FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Moignard [2015] FCA 143

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The order of the Administrative Appeals Tribunal on 30 May 2014 be set aside.

3.    The matter be remitted to the Administrative Appeals Tribunal for rehearing before another member of the Tribunal.

4.    Unless proper cause is shown to the Tribunal, no further evidence is to be adduced at the rehearing.

5.    The Applicant pay the Respondent’s costs of the appeal to be taxed or agreed.

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

REASONS FOR JUDGMENT

1    This appeal on questions of law from the Administrative Appeals Tribunal (the AAT) concerns the assessment of the tax payable by the respondent (Mr Moignard) for the 2007-2008 financial year.

2    The Commissioner’s initial assessment, issued on 13 July 2010, was that no tax was payable. However, after an audit, on 4 April 2011 the Commissioner issued an amended assessment assessing Mr Moignard’s tax liability at $243,959.84. This included tax on his assessable income of $195,814.20 and shortfall interest of $36,133.74. In addition, the Commissioner imposed a penalty of $187,043.45 (including an amount for aggravating factors) in respect of Mr Moignard’s delayed lodgement of his tax return for the 2007-2008 year.

3    The amended assessment was issued because the Commissioner included in Mr Moignard’s assessable income the assessed profit of $480,476.25 made on the sale of a property in Rupert Street, Collingwood (the Collingwood Property). The Commissioner determined that Mr Moignard had received this amount as a beneficiary of a discretionary trust then known as the Rupert Street Trust but later renamed “the Hundred of Comaum Trust” (the RS/HoCT) which was the vendor of Collingwood Property. He considered that the amount of $480,476.25 was properly assessable as income of Mr Moignard in accordance with ss 97(1)(a) and 101 of the Income Tax Assessment Act 1936 (Cth) (the ITAA).

4    Mr Moignard’s objection to the amended assessment was disallowed on 27 April 2012 but his application for review by the AAT pursuant to s 14ZZ(1)(a)(i) of the Taxation Administration Act 1953 (Cth) (the TA Act) succeeded: Moignard and Commissioner of Taxation [2014] AATA 342. The Senior Member considered that the evidence indicated that the $480,476.25 was not assessable income of Mr Moignard in his personal capacity but instead of Mr Moignard in his capacity as trustee of another trust, the Wine Logistics Trust (the WLT). The Senior Member held that, even if those conclusions were wrong, Mr Moignard had in any event effectively disclaimed any entitlement to a distribution from the RS/HoCT. The order made by the Senior Member was to “set aside the objection decision under review”.

5    The Commissioner’s notice of appeal contains six grounds, each of which was said to raise a separate question of law. In addition to complaints that the AAT misconstrued or misapplied provisions in the ITAA and the TA Act, the Commissioner contends that the AAT’s reasons are insufficient; that the AAT failed to give effect to the onus of proof imposed on Mr Moignard by s 14ZZK of the TA Act; and that it failed to make a determination of Mr Moignard’s tax liability.

6    Mr Moignard contends that several of the Commissioner’s grounds of appeal do not raise questions of law at all. In addition to supporting the AAT decision, he contends, by Notice of Contention, that the decision should be affirmed on a further ground, namely that the assessment to which he objected had been issued pursuant to s 170, with the effect that s 14ZZK required him to show only that the sum of $480,476.25 had been incorrectly included in his assessable income for the 2007-2008 year.

7    The principal matter agitated by the parties on the appeal was whether Mr Moignard was, in the terms of s 97(1) of the ITAA, “presently entitled” to a share in the RS/HoCT in the 2007-2008 year so that share had to be included in his assessable income.

Statutory provisions

8    Section 97(1) of the ITAA provides that the income of a trust estate to which a beneficiary is “presently entitled” is to be included in the assessable income of the beneficiary.

97 Beneficiary not under any legal disability

(1)    Subject to Division 6D, where a 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:

(a)    the assessable income of the beneficiary shall include:

(i)    so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii)    so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; and

…

It was not suggested that Div 6D, to which subs (1) is made subject, had any relevance presently.

9    The term “net income of the trust” used in s 97(1)(a) is defined in s 95(1) of the ITAA to mean (relevantly):

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a tax payer in respect of that income and were a resident, less all allowable deductions, except …

In Commissioner of Taxation v Bamford [2010] HCA 10; (2010) 240 CLR 481, it was held that the term “income of the trust estate” takes its meaning from the general law of trusts. Generally, the income of a trust is to be calculated by reference to the terms of the relevant trust deed and to appropriate accounting provisions.

10    Section 101 deems a beneficiary to be presently entitled to the income of a trust in particular circumstances:

101 Discretionary trusts

For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee’s discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary’s benefit by the trustee in the exercise of that discretion.

11    In the AAT, the Commissioner relied upon s 101 as he contended that there had been an exercise of discretion by Mr Moignard in his capacity as trustee of the RS/HoCT to distribute the net proceeds of the sale of the Collingwood Property to himself in his personal capacity. His position in the alternative was that, if there had been no exercise of the discretion, then the default provisions in cl 3(4) and (5) of the RS/HoCT trust deed governed the position, with the effect that the net profit from the sale of the Collingwood Property was to be regarded as distributed to Mr Moignard and his two children in equal shares. During the hearing of this appeal, the Commissioner indicated that he now considered that the default provisions governed this case. I will return to those provisions shortly.

The factual circumstances

12    On 30 May 2005, a company known as Wares Printing and Mailhouse Pty Ltd (WPM) which was effectively controlled by (or at least associated with) Mr Moignard, took a lease of the Collingwood Property. The lease included an option for WPM to purchase the property for $750,000.00. At some time before 15 October 2006, WPM assigned the option to Mr Moignard for $730,000.00. The director and secretary of WPM was a Ms Leydon, who was described by the AAT as “a business associate and personal assistant” to Mr Moignard.

13    On 29 June 2007, Mr Moignard, as trustee for the RS/HoCT purchased the Collingwood Property for $730,000.00. Two months later, the Collingwood Property was sold for $1,315,000.00 to an unrelated party. Settlement occurred on 25 October 2007. The net proceeds from the sale were $902,609.71. Mr Moignard received one cheque from his conveyancer on 25 October 2007, made out to himself, in the sum of $822,835.56 and, on or before 2 November 2007, a cheque from his real estate agent in the sum of $79,774.15, being the balance remaining after the agent had deducted its own fees from the deposit of $131,500.00.

14    On 25 October 2007, Mr Moignard established a Classic Banking account with NAB in his own name. He was the sole signatory. On 26 October 2007, he deposited the cheque of $822,835.56 into that account.

15    On 2 November 2007, Mr Moignard deposited the sum of $79,774.15 received from the real estate agent into a NAB Bank Account in the name of “Bay Terrace Holdings Pty Ltd (as trustee for the BTH Trust)”. That account (the BTH Account) had been opened on 27 February 2004 and Mr Moignard was its sole signatory. Mr Moignard was the sole director and secretary of Bay Terrace Holdings Pty Ltd from 13 June 2007 to 29 October 2008. It has since been deregistered.

16    On 31 October 2007, Mr Moignard purchased the property at Lot 1, Comaum School Road, Comaum in South Australia (the Comaum Property) for $500,000.00 which (apparently) contained an established vineyard. The AAT noted (at [32]) that Mr Moignard had made a declaration of trust by which he declared that he had always held the Comaum Property since its acquisition in his “fiduciary capacity as trustee of the trust”. The AAT also noted that the declaration of trust had not been signed by Mr Moignard, nor witnessed or dated, and did not include the date upon which the Comaum Property was acquired. The AAT did not make any findings as to the circumstances in which the declaration of trust was brought into existence or as to its effect, but did note that the balance sheet for the RS/HoCT for the 2007-2008 year income included “land and buildings – Hundred of Comaum” at $551,727.00. The AAT did not make any finding as to when that balance sheet was prepared, but given the other evidence, it may well not have been until 2010 or 2011.

17    In either 2006 or 2007, Mr Moignard had established a wine merchandising business called “Wine Logistics”. The business was conducted by the WLT of which Wine Logistics Pty Ltd was the trustee. Between 13 June 2007 and 29 October 2008, Mr Moignard was the director of Wine Logistics Pty Ltd.

