Federal Court of Australia

Advanced Holdings Pty Limited as trustee for The Demian Trust v Commissioner of Taxation [2020] FCA 1479

ORDERS

THE COURT ORDERS THAT:

1.    Within 14 days the parties provide by email to the Chambers of Justice Davies a draft form of order in each of the related Federal Court proceedings giving effect to these reasons.

2.    If the parties are not in agreement regarding an appropriate form of order as to costs, within 14 days each party is to file and serve written submissions of no more than three (3) pages and, subject to any further order, the Court will then determine the issue of costs on the papers.

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

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    The applicants in these related Federal Court (FCA) and Administrative Appeals Tribunal (AAT) proceedings are companies and individuals associated with Mr Charbel Demian (Mr Demian) and his family (collectively the Demian Group). These proceedings concern the taxation consequences for the Demian Group arising out of the sale of three properties by Lewisham Estates Pty Ltd (Lewisham Estates) as trustee for the Lewisham Estates Trust for the income year ended 30 June 2013 (2013 income year) and assessments and amended assessments that the respondent (the Commissioner) issued to the applicants on various alternative bases as a result of an audit of the Lewisham Estates Trust. The applicants have challenged the excessiveness of those assessments and amended assessments under pt IVC of the Taxation Administration Act 1953 (Cth) (TAA 1953). Altogether, there are 29 related FCA and AAT proceedings as detailed in Appendix A. Orders and directions were made on 13 December 2019 that the 29 related proceedings be heard together.

2    The parties have distilled the matters for determination to three sets of issues. The first set of issues concerns the determination of the Lewisham Estates Trust’s net income as defined in s 95 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) for the 2013 income year. The second set of issues concerns which entities are assessable on the net income of the Lewisham Estates Trust for the income year 2013. The third set of issues concerns the penalty assessments. The third set of issues relating to the penalty assessments arises for determination in separate review proceedings in the AAT and this judgment is to be read in conjunction with the corresponding AAT decision.

First set of issues: net income of the Lewisham Estates Trust for the 2013 income year

3    The facts relevant to this set of issues were largely not disputed and are substantially taken from the applicants’ written submissions.

4    On 20 March 1998, the Demian Trust was established by a deed of trust between Mavis Valerie Cunneen as settlor and Tramdell Pty Ltd (Tramdell) as trustee (Demian Trust Deed).

5    In May 1998, Tramdell resigned as trustee of the Demian Trust and Demian Holdings Pty Ltd (Demian Holdings) was appointed trustee.

6    In May 2003, the Lewisham Estates Trust was established as a unit trust by a unit trust deed (Lewisham Trust Deed) between Advanced Holdings Pty Ltd (Advanced Holdings) as initial unitholder and Lewisham Estates as trustee. The trustee of the Lewisham Estates Trust at all material times has been Lewisham Estates.

7    On 20 June 2003, Lewisham Estates entered into a Deed of Put and Call Option with Callmask Pty Ltd (Callmask), under which the parties entered into put and call options for the sale by Callmask to Lewisham Estates of land at 78-90 Old Canterbury Road, Lewisham, New South Wales (78-90 Old Canterbury Road). Clause 2.5 provided for the payment of an option fee by Lewisham Estates in two instalments of $500,000 each. Lewisham Estates paid the first of these instalments on 23 June 2003.

8    On 21 June 2003, Lewisham Estates entered into a contract to purchase the land at 72-76 Old Canterbury Road, Lewisham, New South Wales (72-76 Old Canterbury Road) for a purchase price of $1 million. On 18 August 2003, Lewisham Estates entered into a mortgage in favour of National Australia Bank Limited (National Australia Bank) securing $700,000 in respect of this land. The contract settled on 21 August 2003 and the mortgage was subsequently registered in respect of the land.

9    On 8 January 2004, Lewisham Estates entered into a contract to purchase the land at 62 Old Canterbury Road, Lewisham, New South Wales (62 Old Canterbury Road) for a purchase price of $510,000. On 24 June 2004, Lewisham Estates entered into a mortgage in favour of Perpetual Trustee Company Limited (Perpetual Trustee) securing $408,000 in respect of that land. That same day the contracts settled and the mortgage was subsequently registered in respect of the land.

10    On 27 April 2005, Lewisham Estates paid to Callmask the second instalment of the option fee under the Deed of Put and Call Option. It did so after the time permitted by that deed, but Callmask agreed to accept the late payment in consideration for Lewisham Estates paying an additional $250,000 at the time of settlement of the sale of the land at 78-90 Old Canterbury Road.

11    In August 2005, pursuant to the Deed of Put and Call Option, Lewisham Estates acquired the land at 78-90 Old Canterbury Road for a purchase price of $8.6 million, which was in addition to the two instalments of $500,000 previously paid as the option fee and the $250,000 fee paid for Callmask accepting late payment of the second instalment of the option fee.

12    About the same time, Shimden Pty Ltd (Shimden), another company controlled by Mr Demian, acquired the land at 8 William Street, Lewisham, New South Wales (8 William Street) for a purchase price of $525,000. It did so as bare trustee for Lewisham Estates, with Lewisham Estates providing the purchase price. Shimden subsequently transferred title to the land to Lewisham Estates for $1 later the same day.

13    The land at 78-90 Old Canterbury Road and 8 William Street was acquired using funds borrowed from Capital Finance Australia Limited (Capital Finance). A mortgage in favour of Capital Finance was registered in respect of both parcels of land.

14    On 5 January 2006, Demian Holdings Pty Ltd (Demian Holdings) and Riverlands Estate Pty Ltd entered into a facility agreement (the Riverlands Facility Agreement) with Abacus Funds Management Limited (Abacus).

15    On 31 March 2010, Lewisham Estates in its personal capacity and in its capacity as trustee of the Lewisham Estates Trust, Shimden and Summer Hill Business Estate Pty Ltd (Summer Hill) in its personal capacity and in its capacity as trustee of the Camellia Estate Trust entered into a facility agreement with Abacus (the Facility Agreement). Lewisham Estates also entered into a mortgage in favour of Abacus in respect of 62 Old Canterbury Road, 72-76 Old Canterbury Road, 78-90 Old Canterbury Road and 8 William St (collectively the Lewisham Properties). On 8 April 2010 Abacus lodged a caveat over the Lewisham Properties. A mortgage in favour of Abacus was later registered against 72-76 Old Canterbury Road, 78-90 Old Canterbury Road and 8 William St.

