FEDERAL COURT OF AUSTRALIA

Yazbek v Commissioner of Taxation [2013] FCA 39

THE COURT ORDERS THAT:

1.    The application be dismissed with costs.

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

REASONS FOR JUDGMENT

1    The issue in this case can be stated deceptively simply: does a ‘beneficiary of a trust estate at any time in [the year of income]’ in s 170(1) item 1(d) of the Income Tax Assessment Act 1936 (Cth) (the Act) include a person named as a potential object of a discretionary trust who received no income from the trust in that year?

2    The Administrative Appeals Tribunal (the Tribunal) answered that preliminary question: yes, and gave detailed reasons for doing so. This is an application for judicial review of that decision.

Jurisdiction

3    This proceeding commenced as an appeal under the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act). Under s 44 of the AAT Act, a party may appeal to the Federal Court on a question of law from any decision of the Tribunal. A right of appeal lies only from a decision of the Tribunal which constitutes the effective decision or determination of the application for review (Phillips v Inspector-General in Bankruptcy [2011] FCA 612 per Dodds-Streeton J at [46] – [55]). In this case, the decision of the Tribunal was of an interlocutory nature. Without objection from the Commissioner of Taxation (the Commissioner), the original application (NSD 1231 of 2012) was discontinued and the applicant filed the current application under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (the ADJR Act), presumably under s 5 of that Act. There is no dispute that this Court has jurisdiction under the ADJR Act. However, the Commissioner has, helpfully, addressed the issue and I will deal with it briefly.

4    Section 5 of the ADJR Act provides that a person aggrieved by a decision to which that Act applies may apply to the Federal Court for an order for review on the ground, relevantly in s 5(1)(f), that the decision involved an error of law. Schedule 1 to the ADJR Act provides that certain classes of decisions are not decisions to which the ADJR Act applies. Relevantly, decisions making, or forming part of the process of making, or leading up to the making of, assessments of tax, or decisions disallowing objections to assessments of tax, or decisions amending or refusing to amend assessments of tax, under certain Acts are not decisions to which the ADJR Act applies. The list of Acts does not include the AAT Act, but does include decisions made under particular sections of the Taxation Administration Act 1953 (Cth). The list of exclusions in Schedule 1 does not include decisions of the Tribunal, other than decisions conducted by the Security Appeals Division of the Tribunal.

5    Although the Tribunal is said to stand in the shoes of the Commissioner in affirming, setting aside or varying the decision, the process that the AAT undertakes is not an objection decision or the making of an assessment (Szajntop v Gerber (1992) 28 ALD 187 per Hill J at 190). The Commissioner contends, and I agree, that it is a decision of the AAT and is reviewable under the ADJR Act.

6    The decision of the Tribunal was not a decision as to procedural rights. It affected substantive rights and was determinative in these circumstances of the right of the Commissioner to amend an assessment outside the 2-year period from the notice of assessment. If the applicant had been successful, the proceeding would have been complete. The decision was ‘final or operative and determinative in a practical sense of the Tribunal’s power in conducting the review notwithstanding that [it] was made before the ultimate decision to be made by the Tribunal on the correctness or otherwise’ of the Commissioner’s decision (Commissioner of Taxation v McMahon (1997) 79 FCR 127 per Lockhart J at 129).

7    The Court has jurisdiction to hear the application for review and I am satisfied that it should do so.

Background facts

8    The facts are not relevantly in dispute. The applicant was a potential object of a discretionary trust (the Trust) at all times during the relevant tax year, 2005. He is defined as the member of an “eligible class” in the discretionary trust deed, being a class of persons who could benefit under the Trust. The other objects can be described as the applicant’s broader family, a total of 129 human potential objects. For the 2005 tax year, the applicant was an object of the Trust but did not receive a distribution from the Trust, nor was the power to appoint trust property to him exercised in his favour. The applicant characterises this as being that he was ‘not presently entitled to any amount of the trust law distributable income’ of the Trust. Such beneficiaries were the applicant’s wife and a company. The applicant did have rights under the law of equity to compel due administration of the Trust.

Statutory provisions

9    The relevant version of s 170(1) of the Act is set out below. It was inserted by the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005 (Cth) and applies in relation to assessments for the 2004-05 year of income by reason of cl 15 of Schedule 1 of that Act.

10    The table in subsection 170(1) of the Act provides timeframes within which an income tax assessment can be amended by the Commissioner in different circumstances. Items 1 and 4 of the table are relevant to this proceeding. Section 170 relevantly reads:

170    Amendment of assessments

(1) The Commissioner may amend an assessment as follows:

…

    …
    (emphasis added)

11    The original assessment was issued on 18 April 2006. The Commissioner issued an amended assessment on 12 April 2010. The Commissioner has amended the assessment for the applicant outside the period provided in item 1 for an individual but within the extended time that applies if one of the qualifications in that item applies.