18    The AAT found (at [82]) that the funds in the NAB Classic Banking Account and in the BTH Account had subsequently been paid to a variety of suppliers, other trusts and beneficiaries. It accepted (at [88]) that 82% of the funds deposited in the NAB Classic Banking Account had been disbursed, not for Mr Moignard’s personal use, but for vineyard and wine-related purposes in the 2007-2008 year and that 78% of the funds deposited in the BTH Account had been disbursed on vineyard and wine-related business expenses in the 2007-2008 year.

19    In September 2010, Mr Moignard provided the Commissioner with a copy of a document dated 1 July 2007 entitled “Asset Transfer Deed” between Wine Logistics Pty Ltd (as trustee for the WLT (as vendor)) and himself (as trustee for the WLT (as purchaser)). Mr Moignard also provided the Commissioner with a copy of another document entitled “Asset Transfer Deed” and dated 1 July 2008 between Stephen Lionel Moignard (as trustee for the WLT (as vendor)) and Stephen Lionel Moignard (as trustee for the RS/HoCT (as purchaser)). The AAT did not make any finding as to when these documents were brought into existence, nor as to their effect. It did however note (at [50]) that Mr Moignard had not provided any other documentation to support his claim that business of Wine Logistics had been transferred from the WLT to the RS/HoCT on 1 January 2008.

20    Mr Moignard did not lodge income tax returns for the RS/HoCT or for himself for the 2006-2007 and 2007-2008 years in a timely way. On 23 April 2010, after earlier issuing final notices and notices of intention to commence prosecution action, the Commissioner notified Mr Moignard that he had “determined” his liability for tax for the 2007-2008 year pursuant to s 167 of the ITAA (the default assessment provision) and provided reasons for that determination. He determined that the tax payable was $363,695.67 comprised of tax of $207,826.10 and a penalty of $155,869.57. The Commissioner made the determination on the basis that Mr Moignard’s personal income included the amount of $480,476.00 being the net proceeds from the sale of the Collingwood Property as calculated by the Commissioner. His letter informed Mr Moignard that, if he had not contacted the relevant tax officer by 5 May 2010, he would receive “a notice of assessment and a notice of assessment of administrative penalty”.

21    On 4 May 2010, Mr Moignard’s tax agent requested the Commissioner to defer issuing a notice of assessment until 31 May 2010 on the basis that the outstanding taxation returns for both RS/HoCT and Mr Moignard would be lodged by that date. The Commissioner agreed to that deferral. The personal returns for the 2006-2007 and 2007-2008 years of income were lodged on 5 July 2010 as was a return for the RS/HoCT for the 2006-2007 year. The personal return for the 2006-2007 year of income reported a net capital loss of $8,000,000.00 and the 2007-2008 return carried forward that same loss. A draft tax return for the RS/HoCT for the 2007-2008 year was submitted on 31 May 2010, but it seems that a final return has still not been lodged.

22    On 13 July 2010, the Commissioner issued the assessment referred to at the beginning of these reasons which reflected Mr Moignard’s self-assessment in the return lodged on 5 July 2010 that he had no taxable income in the 2007-2008 year.

23    Following the issue of the initial assessment, the Commissioner’s officers conducted further investigations, including by way of informal interview with Mr Moignard and his tax agent and by requests for further information. Mr Moignard claimed that the business of Wine Logistics had become the business of RS/HoCT from 1 January 2008, having been transferred to RS/HoCT when the latter acquired the Comaum Property.

24    On 9 February 2011, the Commissioner informed Mr Moignard that, following the audit of his return for the 2007-2008 year, his views, as set out in the determination of 23 April 2010, remained unchanged. Subsequently, on 4 April 2011, the Commissioner issued the amended assessment for the 2007-2008 year of income to which I referred at the commencement of these reasons.

25    Also on 4 April 2011, Mr Moignard executed documents, including a document entitled “Deed of Disclaimer” by which he disclaimed the distribution to him in his personal capacity of the proceeds of sale of the Collingwood Property and a resolution by which he purported to distribute the net income of the RS/HoCT for the 2007-2008 year to the WLT.

The AAT’s decision concerning Mr Moignard’s “present entitlement”

26    In the AAT, the Commissioner argued that the deposit by Mr Moignard of the sum of $822,835.56 in the NAB Classic Account in his own name amounted to, or evidenced, an exercise of his discretion as trustee of the RS/HoCT to pay the trust income to himself as a specified beneficiary of the trust, with the effect that the deeming provision in s 101 applied. In relation to the sum of $79,774.15 paid into the BTH Account, the Commissioner argued that, as that company was controlled by Mr Moignard, that deposit also amounted to, or evidenced, an exercise of Mr Moignard’s discretion as trustee of the RS/HoCT to apply part of the settlement proceeds to his own benefit. The Commissioner argued that formal declarations or resolutions by Mr Moignard to these effects were unnecessary in order for there to be an exercise of the discretion to which s 101 referred.

27    The Senior Member rejected these submissions for a number of reasons:

(a)    The mere payment of trust monies into an account in Mr Moignard’s own name did not of itself activate the application of s 101 as that application depended on there being an “allocation” of funds (at [76], [86]);

(b)    The deposit of $822,835.56 into a bank account in Mr Moignard’s own name was not evidence that the sale proceeds had been received by him in his personal capacity (at [77]-[78]) and was explicable because there was no bank account in the name of the RS/HoCT in existence at the time: at [86];

(c)    Even in the absence of any other plausible reason for the sum of $79,774.15 being deposited in the BTH Account, the circumstance that Mr Moignard controlled Bay Terrace Holdings Pty Ltd was not evidence that Mr Moignard had received that money in his personal capacity;

(d)    Mr Moignard had “sufficiently demonstrated that the [WLT], rather than [Mr Moignard] in his personal capacity, was beneficially entitled to the distributable income of the [RS/HoCT] for the 2007-2008 year of income.” (at [80]);

(e)    The discrepancy between the “trust law income” and the cheque for the sum of $79,774.15 made it difficult to understand how the Commissioner had determined that that amount was part of the “trust law income” of the RS/HoCT: at [84];

(f)    The conveyancer in the sale of the Collingwood Property had mistakenly failed to ensure that the cheque for the settlement proceeds showed the correct details, namely, Mr Moignard acting as trustee for the RS/HoCT so that (inferentially) no inference adverse to Mr Moignard could be drawn in that respect: at [86]. In any event, as the cheque had not been drawn by Mr Moignard, it could not be regarded as evidence of his intention as trustee in relation to the distribution of the funds: at [87];

(g)    The funds in the NAB Classic Bank Account had in fact been treated as trust funds: at [86].

28    Although reaching these conclusions, the AAT did not make any finding as to whether Mr Moignard had made a determination during the 2007-2008 year as to the distribution of the trust income.

29    The Senior Member went on to hold that, in the event that his conclusion regarding the operation of ss 97 and 101 of the ITAA was incorrect, Mr Moignard’s disclaimer on 4 April 2011 of any distribution from the RS/HoCT in the 2007-2008 year had been effective.

