation of “controlling interest” adopted by Rowlatt J. in B. W. Noble, Ld. v. Inland Revenue Commissioners, when construing that phrase in s. 53, sub-s. 2 (c), of the Finance Act 1920. He said that the phrase had a well known meaning, and referred to the situation of a man “whose shareholding in the company is such that he is the shareholder who is more powerful than all the other shareholders put together in general meeting.”

[Footnote reference omitted]

That looks to be the type of control envisaged by Parliament in s 102N(1)(b). Further, Parliament has prescribed that this type of control may be direct or indirect. Thus, control through an interposed entity would be sufficient.

111    On the evidence in the present case, under the MJH Rural Trust Deed, and as sole unitholder in respect of that trust, the trustee of the MJH Trading Trust could:

(a)    remove the trustee from office (cl 28.1.4);

(b)    appoint a new trustee on retirement or removal of the old trustee (cl 28.4);

(c)    call a meeting of unitholders (cl 30);

(d)    pass any ordinary or special resolution at the unitholders’ meeting (cl 31); and

(e)    sanction or prevent the trustee from revoking, adding to, releasing, deleting or varying the deed (cl 32.1).

Further, Mr Hayes was the sole director of both the trustee of the MJH Fixed Trust and the trustee of the MJH Rural Trust. In practice, each of these trustees was thus under common control. Yet further, as sole beneficiary of the MJH Rural Trust, the trustee of the MJH Trading Trust could require the trustee of the MJH Rural Trust to terminate the trust and transfer to it all the trust property, after payment of any liabilities. Taken in conjunction, these features mean that the trustee of the MJH Trading Trust could, throughout the Relevant Years, control the affairs or operations of the MJH Rural Trust.

112    For these reasons, the MJH Trading Trust was, by s 102N(1)(b), a trading trust.

113    It follows that each of the criteria in s 102R of the ITAA 36 are met on the evidence. The MJH Trading Trust was, during the Relevant Years, a public trading trust. The MJH Trading Trust was liable to be assessed and pay tax at the corporate tax rate. Hayes has therefore proved that the Assessments are wholly excessive.

Is Hayes otherwise not liable under section 99A on a share of the income of the MJH Fixed Trust and MJH Trading Trust?

114    Hayes submitted that, even if the MJH Trading Trust were not a public trading trust, it was not, as its trustee, liable to tax under s 99A of the ITAA 1936 in the Relevant Years. It submitted, and the position is, that, in that circumstance, cl 14.6 provided that cl 14.5 - cl 14.14 of the MJH Trading Trust Deed applied. Under cl 14.7.2 of that deed, the trustee may determine to accumulate any part of the net income for a year.

115    On the evidence (the financial accounts) and subject to the distribution noted above in respect of the 2011 income year to a non-unitholder, the trustee of the MJH Trading Trust credited its accounting profit to a “Retained Profits Account” rather than distributing it to the unitholders in each year of income. Those accounts are sufficient evidence that the trustee exercised the power in cl 14.7.2: Cajkusic v Commissioner of Taxation (2006) 155 FCR 430, at 436, [20].

116    The consequence is that neither Hayes nor the MJH Fixed Trust was entitled to any of the net income of the MJH Trading during the Relevant Years. On this basis also, the Assessments are wholly excessive.

Disposition of Taxation Appeal

117    Hayes has proved that the Assessments are wholly excessive. Its appeal must therefore be allowed, the objection decision set aside and the matter remitted to the Commissioner for the issuing of amended assessments in accordance with these reasons for judgement. The Commissioner must pay Hayes’ costs.

Associate:    

Dated:    27 March 2019

ANNEXURE A