16    On 1 April 2010, Lewisham Estates in its personal capacity and in its capacity as trustee of the Lewisham Estates Trust and Summer Hill in its personal capacity and in its capacity as trustee of the Camellia Estate Trust entered into a Call Option Agreement with Abacus. On 24 June 2010 Abacus exercised its call option under that Call Option Agreement so that on 30 June 2010, Lewisham Estates and Summer Hill entered into a joint venture agreement with Abacus (joint venture agreement). The proper construction of the joint venture agreement is one of the key issues in dispute in this proceeding.

17    On 1 and 3 August 2010, Lewisham Estates drew down on the Facility Agreement in the amounts of $8,703,431.38 and $1,350,350, which were used to discharge the mortgages granted in favour of Capital Finance and National Australia Bank.

18    In July 2012, Lewisham Estates entered into a contract to sell the land at 72-76 Old Canterbury Road and 78-90 Old Canterbury Road for a sale price of $48.5 million. That contract settled on 13 August 2012. After payment of rates, legal fees and agent’s fees, Abacus received a bank cheque for $46,039,960.13 together with $1,356,978.08 from the deposit and, subsequently, a further $453,023 that had been held in a solicitor’s trust account. These amounts were applied by Abacus in discharge of the liabilities of Lewisham Estates under the Facility Agreement, as well as the liabilities of Summer Hill under the Facility Agreement and the liabilities of the borrowers under the Riverlands Facility Agreement. Lewisham Estates did not receive any cash.

19    On 23 April 2013, Lewisham Estates sold the land at 62 Old Canterbury Road for a sale price of $565,000. After payment of rates, legal fees, agent’s fees and amounts owing to a first ranking mortgagee, Lewisham Estates received a bank cheque for $117,618.66 together with $42,159 from the deposit.

20    Lewisham Estates subsequently sold the land at 8 William Street on 31 May 2016 for a sale price of $1,610,000.

21    In issue with respect to the calculation of the net income of the Lewisham Estates Trust is:

(a)    whether, as the applicants contend, Lewisham Estates held 50% of its interest in the Lewisham Properties on trust for Abacus. The determination of this issue depends on the proper construction of the joint venture agreement entered into by Lewisham Estates and Abacus;

(b)    whether an amount of $6,229,962 (or, alternatively $12,459,923) is to be deducted from the net income of the Lewisham Estates Trust for the 2013 income year on the basis it was a repayment of a “revenue borrowing”. This issue requires determination as to whether the amounts borrowed by Lewisham Estates were on revenue account and whether, as contended by the applicants, the amounts paid to discharge the revenue borrowings in excess of the amounts borrowed are allowable as deductions to the Lewisham Estates Trust;

(c)    whether certain other discrete amounts are properly deductible from the net income of the Lewisham Estates Trust for the 2013 income year.

The joint venture agreement issue

22    By a joint venture agreement entered into on 30 June 2010, two joint ventures were formed on the terms and conditions set out in the agreement – one between Lewisham Estates in its personal capacity and as trustee of the Lewisham Estates Trust and Abacus (Lewisham joint venture) and the other between Summer Hill in its personal capacity and as trustee of the Camellia Estate Trust and Abacus (Summer Hill joint venture): cl 2 of the joint venture agreement. The present case is concerned only with the Lewisham joint venture.

23    The applicants contended that this agreement operated to create a 50% equitable interest in Abacus in the Lewisham Properties, and accordingly the Lewisham Estates Trust only beneficially derived 50% of the proceeds of the sale, with the other 50% being beneficially derived by Abacus. Whether such an interest was created depends on whether an intention to create that interest was explicitly or impliedly expressed in the joint venture agreement, as an express trust does not exist unless the parties so intended: Korda v Australian Executor Trustees (SA) Limited [2015] HCA 6; 255 CLR 62 at 69 [3], 73 [11] per French CJ, 100 [109] per Gageler J, 123 [204]–[205], 124 [208] per Keane J. Absent an explicit declaration of such an intention, the Court must determine from a construction of the agreement whether such an intention should be inferred. Importantly, such an intention cannot be imputed simply from the label “joint venture”. As the authorities show, there is no settled common law meaning of “joint venture” and joint ventures can take many forms, with different legal arrangements as between the parties: Gibson Motor Sport Merchandise Pty Ltd & Ors v Forbes & Ors [2005] FCA 749 (Gibson Motor Sport Merchandise) at [76]–[81]; Commissioner of Taxation v BHP Billiton Ltd [2019] FCAFC 4; 263 FCR 334 at 359 [100] per Thawley J. Recognisable and common characteristics of joint ventures include participants holding proprietary interests in the assets of the joint undertaking – often, but not necessarily, as tenants-in-common – but the holding of such interests is not a necessary legal incident of a joint venture: Gibson Motor Sport Merchandise at [80]. Nor can an intention to create a trust be imputed simply from the fact that the parties have agreed to engage in a joint undertaking for mutual commercial gain. In each case, it will depend on the particular contract between the parties.

24    The central provisions of the joint venture agreement said by the applicants to express that intention are cls 2.1 and 5.

25    Clause 2.1 set out the purpose of the joint venture. It provided that:

Abacus and Lewisham Estates form and agree to engage in an unincorporated joint venture for the purposes of holding, developing managing and dealing with [the Lewisham Properties] in furtherance of the Project in respect of [the Lewisham Properties] on and subject to the terms and conditions set out in this document.

26    Clause 5 of the joint venture agreement set out the “interests” of the joint venturers. It provided:

Subject to this document, the Joint Venturers:

(a)     hold their respective interests in the Joint Venture;

(b)     own the Joint Venture Assets as tenants in common, except for the Property, which is held for the Joint Venture by one of the Joint Venturers unless otherwise agreed;

(c)     will share all losses, expenses and outgoings of the Joint Venture; and

(d)     share all capital and profits of the Joint Venture,

in the Agreed Proportions.

27    By cl 1.1:

(a)    “Joint Venturers” meant, in relation to the Lewisham joint venture, Lewisham Estates and Abacus;

(b)    “Agreed Proportions” meant, in relation to the Lewisham joint venture, Lewisham Estates as to 50% and Abacus as to 50%;

(c)    “Property 1” meant the Lewisham Properties and “Property”, in the relevant context, meant Property 1; and

(d)    “Joint Venture Assets” included that “Property” and “property of every kind provided, purchased, acquired or created by or on behalf of the Joint Venturers for the purpose of the Joint Venture, including any rights and entitlements of the Joint Venture under any agreements executed in accordance with this document”.