The adequacy of the AAT reasons

30    The Commissioner contended that the AAT’s reasons failed to comply with s 43(2B) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) because they did not “include findings of fact material to its decision and [contained] insufficient reasoning to enable the parties to understand the basis for the decision and [did] not enable the [Commissioner] to correctly reassess the Respondent’s income in accordance with the decision.” Counsel contended that the reasons failed to address, or to address adequately, the following matters:

(1)    The terms of the trust deed for the RS/HoCT, in particular who was entitled to benefit under the deed in the circumstances in which, for trust law purposes, a beneficiary would become presently entitled to income of the RS/HoCT;

(2)    The quantum of the net income of the RS/HoCT;

(3)    Whether the RS/HoCT made any determination (written or oral) during the income year with respect to the distribution of the income of the RS/HoCT;

(4)    The relevance and effectiveness (or otherwise) of the written resolution made in April 2011 by Mr Moignard, as trustee of the RS/HoCT by which he resolved that the net income of the trust for the 2007-2008 year be applied for the benefit of the WLT. The resolution identified the amount the net income as $384,242.00 and indicated that that amount was 100% of the net income of the RS/HoCT for the 2007-2008 year;

(5)    How Mr Moignard’s use of certain amounts in the NAB Classic Banking Account was to be reconciled with his finding that the amounts were held on trust and, in particular, whether the disbursal of the funds for personal purposes was a “payment, application or setting aside” of income as contemplated by the RS/HoCT trust deed;

(6)    Whether the default beneficiary clause in the trust deed (cl 3(4)) was engaged because Mr Moignard had failed to make an effective determination with respect to some or all of the income of the trust available for distribution by year end such that he had, at the least, a present entitlement to one-third of the undistributed/unaccumulated income;

(7)    Whether Mr Moignard was aware of his entitlement to income from the RS/HoCT prior to the Commissioner’s decision on 4 April 2011 on his objection;

(8)    The nature of the purported disclaimer of 4 April 2011;

(9)    The underlying facts found by the AAT to support its conclusion that the sum of $480,476.00, or some portion of it, was properly assessable to Mr Moignard as trustee of the WLT.

31    The Commissioner’s overall submission was that the perceived shortcomings in the reasons made it difficult for him “to determine with any certainty whether the Tribunal correctly applied ss 97 and 101” and to determine “whether the Tribunal’s judgment is consistent with the taxpayer being properly assessable on some of the net income of the [RS/HoCT], such as by reason of amounts of the income of the trust having been applied to meet personal expenses of the taxpayer.”

32    Subject to certain qualifications which are not presently pertinent, the AAT is required to give reasons, either orally or in writing, for its decision (AAT Act s 43(2)). Section 43(2B) contains a stipulation as to the content of written reasons:

(2B)    Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based.

33    In Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323, the High Court considered the effect of s 430 of the Migration Act 1958 (Cth), a counterpart provision to s 43(2B). McHugh, Gummow and Hayne JJ, with whose reasons Gleeson CJ agreed, rejected the submission that s 430 imposed an obligation on the Refugee Review Tribunal to make findings on any and every matter of fact objectively material to the decision which it was required to make:

[68]    … In its terms, [s 430] it requires no more than that the Tribunal set out the findings which it did make. Neither expressly nor impliedly does this section require the Tribunal to make, and then set out, some findings additional to those which it actually made. … But it is not right to read "material" as providing an objective or external standard of materiality. A requirement to set out findings and reasons focuses upon the subjective thought processes of the decision-maker. All that s 430(1)(c) obliges the Tribunal to do is set out its findings on those questions of fact which it considered to be material to the decision which it made and to the reasons it had for reaching that decision.

(Emphasis in the original and citations omitted)

34    Following the decision of Yusuf, s 43(2B) has been held as imposing an obligation on the AAT to set out only its findings on those questions of fact which it considers to be material for the decision it makes and to its reasons for reaching that decision: TelePacific Pty Ltd v Commissioner of Taxation [2005] FCA 158, (2005) 218 ALR 85 at [52]; Beringer Blass Wine Estates Ltd v Geographical Indications Committee [2002] FCAFC 295, (2002) 125 FCR 155 at [102]-[103].

35    The circumstance that the AAT does not make findings about particular matters may have a number of possible consequences including: supporting an inference that any matter not mentioned was not considered by the AAT to be material and thereby providing a basis for judicial review; indicating an incorrect application of the law to the facts; and jurisdictional error: see Yusuf at [69]. A failure altogether to comply with the obligation imposed by s 43(2B) is an error of law warranting this Court’s intervention on an appeal under s 44(1) of the AAT Act.

36    In the present case, although counsel for the Commissioner contended that the AAT’s reasons did not satisfy the obligation imposed by s 43(2B), she did not develop a submission to that effect, for example, by referring to the relevant authorities. I did not understand counsel to be contending that the identified shortcomings in the AAT’s reasons amounted of themselves to an error of law or that, by themselves, they warranted this Court’s intervention. Rather, the submissions seemed to be that the identified shortcomings, or at least some of them, supported the conclusion that the AAT had erred in the ways identified in the other grounds of appeal. I propose to consider and determine the appeal on this basis.

The issue of “present entitlement”

37    The Commissioner submitted that the AAT had erred in a number of respects in its determination of this issue.

38    As already noted, s 97(1) of the ITAA has the effect that, in order for a share of the income of a trust to be assessable in the hands of a beneficiary, the beneficiary must be “presently entitled” by the end of the relevant financial year to that share. The meaning of the term “presently entitled” in this context is settled. In Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271, the High Court said:

The parties are agreed that the cases establish that a beneficiary is “presently entitled” to share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. … That question must be answered as at the time when the interest was derived, that is to say, during the tax years.

(Citations omitted)

See also Bamford at [37].

39    It is also established that the integers of a present entitlement for the purposes of s 97(1) are to be determined by reference to the general law of trusts, including the terms of the particular trust in question: Bamford at [36]-[39]; Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16, (2011) 192 FCR 298 at [26]-[27], [37]-[38].

40    Section 101 of the ITAA, quoted earlier in these reasons, deems a beneficiary to have a present entitlement when a trustee with a discretion to pay or apply income of a trust estate for the benefit of specified beneficiaries exercises that discretion in favour of that beneficiary.

41    The RS/HoCT was established on 17 April 2007 as a discretionary trust with Mr Moignard as the sole trustee. Clause 3 of the trust deed provides for the treatment of trust income:

(1)    The Trustees may at any time before the expiration of any Accounting Period with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period determine:

(a)    To pay apply or set aside the same for any one or more of the General Beneficiaries living or in existence;

(b)    To accumulate the same;

…

PROVIDED that nothing in this paragraph shall oblige the Trustees to set aside any sum aforesaid or affect any rights of the Trustees in the event of any assessment of tax being made against them in respect of any amount so paid applied or set aside.

(2)    The following provisions shall apply to any determination pursuant to sub-clause (1) of this clause:

…

(c)    A determination to pay apply or set aside any amount to or for the benefit of any beneficiary may be effectually made and satisfied (inter alia) by placing such amount to the credit of such beneficiary or to the credit of a beneficiaries’ control account in the books of account of the Trust Fund or by drawing any cheques in respect of such amount made payable to or for the credit or benefit of such beneficiary or by paying the same over to or for the benefit of such beneficiary in such manner and to such person on behalf of such beneficiary as the Trustees shall think fit providing that all amounts paid applied or set aside shall be paid applied or set aside in Australia;

…

(f)    Without limiting the ability of the Trustees to make a determination by other means the Trustees may effect a determination for the purposes of this clause by oral declaration or by written statement whether or not published to any person and a certificate by the Trustees as to any determination shall be prima facie evidence that such determination was made as and when set out in such certificate and any determination or determinations in an accounting period may be made in respect of one or more types of income (gross or net) for one or more beneficiaries or class of beneficiaries.

…

(4)    The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a valid determination effectually made in relation to such Accounting Period by 9.30pm Eastern Standard Time on the last day of that Accounting Period in trust successively for the persons described in sub-clauses (1) (2) (3) and (4) of clause 4 hereof as and from that time in that Accounting Period.

(5)    Any amount set aside for any beneficiary and any amount held by the Trustees in trust for any person pursuant to sub-clause (4) of this clause shall cease to form part of the Trust Fund and upon such setting aside or becoming subject to such trust (as the case may be) shall thenceforth be held by the Trustees on separate trust for such person absolutely with power to the Trustees pending payment over thereof to such person to invest or apply or deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in clause 6(5) hereof.

42    The “Accounting Period” to which cl 3 refers is defined in cl 1(1) of the trust deed to mean (relevantly) each period of 12 months ending on the 30th day of June in each year.

43    Clause 4 of the trust deed to which cl 3(4) refers, is wrongly numbered in the trust deed as a second cl 3. Subject to that correction, cl 4(2) provides for a class of beneficiary described as a “special beneficiary”. These are three specified beneficiaries, namely, Mr Moignard and his two children. Accordingly, the effect of cll 3(4), 3(5) and 4(2) is that, in the absence of a timely valid determination relating to the net income of the trust, the trustee (Mr Moignard) would hold the net income on a separate trust for each of himself and his two children as the default beneficiaries.

