FEDERAL COURT OF AUSTRALIA

Thomas v Commissioner of Taxation [2015] FCA 968

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

THE COURT ORDERS THAT:

1.    The parties give consideration to the reasons for judgment published today in the proceeding and each party submit to the Court within three weeks proposed orders each party considers ought to be made by the Court in disposition of the proceeding.

2.    The costs of the proceeding are reserved.

3.    The parties are to file and serve submissions as to costs in each proceeding having regard to the orders proposed by that party and that party’s consideration of the reasons for judgment, within three weeks.

4.    The final orders to be made in disposition of the proceeding and the disposition of the question of the costs of each proceeding will be dealt with on the papers subject to Order 5.

5.    Should any party to the proceeding wish to be heard orally on either of the matters referred to in Order 4, a date will be nominated for such an oral hearing.

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

REASONS FOR JUDGMENT

Introduction

1    These proceedings are concerned with seven appeals under Pt IVC of the Taxation Administration Act 1953 (Cth) (the “TAA”) by which the respective taxpayers, a trustee and two beneficiaries of the trust, challenge objection decisions of the respondent Commissioner of Taxation (the “Commissioner”) concerning, put simply, questions going to their respective primary tax liability for one or more of the income tax years 2006, 2007, 2008 and 2009 (depending upon the applicant/appellant) and penalty assessments.

2    There are also three related Applications for Review before the Administrative Appeals Tribunal (the “AAT”) under Pt IVC of the TAA.

3    As to the Federal Court proceedings, orders have been made that evidence in one matter (QUD 274 of 2012) will be treated as evidence in all matters. As to the proceedings before the AAT, directions have been made in the AAT that the evidence given in the Federal Court proceedings will be treated as evidence in the AAT proceedings.

4    These reasons are concerned with the resolution of the matters in controversy in the Federal Court proceedings. As to the appeals which continue to be opposed by the Commissioner and those which are not, see [61] to [71] of these reasons and the background matters commencing at [9] of these reasons.

5    At the heart of these proceedings is the question of the efficacy, as a question of law and fact, of the treatment by the trustee, by a relevant resolution in each income year, of the “net income of the trust fund” in applying that net income for the benefit of the two beneficiaries in a particular proportion and, by a second resolution passed at the same meeting, applying the net income of the trust fund in a way which, on the face of the second resolution, is directed to a particular proportional allocation of “franking credits” and “TFN withheld” and “franking credits” and “foreign tax credits”. The subject matter of the second resolution is essentially concerned with the trustee’s treatment of franking credits related to dividend distributions to the trustee for the purposes of, put simply, the franking credits regime contained within the Income Tax Assessment Act 1997 (Cth) (the “1997 Act”).

6    The resolution of the matters in controversy will require a close examination of that statutory regime against the background of the relevant facts and instruments. There are a number of separate questions raised by these appeals. The various issues will be identified once the background matters have been set out framed, in large part, by a “Statement of Agreed Material Facts” filed by the parties although there is also oral evidence.

7    However, in the course of the opening addresses in relation to the matters in which appeals continue to be opposed by the Commissioner, counsel for the applicants, Mr Harrison QC and Mr Robertson QC, contended that the Commissioner holds an “unshakable determination” to mistakenly attribute to the applicants a particular case that they say is not being put by them, and counsel further observe they do not understand the case being put by the Commissioner: T p 6, lns 26-31. They also say that counsel for the Commissioner, Mr Looney QC and Ms Allen, say the Commissioner does not understand the taxpayers’ case. In final submissions, Mr Looney QC observed that on the submissions of counsel for the applicants “made thus far”, the position of each side might be akin to two ships passing in the night but if not two ships passing in the night, then “this is going to come down, in large part, to a statutory construction of [Div] 207B”: T, p 155, lns 8-11; see also T, p 188, lns 20-24 and lns 39-44.

8    It therefore falls to the Court to not only determine the controversy but also to seek to identify the scope of the questions in controversy.

Background matters

9    The applicants in the various proceedings are Thomas Nominees Pty Ltd (“Thomas Nominees”), Martin Andrew Thomas (“Martin Thomas”) and Martin Andrew Pty Ltd (“MAPL”). Thomas Nominees, in the relevant tax years, was the trustee of the Thomas Investment Trust (the “trust”) established by a trust deed dated 1 February 1979. The trust deed was amended by Deed Poll on 19 September 1986 and on 25 October 1991. A further amendment, of some importance, was made by Deed Poll on 1 October 1992.

10    Martin Thomas and MAPL were, in the relevant tax years, beneficiaries of the trust. References to the relevant tax years are references to, in the case of Martin Thomas, the tax years ending 30 June 2006, 2007, 2008 and 2009; in the case of MAPL, the tax year ended 30 June 2008; and in the case of Thomas Nominees, the tax years ending 30 June 2006, 2007, 2008 and 2009.

11    Martin Thomas and Carmel Thomas (his mother) were the directors and equal shareholders of Thomas Nominees.

12    Martin Thomas was the sole director and shareholder of MAPL.

13    Martin Thomas was a skilled and experienced business person and he utilised the professional services of a qualified accountant and tax agent, Ms Beth Abbott, a Certified Practising Accountant (“CPA”) of Drake and Associates to lodge income tax returns for each of the relevant tax years. Ms Abbott was retained by Martin Thomas, the trustee, and MAPL from 1998 as their accountant and tax agent.

14    On a monthly basis, Ms Abbott prepared the financial accounts for the trust based on instructions received from Martin Thomas. Neither Martin Thomas nor Ms Abbott asked either the Commissioner or the Australian Taxation Office (“ATO”) for an opinion on any of the relevant issues prior to lodgement of each applicant’s tax return.

15    As mentioned, the trust was established on 1 February 1979 by the trust deed. The trust deed was amended on 1 October 1992 so as to amend cl 4 of the trust deed. By the amendment, the former cl 4 became cl 4(1) and cl 4(2) to cl 4(8) were introduced into cl 4. Other than renumbering the earlier cl 4 to cl 4(1), the earlier cl 4 was retained in the amended deed in its entirety.

16    Clause 4(1) of the amended deed is, relevantly, in these terms:

During the continuation of the Trust hereby created the Trustee shall apply the income of the Trust Property in such manner as it[,] subject only to the provisions herein contained[,] in its absolute and uncontrolled discretion shall think fit for the benefit maintenance education advancement in life and general well being and comfort of the Nominated Beneficiaries [and five other identified categories of beneficiaries] equally or unequally and to the exclusion of any one or more of such beneficiaries as it shall see fit. …

[emphasis added]

17    Clause 4(1) of the amended deed further provides:

… If during any year the Trustee has not as aforesaid paid or applied the whole of the net income of the Trust Property by the exercise of its discretion such remaining net income for that year that has not been so paid or applied shall be held by the Trustee upon trust to pay or apply the same to or for the benefit maintenance education advancement in life and general well being and comfort [of the nominated beneficiaries in the manner described].

[emphasis added]

18    The new cl 4(2) is in these terms:

The Trustee may in the books of account and records of the Trust separately record each of the following categories of income received into the Trust property:

(a)    dividends which under The Income Tax Assessment Act 1936 – as amended hereinafter referred to as “the Act”:

(i)    are fully franked;

(ii)    are unfranked;

(iii)    to which a foreign tax credit attaches; or

(iv)    any other separately identifiable taxation consequence or benefit is attached or arises.

(b)    income, including capital gains, which under the Act:

(i)    has an Australian source;

(ii)    has an ex-Australian source;

(iii)    has a foreign tax or other credit attached; or

(iv)    is exempt or otherwise liable not to be taxed;

(v)    has or gives rise to any other separately identifiable taxation consequence or benefit.

[emphasis added]

19    Clause 4(2) is, however, not exhaustive as cl 4(3) provides that the trustee may identify and separately record and maintain in the books of account and records of the trust, income or capital “having, or in respect of which there is attached, individual or unique characteristics” other than as described in cl 4(2) as the trustee by resolution determines.

20    Clause 4(4), relevantly, is in these terms:

(a)    A resolution or determination of the Trustee by which income of the Trust property is distributed or accumulated may separately deal with the whole or part of the income of a category so that the same or any part thereof may be specifically paid, applied or set aside for the benefit of any one or more of the beneficiaries exclusive of the other or others or accumulated, to the extent to which income of the Trust is permitted to be accumulated by this deed and become part of the capital of the Trust property or be held as part of the Trust property as undistributed Tax exempt income as the Trustee may in its absolute discretion determine; and

…

[emphasis added]

21    Clauses 4(5), 4(6) and 4(7) are in these terms:

4(5)    Expenses and outgoings of the trust fund may at the discretion of the Trustee be allocated against and deducted from income or capital of any one or more categories in such manner as the Trustee may see fit.

4(6)    In the event that the Trustee shall not exercise its discretion as provided in the preceding sub-clause in respect of a financial year, outgoings and expenses of the Trust property for that year shall be allocated firstly against and deducted from income which is not income of a category and to the extent to which the same is not sufficient to absorb all such expenses and outgoings, then the part thereof which is not so absorbed shall be allocated in such manner as the Trustee may decide against income of a category or categories to which a tax credit or rebate does not attach, and thereafter against the remaining income of the Trust property.

4(7)    Income or capital of the Trust property to which a default beneficiary becomes entitled and which can be identified from the books and records of the Trust as being of a category, shall retain its separate identity when the same passes to or is received by the default beneficiary or when the default beneficiary otherwise becomes entitled thereto.

[emphasis added]

22    Finally, cl 4(8) is in these terms:

Notwithstanding anything hereinbefore in this clause contained or implied the Trustee shall have the right to accumulate as an accretion to the Trust Property all or any part or parts of such income of the Trust Property upon which no further tax of any kind or nature is payable by the Trustee or any beneficiary hereunder and subject always to the Trustee having the power to determine at any time or times that all or any part of such accumulated tax free income shall be distributed to such beneficiary or beneficiaries and in such manner equally or unequally as the Trustee in its absolute discretion shall think fit.

[emphasis added]

23    In 1992, the Commissioner issued draft ruling EDR 89 followed by a public ruling TR 92/13 entitled Income Tax: distribution by trustees of dividend income under the imputation system which was operative in the relevant tax years.

24    In the relevant tax years the trustee carried on an exchange-traded option (“ETO”) trading business. The ETO business involved dealing in exchange-traded options in respect of shares. The options were exercisable by one or other of the parties as provided in the option document at a specified date. The ETO business involved writing or granting “put options” and receiving premiums for writing/granting those put options pursuant to which the trustee became obliged to buy shares at a future date at an agreed “strike” price. If the market value of the shares was less than the nominated strike price at that future date, the trustee would be required to buy those shares for that higher price.

25    Also, the ETO business involved writing or granting “call options” and receiving premiums by which the trustee became obliged to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was higher than the strike price at that future date, the trustee would be required to sell those shares for that lower strike price. The business also involved acquiring “call options” and paying premiums by which the trustee became entitled to buy shares at a future date for an agreed strike price with the result that if the market value of the shares was greater than the strike price at that future date, the trustee would be able to buy those shares for that lower price.

26    Similarly, the business involved acquiring “put options” and paying premiums by which the trustee became entitled to sell shares at a future date for an agreed strike price with the result that if the market value of the shares was lower than the strike price at that future date, the trustee would be able to sell those shares for that higher strike price. The trustee’s decisions to grant options or acquire options and so too pay and receive premiums depended upon its view at the time of the best option-trading strategy.

27    There is now no dispute between the parties as to the amount of the net income of the trust estate for the purposes of s 95 of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”) arising out of the trustee’s conduct of the ETO business (and otherwise). The agreed net income of the trust for the purposes of s 95 of the 1936 Act in each of the relevant tax years is this:

28    At all relevant times, Martin Thomas controlled the trustee and MAPL.

29    In each of the relevant tax years, Thomas Nominees received dividend income (dividends) that were franked in accordance with Div 207 of Pt 3-6 of the 1997 Act.

30    Thomas Nominees also derived other income in each relevant tax year and incurred expenses in deriving that income. For each of the relevant tax years, the trustee made formal resolutions in the terms as drafted by Ms Abbott. In each of the relevant tax years, the trustee passed two separate resolutions for each relevant income year.

31    The resolutions are described as the “net income distribution resolutions” and the “franking credit distribution resolutions”, respectively.

32    By each of the net income distribution resolutions and the franking credit distribution resolutions, the trustee resolved to apply “the net income of the trust fund” for the relevant tax years to the benefit of the beneficiaries by credit to accounts maintained by the trustee for such beneficiaries as specified in the resolutions.

33    For example, the “net income distribution resolution” for the income year ending 30 June 2006 is in these terms:

TRUST INCOME    Resolved [by Martin Thomas and Carmel Thomas – Mr Martin Thomas’s mother] pursuant to

DISTRIBUTION:    the powers vested in the trustee under the Deed of Settlement establishing the abovenamed trust fund [Thomas Investment Trust] that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them.

