FEDERAL COURT OF AUSTRALIA

Mingos v Commissioner of Taxation [2019] FCA 834

ORDERS

THE COURT ORDERS THAT:

1.    The respondent's objection decision dated 29 January 2018 in respect of the applicant's income tax liability for the year ended 30 June 2014 be varied so as to:

(a)    allow the applicant's objection against the inclusion of the capital gain to the extent necessary to reflect a cost base of $3,400,000;

(b)    include the amount of $289,458 in the applicant's taxable income; and

(c)    adjust the applicant's liability to penalty to reflect the shortfall amount arising as a result of (a) and (b) above.

2.    The appeal otherwise be dismissed.

3.    The applicant pay the respondent's costs of the appeal, such costs to be taxed in default of agreement.

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

REASONS FOR JUDGMENT

DAVIES J:

introduction

1    For the income year ended 30 June 2014 ("2014 income year"), Lemnian Investments Pty Ltd ("Lemnian"), as trustee of the Lemnian Investment Trust ("the Trust"), distributed the whole of the capital gain made on the sale of property at 35-37 Regent Street, Mt Waverley ("the property") to the applicant ("the taxpayer"), a discretionary beneficiary of the Trust. The taxpayer did not return the distribution as assessable income in his taxation return for the 2014 income year and the respondent ("the Commissioner") issued a default assessment to him including the capital gain in his assessable income and imposed a penalty. This proceeding is an appeal by the taxpayer pursuant to Part IVC of the Taxation Administration Act 1953 (Cth) ("TAA") against the disallowance of his objection to the inclusion of the capital gain in his assessable income for the 2014 income year. The substantive issues for determination are:

(a)    whether the taxpayer had an "ownership interest" in the property at the time it was sold;

(b)    if so, whether the taxpayer is entitled to the main residence exemption in Subdiv 118-B of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997"); and

(c)    if not, whether the amount of the capital gain on which the taxpayer was assessed is excessive.

2    The taxpayer has the onus of proving that the assessment is excessive: s 14ZZO of the TAA.

the statutory scheme

3    Subdivision 118-B establishes the main residence exemption. Section 118-125 provides:

Meaning of ownership period

Your ownership period of a *dwelling is the period on or after 20 September 1985 when you had an *ownership interest in:

(a)    the dwelling; or

(b)    land (*acquired on or after 20 September 1985) on which the dwelling is later built.

4    Section 118-130 provides (relevantly):

Meaning of ownership interest in land or a dwelling

(1)    You have an ownership interest in land or a *dwelling if:

(a)    for land—you have a legal or equitable interest in it or a right to occupy it; or

(b)    for a dwelling that is not a flat or home unit—you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

(c)    for a flat or home unit—you have:

(i)    a legal or equitable interest in a *stratum unit in it; or

(ii)    a licence or right to occupy it; or

(iii)    a *share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

…

(3)    For land or a *dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

5    Section 118-110 establishes the "basic case" for a capital gain to be disregarded under the main residence exemption. It provides:

Basic case

(1)    A *capital gain or *capital loss you make from a *CGT event that happens in relation to a *CGT asset that is a *dwelling or your *ownership interest in it is disregarded if:

(a)    you are an individual; and

(b)    the dwelling was your main residence throughout your *ownership period; and

(c)    the interest did not *pass to you as a beneficiary in, and you did not *acquire it as a trustee of, the estate of a deceased person.

facts and evidence

6    The basic facts were not in dispute.

7    In 1992, the property was acquired by Unique Planning Pty Ltd ("Unique Planning") upon trust for the benefit of the taxpayer absolutely and the taxpayer and his wife and their two children took up occupation of the property as the family's main residence.

8    On 16 November 2006, Unique Planning transferred all its estate in the property to the taxpayer. The consideration expressed in the transfer was "entitlement in equity". By another transfer of land on 16 November 2006, the taxpayer transferred all his estate in the property to his then wife, Maria Mingos. The consideration expressed in the transfer was "natural love and affection". Shortly after the transfer to Maria Mingos, the marriage began to deteriorate and the taxpayer moved out of the property into temporary accommodation. Mrs Mingos and the children continued to occupy the property as the family's main residence.

9    In November 2010, the taxpayer and his wife entered into a property settlement which resulted in final orders made by consent by the Federal Magistrates' Court of Australia on 23 December 2010 ("the Orders"). The Orders finally determined the rights and entitlements of the parties and relevantly included the following orders:

2.    That within 120 days from the date of this Order ("the date") the husband pay by way of bank cheque to the wife the sum of $1,300,000 ("the payment").