44    In short, the RS/HoCT is a discretionary trust by which the trustee may “pay, apply or set aside” the net income of the trust for any one or more of the general beneficiaries or may accumulate that income. If the trustee does not make a valid determination as to the net income of the trust fund by the end of each accounting period, then the trustee holds that income on a separate trust for each of the named default beneficiaries, who include Mr Moignard.

45    Against that additional background, I turn to the Commissioner’s particular contentions concerning the AAT’s determination of the issue of “present entitlement”.

A requirement for allocation?

46    At the AAT hearing, the Commissioner contended that s 101 of the ITAA applied so as to deem Mr Moignard to have a present entitlement to the amount of $480,476.00. He contended that the deposit of monies in a personal bank account of Mr Moignard and in the bank account of a company controlled by him amounted to an exercise of his discretion as trustee to pay or apply trust income to or for his own benefit as a specified beneficiary of the RS/HoCT.

47    The AAT rejected that submission, saying at [76]:

The respondent has incorrectly interpreted the operation of s 101. There must be evidence of the exercise of the trustee’s discretion for s 101 to operate, and the mere receipt of funds by a discretionary beneficiary may activate s 101, but only if that receipt is “allocated”. As the applicant has correctly submitted, in my view, the only basis for the application of s 101 is allocation and taxation of beneficiary income on a receipts-basis must be rejected.

48    The Commissioner submitted that the AAT was in error in considering that the operation of s 101 imposed some process of “allocation”.

49    In my opinion, the AAT’s reference to allocation does not indicate that it was imposing an unwarranted additional condition on the operation of s 101. Instead, the AAT was addressing a submission which the Senior Member attributed to the Commissioner to the effect that s 101 would apply to deem Mr Moignard to be presently entitled to an amount even if the trustee of the RS/HoCT had not made a declaration, resolution or other act to distribute that amount to him, providing that an amount had been paid to Mr Moignard’s benefit – see [68(a)] of the AAT reasons. (It is not clear that counsel for the Commissioner had made that submission in those terms, but nothing turns on that for present purposes).

50    The submission of Mr Moignard which the AAT accepted in the quoted passage from [76] was based on a passage in the reasons in Case V85 (1988) 1 ATC 589 at [47]. The AAT in that case, over which Spender J presided, said:

The situation where the trustee allocates and pays the share of the net income during the year of income, and the situation where the trustee allocates during the year of income but pays after the close of the year of income, are not to be distinguished. In each case, present entitlement arises on the allocation of the net income and Div. 6 operates accordingly.

(Emphasis added)

51    Relying on this passage in Case V85, Mr Moignard had submitted to the Commissioner:

“[A]llocation” is a necessary step in determining present entitlement. The discretion of the trustee must be exercised in order to invoke the operation of s 101. The exercise of the discretion of the trustee is not being deemed by the provision, but the present entitlement of the beneficiary.

In this context, it is apparent that the AAT used the word “allocation” and its cognate as a shorthand description of the exercise of a trustee’s discretion to pay or apply income of a trust estate for the benefit of a specified beneficiary. It is such an exercise of discretion on which the operation of s 101 turns. Understood in this way, the AAT was not introducing an additional requirement into the operation of s 101.

52    The reliance on s 101 of the ITAA in the AAT may have been a distraction. It is not at all clear that there was any scope in this case for the application of the deeming effect for which it provides. Gummow J made an observation to this effect in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 552:

Section 101 of the Act has the result, with regard to discretionary trusts, that where the power in question is vested in the trustee and the trustee exercises the discretion in favour of an object of the power, then that person is deemed to be presently entitled to the amount paid to him or applied to his benefit. In the case of objects of the power who were sui juris, s 101 would, in such cases, add little to what would already be done by s 97 of the Act.

53    Similarly, in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 at 477, Hill J said:

A discretionary trust deed may provide a discretion in the trustee to determine, in respect of the income of a particular year, who among a class of beneficiaries is to be entitled. If that determination were made prior to 30 June in a year of income and was irrevocable the consequence would be under s 98 that there would be as at the end of the year of income (that being the relevant time to determine the issue) present entitlement under s 97. There would be no need to have any deemed present entitlement in such a class of case assuming, for present purposes, that there had been no payment of any amount to the beneficiary. In the class of case where there had been a payment, then s 95A(1) would deem the beneficiary to continue to be presently entitled to the income and thus keep s 97 of the Act applicable …

Where on the other hand a discretionary trust deed provides that the trustee has a discretion to pay or apply income of the trust estate to or for the benefit of beneficiaries at his discretion and where there has been a payment there would not (at least in the absence of s 95A(1) which was introduced in 1979) be present entitlement at the end of the year of income, nor in the event that income had been applied in favour of a beneficiary would there have been such present entitlement because, looking at the matter as at the end of the year of income, there would have been no right in the beneficiary to sue the trustee for his share of income, that right having been satisfied by the payment or application already made under s 101. Thus it doubtful that s 101 was intended to cover the entire field. For almost all purposes (and perhaps indeed for all purposes) it will be irrelevant whether a beneficiary is presently entitled under s 97 or 98 or merely deemed to be presently entitled by force of s 101. …

54    For these reasons, the focus on s 101 in the AAT may, as I have said, have been a distraction, but the AAT did not make the error which the Commissioner attributed to it.

Determining present entitlement and the trust deed

55    The Commissioner submitted that the AAT had “misconstrued and misapplied” ss 97 and 101 of the ITAA by determining the existence or otherwise of Mr Moignard’s present entitlement to the trust income without reference to the trust deed and without making the findings of fact on the issues to which its provisions gave rise. As counsel’s submission developed, it seemed that this was not so much a submission that the AAT had misconstrued the two provisions but that it had failed to address the matters they required to be determined. This was particularly so given that s 14ZZK of the TA Act cast on Mr Moignard the burden of proving that the assessment of 4 April 2011 was “excessive”.

56    The AAT understood that the question of whether the $480,476.00 was to be included in Mr Moignard’s assessable income for the 2007-2008 year turned on whether he had a present entitlement to that sum by 30 June 2008. It also referred, appropriately, to the elements of a present entitlement identified in Harmer. However, the AAT did not refer at all to the provisions in the RS/HoCT trust deed by which a present entitlement may accrue to a beneficiary of that trust. Indeed, the AAT’s reasons contain only two references to provisions in the deed. The first was in [17] in which the AAT recorded some formal details relating to the establishment of the RS/HoCT. The second was in [68(b)] in which the AAT summarised the Commissioner’s alternative submission that, if no determination as to the distribution of the trust income had been made before 30 June 2008, it was to be taken to have been distributed to the default beneficiaries. In that context, the AAT referred to subcll 3(4) and (5) and subcll 4(1) and (2).

57    Having regard to the burden of proof on Mr Moignard, the elements of present entitlement for the purposes of s 97, and the provisions in the trust deed, it was necessary for Mr Moignard to satisfy the AAT that:

(a)    he had not made a “determination” of the kind contemplated by cl 3 before the end of the 2007-2008 year to “pay, apply or set aside” the income of the RS/HoCT for his own benefit;

(b)    he had before the end of the 2007-2008 year made a valid determination as to the payment, application or setting aside of the trust income to some other beneficiary (so that the default provision in cl 3(4) of the trust deed which would have resulted in him having one-third of the net income was inapplicable).

These involved matters of mixed law and fact: Mulherin v Commissioner of Taxation [2013] FCAFC 115 at [38].

58    The AAT reasons do not anywhere indicate that it had identified those issues and, subject to some qualifications, do not contain findings of fact concerning them. It is implicit in the AAT’s conclusion that, for the purposes of s 101, there must be an “allocation”, that it proceeded on the basis that there must be an exercise of discretion by the trustee, and to that extent, the AAT can be seen to have addressed in part the first of the two identified issues. Similarly, the AAT statement at [80] that “the resolution, whether written or otherwise” must be made before the end of the financial year is in part a recognition of the first issue. But the AAT does not address the questions of whether and how any resolution had in fact been made. It did not refer to cl 3(2)(f) of the trust deed which was relevant to that question. That clause provided that, without limiting other means by which the trustee could make a determination, the trustee may effect a determination by oral declaration or by written statement and went on to provide that a certificate of the trustee was to be prima facie evidence of such a determination.