12    The part of item 1 that is said to apply to the applicant is item 1(d). It is not in dispute that the provisos do not apply. In particular that the Trust was not an STS taxpayer for that year.

13    The applicant objected to the amended assessment. One of the grounds of objection was that the Commissioner exceeded the time limit allowed for amending the taxpayer’s assessment. The applicant’s submissions before this Court can be shortly summarised:

    The applicant was not a beneficiary of a trust estate within the meaning of s 170(1) item 1(d) of the Act during the 2005 tax year, but was only a potential beneficiary.

    Section 170(1) of the Act requires a relationship between the amended assessment and the relevant qualification.

14    There is no definition in the Act of ‘beneficiary of a trust estate’.

The decision of the Tribunal

15    The Tribunal addressed the meaning to be given to the phrase ‘beneficiary of a trust estate’ according to accepted legal principle, namely to interpret it, in the absence of any statutory definition, according to its ordinary meaning, and its ordinary technical meaning where appropriate, but being mindful of the context in which those words appear. The Tribunal set out these principles in some detail in its reasons. In particular, in considering the ordinary legal meaning of the word “beneficiary”, the Tribunal cited and adopted the observations of Lindgren J in Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 at [42] to [44], approved by Stone J in Colonial First State Investments Ltd v Federal Commissioner of Taxation (2011) 192 FCR 298. It acknowledged the different legislative provisions there considered but saw no basis for attributing any materiality to such distinction.

16    The Tribunal then turned to what it described, compendiously, as the submission that qualification (d) of item 1 of s 170(1) of the Act deals with operational matters or operative facts and not mere description or descriptive matters. It concluded that there was no basis for reading the qualification as anything other than a qualification that applies to the broad class of persons who are beneficiaries in the ordinary legal sense of that word. It said that the qualification was a descriptor, and that the qualifications in item 1 refer to a type of taxpayer without requiring that taxpayer to have derived any particular amount of income in that year. That is, that there is no need for a further operational event such as the receipt of income to arise for the qualification to apply.

17    The Tribunal did not accept the submission that the provision relates to the imposition of a tax or penalty. It pointed out that the provision simply provides for more time for amended assessments of the amount that the individual is obliged to pay by statute and also more time for the making of objections by the taxpayer. Nor did the Tribunal accept that the construction advanced by the Commissioner would produce ‘unlikely, improbable and surprising if not anomalous outcomes’. The Tribunal recorded the Commissioner’s submission that it was open to beneficiaries with no entitlement to the fund and who took no benefit under the trust, or those not aware that they were within the relevant class, to disclaim their interest.

The meaning of “beneficiary”

The ordinary legal meaning

18    The applicant contends that the description of “beneficiary” within the meaning of qualification (d) of item 1 does not include “potential beneficiaries” of a discretionary trust. He says that a “beneficiary” is ‘someone, for whom the trustee holds legal title in property, and who can deal with their equitable interest in that property as an owner’.

19    The applicant relies upon the definition of “beneficiary” in the LexisNexis Encyclopaedic Australian Legal Dictionary, as:

A beneficial owner of property who does not hold the legal title, but for whose benefit the legal title is held by a trustee under trust arrangement … A beneficiary holds an equitable interest in the property and can deal with this beneficial interest as an owner … Persons who are objects of a discretionary trust are commonly referred to as ‘beneficiaries’, but strictly speaking they are not, as they have no beneficial interest in the assets of the trust and have no more than a right to be considered as an object of the trustee’s discretion and a right to compel proper administration of the trust: Gartside v Inland Revenue Cmrs [1968] AC 553 ; [1968] All ER 121.

Consideration

20    However, this strict sense in which a beneficiary may be defined itself recognises the common usage of “beneficiary” to describe the broader category. In Kafataris, Lindgren J considered the ordinary legal meaning of “beneficiary” in the context of a consideration of whether a trust had a “sole beneficiary” for the purposes of s 104-55(5) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) (which is part of the Act by reason of s 6(1) of the Act). At [41]–[44] his Honour said:

41    The expression “beneficiary” is not defined in the Act and bears its ordinary meaning.

42    According to the ordinary meaning of the word, a beneficiary is any person for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms. It is trite that for every trust there must be a “beneficiary” so understood (see, for example, Re Denley's Trust Deed [1969] 1 Ch 373 at 382-384). A beneficiary is not simply a person who as a matter of fact obtains some practical benefit from the existence of a trust: Sacks v Gridiger (1990) 22 NSWLR 502 at 508.