BENEFICIARY        PROPORTION

MARTIN A THOMAS        THE FIRST $21,600

[MAPL]        THE BALANCE

Should the Commissioner of Taxation disallow any amount as a deduction or take any action that would have the effect of creating undistributed net income in the trust as at 30 JUNE 2006 then such net income shall be deemed to be distributed on 30 JUNE 2006 to the abovenamed beneficiaries in proportions as stated above, except where there is a remainder nomination then this amount shall be distributed to that person.

[emphasis added]

34    The “franking credit distribution resolution” for the income year ending 30 June 2006 is in these terms:

TRUST INCOME    Resolved pursuant to the powers vested in the trustee under the Deed

DISTRIBUTION:    of Settlement establishing the abovenamed trust fund that the net income of the trust fund for the financial year ended 30 JUNE 2006 be applied for the benefit of the beneficiaries listed hereunder by credit to accounts maintained by the trustee for them.

BENEFICIARY    PROPORTION

MARTIN A THOMAS    FRANKING CREDITS    $2,416,217.92

    TFN WITHHELD    $17,502.00

[MAPL]    FRANKING CREDITS    $228,900.38

    FOREIGN TAX CREDITS    $4,267.42

Should the Commissioner of Taxation … [and concluding language in the same terms as that set out at [33] of these reasons]

[emphasis added]

35    Apart from the proportions and the reference to the relevant year, each “net income distribution resolution” for the income year ending 30 June 2007, 2008 and 2009 is in the same terms as the resolution for 30 June 2006. Similarly, each “franking credit distribution resolution” for those three income years is in the same terms as the resolution for 30 June 2006 apart from the allotted proportions and the reference to the relevant year.

36    Set out below are the proportions reflected in the trustee’s “net income distribution resolutions” for each relevant income year:

37    Set out below are the proportions reflected in the trustee’s “franking credit distribution resolutions” for each relevant income year (rounded to the nearest whole number):

38    In each of the relevant tax years, Martin Thomas lodged his income tax returns which disclosed the amount of franking credits credited to him by the trustee pursuant to the franking credit distribution resolution. The Commissioner paid amounts to him on the basis of the amounts of franking credit distributions stated in those returns.

39    The income tax returns for the trust for each of the relevant years disclosed the following:

40    The statistics in the above table are drawn from the Statement of Agreed Material Facts. However, the Commissioner asserts that the following amounts are referrable to the following categories in the above table concerning MAPL:

41    On 12 May 2009, the Commissioner notified the trustee of his intention to commence an audit for the tax years ended 30 June 2005 to 30 June 2009. The Commissioner subsequently decided that the audit for the year ended 30 June 2005 would not continue.

42    On 3 November 2009, Drake and Associate wrote to the Commissioner on behalf of the trustee explaining that an error had been made in the income tax returns lodged for the relevant tax years. On 16 November 2009, Drake and Associates again wrote to the Commissioner on behalf of the trustee advising that the letter of 3 November 2009 was itself based on a mistake and the ATO ought to treat it as withdrawn. Financial statements and tax reconciliations were provided to the Commissioner as part of the audit. Corrected financial statements for the years ended 30 June 2005 to 30 June 2008 were provided to the Commissioner by Drake and Associates by facsimile on 4 December 2009. That correspondence enclosed financial statements for the year ended 30 June 2009 prepared by the applicants on the same basis as the earlier corrected financial statements.

43    Following completion of the audit in 2011, Notices of Amended Assessment were issued to Martin Thomas for each of the relevant tax years and to MAPL for the year ending 30 June 2008. Notices of Amended Assessment were issued to the trustee for the tax years 2006 to 2008. These amended assessments, issued to the beneficiaries and the trustee, were concerned with the primary tax liabilities of those parties. Notices of Assessment were also issued in 2011 to the applicants in respect of penalty assessments as follows: to Martin Thomas for each of the relevant tax years; to MAPL for the year ended 30 June 2008; and to the trustee for each of the tax years 2006 to 2008.

44    These various assessments are set out in the table below:

45    The applicants lodged taxation objections in respect of each of these assessments in 2011.

46    The Commissioner disallowed each of the relevant objections and gave notice of his objection decisions on 18 April 2012 together with his reasons for his decisions.

47    The applicants challenged the objection decisions of 2012 concerning their primary tax assessments for the tax years 2006, 2007 and 2008 by filing applications in the Federal Court of Australia on 8 June 2012. Those appeals are proceedings QUD 274, 275 and 276 of 2012 by Martin Thomas, Thomas Nominees and MAPL respectively. The applicants also challenged the objection decisions of 2012 concerning their penalty tax assessments for the tax years 2006, 2007 and 2008 by filing appeals in this Court on 15 June 2012. Those appeals are proceedings QUD 283, 284 and 285 of 2012 brought by Thomas Nominees, Martin Thomas and MAPL respectively. The applicants also challenged the decision not to remit the penalties by filing the Applications for Review before the AAT.

48    In mid-2012, however, after the making of the April 2012 objection decisions, the Commissioner issued further Notices of Amended Assessment to the beneficiaries concerning their primary tax liabilities in respect of the relevant tax years. On 2 November 2012, consequent upon a review of the Applicants’ Appeal Statement filed on 20 September 2012, the Commissioner advised the applicants that he now accepted one of the grounds relied upon in each of the relevant objections to the effect that all premiums paid by the trustee as part of its ETO options trading business were deductible under s 8-1 of the 1997 Act.

49    This change of position is described as the “options concession”.

50    It seems that this concession led to an agreement between the parties that the net income of the trust estate pursuant to s 95 of the 1936 Act in each of the relevant tax years was that set out in the table at [27] of these reasons.

51    Having made the options concession, the Commissioner then contended that the expenses of the trust exceeded its income with the result that it had made a net loss for the 2009 tax year and that no beneficiary was presently entitled to a share of the trust income in that tax year. However, the net income of the trust for the purposes of s 95 of the 1936 Act for the 2009 tax year was $173,743, as agreed.

52    The Commissioner issued the trustee with a Notice of Assessment dated 25 January 2013 for the 2009 tax year imposing upon it liability to tax in respect of the whole of the s 95 net income of the trust estate, in reliance upon s 99A of the 1936 Act.

53    On 28 February 2013, Thomas Nominees lodged a taxation objection in respect of the 2009 assessment to the trustee. The Commissioner disallowed that objection and gave notice of his objection decision on 17 April 2013 together with reasons for his decision. The trustee challenged the objection decision by filing an application in this Court on 17 June 2013. That appeal is QUD 325 of 2013.

54    The Commissioner no longer seeks to rely upon the assessments issued to the trustee in each of the 2006, 2007 and 2008 tax years as alternative assessments and does not now oppose the trustee’s appeal against the Commissioner’s objection decision in relation to those assessments. That appeal is proceeding QUD 275 of 2012. Moreover, the Commissioner no longer opposes the appeals in relation to the penalty assessments in respect of MAPL or the trustee. Those appeals are proceedings QUD 283 and QUD 285 of 2012 respectively. The Commissioner no longer opposes the related Applications for Review before the AAT. Those matters are the application by the trustee for the 2007 and 2008 tax years (2450/2012) and the application by MAPL for the 2008 year (2453/2012).

55    The amounts of the penalty assessments for Martin Thomas were re-calculated following the Commissioner’s options concession, as follows:

The proceedings in the Supreme Court of Queensland

56    On 24 August 2010, the trustee commenced proceedings in the Supreme Court of Queensland. The trustee sought directions under s 96 of the Trusts Act 1973 (Qld) as to the proper construction of the trust deed and the dual resolutions passed in the tax years 2006, 2007 and 2008. The proceedings did not engage any question concerning the 2009 tax year. The beneficiaries, Martin Thomas and MAPL, were the first and second respondents to the trustee’s application. Although they were present at the hearing, they played no active part in it: Thomas Nominees Pty Ltd v Thomas and Ors [2010] QSC 417; (2010) 80 ATR 828, Applegarth J at [10]. The trustee put the Commissioner on notice of the application. However, a representative of the ATO advised the trustee’s solicitor that it was not appropriate for the Commissioner to be a party to the application: Applegarth J at [11]. The factual contentions put before Applegarth J in the affidavits of Ms Abbott and Martin Thomas were uncontradicted: Applegarth J at [36].

57    On 11 November 2010, Applegarth J published reasons for judgment in the proceeding and called upon the applicant to make submissions as to the form of orders to be made.

58    On 12 November 2010, Applegarth J made orders in these terms:

1.    The court directs the applicant under s 96 of the Trusts Act 1973 (Qld), and declares, that:

(a)    on the proper construction of the Income Tax Assessment Act 1997 (Cth), franking credits in respect of a franked distribution made to the trustee of a trust confer a financial advantage which falls to be dealt with by the trustee of the trust; and

(b)    on the proper construction of the trust deed for the Thomas Investment Trust and of the resolutions of the directors of the applicant for the years ended 30 June 2005 to 2008, those resolutions were effective to:

(i)    allocate to the following beneficiaries in the following amounts the benefits pertaining to the franking credits; and

(ii)    entitle those beneficiaries to those benefits in the proportions which those amounts bear, each to the other:

(iii)    confer on each of those beneficiaries respectively a vested and indefeasible interest in possession in a share of the distributable income that is consistent with the above allocation to those beneficiaries of the benefits pertaining to the franking credits;

(iv)    distribute all the distributable income of the Trust in each year among the above beneficiaries in accordance with those resolutions.

2.    The court orders that the application for equitable rectification of those resolutions be dismissed.

[emphasis added]

59    The franking credit proportion of the total franking credits for each income year 2005-2008 allocated to Martin Thomas was approximately 94%, 91%, 89% and 96% respectively.

60    It will, of course, be necessary to examine the question of whether the direction and declaration of the Supreme Court is binding upon the Commissioner and correspondingly the extent to which the scope and operation of the trust deed, the resolutions and the relationship between those things and the taxation law of the Commonwealth can properly be put in issue in these proceedings in the determination of the appeals from the objection decisions under the scheme contemplated by the TAA.

61    In summary, the position in relation to the various appeals and Applications for Review seems to be this.

62    As to the appeal by Martin Thomas from the objection decision of the Commissioner in relation to the amended assessments directed to him for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 274/2012.

63    That position prevails in relation to MAPL’s appeal for the tax year 2008: QUD 276/2012.

64    As to the alternative assessment issued to the trustee, Thomas Nominees, for the tax years 2006, 2007 and 2008, the Commissioner no longer opposes the trustee’s appeal: QUD 275/2012.

65    As to the assessment issued to the trustee for the tax year 2009, the Commissioner challenges and opposes the appeal: QUD 325/2013.

66    As to the appeal by Martin Thomas from the objection decision in relation to penalty for the tax years 2006, 2007, 2008 and 2009, the Commissioner challenges and opposes the appeal: QUD 284/2012.

67    As to MAPL’s appeal from the objection decision concerning penalty, the appeal is no longer opposed by the Commissioner: QUD 285/2012.

68    Nor is the trustee’s appeal from the objection decision concerning penalty for the tax years 2006, 2007 and 2008 opposed by the Commissioner: QUD 283/2012.

69    As to Martin Thomas’s appeal from the refusal to remit penalties for the tax years 2006, 2007, 2008 and 2009, the Commissioner opposes that application: Tribunal proceedings 2445/2012.

70    The Commissioner no longer opposes MAPL’s application for the tax year 2008 concerning the remission of penalties: Tribunal proceedings 2453/2012.

71    Nor does the Commissioner oppose the trustee’s application in respect of the refusal to remit penalties for the tax years 2006, 2007 and 2008: Tribunal proceedings 2450/2012.

72    I propose to now examine aspects of the statutory regime relevant to these proceedings before examining aspects of the contested evidence given by Ms Abbott and Martin Thomas. The statutory provisions of the 1936 Act and the 1997 Act relevant to these proceedings in the form in which these provisions took throughout the income tax years in issue are set out in Schedule 1 to these reasons.

Trust income under the 1936 Act and the franking credits regime under the 1997 Act

Trust income

73    Division 6 of Pt III of the 1936 Act addresses the topic of “Trust income”.

74    The term assessable income has by s 6(1) of the 1936 Act the meaning given by Div 6 of the 1997 Act and an assessment in the case of a trustee of a trust estate (relevantly, the class of trustee such as Thomas Nominees) involves the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax and the tax payable on that net income (or that no tax is payable): s 6(1), 1936 Act. The assessable income of, for example, an Australian resident includes income according to ordinary concepts, ordinary income, derived directly or indirectly from all sources, and amounts that are not ordinary income but which are included in assessable income by provisions of the 1936 and 1997 Acts about assessable income: s 6-5(1) and s 6-10(1) and (2), 1997 Act.

75    Such amounts of non-ordinary income included in assessable income are called statutory income: s 6-10, 1997 Act.

76    If an amount would be statutory income apart from the fact that the addressee (of the section) has not received it, it becomes statutory income as soon as it is applied or dealt with in any way on behalf of that person or as that person directs: s 6-10(3), 1997 Act.

77    Classes of statutory income are set out, as a guide to the operative provisions, at s 10-5 of the 1997 Act and those classes include credits on franked dividends within Div 207 of Pt 3-6, 1997 Act.