59    Instead of identifying and making findings of fact regarding those questions, the AAT’s reasons are expressed in terms of ultimate conclusion. This is evident from the following paragraphs in particular.

[80]    … In my view, the applicant did not have a vested and indefeasible interest in that share of the net income of the [RS/HoCT] in the 2007/2008 year of income. On the evidence, I am satisfied that the applicant has sufficiently demonstrated that the Wine Logistics Trust, rather than the applicant in his personal capacity, was beneficially entitled to the distributable income of the [RS/HoCT] for the 2007/2008 year of income.

…

[89]    The respondent has submitted that the applicant has not discharged his burden of proving that the amended assessment for the 2007/2008 is excessive (s 14ZZK(b) of the Taxation Administration Act 1953). On the material before me, this submission cannot be maintained. In my view, there is evidence (which I have outlined above) to show that the amended assessment is excessive. As was said by Brennan J in Federal Cmr of Taxation v Dalco:

The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point …

[90]    Having reviewed it further, the evidence before me shows that the sum of $480,476, which was derived on the sale of the Rupert Street property and transferred to the applicant’s NAB Classic Banking account and to the bank account in the name of Bay Terrace Holdings, was not assessable income of the applicant under s 97 of the ITAA for the 2007/2008 year of income. I am satisfied that there is sufficient evidence to show that the sum (or some portion of the sum) was properly assessable to the applicant for the 2007/2008 year of income, as trustee of the Wine Logistics Trust.

(Citations omitted and emphasis added)

60    The circumstance that the AAT did not refer to the relevant elements of cl 3, and address these elements which were relevant to the issue of present entitlement, together with the statements of generalised conclusion, gives rise to the apprehension that it did not address itself appropriately to the issues to be determined on the application for review.

61    In [89] of the reasons, the AAT referred to the observation of Brennan J in Dalco that when the Commissioner and a taxpayer had agreed to confine an appeal to a specific point of law, the taxpayer may not have to do more than show that he or she is entitled to succeed on that point. That suggests an apprehension by the AAT that it was required to determine only a single issue, namely, whether the respective deposits into the NAB Classic Banking Account and the BTH Account amounted to a distribution to Mr Moignard personally.

62    However, this was not a case in which the Commissioner and Mr Moignard had agreed to confine the appeal to a single issue. By [4] of the preamble to the Commissioner’s Statement of Facts, Issues and Contentions, the Commissioner stated his reliance on s 14ZZK of the TA Act and said “save for any facts expressly agreed or admitted in writing, [he] puts the applicant to proof of all facts upon the applicant seeks to rely to establish that the assessments, the subject of these proceedings, are excessive”. Further, counsel for the Commissioner submitted expressly that, if it was found that Mr Moignard had not made a distribution to himself personally, then the Commissioner relied upon the default distribution provision in cl 3(4) and (5) of the trust deed. Accordingly, the terms in which the AAT expressed itself in [89] also suggest that the AAT did not appreciate all the issues arising for its determination.

63    I am not overlooking in this respect the agreement of the parties, mentioned for the first time in a supplementary written submission provided by leave after the hearing, that there had been an “implied agreement” to confine the question to be determined on the review. I will return to that “implied agreement” later in these reasons.

64    The impression that the AAT did not appreciate the task required of it is also strengthened by its acknowledgment in [90] that some only of the sum of $480,476.00 may be assessable to Mr Moignard in his capacity as trustee of the WLT. If only some of that amount was assessable to the WLT, then the AAT had to be satisfied (by Mr Moignard) that none of the balance was assessable to him personally. That question arose acutely because of the AAT’s acceptance that, in the 2007-2008 year of income, 82% of the funds in the NAB Classic Banking Account and 78% of the $79,774.15 deposited in the BTH Account had been expended for vineyard and wine related purposes (which the AAT seems to have assumed meant the business of WLT). That meant that 18% and 22% respectively of those amounts had not, prima facie, been disbursed for the purposes of the WLT. Further, the bank statements for the Classic Banking Account suggested that a number of withdrawals had been made for purposes personal to Mr Moignard. These included payments to private schools, periodic payments to cleaners and gardeners, payments for home renovations, cable TV payments and payments of utilities. The circumstance that the AAT did not address the question of whether these payments at least constituted, or evidenced, a distribution of the trust income to Mr Moignard personally tends to confirm that the AAT misunderstood the task required of it.

65    On the appeal, counsel for Mr Moignard sought to avoid this conclusion being drawn from [90] of the AAT’s reasons by submitting, first, that the AAT had determined that none of the sum of $480,476.00 was assessable to Mr Moignard personally by its finding in the first sentence. I am not satisfied that that is so as the AAT appears to be referring in that sentence only to the total sum of $480,476.00 regarded by the AAT as having been deposited into the NAB Classic Banking Account and in the BTH Account. Further, the AAT does not in that context refer at all, let alone make findings about, the apparent personal nature of the expenditure to which I have just referred.

66    Secondly, counsel submitted that Mr Moignard had believed that the whole of the money in the NAB Classic Banking Account had been distributed to the WLT, even if some of the amount so distributed had later been distributed by it for some private purposes. The difficulty with this submission is that the AAT’s reasons cannot reasonably be understood as including a finding to that effect.

67    As already noted, the appeal to this Court lies on a question of law only. This Court is not required, nor authorised, to review conclusions of fact by the AAT or even conclusions of mixed law and fact: Hussain v Minister for Foreign Affairs [2008] FCAFC 128; (2008) 169 FCR 241 at [31]-[32]. Ordinarily, that makes it unnecessary and inappropriate for the Court to review the evidence before the AAT. However, in this case, a review does assist in the assessment of whether the AAT did address the issues arising for its determination. Had the AAT understood that it had to determine whether Mr Moignard had made any determination with respect to the net income of the RS/HoCT (and not just a determination in his own favour), it seems improbable that it would have overlooked the following matters:

(a)    Mr Moignard’s own claim at [137] in his written final submission that he did not exercise his discretion to make a distribution to himself in a private capacity; the matters set out in the final submission upon which Mr Moignard relied to support that claim; and Mr Moignard’s claim at [298] that he had “intended to distribute the trust income to a trust which had a trust loss”.

(b)    Mr Moignard’s claim at [140] of his final submission that some of the proceeds of the cheque of $822,435.56 had been “loaned” to other group entities and recorded in the books and records of those entities as trust funds of the RS/HoCT, is, on one view, inconsistent with his having made a determination or determinations to distribute all the proceeds to the WLT.

(c)    Mr Moignard’s claim at [148] of his final submission that there were “loans” from the RS/HoCT funds to himself in his personal capacity to pay off credit card debts and the like, is a matter which, if true, was seemingly inconsistent not only with the distribution of the monies to Mr Moignard in his personal capacity but with the distribution of the whole of the funds to the WLT.

(d)    Mr Moignard’s claim at [162] of his final submission that he had intended the RS/HoCT, as at 1 January 2008, “to have absorbed” the WLT business and his claim at [171] that “the [WLT] business was effectively merged into the [RS/HoCT] in 2008”. In his cross-examination Mr Moignard said that he held the view that “I was combining the wine businesses into one trust”. In addition, Mr Moignard had provided the Commissioner with documents indicating that there may have been a transfer in 2008 of the business of WLT to the RS/HoCT. In 2010 the Commissioner rejected Mr Moignard’s claim that there had been a merger of the two trusts, but Mr Moignard’s asserted belief in 2008 was seemingly inconsistent with him having made a determination at that time to distribute assets from the RS/HoCT to the WLT. If there had been a merger or a transfer of WLT’s business including its liabilities, a distribution of income would not have been necessary because the losses of the WLT could then have been offset against the net income of the RS/HoCT.