43    The word “beneficiary” reaches beyond a person who has a beneficial interest in the trust property. It is possible for the legal estate in land to be vested in “trustees” without equitable ownership being vested in someone else. The trustees must, however, owe fiduciary obligations in respect of the trust property to persons who, although they may have no interest in the trust property and may never have an interest in the trust property, are called “beneficiaries”. In CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98, the High Court rejected (at [25]):

a “dogma” that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership.

That is to say, there can be a trustee who owes fiduciary obligations in respect of trust property to “beneficiaries” without any of the latter having a beneficial interest in the property.

44    Although the discretionary objects do not have a beneficial interest in any property the subject of a “discretionary” trust prior to a distribution or appointment of income or capital, they are freely referred to as “beneficiaries”; see for example, Gartside v Inland Revenue Commissioners [1968] AC 553 at 617-618; R & I Bank of Western Australia Ltd v Anchorage Investments Pty Ltd (1993) 10 WAR 59 at 79; Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509 at [25]-[28]. Provided it can be said with certainty that any particular person is or is not within the class of discretionary beneficiaries, there is a trust, due administration of which can be enforced by discretionary beneficiaries: see Re Gulbenkian's Settlements [1970] AC 508; McPhail v Doulton [1971] AC 424.

(emphasis added)

21    Justice Lindgren held, therefore, that the relatives who were the objects of Mr and Mrs Kafataris’ respective discretionary trusts were beneficiaries and, accordingly, that neither trust had a “sole beneficiary” for the purposes of s 104-55(5). His Honour concluded at [52] that:

… the applicants' submission wrongly assumes that in order to be a “beneficiary” according to the ordinary meaning of that term, a Relative must have become entitled to an interest in trust property. On the contrary, it is enough that the Relative has an expectancy and is entitled to compel the due administration of the trust by the Trustees.

22    This reasoning was followed by Stone J in Colonial First State.

23    While the applicant relies on Gartside, as cited above, the Commissioner relies on Leedale v Lewis [1982] 1 WLR 1319, where Lord Scarman characterised the term “beneficiary” as: ‘a term which everyone is agreed includes persons who are the objects of the discretionary trusts’. Leedale was considered by the Full Court in Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 174 FCR 387. The Full Court ultimately distinguished Leedale on the question of whether objects had an “interest” in the trust but, as the Commissioner notes, the Full Court in its reasons repeatedly referred to the objects of a discretionary trust as “beneficiaries”.

24    I accept that the common use of “beneficiary” includes a person who is the object of a discretionary trust, including a person who has received no income or benefit from the trust in a given year.

Statutory context

25    It is not in issue that ordinary principles of statutory construction are relevant, including looking primarily to the statutory provision but also to its context and place within the statute and admissible extrinsic material. The basic principles of statutory construction were recently restated by the High Court in Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross [2012] HCA 56.

26    The applicant says, in summary:

    The provisions for individuals were introduced into s 170(1) of the Act in 2005. This amendment changed the rules for individuals so that most individuals had a 2-year rather than a 4-year amendment period. This was said in the Explanatory Memorandum to apply to a majority of taxpayers.

    The 2-year period was not to apply, broadly, to those engaged in large businesses as a principal, partner, or beneficiary in a trust.

    There are numerous family discretionary trusts with potentially very large numbers of potential beneficiaries, many of whom would not necessarily know that they could be so characterised.

    Mischievous taxpayers could include as beneficiaries all residents of Australia or specific public figures. This would deny these included persons the benefit of the 2-year amendment rule.

    Parliament’s intention that the majority of individuals will have a 2-year amendment limitation period would be defeated by the inclusion of potential beneficiaries as beneficiaries for the purposes of s 170(1).

    There is no logical reason to extend the assessment period for individuals who are not in receipt of benefits from a trust.

    Other provisions of the Act have linked assessment with the “present entitlement” of the beneficiary (ss 97(1) and 95A(2)); a share of a capital gain or franked distribution to which the beneficiary is “specifically entitled” (ss 115-228 and 207-58 of the 1997 Act), that is, received or is reasonably expected to be received; and amounts being “trust property paid to” the beneficiary or “applied for the benefit of” the beneficiary (s 99B(1) of the Act).

Consideration

27    The common meaning of “beneficiary” answers the applicant’s submission.

28    The language of qualification (d) is, simply, the ‘beneficiary of a trust estate’. It is not ‘the beneficial owner of trust property’, nor does it provide that the person is presently entitled to a share of trust income or capital or for any other limitation, such as a beneficiary to whom trust property has been appointed.