78    Exempt income is not assessable income but some ordinary income and some statutory income is neither assessable nor exempt income: s 6-1, 1997 Act.

79    Section 95 of the 1936 Act defines net income, in relation to a trust estate, to mean the total assessable income of the trust estate calculated under “this Act” as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions (except deductions under Div 16C or Sch 2G) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Div 36 of the 1997 Act in respect of such of the tax losses of previous years as are required to be met out of corpus.

80    A trustee, of course, is not liable as trustee to pay income tax upon the income of the trust estate, except as provided by “this Act”: s 96, 1936 Act. The term “this Act” is defined to include the 1997 Act: s 6(1), 1936 Act. A trust estate is taken to be a resident trust estate in relation to the year of income if the trustee was a resident at any time during the year of income: s 95(2), 1936 Act.

81    Section 97(1)(a)(i) of the 1936 Act provides (subject to Div 6D) that 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, the assessable income of the beneficiary shall include 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.

82    As to the position where a beneficiary is presently entitled to a share of the income of the trust estate but under a legal disability, see s 98, 1936 Act.

83    Section 95A(1) of the 1936 Act provides, for the purposes of that Act and the 1997 Act, that where a beneficiary of a trust estate is presently entitled to any income of the trust estate, the beneficiary shall be taken to continue to be presently entitled to that income notwithstanding that the income is paid to, or applied for, the benefit of the beneficiary.

84    Section 95A(2) of the 1936 Act provides, for the purposes of both Acts, that where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate, but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate. However, when s 97(1)(a)(i) of the 1936 Act refers to the “income of a trust estate” to which a beneficiary is presently entitled, that reference does not include a reference to income of the trust estate to which a beneficiary is deemed to be presently entitled by virtue of s 95A(2) where the beneficiary is a natural person: s 97(2).

85    Section 99A of the 1936 Act addresses the circumstances when certain trust income is to be taxed at a special rate.

86    Section 99A(4) is in these terms:

Where there is no part of the net income of a resident trust estate:

(a)    that is included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b)    in respect of which the trustee of the trust estate is assessed and liable to pay tax in pursuance of section 98; or

(c)    that represents income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia;

the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

87    Section 101 of the 1936 Act addresses the topic of present entitlements in the context of the exercise of a discretionary power by a trustee.

88    It provides (framed in the masculine) that where a trustee has a discretion to pay or apply income of the trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion. It follows that in those circumstances, such a beneficiary would be “presently entitled to a share of the income of the trust estate” for the purposes of s 97(1)(a)(i). Section 97(2) which operates to exclude the deeming effect brought about by s 95A(2) does not exclude the deeming effect of a beneficiary being presently entitled to amounts paid to him or applied for his benefit by the trustee in the exercise of a discretion, by force of s 101, for the purposes of s 97(1)(a)(i).

89    In the case of a corporate trustee exercising a discretionary power to apply the income of the trust property, the making of each payment to the beneficiary may well properly involve the exercise by the corporate trustee of a discretion to so apply the income without the formal passing of a resolution: Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 per Gummow J at 553.

90    Although the phrase net income, in relation to a trust estate, is defined by s 95(1) of the 1936 Act, the phrase income of the trust estate in s 97(1) is not defined. Nevertheless, as a matter of construction, the references in s 97(1) to a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate, coupled with the definition of trustee in s 6(1) of the 1936 Act, suggests a reference to the general law of trusts: Commissioner of Taxation v Bamford (2010) 240 CLR 481 (“FCT v Bamford”) by the Court at [36] to [39].

91    The “income of the trust estate” is the distributable income of the trust estate ascertained by the trustee (applying the general law of trusts), determined according to appropriate accounting principles taking account of relevantly applicable presumptions (if any) about receipts, outgoings and losses: FCT v Bamford at [17]) and the terms of the trust instrument, measured in respect of distinct income years.

92    The shorthand description “distributable income” would normally be understood as a matter of orthodoxy as a reference to the income of the trust estate available for distribution to beneficiaries or accumulation by the trustee reflecting a net accretion to the trust estate for the relevant income year.

93    The determination of a beneficiary’s share of the distributable income, so understood, to which the beneficiary is presently entitled, is the determinant of the beneficiary’s share or proportion of the s 95(1) net income of the trust estate to be included in the assessable income of that beneficiary: FCT v Bamford at [45]; Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 74-75, per Sundberg J.

94    Thus, s 97(1)(a)(i) adopts a so-called proportionate approach to determining the share the s 95(1) net income of the trust estate to be included in the assessable income of the beneficiary (that is, the same proportion as that beneficiary enjoys of the distributable income to which the beneficiary is presently entitled). Where there is no part of the net income of a resident trust estate that is included in the assessable income of a beneficiary of the trust estate pursuant to s 97, s 99A(4) is engaged and in that event the trustee shall be assessed and is liable to pay tax on the net income of the trust estate at the rate determined by the Parliament.

95    As to the question of when a beneficiary is presently entitled to a share of the income of a trust estate, the High Court observes, (by the Court: Mason CJ, Deane, Dawson, Toohey and McHugh JJ) in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271 that the parties, in that case, had agreed that the authorities establish that (a)  a beneficiary is presently entitled to a share of the income of a trust estate if, but only if, 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. The High Court proceeded to determine the question in issue in the appeal in Harmer upon an acceptance of the correctness of that agreed position.

96    The Court observed at 271:

That being so, the question on the appeal is whether any one or more of the claimants either were “presently entitled” in that sense [as described above] to the interest earned on the funds deposited with the Building Society or had a “vested and indefeasible interest” in that interest.

[emphasis added]

97    Those propositions derive from Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199 at 215-216, 219-220; Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 at 450-452 and Federal Commissioner of Taxation v Totledge Pty Ltd (“FCT v Totledge”) (1992) 60 FLR 149 at 157 and 158.

98    In Harmer v Federal Commissioner of Taxation, the question of the role or engagement of s 101 of the 1936 Act did not arise. Section 101, however, was considered by Latham CJ and Williams J in Federal Commissioner of Taxation v Whiting at 215. Section 101 was said to be entirely consistent with the construction attributed to s 97 of the 1936 Act. At 215, their Honours said this:

Section 98 deals with the case of a beneficiary who is presently entitled, but who is under a legal disability. In such a case the beneficiary under a legal disability may have a vested interest, but the trustee is nevertheless required to pay the tax. The circumstance which distinguishes this case from the case of a beneficiary presently entitled to whom s 97 applies is the existence of a legal disability. That legal disability does not prevent the beneficiary from having a vested interest. The effect of it is to prevent him receiving payment, because he is incapable of giving an effective discharge to the trustee. This provision, therefore, supports the view that when the Act speaks of a beneficiary being presently entitled to a share in income, it refers to the right of a beneficiary to obtain immediate payment, rather than to the fact that a beneficiary has a vested interest.

Section 101, which provides that 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 his discretion shall be deemed to be presently entitled to the amount paid to him or applied for his benefit by the trustee in the exercise of that discretion, fits in with this construction.

[emphasis added]

99    It follows that a beneficiary is presently entitled to a share of the income of a trust estate (within s 97 of the 1936 Act) if the beneficiary has an interest in the income of the trust estate, vested in interest and possession (otherwise described as a vested indefeasible interest vested in possession), coupled with an immediate legal right to demand and receive payment. Actual payment or application of income of the trust estate to or for the benefit of a beneficiary gives rise to a present entitlement under s 101, consistent with such a construction of the notion of being “presently entitled” for the purposes of s 97 of the 1936 Act.

100    The relevant trust deed might provide expressly and unambiguously (or where ambiguity arises a proper construction of the instrument will be necessary), that an object of the trust has an entitlement to be paid gross income as received. Where the instrument is silent about the nature and extent of a beneficiary’s interest, if any, in the gross income of the trust estate, the nature and extent of that interest (if any) falls to be determined according to settled principle (that is, the accepted precepts of the general law of trusts). As to that, Bowen CJ, Deane and Fitzgerald JJ said this in FCT v Totledge at 157:

A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee’s proper costs, expenses and outgoings. Regardless of whether one regards his interest as beneficial “ownership” subject to a charge in favour of the trustee (see, for example, per Lord Wrenbury in Baker v Archer-Shee) or whether one regards the concept of equitable “ownership” misleading where other than a bare trust with one ascertained beneficiary is involved, the life tenant or a beneficiary entitled to income under a trust ordinarily has a present beneficial interest in gross income as derived.

[emphasis added]

[footnotes omitted]

101    As to s 97(1), their Honours said this at 159:

… the preferable construction of s 97(1) is to treat the requirement of present entitlement to a share of the income of the trust estate as not being concerned with distinctions between gross income as derived and “surplus income” after payment of costs, expenses and outgoings but as referring to a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and, retaining that character in his hands, is legally available to be distributed to those entitled to it as beneficiaries under the trusts of the relevant trust estate. Such a right to demand and receive payment represents a present entitlement to receive a share of what retains its character as income of the trust estate regardless of whether, upon closer analysis, it can be seen to reflect a beneficial interest in gross income as derived or whether it represents no more than, for example, the right of an annuitant to be paid a particular amount from surplus or net income.

[emphasis added]

102    Plainly enough, there is likely to be (or may well be) in most cases a difference between the distributable income of the trust estate and the s 95(1) net income of the trust estate as not all outgoings, costs and expenses will necessarily be allowable deductions for the purposes of the 1936 and 1997 Acts.

The franking credit regime

103    Put simply, the 1997 Act establishes an imputation system (see particularly Div 207) for determining how and when the income tax paid by a corporate tax entity (as that term is defined) is imputed to its members who might be shareholders, beneficiaries or partners. The tax is imputed to members by marking or franking the relevant distribution. A franked distribution has tax credits (franking credits) which reflect the tax already paid by the corporate tax entity on its profits distributed to members. The tax credits that can be imputed to members are recorded in the corporate tax entity’s “franking account” as “franking credits”. The franking credit related to a distribution is an imputation credit in the member’s hand which will usually give rise to a tax offset dollar-for-dollar and also, in the case of individuals, relevantly in issue here, an eligibility for refunds of excess imputation credits.

104    Section 63-10(1) of the 1997 Act (and all references are to the 1997 Act unless otherwise indicated) tells the addressee that if you have one or more tax offsets for an income year, they are applied against the person’s basic income tax liability in the order shown in the table and to the extent that an amount of a tax offset remains, Item 40 in the table provides that a tax offset which is subject to the “refundable tax offset rules” (see Div 67) gives rise to a “refund of the remaining amount”.

105    Section 67-25 provides that tax offsets available under Div 207 (which sets out the effects of receiving a “franked distribution”) are subject to the refundable tax offset rules unless otherwise stated in the section. Section 67-25(1B) does so state in this circumstance: if a trustee to whom a franked distribution flows indirectly (as that term is understood in s 207-50(4)), is entitled to a tax offset under Div 207 for an income year because of the distribution and the trustee is liable to be assessed under s 99A of the 1936 Act on a share or all or a part of the trust’s net income for the relevant year, the tax offset is not subject to the refundable tax offset rules. Thus, in principle, a trustee might well seek to exercise powers conferred under the trust (or a settlor might seek to include terms) that avoids the circumstances contemplated by s 99A arising so as to ensure that the tax offsets available under Div 207 are, by s 67-25(1), subject to the refundable tax offset rules so as to preserve the right to a refund on the amount of the excess tax offset: s 63-10(1), Item 40.

106    Subdivision 202-A (s 202-5) provides that an entity franks a distribution (see s 960-120 as to a distribution; such as a dividend) if it is a franking entity (as to which see s 202-15) which satisfies the residency requirement when the distribution is made; and, the distribution is a frankable distribution (as to which see s 202-40); and, the entity allocates a franking credit to the distribution (as to which see s 202-5).

107    Subdivision 202-B addresses the question of whether an entity is a franking entity at a particular time and Subdiv 202-C addresses which distributions can be franked. The object of Subdiv 202-C is to ensure that only distributions equivalent to realised taxed profits can be franked: s 202-35. The maximum franking credit for a distribution (of, for example, dividends by a corporate tax entity) is equivalent to the maximum amount of income tax that the entity making the distribution could have paid, at the prevailing corporate tax rate, on the profits underlying the distribution: s 202-55.

108    A franking credit is the amount of a credit that arises in the franking account of an entity and the table at s 202-15 sets out when such a credit arises.

109    A franking account is an account for each entity that is, or has at any time been, a corporate tax entity (as defined). The maximum franking credit for a distribution is calculated, relevantly for the income tax years in question, according to the following formula: the amount of the frankable distribution multiplied by 30 and divided by 70: s 202-60(2). If the frankable distribution is, for example, $3,500, the maximum franking credit according to the formula is thus $1,500.

110    An entity that makes a frankable distribution must give the recipient a distribution statement reciting, among other things, the amount of the distribution and the amount of any franking credit specified on the distribution: s 202-75(1); s 202-80(3).