3.    Contemporaneously with the payment pursuant to paragraph 3 of this Order:

3.1    The wife do all such acts and things and sign such documents, at the expense of the husband, to transfer to the husband or his nominated entity all her right, title and interest in the former matrimonial home situate and known as 35 Regent Street, Mount Waverley; and

3.2    The husband discharge the mortgages secured over the property with the Bank of Adelaide in the sum of $750,000 or thereabouts.

…

4.    That in the event the husband does not make the full payment pursuant to paragraph 3 together with interest (if any) and/or discharge the Adelaide Bank mortgage pursuant to paragraph 3 herein within seven days of the date, the Regent Street property be immediately placed on the market for sale on the following terms:

…

6.    That pending the payment, discharge of the mortgage, and/or sale of the Regent Street property:

6.1    the husband be responsible for and indemnify the wife wholly in respect of all past, present and future rates, taxes, mortgage repayments and any other outgoings relating to the Regent Street property;

6.2    both parties hold their interest in the Regent Street property upon trust pursuant to this Order …

10    On 27 May 2011, Mrs Mingos, at the taxpayer's direction, transferred the property to Lemnian as the nominated entity. The taxpayer and his brother Con Mingos, as the directors of Lemnian, executed the memorandum of transfer.

11    The circumstances leading to the taxpayer nominating Lemnian to take the transfer of the property were as follows.

12    The taxpayer did not have the funds needed to comply with the Orders and could not borrow the funds personally. However, the Trust did have capacity to borrow the funds. At the time the Trust owned units in the Unique Planning Unit Trust which owned a property at 137-141 Koornang Road, Carnegie ("the Carnegie property"), with a mortgage of $1.5 million owing to BankWest. The Trust also owned properties at 15 Centre Way, Mt Waverley and 48 Station Street, Cheltenham, both of which were unencumbered.

13    On an unspecified date in May 2011, Lemnian borrowed $4 million from the Bank of Queensland, secured by the property as well as the other properties owned by the Trust. Lemnian used those borrowings:

(a)    to discharge the mortgage of $750,000 secured over the property in accordance with Order 3.2;

(b)    to pay Mrs Mingos the sum of $1.3 million in accordance with Order 2;

(c)    to prepay interest in the sum of $242,000; and

(d)    to refinance the BankWest loan over the Carnegie property.

14    For the 2011, 2012 and 2013 income years, the balance sheet of the Trust recorded:

(a)    the property as an asset of the Trust at a value of $4 million;

(b)    the loan from the Bank of Queensland as a non-current liability of the Trust; and

(c)    a non-current liability to the taxpayer of $1,933,404.

15    The property sold in May 2014 for $5.1 million and settlement occurred in August 2014. The 2014 balance sheet for the Trust recorded:

(a)    the sale proceeds of $5.1 million as a receivable of the Trust in respect of the sale of the property; and

(b)    a distribution to the taxpayer of $1.1 million representing "100% profit on sale of [the property]".

16    Also for the 2014 year, minutes of an undated directors meeting record that the taxpayer and Con Mingos, as the directors of Lemnian, resolved "that the total net income of the Trust for the year ended 30 June 2014 be appropriated, set aside and applied" as to the capital gain on the sale of the property 100% to the taxpayer. The minute is signed by Con Mingos as chairman. The taxpayer claimed that he was not at the meeting and the minute was executed by his brother without his knowledge or consent.

17    Consistent with the minute of the directors' meeting, the Trust's tax return for the 2014 income year disclosed the distribution of the capital gain to the taxpayer. The taxpayer did not include that amount in his assessable income and it is that capital gain made on that sale of the property which is the subject of the assessment challenged in these proceedings.

18    Although the property was recorded as a Trust asset, the taxpayer's case, in short compass, was that the property was not an asset of the Trust but was owned by him beneficially. In support, the taxpayer relied on affidavits from himself, Con Mingos and Darren Munro, the Trust's former accountant and tax agent. Each of the witnesses were cross examined.

19    In his affidavit, the taxpayer deposed to the difficulties he had in raising the funds necessary to comply with the Orders and to the arrangement for Lemnian to borrow the funds. The taxpayer also deposed that to enable Lemnian to borrow from the Bank of Queensland the property was needed as security and so he arranged to have the residence transferred to Lemnian. He deposed that he never intended to give "the benefit of" the property to Lemnian and only transferred the property to Lemnian because the Bank of Queensland required it that way in order to proceed with the loan. He deposed that Mr Munro arranged the finance and "it was explained to [him] that the home must be put in the name of [Lemnian] so as to ensure that the [Bank of Queensland] loan could be drawn down within the time constraints imposed by the [Orders]". He exhibited the following exchange of emails.