29    Qualification (d) does say that it applies if the individual is a beneficiary of a trust estate at any time in that year. This could indicate that the circumstances require something to happen in that year other than the existence of the capacity as a beneficiary. However, qualifications (a), (b) and (c) each use that expression “at any time in that year” to describe the status of the person: a person carrying on a business, a partner in a partnership that carries on business, the trustee of a trust estate, rather than circumstances that occur within those positions.

30    As the Commissioner submits, a qualification based on status has the advantage of simplicity and objectivity. Further, the Commissioner points out that where the Act intends to refer to a ‘beneficiary presently entitled’ to trust property, those words are used and not ‘beneficiary of a trust estate’ and refers in particular to other provisions in Part III Division 6: ss 97, 98, 98A and 100A.

31    The language of qualification (d) and the statutory context do not obviate the common meaning of “beneficiary”.

The legislative history

32    There are a number of strings to the applicant’s bow. He draws on the legislative history and submits that, in circumstances where the limitation of the period for amendment was, relevantly, two years, Parliament cannot have intended to make a fundamental change such that such a potentially large class of individuals as named beneficiaries of discretionary trusts would be disentitled to that limitation without specific reference to it in the Explanatory Memorandum.

Consideration

33    The extrinsic materials do not purport to provide any definition of “beneficiary”. However, the extrinsic materials indicate that the intention of Parliament was to include within the qualifications persons whose affairs were “complex”, that is, more complex that that of the “mere” individuals. This was intended to allow the Commissioner additional time to make amendments to assessments for persons with more complex affairs. A person who is actually or potentially a beneficiary entitled to a beneficial interest could come within such characterisation. A beneficiary of a trust, even if he or she has not received trust income in a particular year, may be seen as having more complex affairs.

34    The Explanatory Memorandum to the Bill which introduced s 170(1) of the Act as it applied in relation to the assessment explains that the taxpayer will be excluded from the standard amendment period if he or she has “complex affairs”. That criterion for the qualifications in s 170(1) seems to accord with the status of the taxpayer, but does not exclude the circumstances of the affairs of a particular year.

Consequences of the Tribunal’s construction of “beneficiary”

35    The applicant contends that the construction of “beneficiary” adopted by the Tribunal involves an inconvenient result. He suggests that an assessing action could be ‘arbitrary and capricious, if not haphazard and gratuitous’ as the timeframe can depend on whether the Commissioner can locate a trust of which the taxpayer is a potential beneficiary. This would give the Commissioner extra time to make an amendment, the applicant says, in circumstances that were not seen as justifying extra time.

36    The Commissioner says in response that qualification (d) of item 1 does not operate arbitrarily. He says that it is a reasonable approximation of the true complexity or otherwise of an individual’s tax affairs, having the advantage of simplicity and objectivity. The Commissioner also points out that s 170 of the Act does not impose any tax, let alone any penalty.

Consideration

37    In Commissioner of Taxation v Ryan (2000) 201 CLR 109, in response to contentions of absurdity and incongruity, Gleeson CJ, Gummow and Hayne JJ noted (at [19]) that the question for decision was what were the circumstances in which an amended assessment may lawfully be issued. That question was not answered by asserting the existence of a general policy or overall intention for certainty and finality unless that policy or intention was to be found reflected in the provisions of the Act. Their Honours said that appeals to notions of “fairness” or “justice” usually mean that the conclusion asserted has no foundation in the legislation. Further, their Honours said (at [22]) that the “risk” to which the taxpayer was exposed by extended time limits for assessment was a risk that he or she will be called on to pay amounts lawfully due under the statute.

The link between the assessment and the beneficiary

38    The applicant then submits that there is a necessary link between the assessment that may be the subject of amendment and the status of the person as a beneficiary. That is, for the qualification to apply, the assessment must be by reason of that person’s status as a beneficiary: he or she must be a beneficiary in receipt of income or benefit or be assessed in the capacity of a beneficiary. Put another way, he says that there must be a connection between the assessing power and the amendment power, between the assessment of income or benefit from the Trust and the power to amend. The applicant says that there are limited ways in which a “beneficiary” can be assessed as such which do not involve having become an ‘actual beneficiary’, but involve some further trigger fact or circumstance. He draws attention to s 97(1)(a) of the Act which provides for the assessable income of a beneficiary: ‘the beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate’ and also to s 99B which refers to ‘an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate’.