28    The applicants contended that language of “holding” in cl 2.1 and “is held by” in cl 5(b) evince the necessary intention to create a trust, in that the “holding” of the Lewisham Properties was part of the purpose of the Lewisham joint venture and cl 5(b) expressly provided that the Lewisham Properties were “held” by one of the joint venturers for each of the joint venturers in the proportion of 50% each.

29    Whilst the “holding” of the Lewisham Properties was part of the purpose of the joint venture, it is necessary to read cl 2.1 as a whole. As provided in cl 2.1, the purpose of “holding” was “in furtherance of the Project in respect of” the Lewisham Properties. The joint venture agreement did not define the meaning of the word “Project”. However, cl 1.1 provided that capitalised expressions not defined in that agreement had the meanings given in the Call Option Agreement. The word “Project” was defined in the Call Option Agreement as follows:

Project means the project to enhance and realise the value of the Property by obtaining rezonings and selling the Property after rezonings are obtained and with a view to distributing returns to the participants in the Project, being initially the Owner of the Property and, if the call option is exercised, the Owner and the Grantee.

30    Clause 2.1 of the joint venture agreement must also be read in conjunction with clause 2.1(a) of the Call Option Agreement, which provided:

In consideration of the payment of the Call Option Fee by [Abacus], [Lewisham Estates] grants to [Abacus] an option for [Abacus] to purchase a 50% joint venture interest in the Project.

31    The applicants argued that cl 2.1(a) of the Call Option Agreement must be construed in light of Recital B to the Call Option Agreement which provided that:

[Lewisham Estates] has agreed with effect on the Effective Date to grant to [Abacus] an option, for [Abacus] to purchase [the Lewisham Properties].

The “Effective Date” was defined as the date of the document.

32    Thus, what was purchased by the exercise of the call option was a “joint venture interest in the Project” – that is, an interest in the set activities and agreed distribution of proceeds relating to the Lewisham Properties. I accept the submission for the Commissioner that Recital B to the Call Option Agreement is to be understood as a reference to the acquisition option provided for in cl 16 of the joint venture agreement, which was annexed in draft form to the Call Option Agreement. Clause 16 provided, relevantly:

16.1     Grant of Call Option

Each Owner grants to Abacus an option for Abacus to purchase the Property.

16.2     Irrevocable offer

This Acquisition Option constitutes an irrevocable offer by the Owner to sell the Property to Abacus and does not give rise to a conditional contract for the sale of the Property.

16.3     Exercise of Acquisition Option during the Acquisition Option Period

Abacus may exercise the Acquisition Option during the Acquisition Option Period by giving the following to the Owner:

(a)     a completed Acquisition Option Notice;

(b)     a Contract signed by Abacus, with all details completed; and

(c)     a cheque payable to the Owner or to the relevant financiers to whom the Senior Debt is owed for the Acquisition Option Price.

…

That construction is consistent with the contractual scheme and gives the provisions a sensible commercial meaning, whereas the applicants’ contention that cl 2.1(a) of the Call Option Agreement operated to give Abacus an option to acquire a 50% beneficial interest in the Lewisham Properties disregards the clear words of that provision.

33    Clause 2.1 of the joint venture agreement must also be read in conjunction with cl 5 of that agreement, which defines the “interests of the joint venture”. When read together as a whole, the provisions do not evince an intention for Abacus to hold a 50% equitable interest in the Lewisham Properties. First, there is no explicit provision to that effect to be drawn from the language of “holding” and “is held for”. Secondly, read in context, the language of “holding” and “is held for” does not convey the imputation contended by the applicants. Significantly, the intention of the joint venturers as expressed in cl 5(b) was for the parties to own the joint venture assets as tenants in common “except for” the Lewisham Properties. With respect to those properties, there was to be no joint ownership but, rather, the agreement and contractual obligation was for those properties to be held “for the joint venture”, or as the Commissioner put it, to be “devoted to” the purpose of the joint venture, that is, the development and realisation of those properties as a joint commercial undertaking with the view to sharing the proceeds as provided for in cl 6 of the joint venture agreement. Contrary to the applicants’ submission, the expressions “hold” and “holding” would not be otiose if Abacus did not have a proprietary interest in the Lewisham Properties. The parties to the joint venture agreement could agree, as they did by cl 6, to share the losses, expenses and outgoings of the joint venture without the transfer of an equitable interest in the Lewisham Properties to Abacus.

34    Clause 6 of the joint venture agreement deals with the distribution of proceeds as follows:

The Joint Venturers agree that the proceeds of sale of any Joint Venture Assets, any other revenue derived from the Joint Venture or the Joint Venture Assets and any amounts retained under paragraph (c) below are to be applied in the following order of priority:

(a)     first, to pay unpaid costs and expenses incurred after the date of the Call Option, and to reimburse Joint Venturers for costs and expenses incurred after the date of the Call Option and not funded by Senior Debt, Abacus Debt or other debt, in each case, in furtherance of the Project;

(b)     second, to pay interest and principal due and payable on any Senior Debt secured by the relevant Property;

(c)     third, to be retained as a cash reserve to be available to pay forecast costs, expenses, interest and principal referred to in paragraphs (a) and (b);

(d)     fourth, to pay principal and any other amounts owing in respect of Senior Debt (whether or not due) until the Senior Debt is discharged in full;

(e)     fifth, to pay interest accrued in respect of Abacus Debt;

(f)     sixth, to pay principal and any other amounts owing in respect of Abacus Debt (whether or not due) until the Abacus Debt is discharged in full;

(g)     seventh, if the Acquisition Option has been exercised, to pay Abacus the Acquisition Option Fee then accrued;

(h)     eighth, if the Acquisition Option has been exercised, to reduce the outstanding Acquisition Option Price until the outstanding Acquisition Option Price is reduced to zero;

 (i)     ninth, to pay the Option Amount to Abacus;

(j)     tenth, the balance (if any) to be distributed in the Agreed Proportions between the Joint Venturers in respect of the relevant Property.