111    Section 207-5(1) provides that if a corporate tax entity (such as a company) makes a franked distribution to a member (a shareholder in the case of a company), then as a general rule, an amount equal to the franking credit on the distribution is included in the member’s assessable income (s 202-5(1)(a)) and the member is entitled to a tax offset (dollar-for-dollar) of the same amount (s 202-5(1)(b)). If the member is a partnership or the trustee of a trust, an amount equal to the franking credit on the distribution is also included in the member’s assessable income for the purposes of s 207-5(1)(a): s 207-5(3).

112    As to the tax offset, however, s 207-5(4) provides (and s 207-5(3) and s 207-5(4) need to be read together) that a tax offset in relation to that distribution is only available to an entity (which might be a trustee or a beneficiary or a partner in the partnership) if the distribution flows indirectly to it and does not flow indirectly through it to another entity. In that case, the tax offset available to the relevant entity described above, is equal to its “share of the franking credit on the distribution”: s 207-5(4).

113    Section 207-5(4) has the following note which forms part of the provision:

Note:    That share [of the franking credit on the distribution] is a notional amount and the entity [trustee, beneficiary or partner] can have that share without actually receiving any of the franking credit or distribution.

[emphasis added]

114    Section 207-15(1) provides that Subdiv 207-A sets out, as a general rule, the “tax effect of receiving a franked distribution”. However, the subdivision does not apply to a partnership or trustee to whom a franked distribution is made (such as the franked dividends made to the trustee in this case) or an entity to whom a franked distribution flows indirectly (such as the beneficiaries of the Thomas Investment Trust): s 207-15(2).

115    Section 207-25 provides a description or explanation of the matters Subdiv 207-B addresses.

116    Section 207-25 says that Subdiv 207-B deals with an entity that receives a benefit of a franked distribution where the distribution is made to a partnership or the trustee of a trust and the benefit is received by the relevant entity either directly or through other interposed partnerships or trusts. In those circumstances, the distribution is regarded as flowing indirectly to the entity. What follows is that on the basis of a notional amount of the entity’s share of the distribution, the entity may be entitled to have an amount included in its assessable income and/or a tax offset under Subdiv 207-B.

117    As to the operative provisions of Subdiv 207-B, s 207-35(1) provides for a “gross-up” notion in the following way.

118    If a franked distribution is made in an income year to an entity that is a partnership or the trustee of a trust and the recipient entity is not a corporate tax entity when the distribution is made (accepting and recognising that Thomas Nominees as trustee of the trust was not a corporate tax entity and that s 207-35(1)(c) is not engaged), then the assessable income of the trust (or partnership) for that income year includes the amount of the franking credit on the distribution.

119    Section 207-35(3) bears the sub-heading: “Allocation of the additional amount of assessable income”. It provides that despite any of the provisions of Div 6 (and also Div 5) of Pt III of the 1936 Act, if four particular integers are engaged, then a certain consequence arises.

120    The four integers or pre-conditions to that consequence are these.

121    First, a franked distribution is made, or flows indirectly to, a trustee of a trust or a partnership in an income year: s 207-35(3)(a).

122    Second, the assessable income of the trust or partnership for that income year includes an amount (called the franking credit amount) which is (in whole or in part) the additional amount of assessable income included under s 207-35(1) in respect of the distribution: s 207-35(3)(b).

123    Third, the distribution flows indirectly to an entity that is a beneficiary, a partner or the trustee of the trust: s 207-35(3)(c).

124    Fourth, the entity (partner, beneficiary or trustee) has an amount of assessable income for the relevant income year that is attributable to (that is, plays some part in) the distribution (in whole or in part): s 207-35(3)(d).

125    The consequence is this. If those four integers are engaged, then the entity’s assessable income (the assessable income of the beneficiary, relevantly) for that income year also includes so much of the franking credit amount as is equal to the entity’s share of the credit on the distribution: s 207-35(3).

126    The entity’s share of the franking credit on the distribution is determined by s 207-57: s 995-1.

127    Section 207-35 at the foot of s 207-35(3) contains a worked example illustrative of the operation of the section (which also forms part of the section). The worked example is this:

Example:    A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust’s assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year [made up of the $70 distribution, the $30 franking credit on the distribution [included by s 207-35(1)] and $100 from other sources]. There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust’s income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.

The distribution flows indirectly to P (as P is entitled to a share of that net income and has a 100% share of the distribution under section 207-55). P therefore has an amount of assessable income that is equal to its share of the distribution. Under this subsection, P’s assessable income also includes the full amount of the franking credit (as P’s share of the franking credit on the distribution is $30 under section 207-57). Q’s share of the net income therefore does not include any of the franking credit.

[emphasis added]

128    The above example seems to recognise that so long as the trust deed confers power on the trustee to apply classes of income of the trust estate to particular beneficiaries to the exclusion of others (or differentially among beneficiaries), Div 207 recognises that a trustee might stream all of (or most of) the franked distribution to one beneficiary and other income to another beneficiary. Beneficiaries might have differential shares of the s 95(1) net income of the trust estate yet 100% of the franked distribution is allocated to a particular beneficiary which leads to a particular consequence under s 207-55 and a determination of the beneficiary’s share of the franking credit on the franked distribution under s 207-57.

129    A franked distribution flows indirectly “to a beneficiary” in an income year if, and only if, during the income year, the following three integers are engaged: s 207-50(3).

130    First, relevantly here, during the income year the franked distribution is made to the trustee of the trust: s 207-50(3)(a).

131    Second, the beneficiary has, for that income year, an amount called a share amount (whether or not the share amount becomes assessable income in the hands of the beneficiary), described as a “share of the trust’s *net income for that income year [as defined, that is, the s 95(1) of the 1936 Act, net income] that is covered by s 97(1)(a) of the [1936 Act]”: s 207-50(3)(b)(i).

132    Third, the beneficiary’s share of the distribution under s 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share): s 207-50(3)(c).

133    It will be necessary to return to s 207-55 and the determination of whether the beneficiary’s share of the distribution under that section is positive (irrespective of whether the beneficiary actually receives any of that share).

134    Section 207-45 provides that an entity to whom a franked distribution flows indirectly in an income year is entitled to a tax offset for that income year equal to the entity’s share of the franking credit on the distribution if the entity is an individual, and, by force of s 67-25(1) and s 63-10(1), Item 40, a refund to the extent of any excess franking credit beyond the tax offset.

135    Section 207-55 has, as its object, ensuring that the amount of a franked distribution made to the trustee of a trust (or a partnership) is allocated notionally amongst those entities who derive benefits from that distribution and the allocation corresponds with the way in which those benefits were derived: s 207-55(1). Section 207-55 is effecting a notional allocation of the franked distribution made to the trustee, to those entities deriving benefits from the franked distribution, in proportion to the derived benefits. The statute effects the allocation as a construct or notional allocation. The note to s 207-55(1) is in these terms:

Note:    An entity can derive a benefit from that distribution (and therefore has a share of the distribution) without actually receiving any of the distribution: see subsection (2) of this section and the example at the end of section 207-50.

136    Section 207-55(2) provides that an entity’s share of a franked distribution is an amount notionally allocated to the entity as its share of the distribution whether or not the entity actually receives any of that distribution. The amount of the notional allocation (and thus the entity’s share of the franked distribution) is equal to the entity’s share of the distribution as the focal entity for the purposes of Column 3 in an item of a table contained in s 207-55(3).

137    The relevant item is Item 3.

138    The entity to whom the franked distribution is made (relevantly for the purposes of the income years in question, the trustee of the trust estate, Thomas Nominees) is described, for the purposes of s 207-55(3) and the table, as an intermediary entity. The entity whose share of the distribution is to be determined so as to achieve the object of the section as required by s 207-55(1) is described as the focal entity.

139    For Item 3, the trustee is the intermediary entity and a beneficiary of the trust is a focal entity if a franked distribution is made to the trustee and the beneficiary (relevantly here) has, in respect of the trust, a share amount mentioned in s 207-50(3) (beneficiaries) or (4) (trustees – in the case of interposed trusts). In those circumstances, the trustee’s share of the franked distribution, if the trust has a positive amount of net income for the relevant income year, is, relevantly, the “amount of the franked distribution” (Item 3, Column 2). The focal entity’s share of the franked distribution is so much of the amount worked out under Column 2 (namely, the amount of the franked distribution to the trustee) as is taken into account in working out the share amount mentioned in s 207-50(3). Once the amount notionally allocated as the share of the franked distribution has been determined, s 207-57 provides that an entity’s share of the franking credit on a franked distribution is an amount notionally allocated to the entity as its share of that credit according to the s 207-57(2) formula.

140    Put simply, the beneficiary’s share of a franked distribution is a notional amount equal to so much of “the amount of the franked distribution” (see Item 3, Column 2) as was taken into account in working out the beneficiary’s share of the s 95(1) net income that is, the share amount referred to in s 207-50(3)(b), being the beneficiary’s share of the trust’s s 95(1) net income.

141    By s 207-57, a beneficiary’s share of the franking credit on a franked distribution is an amount notionally allocated to the beneficiary as its share of the franking credit on the distribution (s 207-57(1)) irrespective of whether or not the relevant entity actually receives any of the credit or the distribution. The amount notionally allocated is worked out under s 207-57(2) according to the following formula: the entity’s share of the franked distribution divided by the amount of the franked distribution multiplied by the amount of the franking credit on the franked distribution.

142    Although I will return to the facts of these applications later in these reasons, let it be assumed that in an income year a trust has a positive amount of net income and that the trust receives income comprising a franked dividend of $3,500 and other income of $5,000. Assume also that there are two presently entitled beneficiaries of the trust, X and Y. The trust law income is $8,500. Assume also that the outgoings are $7,000 and thus the net profit according to the trust law P & L is $1,500. Assume also that the beneficiaries are entitled by an exercise of the trustee’s discretion to 60% and 40% of the net profit so that X is entitled to $900 and Y is entitled to $600. The assessable income of the trust includes the franking credits on the franked distribution (s 207-20, s 207-50(1)) and thus the assessable income of the trust is $10,000. Assume that not all of the outgoings of $7,000 are allowable deductions with the result that only $5,000 is allowable. The s 95 net income is then $5,000. Section 97(1)(a) requires a proportionate approach so that the assessable income of each beneficiary is $3,000 (X) and $2,000 (Y). In the absence of any streaming of the franked dividends and the other income, on one view, the whole of the franked dividend was taken into account (s 207-55) in calculating the s 95 share amount of each beneficiary and therefore X’s assessable income includes 60% of the franking credit - $900 and Y’s assessable income includes 40% - $600: s 207-35(3). Each beneficiary is entitled to a tax offset on tax otherwise payable, of $900 and $600 respectively. Assume, however, that the trustee resolves according to a relevant power in the trust deed to allocate all of the franked dividend to X and all of the other income to Y. Since the profit in the trust is only $1,500, the trustee cannot allocate $3,500 to X or $5,000 to Y. Their respective proportionate share of the trust income based on streaming the classes of income would be 41.17% as to X and 58.82% as to Y. If the profit was distributed according to those shares, X and Y would enjoy, approximately, $617.55 and $882.30 respectively. The assessable income in the trust, however, is $10,000: s 207-20, s 207-35(1). The s 95 net income remains $5,000. On the footing that the whole of the franked dividend is taken into account in calculating X’s share of the s 95 net income, his share amount would be 41.17% of $5,000 - $2,058.50, on one view of it. X’s share amount would be $2,941. X’s assessable income would include 100% of the franking credits on the dividends ($3,500) paid to the trust, namely, $1,500. X’s assessable income would be $3,558.50 (s 207-35(3)) and the tax offset would be $1,500 (s 207-45, s 207-55 and s 207-57). Some of the questions raised by these proceedings involve a question of whether the provisions might operate in this way.

The contentions of the applicants – the propositions

143    Having regard to Mr Harrison QC’s contention that the Commissioner is seeking to attribute a case to the applicants not being run by them and Mr Looney QC’s contention that the parties may possibly be akin to ships passing in the night (or not), it is now necessary to identify, first of all, the case actually being run by the applicants.

144    I propose to do so by identifying the essential propositions contended for by the applicants in their oral submissions as the nub of their case although I have had regard to all aspects of the written submissions as well. The essential propositions are these.

145    First, when cl 4(1) of the trust deed (see [16] and [17] of these reasons) talks about the trustee applying the income of the trust property in its absolute discretion and goes on to talk about the trustee not having applied the whole of the net income by the exercise of its discretion (with the result that such remaining net income shall be applied for the benefit of the nominated beneficiaries), the clause is necessarily concerned with s 95(1) net income.

146    The default distribution clause concerning the net income suggests that cl 4(1) should be construed, it is said, against the background of the income tax legislation because the only reason for adopting a default distribution of the net income (or remaining net income) is to avoid exposing the trustee to a tax liability.

147    This context is said to lend force to the notion that the trust deed is concerned with the s 95(1) income tax law notion of net income.

148    This proposition is said to have particular resonance for the 2009 income year because the trust law expenses exceeded the trust law income of the trust estate in that income year notwithstanding that the s 95(1) net income was $173,743. The applicants say that although the Commissioner contends that because there was no net profit according to accounting concepts at 30 June 2009 (and thus a contention that no person was presently entitled to income within s 97(1)(a) of the 1936 Act on the Commissioner’s construction of the trust deed), this problem does not arise, in truth, it is said, because the trust deed, properly construed, adopts a s 95(1) definition of income.