20    An email sent from Shaun Huntington at the Bank of Queensland to Mr Munro copied to the taxpayer and Con Mingos, sent on 27 May 2011, said:

Darren,

Quick note to confirm that the first phase of the Mingos settlements occurred today.

There was a change in the transfer of land at settlement to reflect the transfer being consistent with the mortgage being [in the name of the taxpayer].

You may recall we discussed the mortgage shortly before documents were executed. [The taxpayer] just wants to check that this ownership structure is okay rather than Lemnian Investments. We will hold off on registration for a short period pending this advice.

…

21    An email Mr Munro sent in response on 1 June 2011, copied to the taxpayer and Con Mingos, stated:

It would be preferable if… both the property title and mortgage documents were in the name of Lemnian Investment Trust.

22    Far from confirming his evidence that it was the Bank of Queensland which required the property to be transferred to Lemnian, that email correspondence is contrary to the taxpayer's evidence and evidences that the Bank was prepared to advance the funds on the basis of the property remaining in the name of the taxpayer with the taxpayer giving a mortgage over the property, and that it was Mr Munro who instructed that the property title and mortgage documents should be in the name of the Trust, not the Bank. It may reasonably be inferred from the fact that the property and mortgage were put in the name of Lemnian that the taxpayer acquiesced to that course of action. Certainly, there was no suggestion in the evidence that the taxpayer objected to the property being placed other than in his name.

23    The taxpayer also gave contradictory answers in cross examination as to why the property was transferred to Lemnian. Initially in response to questioning, he gave evidence that it was the Bank of Queensland that required the transfer of the property to Lemnian. Later when Mr Munro's email of 1 June 2011 was put to him, the taxpayer said he was not involved in the negotiations in respect of the finance but he was told by Mr Munro that it was better if the property was in the name of the Trust. When pressed further, his evidence was that in order for the settlement to go through, the property had to be in the name of Lemnian.

24    In view of the emails, I reject the taxpayer's evidence that the property was transferred to Lemnian as a requirement of the Bank. His evidence is not supported by the contemporaneous email correspondence and no other documentary evidence was adduced which demonstrates that it was a requirement of the Bank that the property be transferred to Lemnian.

25    The taxpayer was also cross examined on the recording of the property as an asset of the Trust in the 2011, 2012 and 2013 balance sheets of the Trust. Whilst the taxpayer agreed that he signed the directors' declaration in relation to the 2011 financial statements declaring that the financial statements and notes presented fairly the Trust's financial position as at 30 June 2011, when put to the taxpayer that the Trust balance sheet showed the property as an asset of the Trust, his self-serving response was that he "can't accept that" stating "as far as [he] was concerned, [the property] was [his] property". Although the taxpayer's signature does not appear on the directors' declaration for the 2012 and 2013 financial statements, the property is similarly recorded as an asset of the Trust for both years and there was no suggestion in the evidence that the taxpayer, at any stage, questioned the correctness of the recording of the property as an asset of the Trust or queried whether the accounting treatment was a mistake. At the very least, the treatment of the property in the accounts for each of those years as an asset of the Trust reflects Mr Munro's advice to the Bank that the property title and mortgage documents were to be in the name of the Trust.

26    The evidence of the taxpayer's brother, Con Mingos, was that he recalled discussing the borrowing issues with Mr Munro but could not recall any details other than that he and the taxpayer guaranteed the loan from the Bank of Queensland and the property and another property were used as security. He further deposed that:

I always understood the [property] to belong to [the taxpayer] to be used by him as his home. [The taxpayer] was responsible for the borrowings by [Lemnian] to pay out his wife and discharge the mortgage on the [property]. The accountant made sure that [the taxpayer] was responsible for all costs associated with the [property] like rates and land tax.

Darren Munro arranged the paperwork and I attended to the signing thereof. I do not understand the legal structure used but I trusted Darren Munro and accepted his advice. I do not understand the way the proceeds of sale of the [property] were dealt with by the accountant. I thought that the proceeds were John's money.

27    Mr Mingos' evidence was far from satisfactory. His evidence was vague, lacking in specifics and highly generalised and his subjective view about what he said he understood was contradicted by the objective circumstances that, as a director of Lemnian, he signed the transfer of land form placing title to the property in the name of the company. He also signed, as fairly presenting the Trust's financial position, the Trust accounts for each of the 2011 and 2012 income years in which the property was recorded as an asset of the Trust and the Trust accounts for the 2014 income year in which the sale proceeds were recorded as a receivable of the Trust. Whilst only an unsigned copy of the Trust accounts for the 2013 income year was in evidence, the property was similarly recorded as an asset of the Trust for that year and there was nothing in the evidence to suggest that Mr Mingos had not approved those accounts. It is also of significance that there was no suggestion in Mr Mingos' affidavit or oral evidence that he, at any stage, questioned the correctness of recording the property as an asset of the Trust.