35    The applicants submitted that cl 6 should be read in light of cl 5(c), which provided that Lewisham Estates and Abacus were to “share all losses, expenses and outgoings” of the joint venture as to 50% each. It was argued that the distribution “waterfall” in cl 6 includes payments of such expenses and outgoings, such as sub-cls (a) and (c), which expressly provide for payment of the expenses of the joint venture. It was submitted that the use of the proceeds of sale to pay expenses to be shared as to 50% between each of Lewisham Estates and Abacus meant that the proceeds of sale and other revenue from the Lewisham Properties must be derived beneficially by those two entities. Were it otherwise, it was argued, the expenses would not be shared as to 50% each as required under cl 5(c) – the expenses would be being met wholly by the joint venturer beneficially entitled to those proceeds of sale or other revenue. There are three answers to this submission. First, cl 5(c) is “subject to this document”. Secondly, the fact that cl 5(c) provided for the sharing of losses, expenses and outgoings of the joint venture in the “Agreed Proportions” (namely, 50:50) reflects the proportionate interest of the joint venturers in the joint venture, and that any profits from the proceeds of the sale of “Joint Venture Assets”, after the satisfaction of ranking priorities, was to be divided in equal shares. Clause 5(c) does not indicate or require that Abacus has a 50% equitable estate in the Lewisham Properties. Thirdly, the cascading priority provisions also tell against the applicants’ contention. Notably, those cascading payments included sub-cls 6(e) and (f), which required the proceeds to be applied to pay interest accrued in respect of debts owed to Abacus, principal debt and any other amounts owing to Abacus as priority payments, the effect of which would have been to require the moneys owed to Abacus to be repaid out of its equity in the Lewisham Properties, if it was the case that Abacus had a 50% equitable interest in the Lewisham Properties. Such clauses are inconsistent with an intention that Abacus hold a 50% equitable interest in the property. As provided in cl 6(j), the parties were to share equally in the balance of the proceeds only after the payment of expenses and repayments of debts, including to Abacus.

36    The applicants also argued that cls 11 and 16 of the joint venture agreement would be inapposite if Abacus only had contractual rights against Lewisham Estates rather than an interest in land.

37    Clause 11 relevantly provided that:

(a)     Subject to the terms of this document, Abacus (but not the other Joint Venturer, who may only do so with the prior written consent of Abacus) shall be entitled to grant a security interest over its Joint Venture Interest provided that it gives 10 Business Days’ notice of its intention to do so to the other Joint Venturer.

(b)     Prior to entering into a security interest over its Joint Venture Interest, Abacus shall procure that the proposed beneficiary of the security interest (Financier) enters into a deed with each of the Joint Venturers whereby the Financier agrees that should it wish to exercise its security rights and sell Abacus’ Joint Venture Interest, it shall allow the other Joint Venturer an opportunity to buy the Joint Venture Interest which is to be the subject of such sale in accordance with the provisions of this clause 11 provided that the Financier will receive, upon completion of such sale, all amounts which it is entitled to recover by enforcing its security.

(c)     If Abacus is in default under any security interest granted by it over its Joint Venture interest such that its Financier is entitled to appoint a receiver over its Joint Venture Interest or issue a notice under section 57(2)(b) of the Real Property Act 1900, the other Joint Venturer shall have a right to acquire the Joint Venture Interest of Abacus in accordance with this clause 11.

(d)     Upon receipt by Abacus of a notice from its Financier of the default or a notice under section 57(2)(b) of the Real Property Act 1900 issued by or on behalf of its Financier or upon Abacus receiving notice of the appointment by its Financier of a receiver over its Joint Venture Interest, Abacus or its Financier shall notify the other Joint Venturer in writing of the receipt by Abacus of such notice.

(e)     If following receipt of such notification from Abacus or its Financier, the other Joint Venturer wishes to purchase Abacus’ Joint Venture Interest, it shall by notice in writing to Abacus and its Financier, within 10 Business Days after service of Abacus’ notice, advise Abacus and its Financier of its intention to purchase Abacus’ Joint Venture Interest. If the amount payable by the other Joint Venturer on purchase of Abacus’ Joint Venture Interest is sufficient to satisfy the debt owing to the Financier, Abacus and its Financier shall accept the offer of the other Joint Venturer to acquire Abacus’ Joint Venture Interest and Abacus and its Financier shall be deemed to have accepted such offer on the following basis:

(i)     the purchase price shall be the Market Value, all income and outgoings (including land tax on a single holding basis) shall be adjusted and the terms of sale in so far as the Property is concerned shall be in accordance with the current form of Contract for the Sale of Land published by the Law Society of New South Wales or the Real Estate Institute of New South Wales; and

(ii)     completion of the purchase shall take place on a date being no later than 3 months after Abacus and its Financier have accepted the other Joint Venturer’s offer.

(f)     If the other Joint Venturer does not, within die said period of 10 Business Days, offer to purchase Abacus’ Joint Venture Interest, the Financier shall be entitled to exercise its powers of sale or proceed with a receivership sale pursuant to a public auction, tender or other procedure where the other Joint Venturer is permitted to bid or tender, as the case may be, and Abacus must, if requested by the Financier or the purchaser of the Joint Venture Interest, enter into a joint venture agreement on the same terms as this document with that purchaser.

(g)     Abacus hereby waives all claims it may have against its Financier or the other Joint Venturer arising from the sale of Abacus’ Joint Venture Interest, as contemplated by this clause 11.

(h)     Each Joint Venturer will pay its Agreed Proportion of all rates and taxes (including land tax) and other amounts applicable to the Joint Venture Interest so that the Joint Venture Interest shall not be encumbered as a result of the non-payment of such amount.

38    Clause 16 is extracted above.

39    Neither clause provides support for the applicants’ construction. Clause 11, as a matter of construction, deals with the creation of a security interest only over Abacus’ joint venture interest. What constitutes Abacus’ joint venture interest is prescribed by cl 5 and, properly construed, that clause does not confer an equitable interest in the Lewisham Properties upon Abacus. Clause 11(e) then deals with the circumstance where, if a security interest is granted, the security interest is sought to be enforced by the security holder and Lewisham Estates exercised the right to acquire Abacus’ joint venture interest. Clause 11(e)(i) only makes commercial sense if Abacus had exercised the option provided for by cl 16 to purchase the Lewisham Properties from Lewisham Estates. It strains the language of cl 11(e), read in the context of the joint venture agreement as a whole, to construe that clause as importing an intention of the parties for the joint venture agreement to create a 50% equitable interest in the Lewisham Properties in favour of Abacus. Clause 11(h) likewise does not assist the applicants but is consistent with the agreement of the parties to share the outgoings of the joint venture.