149    Thus, for each income year, the beneficiaries were presently entitled: T, p 6, lns 33-41; T, p 135, lns 35-36.

150    The applicants say that because the language of cl 4(1) is - “the Trustee shall apply the income” - the notion is not one of “distributing” income, and the second part of cl 4(1) brings into operation a default position if, during the income year, the trustee has not applied the whole of the net income that may be applied. Therefore, it is said, the clause is concerned with income up to midnight on 30 June and not income as at 30 June. Therefore, the “distribution resolutions”, properly construed, refer to the income as at the end of the financial year because the trustee does not know until the end of the financial year whether there is going to be net income in trust law terms or s 95(1) terms until then: T, p 130, lns 27-45.

151    The second proposition is concerned with cl 4(2) of the trust deed (see [18] of these reasons) which was inserted by amendment on 1 October 1992 along with cls 4(3) to 4(8).

152    The applicants say that when the trust deed by cl 4(2) recognises that the trustee may separately record in the books of account and records of the trust, categories of income, defined at cl 4(2)(b) as “income, including capital gains, which under the [1936 Act] … has or gives rise to any other separately identifiable taxation consequence or benefit” (see cl 4(2)(b)(v)), that definitional language of “income” is sufficient to “catch up the benefits that come from being entitled to the tax offset – the income tax offset”: T, p 10, ln 37.

153    Thus, the franking credit benefit as a tax offset is said to be income of the trust estate under cl 4(2)(b) of the trust deed.

154    The applicants also say that cl 4(2) treats the income of the trust as including income which is only relevant to s 95 income: T, p 130, lns 46-47. The applicants say that the amended deed should be read as a whole and as a matter of construction the intention of the settlor in amending the deed ought to be understood as amending it in conformity with cl 4(2) as relevant only to s 95 net income: T, p 131, lns 3-7.

155    Third, even if the applicants’ contentions as to the construction of the trust deed are not accepted, the way those concerned with the administration of the trust have dealt with cl 4 gives rise to an estoppel by convention which would establish, as the proper interpretation and operation of the trust deed, the way in which it has been so construed and dealt with by those persons, that is, in a manner consistent with the contended construction: T, p 131, lns 7-15.

156    Authority for such a proposition is said to be found in Shanemist Pty Ltd v Denmac Nominees Pty Ltd [2003] QSC 373 and Unruh v Seeberger (2007) 10 HKCFAR 31 at [142] to [148] which support, it is said, the proposition that an estoppel by convention can apply to effect a change to a contract: T, p 132, lns 1-3. See also The Bell Group Ltd (In Liq) and Others v Westpac Banking Corporation and Others (No 9) (2008) 225 FLR 1, Owen J at [3515] and following. The applicants then say that although the relevant instrument here is a trust deed, that instrument is in the nature of a contract and, as a matter of principle, the authorities say that contractual principles apply to the construction of the terms of a trust deed: T, p 132, lns 39-47. Byrnes v Kendle (2011) 243 CLR 253 at [59], per Gummow and Hayne JJ, is said to support that proposition.

157    The applicants say that although there is no authority to the effect that estoppel by convention applies to trust deeds, the analogous application of estoppel by convention to contracts gives rise to the reasonable proposition that the doctrine ought to apply to the construction of a trust deed if participants have acted on a certain assumption or footing when engaging with the trust instrument. Thus, one would not impose, it is said, a s 97 process upon the trustee of first determining the trust law distributable income if that is not required of the trustee by the terms of the trust deed: T, p 133, lns 4-18. FCT v Bamford (2010) 240 CLR 481 is said to be authority for the proposition.

158    In short, the applicants say that if the trust deed tells the trustee to distribute the s 95 income, that is also the “distributable income”: T, p 134, lns 10-11. The applicants also say that Goldie v Getley (No 3) (2011) 8 ASTLR (Australian Succession and Trusts Law Reports) 166 at [215] to [226] and Public Trustee v Smith (2008) 1 ASTLR 488 at [83]-[95] may be of assistance on the estoppel question although they are said not to be sufficiently relevant to the questions in issue here that copies of them should be provided to the Court. They may be of assistance, it is said.

159    The applicants also say that it is not necessary for them to go so far as an estoppel by convention as a broader principle applies which is that it is not for the Commissioner to challenge distributions that the beneficiaries have chosen not to challenge themselves. The applicants rely upon Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 and Federal Commissioner of Taxation v Noza Holdings Pty Ltd (Full Court of the Federal Court) (2012) 201 FCR 445 as support for that proposition.

160    Fourth, cl 4(1) does not require the trustee’s application of the income to be by way of “resolution” and cl 4(4)(a) (see [20] of these reasons) which addresses the trustee’s entitlement to distribute or accumulate income by separately dealing with the whole or part of the income of a category, for the benefit of one or more beneficiaries, talks about exercising the power by resolution or determination. It follows for the applicants that the trustee’s decision to make payments to the beneficiaries throughout the 2009 income year is just as much an application of the benefit (income) as a resolution to do so: T, p 136, lns 1-2.

161    The applicants say that the decision of the trustee to make the payments and the making of the payments falls within s 101 of the 1936 Act, and thus they were presently entitled.

162    Because the applicants say that cl 4(2) treats “any other separately identifiable taxation consequence or benefit” as income, cl 4(4)(a) should be construed so as to empower the trustee to deal with tax benefits “insofar as they may be dealt with under the relevant [tax] legislation”: T, p 11, lns 31-33.

163    Fifth, the applicants say that consistent with their contentions, Applegarth J in the Supreme Court of Queensland proceedings held, on the trustee’s application for directions, that the tax benefits (in the form of franking credits giving rise to income tax offsets) either came within the notion of income under the trust deed (T, p 12, lns 12-13) and therefore could be dealt with by the trustee under cl 4(4)(a) or were, at least, a financial benefit. The applicants say that the trustee had a duty to deal with that financial benefit in a way that most advantaged or benefited the beneficiaries and in the written submissions they say that certainly the “financial benefit” could not be “wasted” by the trustee without the trustee falling into breach of duty. The applicants say that the franking credit benefit is a “real thing” which has monetary value and the trustee has a duty to deal with it: T, p 138, lns 35-41.

164    Sixth, the orders of the Supreme Court in the form of directions and declarations (Order 1 – see [58] of these reasons) determines the proper construction and legal effect of the resolutions (see [32] – [37] of these reasons as to the resolutions) and the Commissioner must necessarily accept, as a matter of law, the construction attributed to the resolutions by the Supreme Court and assess the participants to tax on the footing of the Court’s orders. In other words, the applicants say that the Commissioner cannot simply ignore the directions and declarations and adopt his own view of it notwithstanding that the orders were made inter-parties in the absence of the Commissioner (as the Commissioner declined the invitation by the trustee applicant to be heard or joined in those proceedings). The applicants say that the Commissioner must take the world as he finds it.

165    The seventh proposition (although the applicants say the proposition does not take the matter very far) is that s 207-5(4) (see [112] of these reasons) seems to operate on the assumption that a determination is made as to where the “franking credit” will go as there is no reference to a “franked distribution” in the subsection which, it is said, seems to be inconsistent with the Commissioner’s contention that the legislation requires the trustee to say, by resolution, where the distribution will go not where the franking credit will go.

166    Thus, in effect, as the argument goes, so far as the applicants understand the Commissioner’s position (although putting their understanding of it in my own language), resolutions which, taxonomically, address the distribution of a franking credit fail to address the statutory requirement to address the allocation of the distribution to which the franking credit relates.

167    Eighth, s 207-35(3) seems to adopt a concept that first selects the franking credit amount but which has both the franking credit amount and the distribution flowing to the beneficiary or partner. In other words, the allocation of an additional amount of assessable income begins with an allocation of the franking credit amount under s 207-35(1) and provides for the franking credit amount and the distribution to which it relates, to flow to the beneficiary. The applicants say that their case is (T, p 16, ln 36) that a franked distribution has flowed indirectly to a beneficiary and under s 207-45 the beneficiary is entitled to a tax offset equal to the beneficiary’s share of the franking credit.

168    Ninth, s 207-50(3) simply determines whether one can say that a franked distribution has flowed indirectly to a beneficiary of the trust which engages the question of whether the beneficiary’s share of the distribution under s 207-55 is a positive amount which, in turn, asks the question of how much of a share of the distribution does the beneficiary enjoy. The applicants say that the object of ss 207-55, as recited at s 207-55(1), (which talks about ensuring that the amount of a franked distribution to the trustee is allocated notionally amongst entities who derive benefits from the distribution), suggests that the real focus is the identification of the derived benefits which then “drags along the franked distribution”: T, p 17, lns 26-27.

169    The tenth proposition starts with the ninth proposition and asserts that s 207-55 determines the notional allocation to the beneficiary of the amount of the franked distribution made to the trustee, according to derived benefits, and that s 207-57 determines the beneficiary’s notional allocation, by operation of the section, of its share of the franking credit on the franked distribution, so determined. The applicants then say that the Commissioner’s position asserted in all of the objection decisions that the “legislative provisions make it clear that the franking credit, both as an offset and as a grossed-up amount, cannot be considered separately from the franked distribution to which it attaches” and “the Act itself makes plain that a beneficiary’s share of the franking credit is calculated by reference to their share of the distribution to which the franking credit is attached”, is correct “as far as it goes”: T, p 19, lns 42-47.

170    However, the applicants say that the Commissioner seems to be postulating that the trustee must make a direct reference in the distribution resolutions to the notional proportion of the franked distribution. As the applicants understand the Commissioner’s position, the Commissioner is contending that the trustee must work out a percentage of the franked distribution (to be allocated to a beneficiary) and it is not possible for the trustee to apply the franking credit benefits for the benefit of a particular beneficiary by resolving to apply so much of the franked distribution as carries with it a nominated amount of franking credits: T, p 20, lns 1-7.

171    Rather, the proposition is that, consistent with the legislation, a trustee could identify a percentage of the franked distribution (to which the franking credit is attached) to be allocated to a beneficiary or the trustee could allocate so much of the franking credit benefits as it determines should go to a particular beneficiary and in that event the legislation “steps in” and has the effect, it is said, of treating the beneficiary as having notionally received the benefit of the franked distribution. In short, the applicants say that the trustee has resolved that the franking credit benefits go in the way allocated in the resolutions and the legislation brings along the franked distribution. The material consideration is the intention of the trustee in framing and passing the resolutions.

172    The applicants therefore contend that “there was a distribution [by allocating the franking credits] and we say that it is unnecessary, as it were, to stream the franked distribution, that’s the original dividend, in any way through”: T, p 136, lns 6-9; T, p 136, lns 45-46; T, p 137, lns 1-2.

173    The eleventh proposition is concerned with the resolutions themselves.

174    The applicants say that the resolution at [33] of these reasons, for example, (and all the equivalent net income distribution resolutions for each income year), applying the net income of the trust fund for the 2006 income year to Martin Thomas as to $21,600 and the balance to MAPL confers a “real or present entitlement” on Martin Thomas calculated by reference to the taxable income, that is, calculated on the assumption that the trust deed is concerned with s 95(1) net income. The applicants understand the Commissioner’s position to be that despite his contentions concerning the 2009 income year (of no present entitlement in any beneficiary due to no trust law accounting profit at 30 June 2009), the Commissioner accepts that the distributions of s 95 taxable income is effective under the trust deed.

175    The twelfth proposition concerns the next group of resolutions called the franking credit distribution resolutions an example of which for the 2006 income year is at [34] of these reasons. These resolutions deal with franking credits and foreign tax credits. The twelfth proposition is related to the tenth proposition and goes to the proper construction of the resolutions as showing an intention on the part of the trustee to allocate the franking credits or the benefits of the franking credits as specified in each resolution: T, p 21, lns 26-28. That, it is said, was the intention and the resolutions reveal it precisely: T, p 24, lns 16-18. That being so, the legislation, it is said, simply has the effect of “bringing along … – an appropriate amount of the franked distribution”: T, p 21, lns 28-29.

176    Thirteenth, support for the twelfth proposition is to be found in the orders made and reasons for judgment published by Applegarth J in the Supreme Court of Queensland proceedings. The applicants say that Applegarth J held that the resolutions “had achieved the effect that was intended [and as they contend for]”: T, p 21, lns 35-36; T, p 22, ln 11. The applicants contend that Order 1 (see [58] of these reasons) declares that the franking credits confer a “financial advantage” as referred to in the trust deed which is rendered “income” for the purposes of the trust deed thus empowering the trustee to deal with them, as a matter of construction of the deed.

177    Fourteenth, as the applicants understand the position, the Commissioner is not contending that the applicants could not have achieved the intention (or at least the intention that the applicants contend for) sought to be achieved by the resolutions but rather that the resolutions do not give effect to the intention sought to be achieved.