39    The applicant submits that the Commissioner cannot use qualification (d) to amend an individual’s assessment beyond two years, other than in that person’s capacity as a ‘beneficiary of the [relevant kind of] trust estate’. This is said by the applicant to accord with the nature of the other qualifications in item 1, which are circumstances which provide what he describes as a ‘tenable justification for giving the Commissioner extra time to make amendments’ which relate only to those circumstances, which are more complex. Otherwise, the applicant contends, s 170(1) becomes a ‘capricious system’ giving extra time to the Commissioner which would otherwise be unavailable and such a consequence cannot have been intended by Parliament. The applicant says that it follows that the Court should reach an available alternative construction that is reasonably open and more clearly conforms with legislative intent (referring to IRG Technical Services Pty Ltd v Federal Commissioner of Taxation (2007) 165 FCR 57 per Allsop J at [21]). Further, he says, the rule of construction of tax statutes, considered in Anderson v Commissioner of Taxes (Vic) (1937) 57 CLR 233 at 243 and Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 at 510–511 and endorsed by Edmonds and Gilmour JJ in Virgin Blue Airlines Pty Ltd v Federal Commissioner of Taxation (2010) 190 FCR 150 at [30], requires that the imposition of a special, more rigorous, or penal tax regime must be in plain terms. This means, he says, that the words ‘a beneficiary of a trust estate at any time in that year’ must be construed to mean a person entitled to receive a benefit under the trust, being an ambit of the application of the tax that extends no further than that which can be taken from the clear words of the statute.

40    The Commissioner’s response is first to rely upon the fact that qualification (d) contains no qualification or restriction on the phrase “beneficiary of a trust estate”. It is, he says, a simple, objective qualification, as are the other qualifications in item 1. He also says that Div 6AAA of the Act as it then applied provides for the assessment of a beneficiary, inter alia, whether or not that beneficiary had rights in law or in equity to benefits from the trust estate. The Commissioner also refers to s 99B(1) of the Act in which an amount applied for the benefit of a beneficiary may be taxed. The Commissioner says that the word “beneficiary” is used elsewhere in the Act to refer to or include the object of a discretionary trust, such as s 101 of the Act, which also draws a distinction between a beneficiary who is the object of a discretionary trust and a beneficiary receiving income or a benefit from the trust, who is deemed to be “presently entitled”. Another example given is s 152-78 of the 1997 Act which refers to beneficiaries in the context of persons who did not receive a distribution of income or capital.

41    The Commissioner also points out that s 170(10) itself provides that nothing in s 170 prevents the amendment, at any time, of an assessment for the purpose of giving effect to a number of specified provisions of the Act. This is in answer to the applicant’s submission that the intention was to limit those persons who were not subject to the 2-year limitation in s 170(1).

Conclusion

42    The applicant has, in this Court, basically repeated the arguments advanced to the Tribunal. I see no error in the decision or reasoning of the Tribunal. I note the reasoning of Lindgren J in Kafataris, which was followed by Stone J in Colonial First State. I do not accept that such reasoning is clearly wrong; indeed I agree with it and I do not accept the applicant’s submission that the reasoning is inapposite to this case. The ordinary meaning of “beneficiary” is a person for whose benefit a trust is to be administered and who is entitled to enforce the trustee’s obligation to administer the trust according to its terms. I agree with the Tribunal that it applies to the meaning to be given to “beneficiary” in the present context in the Act. That meaning accords with the ordinary and ordinary technical meaning given to “beneficiary”. This was even acknowledged in the LexisNexis Dictionary on which the applicant relies.

43    I do not accept that there is an absurdity said to flow from the Tribunal’s construction that would mean that the ordinary meaning should be displaced. It is not an absurd construction that Parliament intended to increase the time limit for amending an assessment of a “beneficiary” in the ordinary sense of the word where the “risk” to the taxpayer is that the taxpayer would be called on to pay amounts that are lawfully due under the statute (Ryan at [22]).

44    There is no reason in the context of the section and of the Act or the Explanatory Memorandum not to give the word “beneficiary” its commonly accepted meaning. It is not apparent that Parliament intended qualification (d) of item 1 of s 170(1) of the Act to have other than its ordinary meaning and to apply only to those contingent beneficiaries who received benefits in the relevant year. Where such was intended, the Act generally makes that clear, for example by referring to a ‘beneficiary presently entitled’.

45    I do not accept that qualification (d), in the context of s 170(1), item 1 of the Act, requires that the amendment period of two years applies unless the assessment is of a beneficiary in the capacity of a beneficiary or is otherwise linked to income received as a beneficiary. The qualification is descriptive of the person. If the person is the beneficiary of a trust estate in the ordinary sense of that word, the time for amendment in item 1 does not apply.

46    It follows that the application should be dismissed with costs.

Associate:

Dated:    31 January 2013