28    Mr Munro is the former accountant of the taxpayer and the Trust. He gave evidence that he assisted the taxpayer in 2010 in reaching the matrimonial settlement with his ex-wife. He deposed that the taxpayer did not have the financial resources to borrow the funds needed to pay out his ex-wife, but the Trust had at the time surplus rental income to meet the refinance debt servicing requirements as well as significant equity in properties. He deposed that at the time he was able to secure for the taxpayer a refinance deal with the Bank of Queensland for $4 million and this was settled in May of 2011. He further deposed that from the loan refinance monies, the cash amount of $1.3 million was paid to the taxpayer's ex-wife and the property was "then transferred into the name of [Lemnian] to be held on trust for [the taxpayer's] sole benefit as his residential home".

29    Mr Munro prepared the 2011 and 2012 financial statements for the Trust. He also prepared the tax returns and the minutes of directors meetings for those years. He did not prepare the 2013 and 2014 accounts of the Trust or the Trust tax return for the 2014 income year. Those accounts and tax returns were prepared by anther accountant within Mr Munro's firm.

30    Mr Munro explained in his affidavit why he recorded the property in the books of account of the Trust for the 2011 and 2012 income years at a value of $4 million. Mr Munro explained that the Bank of Queensland, for the purposes of the loan, had obtained a valuation of the property at the time of $3.4 million based on existing use. Mr Munro deposed that:

We also believed the property was a potential development site for as many as 12 townhouses at a value of $350,000 each which would have valued the property at $4,200,000. After allowing for possible future planning and demolition expenses, in 2010, a valuation of $4,000,000 was considered to be reasonable and realistic.

31    The connection with 2010 as the relevant year was left unexplained in the evidence given that the loan was taken out in May 2011 but be that as it may, Mr Munro's explanation as to how the property came to be valued at $4 million did not appear to be in controversy.

32    The balance sheets for the 2011 and 2012 income years prepared by Mr Munro also recorded beneficiary entitlements payable to the taxpayer of $1,933,404. Mr Munro explained in his affidavit:

At the time I recorded the residential home at 35 Regent Street, Mt Waverley in the books of the [Trust] at a value of $4,000,000. This was recorded as an amount of $2,050,000 representing the refinance sum of $750,000 and the $1,300,000 paid to his ex-wife.

The other side of that book entry was to recognise the mortgage debt owing to the [Bank of Queensland]. I recorded the balance of $1,950,000 as the market value determined at that time of $4,000,000 ($4,000,000 less $2,050,000). The other side of that book entry was to recognise a beneficiary entitlement owing to [the taxpayer] as the property was being held in trust for his sole benefit.

33    Mr Munro also deposed that:

In the financial accounts the initial amounts paid (the $750,000 to discharge the mortgage, $1.3 million as part of the settlement and prepayment of interest) was treated as [the taxpayer's] private portion of loans… all costs associated with the property paid by the trust included property rates, land tax and that portion of the interest on the loans that was of a private nature) were then added to [the taxpayer's] private portion of loans and John's beneficiary distribution entitlements from [the Trust] were used to offset and reduce that loan. Any other property costs paid by [the taxpayer] personally were never reimbursed by the [Trust].

34    In evidence was the schedule of loan account transactions for the taxpayer for the period 1 July 2012 to 30 June 2014. The schedule included a summary of the "private portion" for the 2013 and 2014 income years, included in which was recorded:

    Bank of Queensland loan: $1.3 million

    Bank of Queensland loan: $750,000 (taxpayer's portion 32%)

    Rates: $6,361

    Land tax on the property: $32,833

    2013 interest on Bank of Queensland loan: $52,355

    2014 interest on Bank of Queensland loan: $43,134.71

35    In cross examination, Mr Munro's evidence was that the property was recorded as an asset of the Trust "for convenience". The following exchange occurred:

COUNSEL: Well, how could it possibly be that you've classified 35 Regent Street as an asset of the – sorry, that you've included 35 Regent Street, Mount Waverley under that heading as an asset of the Lemnian Investment Trust and that you're now telling the court that it wasn't?

MR MUNRO: It was recorded in the accounts for convenience. It was being held in two separate sub-trusts within Lemnian, so we always – there was the – you know, Lemnian acting as trustee of Lemnian Investment Trust and Lemnian holding an asset on behalf of John Mingos. And that's how we recorded it. For ease of convenience, a consolidated approach as opposed to two separate approaches. And that's how we booked into the accounts. It was taken up as the property value, the other side taking the debt and the balance being put to an entitlement account on behalf of Mr Mingos. So my position is that it was a consolidated position of the trustee.