(e)    Mr Moignard acknowledged at [185]-[187] of his final submission that some $26,207.56 had been paid from the NAB Classic Banking Account to himself personally as “loans, distributions to and payments on behalf of Stephen Moignard in his personal capacity” and at [191]-[193] that there had been “loans” of other amounts to him in his personal capacity. On its face this seemed to be an admission that at least some of the net income of the RS/HoCT had been distributed to himself.

(f)    The effect of the trustee’s resolution signed by Mr Moignard resolving that the net income (said to be $384,242.00) of the RS/HoCT be applied for the benefit of the WLT. Mr Moignard had claimed that the funds were “allocated as per that resolution”. The resolution was undated but Mr Moignard acknowledged that it was not made until 2011. Mr Moignard’s explanation in evidence for signing the resolution was as follows:

[T]his resolution was signed as part of the process of lodging financials with the objection, and given that the objection contained the trustee’s – my position that we distributed all the profit to Wine Logistics that had a loss and that we weren’t attempting to merge all the transactions even though that was initially what we thought happened, because the Commissioner had changed our reality we prepared these documents that we thought would be more satisfactory for the Commissioner’s reality that there was just a simple distribution. So this was signed at the same time as the financials were submitted on objection, so these would have been signed to reflect my true intentions in 2011 that also reflect my intention as trustee as to what I intended to happen in 2007-2008 financial year.

    At T31, Mr Moignard gave the following evidence:

Q:     You would have signed it without it being dated?

A:     That was my – my common practice was to sign all the documents at once for the accountants and they would date all of the various trust documents. Because there were six or seven trusts and the various profits would all flow between the trusts to produce the appropriate tax outcome for the group, they were all just signed by me and Mark Keating would then date them all …

Q:    So when there are these distributions between the trusts, profits between the trusts, are you satisfied that those distributions had been properly made? In other words, the trust recipient is a beneficiary and is entitled to receive those profits?

A:    Yes.

(g)    The effect of the certificate signed by Mr Moignard and dated 4 April 2011, the terms of which were as follows:

CERTIFICATE

Issued by the Trustee of the Rupert St Trust

This certificate evidences my intention to distribute the whole of the net proceeds of the sale of the property at 43 Rupert St Collingwood to the Wine Logistics Trust as per clause 3(1)(a) and 3(1)(f) of the trust deed, effective for the 2007-2008 financial year.

Signed

Stephen Moignard

Date

4 April 2011

Initially, counsel for Mr Moignard on the appeal submitted that this certificate could be regarded as a certificate to which cl 3(2)(f) of the trust deed referred. For present purposes, it is not necessary to express a concluded view on this submission, the point being that the AAT made no reference to the certificate let alone determining whether it could, in terms of cl 3(2)(f), constitute prima facie evidence that a determination had been made. Had the AAT relied on the certificate, it would have had to consider whether it was a certificate as to a “determination”, given that it made no express reference to a determination, let alone to the manner and time when the determination was made, as appears to be contemplated by cl 3(2)(f).

(h)    The circumstance that Mr Moignard did not claim, in either the final submissions or in his evidence in chief that he had, in 2007-2008, made a determination pursuant to cl 3 of the trust deed.

(i)    Mr Moignard’s evidence in cross-examination, to which his counsel on appeal referred, relating to his practice of distributing the profit from one trust to another so as to avoid a tax liability:

[I]n principle it was like the profit and loss account of a single entity. In principle you don’t have to pay tax if you have spent more than the profit on expenses group-wide … (T34)

(j)    The fact that some of the payments from the RS/HoCT were recorded (apparently contemporaneously) as “loans” to the WLT, a circumstance which is seemingly inconsistent with the net income of the RS/HoCT having been distributed to the WLT.

68    The matters to which I have just referred bear so obviously on the question of whether Mr Moignard had made any resolution as to the payment, application or setting aside of trust income on or before 30 June 2008 that they could not all have been ignored or not mentioned if the AAT had understood the issues for its determination.

69    Two submissions of counsel for Mr Moignard on the appeal tended to point up the absence of consideration by the AAT of the critical issues. Counsel submitted that the evidence warranted a conclusion that determinations were made by Mr Moignard “in his own mind considering the application of the funds and so applying them”. The very content of that submission begs a number of questions and suggests that the question of whether Mr Moignard had made any determinations was not one to which there was an obvious answer or which could be assumed. It tended to highlight the significance of the AAT not having addressed the question other than in the very limited way to which I referred earlier.

70    The second was the submission that, because the majority of the funds in the NAB Classic Banking Account and BTH Account had been spent on the business of the WLT, it could be inferred that the whole of the funds in the accounts had been distributed to the WLT, even if later dispersed by the WLT for some purpose unrelated to the wine and vineyard business. An inference to this effect involves so many separate elements not considered by the AAT that, to my mind, it also points up the failure by the AAT to address the critical issues. Amongst other things, it would be necessary to have regard to the evidence indicating that the Comaum Property containing the vineyard was owned by the RS/HoCT.

71    A failure by the AAT to address the issues raised for its determination is by itself an error of law. Thus, in Repatriation Commission v Hill [2002] FCAFC 192; (2002) 69 ALD 581 at [59] the Full Court said:

… If a tribunal falls into an error of law "which causes it to identify a wrong issue, to ask itself a wrong question, to ignore relevant material, to rely on irrelevant material or, at least in some circumstances, to make an erroneous finding or to reach a mistaken conclusion, and the tribunal's exercise or purported exercise of power is thereby affected, it exceeds its authority or powers” … An error of law of this kind may support an appeal under s44 of the AAT Act on a question of law. …

In the earlier decision of Repatriation Commission v O’Brien (1985) 155 CLR 422, Brennan J said at 445:

[A] failure by a tribunal adequately to fulfil its statutory obligation to state the reasons for making an administrative decision does not, without more, invalidate the decision or warrant its being set aside by a Court of competent jurisdiction. If a failure to give adequate reasons for making an administrative decision warrants an inference that the tribunal has failed in some respect to exercise its powers according to law (as, for example, by taking account of irrelevant considerations or by failing to consider material issues or facts), the Court may act upon the inference and set the decision aside. In such a case, the exercise of the statutory power to make a decision is held invalid not because of a failure to state the reasons for making the decision, but because of a failure to make the decision according to law …

Brennan J was in dissent in O’Brien but this statement of principle has been accepted as authoritative: Yusuf at [69].

72    Further, the AAT’s statement of ultimate conclusions only did not, as required, disclose its path of reasoning. Such a failure is, by itself, an error of law: Carlisle Homes Pty Ltd v Barrett Property Group Pty Ltd [2009] FCAFC 31 at [45]. Section 43(2B) of the AAT Act entitles the parties to know what evidence the AAT accepted and took into account as well as the evidence it rejected. The failure of the AAT to make findings of fact constitutes an error of law: Copperart Pty Ltd v Federal Commissioner of Taxation (1993) 26 ATR 327 at 329. Sullivan v Department of Transport (1978) 20 ALR 323 at 348-9 is an oft-cited example of an error of law being found by reason of the AAT’s failure to make findings of facts of particular relevance to the exercise of judgment involved.

73    For these reasons, I consider that the Commissioner has made good his contention that the AAT did not address the issues arising for its determination on the review. In particular, it determined the issue of “present entitlement” without recourse to the trust deed and without addressing, and making the necessary findings of fact concerning, the question of whether Mr Moignard had, in the 2007-2008 year, made a determination or determinations with respect to the payment, application or setting aside of the net income of the RS/HoCT. This means by itself that the appeal should be allowed.

Determination of present entitlement at the wrong point in time?

74    The Commissioner contended that the AAT had “misconstrued and misapplied” ss 97 and 101 of the ITAA by determining Mr Moignard’s present entitlement at the wrong point in time. In my opinion, this particular complaint faces a number of difficulties.

75    First, the contention is inconsistent with the Commissioner’s principal submission that the AAT had made no finding as to a determination or determinations.

76    Secondly, the submission made in support of this complaint was not so much that the AAT had determined Mr Moignard’s present entitlement at the wrong time but that it had considered events occurring after 30 June 2008 as being relevant to that question. The submission in those terms fails as a matter of both fact and principle. Contrary to the Commissioner’s submission, [88] of the AAT’s reasons to which he referred contains findings relating only to the disbursement of funds in the 2007-2008 year of income itself. The findings do not relate to any period occurring after 30 June 2008.