40    Clause 16 should be construed on its terms, not, as submitted for the applicants, as “[dealing] with Abacus acquiring title to the Property without disturbing the beneficial interests”. It was contended that the acquisition option price, which was defined to mean “an amount equal to the amount required to pay and discharge in full any Senior Debt in respect of [the Lewisham Properties]…” (cl 1.1), was “clearly… not the price of Abacus acquiring the absolute interest in the Property – it is simply Abacus discharging the Senior Debt and taking title to the Property, which will remain subject to the joint venture agreement”. Further, it was argued, cl 6(h) required the acquisition option price paid by Abacus to be repaid to Abacus as a priority payment. Thus, it was submitted, Abacus was not ultimately “paying for the [bare] legal title” because the amount is returned to it. Viewed in that way, the argument went, the joint venture agreement provided for legal title to the Lewisham Properties to change between Lewisham Estates and Abacus, but for the parties’ beneficial interests to remain the same. It was argued that cl 5(b), in referring to the Lewisham Properties being held for the joint venture in the agreed proportions “by one of the Joint Venturers” (either Lewisham Estates or Abacus) rather than by the “Owner” (Lewisham Estates), was deliberately drawn to contemplate that either of the joint venturers may hold the legal title to the properties for the joint venture because under cl 16 Abacus was able to acquire legal title to the properties without disturbing the beneficial interests in the properties.

41    To the contrary, cl 16.3 makes it clear that it was an option to buy an undivided legal interest as registered proprietor in the fee simple of this property. That is because the word “Contract” is a capitalised word, which is defined in cl 1.1 as a contract for the sale of the Lewisham Properties in the form of sch 2 to the joint venture agreement. Schedule 2 in turn refers to the form of Annexure C to the Call Option Agreement. Annexure C to the Call Option Agreement is the standard form of contract for the sale of land in New South Wales. Clause 6(h) also does not advance the construction urged by the applicants as, for the reasons already given, the parties’ agreement concerning the distribution of proceeds is not indicative of an intention to create a 50% equitable interest in the property in favour of Abacus.

42    Finally, the applicants’ reliance on cl 13 also does not assist.

43    Clause 13(a) provided that:

The Joint Venturers agree that neither of them will (except after 6 months prior notice in writing to the other of them) make application to court for the appointment of trustees for sale or partition of the Property pursuant to the provisions of section 66G of the Conveyancing Act 1919 (NSW).

44    Section 66G(1) of the Conveyancing Act 1919 (NSW) (Conveyancing Act) provides:

Where any property (other than chattels) is held in co-ownership the court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.

45    Section 66F(1) of the Conveyancing Act provides:

Co-ownership means ownership whether at law or in equity in possession by two or more persons as joint tenants or as tenants in common; and co-owner has a corresponding meaning and includes an incumbrancer of the interest of a joint tenant or tenant in common.

46    Thus, for a person to make an application under s 66G of the Conveyancing Act in relation to property, there must be at least two “co-owners” of the property and, as defined in s 66F(1), a “co-owner” must have a beneficial interest in the property in the strict sense. The applicants placed reliance on Kelly v Kelly [2007] NSWSC 1076 where Austin J observed at [30] and [32]:

First, s 66G(1) relates to specific parcels of property in co-ownership, both in terms of its wording and its purpose. The opening words of the subsection identify some particular property held in co-ownership, and the section authorises the court to appoint trustees to that property for the purposes of sale or partition. The purpose of s 66G(1) is to allow the court to authorise the sale of particular property, by making orders which, typically, include orders relating to the process of sale and the destination of the purchase money. Orders of these kinds do not appear appropriate where the applicant for orders has only a right in respect of a potentially fluctuating group of assets, stemming from his or her entitlement to compel the due administration of those assets.

…

The plaintiff has an interest in relation to the assets of the estate as a whole, and an expectation that, upon due administration, he will receive the half-interest in one or two or all three properties to which he is entitled under the will and the court's orders… In my opinion the general and inchoate interest described in Schultz's case and Horton v Jones, even if it is a proprietary interest in all of the assets of the unadministered estate, is not sufficient to attract the jurisdiction under s 66G.

47    Thus, it was argued, for cl 13 of the joint venture agreement to be capable of having any operation, Lewisham Estates and Abacus must each have a beneficial interest (in the strict sense) in the Lewisham Properties, otherwise there would not be at least two co-owners of the Lewisham Properties and so s 66G would be inapplicable. It was submitted that the Court should avoid giving an interpretation to the joint venture agreement that rendered one of its provisions otiose when another interpretation that is open on the text of the agreement would give that provision work to do, citing in support XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215 at [72]–[73] per Gleeson JA (Bell P agreeing); HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [154] per Leeming JA. Additionally, it was submitted that the fact that the parties included cl 13 indicated that, objectively considered, the parties intended the joint venture agreement would give each of them a beneficial interest in the Lewisham Properties, and effect should be given to that objective intention.

48    The difficulty with the argument is that cl 13 on its face appears to be inconsistent with the contractual requirement for the Lewisham Properties to be held for the purposes of the joint venture and cl 5(b), which expressly provided that there was no co-ownership of the Lewisham Properties as tenants in common. Further, s 66F of the Conveyancing Act requires that the co-ownership be “in possession”, denoting an immediate right to possession or enjoyment of the particular property. Given the terms of the joint venture agreement, an immediate right to possession by Abacus of one half of the Lewisham Properties would have been inconsistent with the continued devotion of the Lewisham Properties to the purposes of the joint venture. Accordingly, I do not consider that cl 13 supports the construction urged by the applicants.

49    There are four other matters that tell against the applicants’ case.

50    The first is that it is unnecessary to impute a trust relationship with Abacus in order to give the joint venture agreement a commercially sensible construction. In that regard, if it was intended by the parties to create a trust, it is significant that the joint venture agreement did not expressly so provide. A court should exercise caution when deciding whether there is an intention to create a trust in the context of sophisticated commercial relationships: Walker v Corboy (1990) 19 NSWLR 382 at 390 per Clarke JA.

51    Secondly, at the time the joint venture agreement was executed, Lewisham Estates did not hold an undivided interest in the Lewisham Properties but held its interest in the Lewisham Properties subject to the terms of the Lewisham Estates Trust. Nothing either in the terms of the joint venture agreement nor in any other document in evidence indicates how the creation of that equitable estate was to be reconciled with the rights and interests of the unitholders of the Lewisham Estates Trust. That tells against the inference of a trust.