178    The fifteenth proposition concerns the operation of a franking account by MAPL which is a corporate tax entity as that term is defined. MAPL has, by s 205-5(1) and s 205-10, a franking account. Section 205-15(1) provides that a credit arises in the franking account of an entity and the amount of the credit (called a franking credit) is determined according to, among other items, Item 4. That item is engaged if a franked distribution flows indirectly to, in this case, MAPL, through a trustee of a trust; MAPL is a franking entity when the franked distribution is made; and MAPL is entitled to a tax offset under Div 207. In that event, a credit arises in MAPL’s franking account of its share of the franking credit on the distribution at the end of the income year during which the franked distribution flows indirectly to the entity: s 205-15(1), Item 4; s 205-15(2). Ms Abbott, the accountant to the trustee and the beneficiaries, gave evidence in re-examination when producing additional documents (a file containing franking account transactions and financial statements for MAPL – Exhibits 3, 4, 5(1/3) and 5(2/3)) that she had made entries (credits) in MAPL’s franking account in the income years 2006 to 2009 consistent with the franking credit distribution resolutions.

179    So, the proposition is that it would be contrary to Ms Abbott’s understanding of the resolutions and contrary to the way they ought to be interpreted to conclude that MAPL received anything other than the franking credits (and thus the tax offset benefit) reflected in the credit entries in the franking account. Further, it is said, it must follow inferentially that Martin Thomas must have received the rest of the franking credits because the intention was to deal with them all: T, p 134, lns 30-45; T, p 138, lns 12-15.

180    The sixteenth proposition concerns s 207-35(3) and the four integers that must be satisfied before the section is engaged: see [117] to [126] of these reasons. The proposition is this: when s 207-35(3) talks about a distribution flowing indirectly to a beneficiary and the beneficiary having an amount of assessable income for the income year that is attributable to all or a part of the distribution, all that is necessary is that the franked distribution was taken into account in calculating what was available: T, p 139, lns 33-39.

181    The seventeenth proposition concerns s 207-55 which effects a proportionate notional allocation of a franked distribution made to a trustee or partnership to those entities who derive benefits from it. The proposition is this: s 207-55 itself operates to allocate the franked distribution (made to the trustee of the trust) to or amongst those beneficiaries who derive franking credit benefits, in proportion to the benefits derived. Thus, the section is making plain that if a beneficiary derives a franking credit benefit from a franked distribution made to the trustee, then the franked distribution is notionally allocated in proportion to the benefits derived. It follows, it is said, that the section does not require the trustee to distribute the franked distribution.

182    Put simply, on that footing (putting the contention in my terms), the section contemplates an ex ante allocation of the benefits by the trustee and a consequential proportionate notional allocation of the distribution by the statute.

183    Item 3 in the table determines the notional allocation. The applicants say, that which is “real”, is the share of the franking credit benefit, and that which is notional, is the franked distribution: T, p 145, lns 12-14.

184    Eighteenth, the Commissioner’s contention as to the operation of the imputation provisions is inconsistent with the operation of the partnership provisions and thus the provisions must be given a construction that makes sense of franked distributions to the trustee of a trust and also a partnership with distributions flowing indirectly to either beneficiaries or partners.

185    Nineteenth, the resolutions must be construed against the relevant background circumstances and not simply in isolation, with the result that if the selected language of the resolutions does not give effect to the intention of Mr Thomas and the trustee as advised by Ms Abbott, the intention is nevertheless clear. The applicants say that by analogy the “generous interpretation” given to the terms of contracts and deeds to give effect to the true and clear intention of the relevant participants “applies equally” to the construction of the resolutions: T, p 141, lns 42-47.

186    The twentieth proposition concerns the 2009 income year.

187    The proposition is that even though the trust is a discretionary trust, the trustee operated on the footing (on the evidence) that the beneficiary had a beneficial interest in the gross income as it was derived with the result that income could be applied by the trustee for the benefit of a beneficiary during the course of the income year (without having to wait to the end of the income year) with the trustee thus foregoing a lien over the gross income as security for its right of indemnity for costs and expenses. Should the trustee apply too much of the gross income to the benefit of a particular beneficiary, the trustee would, it is said, nevertheless remain personally liable for costs and expenses incurred: T, p 142, lns 44-47; T, p 143, lns 1-2.

188    Subject to the applicants’ contentions as to the effect that a court ought not to allow a deficiency of form to prevail over the true intention of the taxpayers (and should strive to give effect to the true intention of the taxpayers); contentions going to s 357-60 in Sch 1 to the TAA having regard to Taxation Ruling TR92-13; and the rectification claims, these propositions represent the essence of the case put by the applicants.

189    Fundamentally, the applicants say that Mr Thomas and Ms Abbott endeavoured to ensure each year that all trust income was distributed (the distributable income being said to be the s 95 net income for the purposes of the trust deed) so as to avoid the operation of s 99A, and in doing so, ensure that the distribution occurred in a way that maximised the cash refunds payable to Mr Thomas. At para 9 of the submissions, the applicants put the matter this way:

9.    The Trustee, intending to avoid the operation of s 99A and to maximise the refundable tax offsets available only to Martin Thomas, passed dual net income distribution resolutions at the end of each year, which Beth Abbott drafted in consultation with Martin Thomas:

9.1    one resolution shared the net income relating to franking credits and foreign income (which had a similar tax advantage) between Martin Thomas (as to over 90%) and Martin Andrew Pty Ltd (as to less than 10%);

9.2    the other resolution shared all other net income between Martin Thomas (as to less than 1%) and Martin Andrew Pty Ltd (as to more than 99%).

190    The applicants say that Martin Thomas was thus required by s 97(1)(a) of the 1936 Act to include a share of the trust’s s 95 net income in his assessable income. They say that that circumstance then qualified him to receive a share of the franking credits on the franked dividends received by the trustee (s 207-50(3)(b)) and thus an entitlement to tax offsets under s 207-45 which became refundable to him (as to surplus offsets) under s 67-25. However, his share of the franking credits is determined by s 207-57 according to the formula which engages, as an integer of the formula, the beneficiary’s “share of the franked distribution” as determined under s 207-55. That section determines, it is said, Martin Thomas’s share of the franked dividend having regard to his entitlement to the benefit of the franked distribution to the trustee whether or not he actually received any of the distribution, rather than by reference to his share of overall trust income. Then, s 207-57 notionally allocates a corresponding amount of the franking credit to Martin Thomas whether or not he actually received any of that credit or distribution.

191    As to the Commissioner’s notion (as the applicants understand the Commissioner’s case) that what must be distributed is the franked distribution represented by the dividend income, the applicants say that a trustee might receive an amount of dividend income yet that income is depleted by expenses and thus there is no franked dividend income to distribute by resolution or otherwise. Nevertheless, a beneficiary can be notionally allocated the franked distribution by operation of s 207-55. At para 42, the applicants say this:

… the Thomas Investment Trust Deed expressly allowed the Trustee to confer entitlements to franked distributions on Martin Thomas when making its distributions of net income. The Trustee’s intention by its net income resolution was plainly to allocate to Martin Thomas so much of that income as would confer on him 90% of the franking credits. If the respondent [Commissioner] is right in his submission that the wording of the resolution should in form have been an allocation of “franked distributions” or “notionally allocated franked distributions”, it gets him nowhere [as] … Courts of Equity do not deal with such resolutions with that formality.

[emphasis added]

192    At para 49, the applicants emphasise this matter again in this way:

Martin Thomas was, under the twin resolutions, entitled inter alia to net income that corresponded with certain amounts of franking credits, being over 90% of that net income. Of course the only income that carried franking credits was the franked dividend income, which was depleted by the trust’s losses and could not in fact be distributed. Those notionally allocated amounts were his share of the franking credits on the franked dividends within s 207-57. Accordingly, he was entitled to tax offsets equal to those additional amounts under s 207-45. They were “refundable tax offsets” under s 67-25(1) because he was an individual not excluded by the later subsections in s 67-25.

[emphasis added]

193    At para 60, the applicants say that the sole basis for the Commissioner’s contention about the meaning of the resolutions is that they are “internally inconsistent”. The applicants say that the Commissioner’s contention seems to be that income under the trust deed means income according to ordinary concepts and since franking credits are not income according to ordinary concepts, the franking credit resolution must be ignored as having no effect at trust law or for taxation purposes. Thus, it follows, so the argument is said to go, that the net income distribution resolutions (the non-franking credit resolutions) are the only resolutions that properly determine the trustee’s true intention. However, at para 65, the applicants say that objectively construed, having regard also to the terms of the trust deed, the resolutions are plainly concerned with allocating the net income that relates to franked dividends (and foreign-sourced income) so as to confer the benefits of the tax characteristics of those types of income on the named beneficiaries only, and in the amounts set out in the resolutions.

194    In each income year there were the dual resolutions as described at [32] to [37]. Each resolution recites that the trustee, pursuant to the powers vested in it under the Deed of Settlement, resolves that the net income of the trust fund for the relevant financial year be applied for the benefit of the nominated beneficiaries by credit to accounts maintained by the trustee for them. The subject matter of the application of the net income of the trust fund by one resolution is the application of the net income which is said to be the distributable income which, in turn, is framed, by the trust deed, in terms of the s 95 net income of the trust. In the 2006 income year resolution, the net income was applied to Martin Thomas as to $21,600 and to MAPL as to the balance (which is now known to be $777,226). In the second resolution for that income year, the resolution recites that the net income of the trust is being applied by allocating franking credits of $2,416,217.92 to Martin Thomas and franking credits of $228,900.38 to MAPL. Those franking credits amount to $2,645,118.30.

The evidence

195    Before examining the contentions of the Commissioner in respect of these matters and related questions, it is necessary to examine the evidence of Mr Thomas and Ms Abbott concerning the intention of the trustee as formed by the sole guiding mind of the trustee, Mr Thomas (see T, p 32, lns 15-22), acting on the advice of Ms Abbott, and consider that matter in the context of the language of the resolutions passed by the trustee.

Mr Martin Thomas

196    Mr Thomas understood for each of the relevant income years that if he had an entitlement to dividend income that carried franking credits, he could claim, as an offset against tax payable, the relevant amount of the franking credits by way of a dollar-for-dollar reduction of the tax otherwise payable (T, p 33, lns 7-13) and agreed in evidence that that offset might be described as the “franking credit benefit”: T, p 33, lns 15-16.

197    Ms Abbott was Mr Thomas’s accountant for the relevant tax years (and well before). She prepared the tax returns, did all the bookwork and prepared monthly accounts for the trust: T, p 33, lns 34-41. The monthly accounts contain a Monthly Position Statement for the trust at a particular date from 1 July of the relevant income year (on a cumulative basis); a Profit and Loss Statement (“P & L Statement”) to that date for the trust (showing a full year comparison with the preceding financial year) and a Balance Sheet for the trust also showing a comparison with the previous year.

198    For example, for the month ending 31 July 2008, the net profit of the trust was $799,107 according to the P & L Statement. The monthly Position Statement starts with that net profit, adds non-deductible expenses of $6,997 (being expenses Mr Thomas understood could not be claimed as a deduction for income tax purposes) and adds imputation credits of $361,157 to produce taxable income of the trust of $1,167,261. Mr Thomas understood that amount to represent the taxable income of the trust on the assumption that these transactions were the last set of transactions for the financial year, in theory. As to the non-deductible expenses, two particular items in the expenses in the P & L Statement amount to $6,997.

199    As to the imputation credits, Mr Thomas understood that this item related to the franking credits on the dividend income received by the trust ($842,700). The monthly Position Statement then sets out particulars of “Distribution and tax position” which shows firstly a notional distribution (T, p 37, ln 47) to MAPL of $1,107,261; tax at 30% of $332,178.30; less imputation credits of the same amount as the tax; and tax payable of nil. Secondly, it shows a notional distribution to Mr Thomas of $60,000; other taxable income (capital gain – Telstra) of $19,327; tax payable of $18,988.01; less imputation credits of $28,978.70; and tax refundable of $9,990.69. The notional allocation of the proportion of the franking credit offsets or franking credit benefits to MAPL was intended to reduce the whole of the tax payable by it (as a notional position as at 31 July 2008).

200    As to Martin Thomas, the imputation credits allocated to him represent the balance of those credits/benefits ($28,978.90) after allocating notionally to MAPL sufficient of them to extinguish MAPL’s notional tax at 30% of $332,178.30, resulting in a notional refund of $9,990.69 to Martin Thomas: T, p 39, lns 1-9.

201    As to the position at 30 September 2008, the trust had made a profit according to the P & L Statement (including significant capital gains on securities), although the net taxable loss according to the monthly Position Statement was $2,830,343 which meant that there would be no notional distributions to MAPL or Martin Thomas thus overtaking the notional distribution calculation as at 31 July 2008.

202    The same position obtained as at 31 October 2008.

203    By then, the net taxable loss was $2,223,438 and again no notional distributions occurred. The same position obtained at 30 November 2008 and at February 2009 although the particular numbers are different.

204    As to the position at 31 March 2009, the P & L Statement shows a net pre-tax profit of $14,164,933 which after adding non-deductible expenses of $132,840 and imputation credits of $1,054,333 (on dividends of $2,460,112), gave rise to $15,352,106 as the taxable income of the trust subject, however, to the proper removal of the non-assessable capital gains (of $15,083,854) for the purposes of the calculation of the net taxable profit, resulting in a net taxable profit of $268,252. That amount was distributed notionally by the Monthly Position Statement to MAPL as to $188,252. The tax at 30% was $56,475.60. Imputation credits of the same amount were allocated resulting in no tax payable by MAPL.