COUNSEL: I'm going to submit to the court at the conclusion of this hearing that is a false explanation. There isn't a single document that you've produced that reflects that position, is there?

MR MUNRO: No. Well, it's in the way we've recorded it in the books is the evidence. You know, we've put the recording that way. We've always put the costs associated with that property against Mr Mingos. You know, if it was an asset of the trust, we would have been recording, you know, some notional rent. We would have been expensing interest payments, but we didn't do that. We ran specific schedules, which have been tendered in my evidence, to show that we were placing those expenses and costs around that home against the entitlement account. Now - - -

COUNSEL: Mr Munro, the fact that you ran an account reflecting notional obligations of Mr Mingos to the trust has nothing to do with the question whether the 35 Regent Street, Mount Waverley was an asset or wasn't an asset of the trust. Do you agree with that?

MR MUNRO: No, I don't agree with that. You know, I'm saying to you – you asked me what's the evidence. I'm saying the evidence is in the manner in which I've recorded expenses in respect to that property. You know, if it was an asset of the trust, I would have been expensing interest. I would have been doing things to reflect the ownership of the trust. And all I'm saying is that the accounting treatment in itself is the evidence of how we looked at the ownership of that particular asset, being a specific asset of Mr Mingos.

36    When this issue was further explored with Mr Munro, he gave the following evidence:

COUNSEL: What I'm putting to you is that there is an inconsistency between the financial statements of the Lemnian Investment Trust, which clearly shows 35 Regent Street as an asset of the trust, and the evidence that you're now giving to this court?

MR MUNRO: No. I've explained that the financial statements, as presented, represent a consolidated position of the trustee, Lemnian Investments. And it's quite common sometimes to consolidate trusts.

COUNSEL: Do you wish to take me to [the] word "consolidated" anywhere in this financial report?

MR MUNRO: No. Because it's not there. It's just - - -

COUNSEL: The word doesn't appear?

MR MUNRO: No.

HER HONOUR: What was the other trust that you say Lemnian Investments Proprietary - - -?

MR MUNRO: Well, we say that Lemnian Investments was holding Regent Street on trust for John Mingos as the entitled beneficiary for that property. And that it was also holding assets on trust for the Lemnian Investment Trust. So we certainly were creating two sub-trusts within the accounts, but it's not necessarily common practice to have to disclose that, you know? And we've certainly – in the beneficiary's entitlements, we certainly separated who was entitled to each. So in each of those statements you will see beneficiary entitlements held on trust by the C&D Mingos Family Trust, which was John's brother and his interests in the assets. There was a ..... put on trust by the Mingos Family Trust, which was John's family trust in respect to his interests in the joint assets. And then there's a beneficiary entitlement to John Mingos, which represented his entitlement to that particular asset within the trust. And that's how we recorded it. That's how we recorded it for how the bank would like to see the financial statements – you know, their financial statements prepared as general purpose financial statements for the purpose only of users and beneficiaries of those financial statements. So there's certainly not statements that are relied on by the public in general and the disclosures are different.

37    When further pressed in questioning, Mr Munro repeated that the sub-trust was evidenced in the way in which he had accounted for the transaction and in the schedule of loan account transactions for the taxpayer. Had it been accounted for as an asset of the Trust he said the Trust "would have been looking to charge rent".

38    In the 2014 accounts, the proceeds of $5.1 million were recorded as an asset of the Trust as a receivable in respect of the sale of the property. When asked about this, Mr Munro said it was "consistent but the tax treatment is certainly incorrect". Mr Munro offered the explanation in his affidavit, in a paragraph that was not the subject of objection, that it appeared that the accountant who prepared the tax return thought that the property was held in the Trust and "was not aware that the property was held on a separate trust solely for the benefit of [the taxpayer] so that any capital gain belonged solely to [the taxpayer] and should not have been mixed with the assessable income of the [Trust]." That evidence was in direct contradiction to an earlier paragraph of his affidavit in which he deposed by reference to an email dated 2 July 2014 that the accountant "appear[ed] to have understood that the property was [the taxpayer's property] because in an email addressed to [the taxpayer] the accountant said that 'the proceeds from [the property] are retained within the [Trust] for the sole beneficial interest of [the taxpayer]'". Apart from the contradiction and self-serving nature of the evidence, the email in question does not support Mr Munro's claim that the Trust's then accountant, Taryn White, knew that the property was retained within the Trust for the sole beneficial interest of the taxpayer. The email, which is an exhibit to Mr Munro's affidavit, must be read with an earlier email dated 22 June 2014 sent by Mr Munro to the taxpayer and Ms White. In the 22 June email, Mr Munro put a proposal for the separation of the financial interests of the taxpayer and his brother, who at the time were in dispute. The proposal included that the "proceeds from [the property] are retained within the [Trust] for the sole beneficial interest of [the taxpayer]". The 4 July 2014 email from Ms White to the taxpayer sought his confirmation that he was happy with the proposal put by Mr Munro. The email did not evidence any apparent understanding of the Trust's then accountant that the property was held beneficially by the taxpayer and Ms White was not called as a witness. No explanation was provided and it may reasonably be inferred that her evidence would not have assisted the taxpayer.