52    Thirdly, the grant of the option to Abacus to purchase the Lewisham Properties in cl 16 of the joint venture agreement is inconsistent with an intention that Abacus has a 50% equitable interest in the Lewisham Properties. The purpose of cl 16 is not evident if Abacus had such an equitable estate.

53    Finally, contrary to the applicants’ submission, the fact that cl 4.1 of the joint venture agreement provided that nothing in the joint venture agreement constituted one joint venturer as a partner of the other joint venturer “other than for the purpose of the Income Tax Assessment Act 1997 (Cth) because the joint venturers may receive income jointly” does not direct any different construction of the joint venture agreement. As noted, a joint venture can take many forms and does not necessarily include, let alone require, each joint venturer to hold a proprietary interest in the joint venture assets.

54    Accordingly, I find that Abacus did not have a 50% equitable interest in the Lewisham Properties.

Revenue borrowings issue

55    When the Lewisham Properties were sold in the 2013 income year, Abacus was paid $48,009,738.87 out of the proceeds of sale. Of that amount, $18,861,669.52 was applied to the repayment of the principal owing from the drawdowns by Lewisham Estates on the Abacus Facility Agreement and $5,772,315.78 was applied to pay capitalised interest on those drawdowns. Two million dollars was paid on account of the cancellation amount payable pursuant to cl 4 of the Call Option Agreement, which had the effect of cancelling the call option in respect of the Lewisham Properties. The balance of $21,375,753.57 was applied by Abacus in discharge of debts owed by other members of the Demian Group under the Facility Agreement. Consequently, the amounts paid to Abacus out of the proceeds of sale exceeded the repayment of the drawdowns and capitalised interest of Lewisham Estates by $23,375,753.57 (the excess amount). In issue was whether a portion of the excess amount is deductible from the net income of the Lewisham Estates Trust for the 2013 income year as “revenue borrowings”. The applicants contended that an “applicable” proportion of the excess amount has a revenue character on the basis that:

(a)    it was not in dispute that Lewisham Estates was in the business of property development or that the Lewisham Properties were its trading stock;

(b)    those properties were purchased by Lewisham Estates between 2003 and 2005 and financed through borrowings from Capital Finance, Perpetual Trustee and National Australia Bank;

(c)    because those borrowings were used by Lewisham Estates to fund the purchase of its trading stock, viz, the Lewisham Properties, those borrowings formed an “integral part” of Lewisham Estates’ business and part of the process by which Lewisham acquired its trading stock and thus were of a revenue character;

(d)    in 2010, Lewisham Estates repaid the Capital Finance and National Australia Bank loans using two drawdowns on its facility with Abacus: on or around 30 July 2010, it drew down $8,703,431.38 (plus an amount for Abacus’ fees, costs and expenses), which it used to repay the Capital Finance loan; and on 3 August 2010, it drew down $1,350,350 which it used to repay the National Australia Bank loan;

(e)    the amounts borrowed from Abacus, at least to the extent of the drawdowns to repay the National Australia Bank and Capital Finance, had the same character as the original borrowings and were on revenue account; and

(f)    the excess amount paid to Abacus has a revenue character to the extent to which the drawdowns from the Abacus facility were used to discharge Lewisham Estates’ borrowings from Capital Finance and the National Australia Bank because to that extent, the excess amount is attributable to the discharge of those revenue borrowings.

56    The applicants accepted that not all of the access amount was revenue in nature. However, it was contended that 53.3% of the excess amount should be treated as revenue in nature on the basis that percentage amount is the same proportion that the revenue drawdown of Lewisham Estates from the Abacus facility ($10,053,791.38) to repay the National Australia Bank and Capital Finance bore to the total principal drawdowns ($18,861,669.52). 53.3% of the excess amount translates to a deduction claim of $12,459,923 if Abacus did not hold a 50% equitable interest in the Lewisham Properties, or $6,229,961.50 if Abacus held a 50% equitable interest and Lewisham Estates only had a 50% interest in the Lewisham Properties.

57    The applicants relied on The Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; 63 CLR 382 (Texas); Avco Financial Services Ltd v Commissioner of Taxation (Cth) [1981] HCA 6; 150 CLR 510 (Avco); Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 14 ATR 629 (Hunter Douglas); Thiess Toyota Pty Ltd v Commissioner of Taxation [1978] 1 NSWLR 723 (Thiess Toyota); and Federal Commissioner of Taxation v Cadbury-Fry Pascall (Aust) Ltd (in vol liq) (1979) 10 ATR 55 (Cadbury-Fry Pascall) in support of their submissions.

58    In Texas the taxpayer, an oil company, purchased its petroleum products from its parent or related companies in the United States. As its share capital was insufficient to meet its requirements for working capital, the taxpayer was allowed to delay payments in respect of the purchases in order to provide it with funds large enough for its needs. Before payment was made, the rate of exchange moved against Australia and increased the outlay in Australian pounds for the products. It was held that the increased outlay was deductible as part of the cost of the purchase of trading stock and hence on revenue account. In the words of Starke J at 450, the additional amounts were “outgoings incurred in connection with the trading operations of the taxpayer: the purchase of the stock in which it traded”. See also Latham CJ at 427 and Dixon J at 468–9.

59    The issue in Avco was whether exchange gains and losses made by a finance company in the repayment of moneys borrowed by it in the ordinary course of its business for lending to its customers were on revenue or capital account. The exchange gains and losses were held to be on revenue account. Gibbs CJ reasoned at 518:

Where a taxpayer carries on the business of borrowing and lending money, the moneys used for that purpose are analogous to trading stock – the taxpayer in effect deals in the money. Exchange gains and losses, regularly and frequently made and incurred, in the course of making repayments of borrowed money which is used by a taxpayer in making loans in the course of its finance business are outgoings made in the day to day conduct of the business and for the purpose of carrying on the business as a going concern... the additional moneys paid as a result of the unfavourable exchange variations – the exchange losses – were part of the price by which the appellant obtained the money which it used to make a profit – part of the process by which the appellant obtained regular returns.

The majority (Mason, Aickin and Wilson JJ) at 527 similarly reasoned that:

The essence of the business of a finance company… is the borrowing and lending of money, the rates of interest payable on money lent being significantly higher than the rates payable on the money borrowed, for it is from the difference in the rates that the company generates its profit, after making provision for bad debts…

Exchange gains and losses are an ordinary incident of overseas borrowings by a finance company. If an overseas loan, the proceeds of which are to be used in the Australian business of the finance company, is to be repaid in the foreign currency, the company has, in the first instance, to exchange the foreign currencies for Australian dollars, and later to buy the foreign currency with Australian dollars. Exchange gains and losses are therefore an incident of borrowing.