205    The balance of the net profit ($80,000) was notionally distributed to Martin Thomas. The tax payable was $19,800. The balance of the imputation credits (the franking credit benefits) after the notional allocation to MAPL of sufficient credits to extinguish its tax liability, were distributed to Martin Thomas ($1,054,333 less $56,475.60 amounting to $997,857.40) resulting in a refund, notionally, of $978,057.40 after extinguishing the tax payable by Mr Thomas of $19,800.

206    The same approach obtained at 31 May 2009.

207    In the case of the notional distributions as at 31 March 2009 and 31 May 2009, the notional allocations allocated the net taxable profit of the trust shown on the Monthly Position Statements. That amount took into account the dividends received by the trust in calculating the net profit according to the P & L Statements (dividends at 31 March 2009 of $2,460,112 and at 31 May 2009 $2,561,592). In each case, the net profit according to the P & L Statement is the starting point of the calculation of the net taxable profit. To that is added non-deductible expenses and the imputation credits on the franked distribution (dividends) as a required “gross-up”. Non-assessable capital gains are removed. The result is net taxable profit at 31 March 2009 of $268,252 and by 31 May 2009, $262,131. That amount is then notionally distributed to MAPL and Martin Thomas according to the approach earlier described.

208    Mr Thomas accepted that although reference is made to the term “franking credits”, it is necessary to focus on whether what is being addressed by that term is the amount of the franking credit representing the gross-up of the income for tax purposes or the amount of the offset or franking credit benefit obtained even though numerically the amounts are the same: T, p 42, lns 11-14.

209    Mr Thomas accepted that the franking credit income gross-up has been taken into account in the calculation of the net profit of the trust for tax purposes which is to be the subject of notional allocation to the beneficiaries: T, p 42, lns 16-18.

210    Mr Thomas also accepted that, in effect, it follows that the net taxable income of the trust is calculated after including the franking credit income and after including the relevant dividends (the franked distributions) received by the trust (T, p 42, lns 30-33) and that the net result (which takes account of these two things plus the other factors of non-deductible expenses and removed non-assessable capital gains) is that which is notionally distributed between MAPL and Martin Thomas according to the method earlier described: T, p 42, lns 34-43.

211    Mr Thomas also accepted three other things on this topic.

212    First, the calculation of the amounts to be notionally distributed to each beneficiary did not involve any calculation or identification of particular components of the net income making up the notional distributions: T, p 43, lns 34-42.

213    Second, having made that notional allocation, a separate decision was then made concerning how the franking credit benefits might be allocated to each beneficiary: T, p 43, lns 44-46.

214    Third, the allocation of the franking credit benefits to each beneficiary bears no relation to the allocation of the taxable net income except to the extent of allocating to MAPL sufficient franking credit benefits (setoffs) equal to the tax payable on the net distribution to MAPL (its share of the net taxable income of the trust): T, p 44, lns 1-5.

215    Mr Thomas also accepted that the same calculations (that is, the same methods of calculation) were done, together with the assistance of Ms Abbott, for each of the net income years 2006, 2007, 2008 and 2009 for the “end of year figures” and those calculations were done before the resolutions were passed for each year: T, p 44, lns 9-18; lns 27-29.

216    As to these various Monthly Position Statements and the calculations (including the ultimate “end of year figures” calculations) Mr Thomas understood that it was the s 95 taxable income of the trust that was being calculated (and it was his intention aided by Ms Abbott’s professional knowledge) to “get to the same position as the s 95 net income”: T, p 45, lns 10-25.

217    As to the 30 June 2009 income year (recognising that the documents and calculations along the lines of the 31 May 2009 Monthly Position Statement calculations for June 2009 do not now exist), Mr Thomas accepted that the s 95 taxable income of the trust was calculated for that financial year by having regard to the dividend income to 30 June 2009 disclosed in the original version of the accounts which item did not change in the amended accounts. The dividend income in the P & L Statement is $2,561,592 at 31 May 2009 and also at 30 June 2009. The amount of the imputation credits related to those dividends is $1,097,825 which is the amount of the gross-up forming part of the s 95 assessable income of the trust. The non-taxable capital gains were excluded in calculating the s 95 net income. The s 95 net income of $173,743 was then distributed by the net income distribution resolution for that year to Martin Thomas ($16,600) and MAPL ($157,143). Mr Thomas accepted that the intention of the resolution was to distribute the then known s 95 net income of the trust to 30 June 2009: T, p 49, lns 15-19.

218    Thus, the calculation took into account the gross dividends received by the trust that year ($2,561,592); the gross-up of the assessable income by the amount of the franking credits on those dividends; and excluded the non-taxable capital gains; T, p 49, lns 15-38.

219    As to the franking credit distribution resolution that year, Mr Thomas accepted that the amount of the franking credit offset allocated to him of $1,050,925 out of a total of $1,097,825 (95.72%) bears no relation to the proportion of the s 95 net income distributed to him that year (that is, $16,600 out of $173,743 or 9.55% of the net income): (T, p 49, lns 45-46; T, p 50, lns 1-2; T, p 57, lns 23-24.) Mr Thomas accepted that the franking credit distribution resolution for 2009 seeks to allocate to the respective beneficiaries an entitlement to claim a franking credit offset (T, p 49, lns 41-43) and the only relationship between the s 95 net income distribution resolution and the franking credit distribution resolution is to allocate to MAPL sufficient franking credit offsets as would extinguish its tax on the net income distributed to it: T, p 50, lns 4-8.

220    Nor was there any relationship between the amount of the franking credit offset (benefits) allocated to each beneficiary and any particular component of the taxable income of the trust: T, p 51, lns 29-32; T, p 52, lns 12-13.

221    The same position obtained for 2006, 2007 and 2008: T, p 52, lns 15-17.

222    Mr Thomas swore an affidavit in the Supreme Court proceedings which is part of the record in these proceedings: see trial bundle pp 646-720.

223    In that affidavit Mr Thomas said this:

34.    Each year the Trustee made resolutions concerning the income of the Trust.

35.    My aim was to distribute all the trust income so that no income was left sitting in the Trust.

36.    I understood that once the Trustee makes the resolution giving the beneficiary a particular allocation of income, the beneficiary is entitled to that income.

37.    My intention was to minimise tax generally under the income tax law consistently with the trading and investment activities that I was carrying on in the course of the year by not leaving undistributed trust income in the hands of the trustee. I understood that if there is some income of the trust which was not allocated to a particular beneficiary, then there would be some income to which no beneficiary of the trust would be presently entitled. That income would be taxed at a higher rate than if given to a beneficiary of the Trust such as [MAPL].

38.    I did not want that to happen.

39    My intention as a director of the Trustee was always to ensure that every year the Trust i.e. The Thomas Investment Trust, had all its income cleaned out and distributed to particular beneficiaries leaving no income sitting there in the Trust undistributed.

40.    In more recent times, and in particular in the years, the subject of this application, I formed my intention after discussions with the Trustee’s accountant, Beth Abbott. I gave Ms Abbott instructions to prepare trustee resolutions to achieve that aim, and also my aim, referred to below, to provide me with refunds from the distribution to me of franking credits. My intention in signing the trustee resolutions was to achieve my purpose of leaving no trust income undistributed in the Trust in any financial year.

41.    For me all these trust distributions were happening in the context of the income tax law.

[emphasis added]

224    As to the distribution resolutions, Mr Thomas said this in his affidavit:

52.    For each financial year for the Trust there would be two distribution resolutions.

53.    There would be a distribution resolution concerning the distribution of the franking credits.

54.    There would be a distribution resolution for other net income of the Trust.

55.    Beth would submit draft distribution resolutions to me for my approval. After discussions with her they would be adopted, or amended and adopted.

…

57.    Before the end of each financial year I was aware of the amount of the dividends received by the Trustee and the amount of franking credits available for the Trustee to distribute. I was also aware of my own personal taxation circumstances.

58.    In the case of the two distribution resolutions for each year my intention was always to get whatever other income was necessary to get the franking credits that were available for distribution by the Trustee of the Trust.

59.    My overriding intention in regard to the annual distribution resolutions was to make sure that I got the franking credits because that was by far the greatest benefit from the Trust for me personally where I was in a personal loss position due to my option trading activities.

60.    I had no intention, in executing the resolution that did not deal with franking credits, to deal with franking credits. My intention was solely to deal with the other net income of the Trust.

61.    The refund of the franking credits was all calculated in by me as part of my decision making.

[emphasis added]

225    Mr Thomas says that when he realised that the franking credits were refundable, he brought that circumstance into everything he was doing, taking steps “with the knowledge that I could get the unused franking credits back at the end of the year because I could arrange some option positions and then sort out what was to happen with those positions the next year”: para 62. Mr Thomas says that he understood when swearing his affidavit that the Commissioner was asserting that the franking credits were intended to be allocated in accordance with the net income distribution resolution not the franking credit distribution resolution. He says at para 64 that it was never his intention to do so in causing the resolutions to be passed.

226     When Mr Thomas uses the term “trust income” in para 35 he accepts that he is talking about the amounts dealt with by the net income distribution resolutions: T, p 56, lns 11-13.

227    In para 39 where Mr Thomas talks about his intention of causing all trust income to be cleaned out and distributed, he is referring to the s 95 net income the subject of the income distribution resolutions: T, p 56, lns 21-22.

228    At para 53 where he talks about the distribution of the franking credits, he is referring to the franking credit offsets or benefits: T, p 56, lns 30-31.

229    At para 54 where Mr Thomas refers to a distribution resolution for “other net income of the Trust”, he accepts that he is only talking about the s 95 net income of the trust (T, p 56, lns 34-35) as there was no other net income and the only other resolution passed by the trust concerned the franking credit benefit conferring an entitlement to a setoff.

230    As to para 58 and the intention of Mr Thomas in passing the two distribution resolutions to “get whatever other income was necessary” so as to get the available franking credits, he accepted that he did not “allocate any income so that the benefits, the franking credit benefits would follow the income, [he] just simply purported to allocate an entitlement to claim those benefits” [emphasis added]: T, p 57, lns 43-46.

231    As to para 60 concerning Mr Thomas having no intention (when executing the net income distribution resolution) (T, p 58, lns 15-16), to deal with franking credit benefits (the subject of the other resolution each year), Mr Thomas accepted that he did not intend, by the net income distribution resolution, to deal with the franking credit income which grossed-up the Trust income in calculating the s 95 net income: T, p 58, lns 28-34.

232    Mr Thomas also swore a principal affidavit in these proceedings.

233    At para 27 he says that with the advice of Ms Abbott he elected to adopt a simple corporate beneficiary structure where all taxable income of the trust would be shared between him and MAPL. At paras 28 and 29, he says this:

28.    Over the years, I have wanted regular snapshots of the financial and taxation position of the Trust.

29.    To this end I engaged Drake & Associates to produce Monthly Position Statements that showed

(a)    The profit and loss statement for the month from option trading, interest and dividends

(b)    [T]he balance sheet for the month, showing assets and liabilities, including margin loan liabilities

(c)    What the cash and tax position would be after distributing all the income and franked dividends among [MAPL] and me as beneficiaries of the Trust in the tax-effective manner that (i) utilised franking credits against [MAPL’S] tax liability to the extent of that liability and (ii) fully utilised franking credits against my tax liability so as to allow me cash refunds

(d)    What capital losses were available.

234    As to those paragraphs and particularly para 29(c), this exchange occurred (T, p 60, lns 16-37):

Q.    Now, you would agree with me, wouldn’t you, that what they [the Monthly Position Statements] show is what the cash and tax position would be after distributing not all the income, but all the section 95 net income or tax net income of the trust.

A.    Yes.

Q.    And not the franked dividends but, in fact, the allocation of the franking credit benefits. There was no purported distribution of franked dividends, was there? The only thing that you did was distribute the net income – taxable net income

A.    Yes.

Q.    … or purport to distribute that, and purport to allocate the franking credit benefits?

A.    Yes. That’s right.

Q.    You didn’t make any decisions about franked dividends?

A.    In what way, sorry?

Q.    Well, in any way. You didn’t turn your mind to a distribution, specifically, of franked dividends between the two beneficiaries?

A.    In the monthly statements?

Q.    Yes?

A.    No. No.

Q.    Thank you. And insofar as what’s set out in that paragraph differs from the answers you’ve given to me today about what the monthly statements show, you would prefer your answers given to me today?

A.    Well, to the best of my knowledge, yes.

[emphasis added]

235    As to the cash drawings in 2009, Mr Thomas said this at paras 33-39 of his affidavit:

33.    I have no regular income to live on separately from the resources of the Trust. I do not cause my entities to pay me any salary.

34.    Accordingly, approximately each month in 2009 I took cash of around $20,000 from the Trust for my monthly living expenses. I also caused the Trust to pay some of my living expenses directly. The bank account out of which I withdraw these funds is the same bank account into which all franked dividend receipts were deposited. The bulk of the dividend receipts were deposited in July and September 2008.