39    Mr Munro's evidence concerning why the property was transferred into the name of Lemnian was equally unreliable. Initially his evidence was "that's what the Bank's preference was, that we held it all together". That evidence was not supported by the only contemporaneous documentary evidence, namely the email which he sent to Mr Huntington at the Bank of Queensland on 1 June 2011, copied to the taxpayer and Con Mingos, advising that:

It would be preferable if both the property title and mortgage documents were in the name of Leminan [sic] Investment Trust.

40    Faced with that email, Mr Munro then gave the self-serving evidence that:

MR MUNRO: On reflection, I meant Lemnian Investment Proprietary Limited.

COUNSEL: No, you didn't. You just made the distinction between the trust and the company?

MR MUNRO: I'm saying to you that in my email there it's an error. It's not what I intended to say and it's not consistent with the manner in which we've – we've – we've treated it in the books.

41    I reject as untruthful his evidence that what he said in the email to the Bank was in error. Against that evidence is the clear email instructing the Bank that the property title was to be in the name of the Trust, which I accept on its face was accurate and shows Mr Munro's evidence to be demonstrably wrong in this respect. Later in his cross examination Mr Munro gave evidence that he "never recorded anything as showing that [the] property belonged to the [Trust]" as an asset of the Trust in the financial statements. I reject that evidence also as untruthful as the property plainly was accounted for in the financial statements as an asset of the Trust.

42    For the reasons given above, I have not accepted the evidence of these witnesses where their testimony was contradicted by contemporaneous documents which I consider to be more reliable. Given the contradictory documentary evidence, I was left with the clear impression that there was a great deal of reconstruction in their evidence, rather than evidence based upon clear recollection.

decision

43    There are two primary issues. The first primary issue is whether the taxpayer has discharged the onus of proving that he had an ownership interest in the property. In the present case, the body of evidence available is against the proposition that the taxpayer did have an ownership interest.

44    First, pursuant to the Orders, it was open to the taxpayer to nominate another entity as the transferee.

45    Second, I find on the evidence that the taxpayer nominated Lemnian in its capacity as trustee of the Trust. That was the instruction given by Mr Munro to the Bank and, consistently, the property was brought to account as an asset of the Trust in the 2011 financial accounts which were compiled by Mr Munro. It may reasonably be inferred that Mr Munro did so consistently with his instruction to the Bank that the property and mortgage were to be in the name of the Trust.

46    Third, under the terms of the Trust deed the Trust was able to acquire property.

47    Fourth, the taxpayer and his brother, as the directors of Lemnian, signed the 2011 accounts as fairly representing the financial position of the Trust and it follows that it may be inferred that the treatment in the later accounts was also accepted by the taxpayer as correct, although he did not sign the directors' declaration for those later years. Furthermore, the validity and effectiveness of the 2014 resolution was not the subject of any challenge.

48    Fifth, there was no suggestion in the evidence that at any time the treatment of the property as an asset of the Trust was questioned by either the taxpayer or his brother.

49    Sixth, consistently, on the sale of the property, the proceeds were accounted for as an asset of the Trust.

50    Seventh, the taxpayer was a member of the class of potential beneficiaries under the Trust deed.

51    Eighth, consistently with the terms of the Trust deed, the directors of Lemnian in its capacity as the trustee of the Trust had the power to allocate the net capital gain to a beneficiary.

52    Ninth, consistently with treating the property as an asset of the Trust in the accounts, the net income of the trust referrable to the capital gain on the sale of the property was distributed to the taxpayer.

53    Tenth, consistently with the recorded resolution for the 2014 income year, the tax return of the trust disclosed the distribution of the net capital gain to the taxpayer.

54    Eleventh, Con Mingos' evidence was that the resolutions were explained to him satisfactorily before he signed them. It may be inferred that he accepted at the time the correctness of both the accounting and tax treatment in relation to the proceeds of sale.