The majority continued at 530:

The true principle is that in the case of a finance company which borrows money overseas in the ordinary course of its business and not for some special purpose, the added cost of repayment in foreign currency caused by the devaluation or depreciation of the Australian dollar is an additional cost of the borrowing and, like other costs of the borrowing, is an allowable deduction under s. 51(1).

In that regard, no distinction was drawn between the borrowing of moneys for the purpose of on-lending and the borrowing of moneys for the purpose of repaying loans previously borrowed for on-lending. As the majority explained at 532 “[i]n each instance the transactions are continuously and regularly entered into in the ordinary course of the finance company’s business; they are an integral part of that business”.

60    In the course of reasoning, the majority also stated that there is an important distinction between the borrowing and repayment of loans of a finance company in the ordinary course of its business and the borrowing and repayment of loans by a manufacturing or trading company. The majority said at 527:

In general the finance company’s borrowings provide money which it turns over at a profit. Borrowing otherwise than for on-lending or for the payment of funds borrowed for on-lending, that is, borrowing undertaken for capital rather than revenue purposes, as in [Commercial & General Acceptance Ltd v Commissioner of Taxation (Cth) [1977] HCA 47; 137 CLR 373 (CAGA)] is an exception to the general rule. On the other hand, borrowing by a manufacturing or trading company is often undertaken to strengthen the capital or profit-earning structure of the company. A finance company usually borrows in order to increase its working capital which is then turned over at a profit; the manufacturing or trading company frequently borrows to strengthen its permanent capital.

CAGA is authority that where a borrowing is undertaken to strengthen the capital or profit earning structure of the taxpayer, the repayment of the borrowing is an expenditure on capital account.

61    Thiess Toyota and Cadbury-Fry Pascall were both cases in which a trader acquired trading stock in foreign currency. In Thiess Toyota the trader arranged for the financier to pay directly for the trading stock to be later reimbursed by the taxpayer. Movements in the exchange rate resulted in the trader making foreign currency gains and the gains were held to be on revenue account. Meares J distinguished CAGA from the case where a manufacturer or trader buys or sells stock in trade for a price payable in foreign currency which appreciates or depreciates before payment is made and held that the appellant’s finance arrangements were “all part of a transaction relating directly to, and having the purpose of, the purchase of trading stock”: Thiess Toyota at 728. Thiess Toyota was cited with approval by Gibbs CJ in Avco at 517–8. In Cadbury-Fry Pascall, the Australian taxpayer’s English parent company purchased trading stock for the Australian taxpayer in foreign currency, with the Australian taxpayer repaying the parent company later. Movements in exchange rates saw the Australian taxpayer make a gain on the repayment to its English parent company and that gain was found to form part of its assessable income. Jenkinson J found that the credit facility was principally for the payment of liabilities in respect of the purchase of raw materials and the payments in reduction of the loan account were in substance part of the regular outlay of the taxpayer for the raw materials acquired by it for manufacture and it followed that the exchange gain was on revenue account: Cadbury-Fry Pascall at 61.

62    Hunter Douglas was a case where the taxpayer borrowed money in foreign currency to use in the course of its business, including to pay wages, payroll tax and for stock in trade. Exchange rate movements resulted in the taxpayer making exchange losses. It was held by majority (Fisher and Lockhart JJ, Franki J dissenting) that the exchange losses were not deductible by reason that the borrowings and exchange losses were not an integral part of the ordinary operation of the taxpayer’s business of development, manufacture and marketing of window covering, home improvement, casual living, architectural and building products. After reference to Avco, Fisher J reasoned at 641–2:

The position is different where the company is not a finance company but a trading or manufacturing company which incurs exchange losses or gains otherwise than through the purchase of trading stock. Here the losses or gains will in the ordinary course be on capital account. For them to be on revenue account it is necessary for the taxpayer to establish that the additional expenditure to meet exchange losses was expenditure incurred in the process of producing its income, and in the words of Mason, Aickin and Wilson JJ in Avco set out above, as an integral part of that process. It is not sufficient, with all respect to the learned trial judge, to rely upon the finding that in fact the borrowed monies were used to satisfy day to day outgoings. The borrowings in such a case are prima facie an addition to the capital employed in the business.

…

… the borrowing of the moneys and the repayment thereof in this matter was expenditure in relation to the financing of the taxpayer's business by augmenting its working capital. It was money borrowed to pay liabilities incurred in carrying on and expanding the business, as part and parcel of the taxpayer's financial as opposed to its trading activities. The borrowings and their exchange losses were not an integral part of the ordinary operation of the taxpayer's business. They were borrowings arranged for special purposes…

Lockhart J similarly concluded at 645 that the borrowings were not “an integral part of the ordinary operations of the taxpayer’s business so as to represent a matter of revenue rather than capital”, citing Avco at 524–5 per Mason, Aickin and Wilson JJ.

63    Lockhart J at 643 referred to Avco and observed that, in general, loans and repayments of loans were on capital account. Lockhart J then referred to two exceptions to this “prima facie presumption”, namely borrowings by finance companies to lend to their customers, and borrowings by trading companies to finance the purchase of trading stock. Lockhart J explained at 643:

Borrowings by finance companies in the ordinary course of their business or borrowings by trading companies to purchase trading stock are examples of expenditure incurred in the earning of a taxpayer’s income and not for the purpose of enhancing the business or organisation of the taxpayer as an income earning entity. It is well established that such borrowings are revenue items.

…

Where a trading company buys goods which it turns over as trading stock gains or losses incurred are of a revenue nature. If moneys payable by a taxpayer are allowable deductions, in general any increase or decrease in those amounts caused by fluctuations in the exchange rate are likewise allowable deductions or assessable income as the case may be. If a trading company borrows money overseas in circumstances where the borrowing is a necessary part of and has the purpose of purchasing trading stock gains or losses will be revenue items.

and at 645:

Borrowing money to carry on business must prima facie be treated as augmenting the capital employed in the business. Borrowings by finance companies to then lend to their customers, and borrowings by trading companies to finance the purchase of trading stock, are exceptions to this general rule. Such borrowings are an integral part of the ordinary conduct of the company's business and are thus revenue, not capital, items. Moneys borrowed by a finance company are turned over by making loans to its customers.