35.    My living expenses covered, amongst other things, expenses on food, dining out, repairs and maintenance of a boat and travel and accommodation expenses.

36.    I knew that the Trust had made over the years and was continuing to make significant profits from its activities and that these payments to me for my living expenses would not affect the capacity of the Trust to meet its liabilities.

37.    The total amount paid to me or for my benefit from the Trust for my living expenses for 2009 was approximately $205,000.

38.    I did not consider those sums to be loans by the Trust to me. They were disclosed by me as my living expenses to Beth Abbott, to be dealt with by her in a manner appropriately authorised by the Trust deed.

39.    Occasionally I take other monies from the Trust that I do intend to pay back, such as where I wish to purchase share in my own name and where there might be restrictions on amounts to which any particular person can subscribe, e.g. the Telstra float. …

[emphasis added]

236    As to these matters, the proposition was put to Mr Thomas that whenever (2009 or otherwise) he took a cash drawing he never turned his mind to the question of whether it was a “distribution of the Trust”. Mr Thomas said that he always treated these amounts as income although he regarded them as and called them “drawings”: T, p 60, lns 40-45; T, p 61, lns 1-6.

237    Mr Thomas accepted that he did not regard drawings as income upon which he would be required to pay tax: T, p 61, lns 11-12. As to whether he turned his mind, standing in the shoes of the trustee, to whether by making the payments and taking the drawings he was making a distribution of income, Mr Thomas said that he left, in effect, the characterisation of the payments, to his accountant. He accepted that he drew down the money which was to be accounted for at the end of the financial year with year-end income resolutions to be passed formalising whatever had occurred during the year: T, p 61, lns 14-24.

238    As to the 2009 resolutions, Mr Thomas also says this at paras 45-47 of his affidavit:

45.    I intended that the 2009 resolutions would cover all the dividends in fact received by the Trustee for the 2009 year and I confirm that all income available for distribution under the Trust Deed had been distributed to the beneficiaries.

46.    Since executing the resolutions I have been made aware that the Profit and Loss Statement for the 2009 year was adjusted to show an overall net loss for accounting purposes as at 30 June 2009.

47.    The distributions [were] actually made to me as a beneficiary during the year for living expenses out of the dividends received during the year. I never intended to repay them. The Trustee has not treated it as a distribution of capital, and will not unless ordered by the Court upon action by any affected person [to], so treat it.

[emphasis added]

239    As to his intention recited at para 45 concerning the 2009 resolutions, Mr Thomas accepted that the only intention he formed about distributing income of the trust was to distribute the s 95 net income of the Trust as had been calculated prior to formulating the resolutions (T, p 61, lns 40-42) and he accepted that he did not turn his mind specifically to whether the resolutions would cover all the dividend income received by the Trust: T, p 61, lns 44-45.

240    Mr Thomas accepted that insofar as the dividends formed a part of the calculation of the net taxable income of the trust, he assumed that they were “incorporated that way”: T, p 62, lns 1-3.

241    Mr Thomas gave evidence that he believed that all of the income of the trust had been distributed by reason of the distribution “resolutions themselves”: T, p 62, lns 11-12.

Ms Beth Abbott

242    As Mr Thomas said in oral evidence, “I’ve mostly left everything up to the accountants”: T, p 61, lns 15-16.

243    In Mr Thomas’s affidavit material he says that he acted extensively on the advice of Ms Abbott.

244    Ms Abbott prepared the Monthly Position Statements showing an estimated year-to-date position and a notional (“as in possible”, as she said) distribution or allocation of taxable income and a notional distribution of the franking credit benefits – the tax offsets, recognising however, that things might change as the taxable income changed, as can be seen in the comparison between the financial information set out at p 303 of the Monthly Position Statement to 31 July 2008 and p 307 of the statement to 30 September 2008.

245    Ms Abbott also prepared the tax returns and the financial accounts.

246    Ms Abbott’s method in preparing the Monthly Position Statements for Mr Thomas and the trustee was this.

247    She would identify the profit, based on the monthly (year-to-date) P & L Statement.

248    She would then make adjustments so as to calculate the s 95 net income assuming no other transactions to year end for the sake of the exercise. The adjustments involved adding back non-deductible expenses and adding the franking credits related to the dividend distributions to the trustee of the trust – the required gross-up. Non-taxable capital gains were excluded and removed from the calculation resulting in the total taxable income at that date upon the hypothesis of no further transactions to year end: T, p 72, lns 3-4.

249    The next step was to notionally allocate the s 95 net income between MAPL and Mr Thomas to ensure that Mr Thomas did not receive an amount that would cause him to be paying more than 30c in the dollar as an average tax rate.

250    After having notionally allocated the s 95 net income, Ms Abbott would notionally allocate the franking credit offsets (benefits) between the two beneficiaries based on an amount sufficient to meet (and no more) MAPL’s income tax liability based on the notional s 95 net income distribution with the balance allocated to Mr Thomas. Thus, the “only intention” in allocating a particular amount of offsetting franking credit benefits was to meet the tax otherwise payable by MAPL and no more. The remaining franking credits would then be allocated to Mr Thomas and applied against his tax payable. The assumption was that he would then be entitled to a refund of the surplus or unused franking credit benefits beyond offsetting the tax payable by him.

251    Ms Abbott accepted that these steps reflected her philosophy in preparing the documents throughout the relevant tax years: T, p 73, ln 8.

252    Ms Abbott also accepted that the same philosophy was applied to the determination of the actual resolutions passed each year for the trust: T, p 73, lns 10-11.

253    Having accepted that this was the method or philosophy adopted for each income year, Ms Abbott accepted that the s 95 net income was distributed by means of one resolution but further observed that “it was put into two” resolutions (although she said she might have misunderstood the proposition put to her): T, p 73, lns 13-15. Ms Abbott accepted that one resolution addressed a distribution of s 95 net income and the “other” concerned an allocation of franking credit benefits: T, p 73, lns 17-21. However, momentarily later, at T, p 73, lns 31-40, Ms Abbott observed seemingly by clarification in her mind, that the “other” resolution operated to distribute the franking credits. Mr Looney QC put to Ms Abbott that the subject matter of the resolution was the allocation of the benefits (that is, the potential offset entitlements) and Ms Abbott responded by describing the subject matter of the resolution, in her mind, as the distribution of the franking credit amounts to the beneficiaries: T, p 73, lns 31-45. Mr Looney QC then put to Ms Abbott that her reference to franking credit amounts is to be understood as the franking credit benefits – the “entitlement to claim the offset”: T, p 74, lns 1-2. Ms Abbott responded: “Technically. But that’s probably not what – the terminology I would use, no. Franking credit benefit – I don’t know”: T, p 74, lns 4-6.

254    I mention this exchange because it suggests that at least up until that moment in Ms Abbott’s cross-examination (and the putting to her, as a frame of reference, that the intention of the resolution at the time of making it was to distribute entitlements called franking credit benefits), Ms Abbott thought that she was framing a resolution which was allocating franking credit amounts and that as a matter of taxonomy or terminology she did not consider (at the time) the resolution as allocating franking credit benefits, so described.

255    Ms Abbott accepted, however, that the franking credits resolution did not seek to do anything with the franking credit income, that is, the amount of the gross-up (T, p 74, lns 17-20; lns 37-38) and observed that the purpose of the resolution was “to indicate who those benefits [“referable to the franking credits that came with the dividend”] were to go to”: T, p 74, lns 22-24. It thus seems that although Ms Abbott was not thinking about these things at the time by reference to the term franking credit benefits, the substance and subject matter of her thinking involved the allocation of a benefit in the form of an offset.

256    Nor was there any intention to deal with the original dividends paid to the trust in passing the franking credits resolution: T, p 74, lns 33-35.

257    Ms Abbott seemed to accept that the dividend income and the amount of the franking credit gross-up were included in (“captured in”) the s 95 net income resolutions: T, p 74, lns 40-47.

258    In the 2006, 2007 and 2008 income years the net income distribution resolutions allocate a relatively small amount to Mr Thomas and the balance to MAPL. The trust tax returns for those years show that allocation to Mr Thomas and the amount of the balance s 95 net income allocated to MAPL. The total for each income year derived from the trust returns always equals the total of the s 95 net income distributions. The same position obtained for the 2009 income year although two specific amounts are nominated in the resolution for that year, T, p 75, lns 2-25.

259    As to the franking credit distribution resolutions, they address for each income year the total amount of the franking credits (capable of being the subject of offsets) associated with the dividends received by the trust. The amount of those credits (treated as offset entitlements) was then apportioned to the beneficiaries according to the philosophy adopted by Ms Abbott as described: T, p 75, lns 38-39.

260    The tax returns reflect those respective distributions.

261    Ms Abbott accepted that the only relationship between the proportion of the s 95 net income distributed to the beneficiaries and the proportion of the amount of the franking credits (treated as offset benefits) allocated to those beneficiaries was that a proportion of the franking credit amount sufficient to meet the tax payable by MAPL on the s 95 net income distributed to it, was allocated to MAPL: T, p 75, lns 45-47; T, p 76, lns 1-2.

262    For example, in the 2007 income year MAPL was allocated franking credit offsets of $548,489 (out of a total of $5,313,842 – 10.32%) to offset its tax on the s 95 net income distribution and Martin Thomas was allocated franking credit offsets of $4,765,353 (89.68%). In each of the income years in issue, these franking credit offset distributions to the beneficiaries in the ratio so determined each year, bore no relationship to the proportions of the s 95 net income distributed to each beneficiary (save for the imperative of meeting MAPL’s tax liability on its s 95 net income distribution). Nor were the resolutions intended, by Ms Abbott, to reflect any relationship with the proportions of the s 95 net income distributed to the beneficiaries: T, p 76, lns 17-31.

263    Ms Abbott swore an affidavit in the Supreme Court proceedings which forms part of the hearing record in these proceedings (pp 730-734). In that affidavit Ms Abbott refers to her practice of preparing the Monthly Position Statements and in respect of the income years 2005 to 2008 Ms Abbott describes the preparation of the two distribution resolutions each year.

264    As to the Monthly Position Statements, those statements adopted the philosophy of splitting the s 95 net income (calculated to the relevant date) between the two beneficiaries and separately splitting the franking credit benefits: T, p 77, lns 20-21.

265    Ms Abbott accepted that as to the draft distribution resolutions, they were discussed with Mr Thomas and reflected his wishes which were consistent with the intention for the resolutions held by her in preparing them, as earlier described: T, p 77, lns 29-30.

266    Ms Abbott accepted that the references in her affidavit to trustee distributions of income were intended to mean a distribution of s 95 net income and references to trustee distributions of franking credits were intended to be references to: “[b]enefits would be what I call that” – franking credit benefits: T, p 77, lns 42-44.

267    Ms Abbott accepted that the reference in para 12 to the distribution resolution addressing net income was intended to be a reference to the net taxable income and where Ms Abbott says that she did not intend or understand the resolution to include franking credits, the reference to franking credits was intended to be a reference to the franking credit benefits – that is, the offsets: T, p 77, lns 32-47; T, p 78, lns 1-8. That reference was not intended to be a reference to, or include, franking credits in the form of income by reason of the income gross-up obligation. Thus, the resolution was dealing with the franking credit benefits and Ms Abbott understood that they had to be “allocated by the trustee”: T, p 78, lns 14-16. Similarly, the reference at para 36 of her affidavit to franking credits being given personally to Mr Thomas and attaching to his other income was intended to be a reference to an entitlement to the benefit of a setoff: T, p 80, lns 1-12.

268    Ms Abbott gave evidence that she understood the role played by being “presently entitled” in relation to the distribution of income of a trust and accepted that in preparing the distribution resolutions she was not intending or purporting to allocate the “distributable income of the trust”: T, p 78, lns 35-36. Ms Abbott understood the term “distributable income” to mean the income of the trust less its expenses, otherwise distributable under the trust deed: T, p 78, lns 38-41. Notwithstanding that understanding, it was Ms Abbott’s intention to distribute just the s 95 net income when forming her intention together with Mr Thomas: T, p 78, lns 43-44, T, p 79, lns 18-19.

269    In that context, Ms Abbott also said this at T, p 79, lns 21-32:

Q.    You didn’t form an intention and you didn’t understand Mr Thomas to instruct you about his intention to distribute the income of the Trust other than the section 95 net income?

A.    Yes. But my understanding was what I was – I mean, to go forward a step, to I know what you’re saying about the trust deed, my understanding was I was [following] the trust deed in my resolutions, because that’s what I turned my mind to, if that clarifies that.

Q.    Thank you. And you were drafting the resolutions with the intention not to waste franking credit benefits by them being left with the trustee?

A.    That particular resolution.

Q.    Yes?

A.    Yes.

[emphasis added]

270    At para 39 of her affidavit (filed in the Supreme Court proceedings), Ms Abbott said this:

39.    The aim each year was to distribute income of the Trust in a way that always used up all of the franking credits and obtained the full benefit of all of the franking credits available in any year.