77    At the level of principle, it cannot be said that the conduct of Mr Moignard after 30 June 2008 in relation to the settlement proceeds was not capable of bearing upon the question of whether there had been a determination for the purposes of cl 3 of the trust deed before 30 June 2008. Amongst other things, evidence that after 1 July 2008, Mr Moignard had treated the funds as those of the RS/HoCT and not of the WLT would be pertinent to an assessment of the veracity of any claim made by him that he had determined on or before 30 June 2008 to distribute the funds to the WLT.

78    Thirdly, one of the Commissioner’s submissions referred to Mr Moignard’s resolution of 4 April 2011, suggesting that the AAT had relied on it. However, the AAT did not refer at all to this resolution in the section of the reasons headed “Consideration”.

79    This ground of appeal fails.

The application of s 14ZZK of the TA Act

80    Two of the Commissioner’s grounds of appeal related to the AAT’s application of s 14ZZK of the TA Act. First, the Commissioner contended that the AAT had “misapplied and/or reversed” the onus of proof imposed on Mr Moignard by s 14ZZK. Secondly, the Commissioner contended that the AAT had failed to determine, as required by s 14ZZK(b)(i), what the assessment of Mr Moignard’s tax liability should have been, given that such a determination was a necessary step to a finding that the amended assessment was excessive.

81    The submissions of the parties on these grounds tended to overlap and it is convenient to address them together.

82    The parties made their submissions at the hearing by reference to s 14ZZK of the TA Act as it has been in force since 1 July 2013. However, it was s 14ZZK as in force between 1 July 2012 and 30 June 2013 which is the relevant provision as Mr Moignard lodged his application in the AAT on 27 September 2012. Section 14ZZK as in force in that period provided:

14ZZK Grounds of objection and burden of proof

On an application for review of a reviewable objection decision:

(a)    the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and

(b)    the applicant has the burden of proving that:

(i)    if the taxation decision concerned is an assessment (other than of franking assessment or a starting base assessment) – the assessment is excessive; or

(ii)    if the taxation decision concerned is a franking assessment or a starting base assessment – the assessment is incorrect; or

(iii)    in any other case – that the taxation decision concerned should not have been made or should have been made differently.

83    Following the hearing, my Associate drew the parties’ attention to the correct provision and invited them to make short written submissions directed to it. The parties conferred and, commendably, provided a joint supplementary submission.

84    Section 14ZZK applies to proceedings in the AAT. It is subpar (b)(i) which was pertinent in this case, meaning, prima facie, that Mr Moignard had the burden of proving that the amended assessment issued on 4 April 2011 to which he had objected was “excessive”.

85    In relation to the complaint that the AAT had reversed the onus of proof, the Commissioner made two submissions. First:

The Tribunal’s apparent focus on the evidence on matters such as: (a) the payment of the proceeds of sale into the NAB and BTH accounts, and (b) the taxpayer’s analysis of how the funds were spent thereafter, rather than [properly] on evidence of a valid distribution to the WLT, is demonstrative of a misapplication, or an inversion, of the applicable onus of proof which lay on the taxpayer.

However, this submission was not developed and it is not apparent how the AAT’s focus on the identified matter demonstrated a reversal or misapplication of the onus of proof.

86    Secondly, the Commissioner submitted that “to the extent that the AAT required the Commissioner to prove an “allocation” of income amounting to a present entitlement, that was both an error as to the application of the statute and a reversal of the onus”. This complaint fails. The AAT did not require the Commissioner to prove an “allocation”. As indicated above, the AAT referred to an allocation only as a shorthand label for the exercise of discretion upon which s 101 of the ITAA operated.

87    Ultimately, the Commissioner’s submission in support of these two grounds became more confined and was to the following effect: it was for Mr Moignard to establish that he was not assessable on any part of the amount in dispute; the AAT’s rejection of the Commissioner’s submissions concerning s 101 and the deposit of funds into the NAB Classic Banking Account and the BTH Account did not relieve Mr Moignard from that onus; which he had to discharge, particularly having regard to the default distribution provision in cl 3(4) and (5) of the trust deed and the evidence that some of the monies in the NAB Classic Banking Account had been applied to meet personal expenses.

88    In considering the content of the obligation imposed by s 14ZZK(b)(i) it is appropriate to have regard to aspects of its history. Section 14ZZK of the TA Act was, in slightly different form, formerly contained in s 190 of the ITAA. Section 190 provided:

Upon every such reference or appeal –

(a)    The taxpayer shall be limited to the grounds stated in his objection; and

(b)    The burden of proving that the assessment is excessive shall lie upon the taxpayer.

89    Section 190 was considered by the High Court in a number of cases. In Gauci v Commissioner of Taxation (1975) 135 CLR 81, Mason J said at 89:

Section 190(b) of the Act imposed on the appellants the burden of proving that the assessments were excessive. … The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.

Although Mason J was in dissent in Gauci, that view of s 190 has been regarded as authoritative: McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 303, 306, 323.

90    Section 190(b) was construed as imposing on the taxpayer the burden of proving the true tax liability of that taxpayer. In Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621, Brennan J said:

A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by s 190(a) to the grounds stated in an objection against the assessment. … But an objection and a Commissioner’s notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income. After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. … It would be inappropriate for a Court determining an appeal to make an order altering the tax liability assessed (section 199) unless the Court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer.

(Emphasis added)

91    Later (at 623) Brennan J quoted with approval a passage in the judgment of Kitto J at first instance in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 189:

[Section] 190(b) places the burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment.

(Emphasis added)

92    In a short separate judgment in Dalco, Deane J at 627 held that the taxpayer’s failure to discharge the onus of showing that he had not derived other undisclosed income had the consequence that he had failed to establish that the Commissioner’s assessments of his assessable income were excessive.

93    Toohey J in Dalco said at 631:

I agree with Wilcox J in the Federal Court that “the task for the taxpayer, upon an appeal or review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer.” As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. … A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.

(Emphasis added)

94    Section 14ZZK was inserted into the TA Act (and s 190 of the ITAA repealed) by the Taxation Laws Amendment Act (No 3) 1991. However, that change in the location of the provision was not intended to alter its meaning. In the second reading speech for the Bill relating to that amendment, the Treasurer said:

[26.40]    The law in relation to limitation of the grounds of objection and the burden of proof, in proceedings before the AAT or the Federal Court, has not been altered from that which operated previously. For example, the effect of provisions such as s 190 of the ITAA, being repealed by this Bill, will continue.

95    The proposition that s 14ZZK(b)(i) requires a taxpayer on an appeal against an assessment to establish his or her true tax liability is settled. In Mulherin v Commissioner of Taxation [2013] FCAFC 115, the Full Court said at [42]:

[T]he Tribunal did not err in law in stating that it is not enough for a taxpayer to show error in the Commissioner’s assessment; the taxpayer must positively prove his or her “actual taxable income” and, in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer … . Unless he does so, the taxpayer has not discharged the burden of proving the assessment is excessive.

96    Although the AAT referred to s 14ZZK and the burden of proof (at [6]), it did not address this aspect of its application, and did not make any finding as to whether Mr Moignard had discharged the onus of proof. Nor did the AAT make any finding as to Mr Moignard’s actual tax liability. As noted earlier, the only order made by the AAT was to set aside “the objection decision under review”. Prima facie, this means that the AAT failed to make its decision in accordance with the law.

97    Counsel for Mr Moignard sought to avoid this conclusion by a submission having the following elements:

(a)    Contrary to the Commissioner’s supposition, the assessment of 4 April 2011 which was the subject of the objection was an amended assessment issued by the Commissioner under s 170(1) of the ITAA (which authorises the issue of amended assessments) and not a default assessment pursuant to s 167;

(b)    Section 14ZV of the TA Act applies to objections against amended assessments. It provides:

14ZV Limited objection rights in the case of certain amended taxation decisions

If the taxation objection is made against a taxation decision, being an assessment or determination that has been amended in any particular, then a person’s right to object against the amended assessment or amended determination is limited to a right to object against alterations or additions in respect of, or matters relating to, that particular.