55    Twelfth, Ms White, the accountant who prepared the 2013 and 2014 financial statements and the 2014 tax return was not called to give evidence and a Jones v Dunkel inference is available.

56    Thirteenth, the entries in the loan schedule neither prove the asserted 'sub-trust' nor gainsay that the property was an asset of the Trust. Rather, such entries are equally consistent with what, in fact, actually happened – that is, the benefit flowed through to the taxpayer through the trust structure and distributions.

57    Accordingly I find that the taxpayer has not discharged the onus on him to prove that he held a beneficial ownership in the property pursuant to a separate trust of which Lemnian was trustee.

58    Next it was contended by the taxpayer that the Orders vested an equitable interest in the property to him. In support of this contention, the taxpayer relied on Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26 (Wilcox, Branson and Merkel JJ) and Jones v Daniel (2004) 141 FCR 148; [2004] FCAFC 278 (Hill, Moore and Allsop JJ). Both cases are authority that a court order under s 79 of the Family Law Act 1975 (Cth) requiring a party to a marriage to transfer that party's interest in real estate to the other party vests an equitable interest in the property in the transferee pending the transfer of the legal estate or interest. It followed, it was submitted, that the estate or interest conveyed by Mrs Mingos to Lemnian was no more than a bare legal estate. I disagree. Both cases are distinguishable and neither case assists the taxpayer. First, the submission ignores cl 6.2 of the Orders that pending "the payment, discharge of the mortgage, and/or sale of [the property]" that "both parties hold their interest in [the property] upon trust pursuant to this Order". In other words, the Orders did not have an immediate dispositive effect of vesting an absolute equitable interest in the property to the taxpayer. Secondly, the submission ignores the conditional nature of the taxpayer's entitlement to conveyance of the property under the Orders, as the taxpayer's entitlement was conditional upon the discharge of the mortgage and the payment of $1.3 million to Mrs Mingos, failing which the property was to be sold. Thirdly, the submission ignores the fact that the taxpayer exercised his right to direct that the wife transfer all her right, title and interest in the property to his nominated entity which, in this case, was Lemnian.

59    Next it was argued by the taxpayer that the transfer by his former wife to Lemnian constituted a mortgage of Torrens title land by absolute transfer, vesting the legal title in Lemnian as mortgagee and leaving the taxpayer (mortgagor) with an unregistered equitable interest in the land. I also reject this submission. The evidence does not support a finding that the true nature of the transfer of the property to Lemnian was as security for Lemnian's borrowings from the Bank of Queensland. First, the funds borrowed by Lemnian were not just for the purpose of enabling access to the amounts which the taxpayer was required to pay his wife to obtain title to the property, but were also used to refinance the Carnegie property, which was a Trust asset. Secondly, if the transaction effected by the transfer to Lemnian was a general law mortgage, Lemnian was obliged to account to the taxpayer for the balance of proceeds after discharge of the taxpayer's liabilities to Lemnian. There is no evidence that it did so. To the contrary, the proceeds were recorded as a receivable of the Trust and a distribution of the capital gain made to the taxpayer. The treatment of the proceeds is not consistent with the characterisation of the transfer as a security transaction.

60    Next it was contended that, upon transfer of the property to Lemnian by Mrs Mingos, Lemnian held the property on a resulting trust or constructive trust for the taxpayer. This submission can also be readily dismissed on the evidence. First, as earlier found, the facts establish that the taxpayer intended a conveyance of the estate in fee simple in the property to Lemnian to be held on the terms of the Trust. Secondly, the financial statements brought to account as a beneficiary entitlement payable to the taxpayer the difference between the attributed market value of the property at $4 million and the amounts which the Trust had paid out of the borrowing it took from the Bank of Queensland to enable the taxpayer to comply with the Orders. In other words, the Trust provided valuable consideration for the transfer of the property to it in the form of the recognition of a non-current liability to the taxpayer.

61    Finally it was argued that the evidence showed that the taxpayer occupied the property as his place of residence, otherwise than as a tenant, which supported an inference that he held either a licence or a right to occupy the property. Such licence or right to occupy was said to constitute an ownership interest for the purposes of the main residence exemption. However, the relevant capital gain which has been assessed to the taxpayer relates to the CGT event constituted by the contract for the sale of the property to a third party in May 2014, that is the disposition by Lemnian. Whether the taxpayer rather than Lemnian made the capital gain on disposal depends on whether the taxpayer had an absolute entitlement to the property as against Lemnian.

62    Section 118-110(1) applies to a capital gain "you make". There is no issue that the property was a dwelling or that a capital gain happened in relation to the property when Lemnian disposed of it. The issue was who made the capital gain.