    The combined effect of s 14ZV and 14ZZK was that, subject to a grant of leave by the AAT, Mr Moignard was confined to objecting against the particular alteration to the original assessment of 13 July 2010, or to matters relating to that particular alternation;

(c)    The AAT had not granted leave to him pursuant to s 14ZZK(a) to object on any wider basis;

(d)    Mr Moignard’s onus of proof under s 14ZZK was informed by the limitations on his right to object imposed by s 14ZV, with the effect that he was relieved from the burden of establishing his true tax liability.

98    This submission led to a number of submissions at the hearing concerning the question of whether the initial assessment of 13 July 2010 was issued under s 166 or 167. In the joint supplementary submission, the Commissioner contended that, being dissatisfied with Mr Moignard’s return, he had acted pursuant to s 167(5) of the ITAA in issuing the amended assessment under s 170 of the ITAA. The Commissioner also contended that s 167, properly understood, is supportive or facilitative of s 166 (George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 203-204) so that distinctions between an assessment pursuant to s 166 and 167 are not helpful.

99    In my opinion, the resolution of the issues on the appeal does not require these matters to be addressed. The principal question raised by Mr Moignard’s submission as just outlined is whether s 14ZZK(b)(i) has a different operation in relation to applications concerning assessments amended pursuant to s 170 than it does in relation to assessments pursuant to s 166 and, in particular, s 167.

100    Section 14ZZK refers to an application for review of “a reviewable objection decision”. The term “reviewable objection decision” is defined in s 14ZQ to mean “an objection decision that is not an ineligible income tax remission decision”. The reference to “an ineligible income tax remission decision” can be ignored for present purposes. An “objection decision” is a decision made by the Commissioner under s 14ZY(1), (1A) and (1B). None of those provisions draws a distinction between objections to assessments made pursuant to s 166, 167 or 170 of the ITAA. They do not provide a basis for an inference that the operation of s 14ZZK(b)(i) is modified in some way in respect of objections to amended assessments.

101    Further, in principle the limitation of the grounds upon which a taxpayer may object to an amended assessment should not affect a taxpayer’s burden of establishing his or her true tax liability. The obligation on a taxpayer imposed by s 14ZZK(b)(i) to reveal any taxable income not previously disclosed to the Commissioner cannot reasonably be understood as being qualified by the limitation on the grounds of objection to the assessment in fact issued by the Commissioner, nor can the taxpayer’s obligation to show that no portion of a total amount included by the Commissioner in the assessable income is properly assessable be so regarded. A contrary construction would be inconsistent with the object of s 14ZV. That object was described by Gordon J in Epov v Commissioner of Taxation [2007] FCAFC 139; (2007) 244 ALR 334 at [32]-[33]:

[32]    … In other words, if a taxpayer wished to object to an assessment, then he or she could do so. If they did not and the respondent served an amended assessment, the taxpayer’s grounds of objection were limited to the specific items addressed in the amended assessment. The object of s 14ZV was to prevent a taxpayer treating the amended assessment as an assessment with unlimited rights of objection under Pt IVC of the [TA Act]. …

[33]    The fact that the taxpayer had limited rights to object against an amended assessment reflected the interaction between s 170(2) of the 1936 Act and Pt IVC of the [TA Act]. The 1936 Act permitted the respondent to amend the assessment to include “the addition of new items of income or the allowance of deductions not previously allowed” within prescribed time limits, and at the same time preserved the time limits imposed upon taxpayers to object to items included or excluded from their assessable income: see Pt IVC of the [TA Act]. The interaction of the 1936 Act and Pt IVC of the [TA Act] therefore imposed safeguards for the proper administration of the tax legislation for both the respondent and the appellant.

102    There may, I suppose, be circumstances in which a taxpayer may wish to raise, belatedly, a claim for additional deductions. Whether or not s 14ZV and s 14ZZK would preclude the taxpayer from doing so is something which does not have to be decided presently. The resolution of that question would have to take account of the AAT’s power “to order otherwise” contained in s 14ZZK(a). If, despite s 14ZZK(a), a taxpayer is precluded from establishing additional deductions in the proof of the actual tax liability, that will be a consequence of the statutory provisions operating in accordance with their terms. It would not warrant a judicial revision of the plain and ordinary meaning of s 14ZZK.

103    The notion that s 14ZV modifies the onus of proof imposed by s 14ZZK on a taxpayer is also inconsistent with the decision of the High Court in Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Limited (1994) 181 CLR 466 in which it was held that it is open to the Commissioner on an appeal against the disallowance of an objection to raise for the Court’s determination the appropriateness of deductions allowed to the taxpayer in the Commissioner’s assessment. It is not readily to be supposed that s 14ZV would preclude a taxpayer from objecting to something raised by the Commissioner.

104    Although by virtue of s 14ZZK(b)(i), a taxpayer has the burden in the AAT of showing his or her correct taxable income, it is possible for the parties to “agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends”: Dalco at 624 (Brennan J) and 626-7 (Deane J). When that occurs, success by the taxpayer on the identified issue may be sufficient to indicate that the assessment is excessive. In their joint supplementary written submission, the parties said for the first time that there had been an “implied agreement” in the AAT that the review should be confined to the question of whether Mr Moignard’s assessable income included the whole or any part of the net income of the RS/HoCT in the 2007-2008 year under s 97 or s 101 of the ITAA.

105    It seems surprising that neither the AAT nor this Court was informed of this implied agreement at the respective hearings, although the written submission in reply in this Court of the Commissioner had indicated that as a matter of law Mr Moignard did not have to establish that he had no other income. Nevertheless, it is appropriate to act on the basis of the parties’ agreement. It means that Mr Moignard was not required to establish in the AAT that he did not derive any income from other sources in order to establish that the assessment was excessive, but he did have to establish that he did not at year end have a present entitlement to any of the income of the RS/HoCT for the 2007-2008 year. That was so whether the assessment to which he objected was made pursuant to s 166, 167 or 170.

106    For the reasons given earlier, I am satisfied that the Commissioner has made good his contention that the AAT erred in law by failing to determine whether Mr Moignard had discharged the burden imposed on him of establishing that his assessed tax liability in respect of the 2007-2008 year was excessive because it did not consider whether there had been a determination in respect of the whole of the income of the RS/HoCT in that year.

Disclaimer

107    The Commissioner contended that the AAT had also erred in law in its treatment of Mr Moignard’s claim that he had on 4 April 2011 disclaimed any distribution to him in his personal capacity of income from the RS/HoCT in the 2007-2008 year. However, at the hearing, counsel for the Commissioner acknowledged that it was not necessary for the Court to address this ground in the event that the Commissioner’s primary contentions were accepted. Counsel for Mr Moignard did not express any contrary view.

108    Given my conclusion that the proceedings in the AAT miscarried by reason of its failure to address the issues properly arising for its determination, I will refrain from determining this ground of appeal.

Conclusion

109    The appeal must be allowed and the order made by the AAT set aside.

110    Counsel for the Commissioner submitted that the Court should itself make orders assessing Mr Moignard’s taxation liability on the basis that, in accordance with cll 3(4), 3(5), 4(1) and 4(2) of the trust deed, he is liable for one-third of the net income of the RS/HoCT for the 2007-2008 year. I consider such a course to be inappropriate. The proceedings in the AAT miscarried and the Court does not have a firm factual foundation for an assessment on the basis now proposed by the Commissioner. Further, and in any event, the Court has not been provided with the details which would permit an assessment for that year.

111    Although it is regrettable, I consider that the proper course is for the matter to be remitted to the AAT, with a direction that Mr Moignard’s application be heard afresh by another member of the AAT on the basis that, unless proper cause is shown to the AAT, no further evidence is to be adduced.

112    The Commissioner has regarded the present appeal as a test case and has agreed to pay Mr Moignard’s costs irrespective of the outcome. In that circumstance, the parties are agreed that there should be an order that the Commissioner pay Mr Moignard’s costs to be taxed or agreed.

Associate:

Dated:    3 March 2015