63    When CGT event A1 happens, the capital gain is made by the person who disposes of the asset: s 104-10. In this case, that person was Lemnian. That result is subject only to a statutory exception found in Div 106: see s 106-1. The relevant exception is found in s 106-50, which provides:

Absolutely entitled beneficiaries

(1)    For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

(2)    This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee).

…

64    Section 106-50 deems an act done in relation to an asset to which a taxpayer is absolutely entitled as against the trustee of a trust to be done by the taxpayer. A beneficiary will be absolutely entitled to an asset as against the trustee of a trust if the beneficiary has a vested, indefeasible and absolute entitlement in the trust asset, and is entitled to require the trustee to deal with the trust asset as the beneficiary directs: Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242; [2008] FCA 1454 at [61] (Lindgren J); Taras Nominees Pty Ltd v Commissioner of Taxation (2014) 94 ATR 751; [2014] FCA 1 at [118] (Kenny J).

65    For the reasons already given, the taxpayer has not established that he had an absolute entitlement to the property as against Lemnian.

66    For the sake of completeness I should add that had the taxpayer established a relevant ownership interest, I would otherwise have been satisfied on the basis of the affidavit of Fiona Milnes, the taxpayer's partner, that the taxpayer used the property as his main residence throughout the ownership period. Ms Milnes' unchallenged evidence was that she met the taxpayer in the middle of February 2013 and started to visit him regularly at the property. She observed that he then used the property as his main residence and in about June 2013 she moved in with him and they used it as their main residence until it was sold. The taxpayer also gave evidence that he has always treated the property as his main residence, that it was listed as his place of residence on the electoral roll, it was listed with VicRoads as the address at which his car was garaged and all utilities attributable to that residence were invoiced to that address. Although he did not exhibit any relevant invoices or other source documents confirming that evidence, there is no reason to doubt its truthfulness.

67    The second primary issue concerns the amount of the capital gain.

68    The capital gain is to be assessed as the difference between the market value cost base of the property, which the Commissioner now accepts as $3.4 million at the time the property was transferred to Lemnian (established by the Bank of Queensland valuation obtained at that time) and the capital proceeds of $5.1 million. The amount of a capital gain made when CGT event A1 occurs is the difference between the capital proceeds from the CGT event and the cost base for the CGT asset: ss 100-45 and 104-10(4). The market value substitution rule applies to determine the first element of Lemnian's cost base in respect of the property: s 112-20(1).

69    The taxpayer contends that the amount of the net capital gain contended for by the Commissioner is excessive because it does not take into account holding and selling costs comprising interest, land tax and rates, agents' fees and advertising costs. Taking those amounts into account, the taxpayer's current accountant, Mr Bill Kontos, calculated the capital gain to be $701,960.15. In the alternative, Mr Kontos estimated the capital gain to be $401,960.15 based on a $4 million valuation. Calculations were as follows:

70    For the purposes of that calculation Mr Kontos had regard to the taxpayer's loan account with the Trust which debited against the taxpayer amounts for interest and land tax. However aside from that loan agreement, there is no evidence whatsoever to substantiate either the amount of interest, the land tax or any selling costs. Furthermore, no witness deposed to the accuracy of the loan account which contains mere entries. In the absence of any source documents substantiating the land tax, selling and holding costs, the taxpayer has not discharged the onus of proof that the capital gain on which he was assessed is excessive.

71    The remaining issue is whether the taxpayer was properly assessed to penalties. The Commissioner assessed the taxpayer to a penalty under s 284-75(3) of Schedule 1 to the TAA for failing to lodge a tax return for the 2014 income year. The base penalty amount in such a case is 75% of the tax liability: s 284-90(1) item 7. It was argued that penalties should be remitted in whole or in part because at all relevant times the taxpayer acted reasonably and took all steps necessary and expected of any taxpayer in his circumstances to ensure full and proper compliance with the taxation legislation. That submission must be rejected as it has no evidentiary foundation whatsoever. To the contrary, the evidence showed that the taxpayer received notification from the ATO by letter dated 23 October 2015 that he needed to lodge his tax return for the year ended 30 June 2014 reporting the Trust distribution. He did not do so and by letter dated 29 April 2016 he received notification of the intention of the ATO to issue a default assessment and penalty to him if he did not lodge his tax return by 27 May 2016. He did not do so and a default assessment issued on 13 June 2016 together with an assessment of penalty for failing to lodge his tax return. The penalty was correctly imposed and as there was no evidence at all explaining his non-compliance with his tax obligations, no error is discernible in the Commissioner's refusal to exercise the discretion to remit the penalty.

72    For the above reasons the proceeding must be dismissed.

Associate:    

Dated:    7 June 2019