At 645, Lockhart J contrasted the facts in Thiess Toyota and Cadbury-Fry Pascall, holding that the borrowings were not part of the process by which the taxpayer operated to purchase trading stock. His Honour concluded that the nature of the borrowings determined the nature of the exchange losses for fiscal purposes. As the principal purpose of the borrowing was to finance an expansion of the taxpayer company’s business activities and to provide additional funds to increase its working capital for the purpose of avoiding a cash flow or liquidity problem during the period of expansion, the borrowings were on capital account and thus so too were the exchange losses.

64    Most recently, the High Court in Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36; 93 ALJR 1147 (Sharpcan) set out the test for determining whether an outgoing is incurred on revenue account or capital account as follows at 1154–5 [18]:

Authority is clear that the test of whether an outgoing is incurred on revenue account or capital account primarily depends on what the outgoing is calculated to effect from a practical and business point of view. Identification of the advantage sought to be obtained ordinarily involves consideration of the manner in which it is to be used and whether the means of acquisition is a once-and-for-all outgoing for the acquisition of something of enduring advantage or a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments. Once identified, the advantage is to be characterised by reference to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; and between an enterprise itself and the sustained effort of those engaged in it. Thus, an indicator that an outgoing is incurred on capital account is that what it secures is necessary for the structure of the business.

(footnotes omitted)

Applying the test to the facts in the present case, whether the excess amount is deductible in the first instance thus depends on the character of the original borrowings to acquire the Lewisham Properties and whether those borrowings were “an integral part of the ordinary operations of the taxpayer’s business”. That is, whether those borrowings were part of the process by which Lewisham Estates operated to purchase trading stock, or whether they were undertaken to augment Lewisham Estates’ working capital.

65    The evidence concerning the borrowings was as follows:

(a)    72-76 Old Canterbury Road: Lewisham Estates entered into a contract to purchase this land for the sum of $1 million on 21 June 2003. On 18 August 2003, Lewisham Estates granted a mortgage in favour of National Australia Bank over the property (NAB mortgage), securing the sum of $700,000. The contract settled on 21 August 2003 and the mortgage was subsequently registered over the property;

(b)    62 Old Canterbury Road: Lewisham Estates entered into a contract to purchase this land for the sum of $510,000 on 8 January 2004. On 24 June 2004, Lewisham Estates granted a mortgage in favour of Perpetual Trustee, securing the sum of $408,000 (Perpetual mortgage) and the contract was settled on the same day. The mortgage was subsequently registered over the property;

(c)    78-90 Old Canterbury Road and 8 William Street: Lewisham Estates entered into a facility agreement with Capital Finance on 29 June 2005 for the purpose of acquiring both of these properties. On 4 August 2005:

(i)    Lewisham Estates, as transferee, executed a transfer for 78-90 Old Canterbury Road for consideration in the sum of $8.6 million;

(ii)    Shimden, as transferee, executed a transfer for 8 William Street for consideration in the sum of $525,000. Mr Demian’s evidence was that Shimden purchased this property using funds advanced at the direction of Lewisham Estates under the Capital Finance mortgage and acquired the property as bare trustee for Lewisham Estates;

(iii)    Lewisham Estates granted a mortgage over 78-90 Old Canterbury Road and also 8 William Street in favour of Capital Finance, securing the sum of $8.4 million (Capital mortgage);

(iv)    the Capital mortgage was subsequently registered over the properties.

66    The evidence established that Lewisham Estates borrowed funds which it used to acquire properties for the conduct of its property development business. However, the use to which the borrowed funds were put is not conclusive of the character of the borrowings: Hunter Douglas at 644 per Lockhart J. Merely because the borrowings were used to acquire the properties does not give the borrowings a revenue character. As the authorities make clear, for the borrowings to be on revenue account requires the finding that the borrowings were an incident of the commercial operations by which Lewisham Estates acquired its trading stock: Cadbury-Fry Pascall at 61; Hunter Douglas at 645 per Lockhart J. However, the evidence did not substantiate that the original borrowings were an incident of the process by which Lewisham Estates operated to purchase its trading stock, as distinct from borrowings made by Lewisham Estates to provide funds to enable it to conduct its business enterprise, which is an affair of capital. It follows from this conclusion that the excess amount is not deductible.

67    In case I am wrong I should deal with the next part of the argument, namely that the Facility Agreement was in substitution for the original borrowings and thus bears the same character (on the assumption they were borrowings on revenue account). The evidence was as follows.

68    On or around 12 June 2007, Lewisham Estates granted a mortgage to Equititrust Ltd (Equititrust) over 72-76 Old Canterbury Road, 8 William Street and 62 Old Canterbury Road, securing the sum of $865,000.

69    In 2009, the Demian Group suffered financial distress as a result of the global financial crisis. Lenders to the Demian Group commenced calling in their loans. This included Capital Finance and Equititrust in relation to Lewisham Estates’ facilities secured over the Lewisham Properties.

70    On 31 March 2010, in order to re-finance the Demian Group’s existing debt facilities, Lewisham Estates, Shimden and Summer Hill entered into the Facility Agreement with Abacus (Abacus Facility). The Abacus Facility had an initial facility limit of $20 million. On the same day, Lewisham Estates mortgaged each of the Lewisham Properties to Abacus. That mortgage was, in effect, an “all moneys” mortgage.

71    Also on 31 March 2010, Lewisham Estates, Shimden and Summer Hill (referred to as the “Borrowers”) and Abacus executed a Payment Deed, which contained a collateralization clause as follows:

As a condition to Abacus entering into and making advances under the Facility Agreement, the Borrowers jointly and severally agree with Abacus as follows:

(a)    each Borrower must, having applied any returns which they receive from the Projects or the Properties, including sales proceeds in respect of the Properties, in accordance with the Transaction Documents in full satisfaction of the Secured Moneys, apply any residual such returns as directed by Abacus to satisfy any amounts owing to Abacus by any of the Borrowers, Demian Holdings Pty Ltd, Riverland Estate Pty Ltd, Demian Investments Pty Ltd, West Apartments Pty Ltd, Belgrave Holdings Pty Ltd, and Charbel Demian (in each case, in whatever capacity);

    …

(collateralization clause)

72    On 30 July 2010, Lewisham Estates, Mr Demian and other entities in the Demian Group entered into a Second Deed of Amendment, Restatement and Affirmation with Abacus, which amended cl 2.1 of the Facility Agreement to provide that the purposes of the Abacus Facility included the repayment of the amounts owing to National Australia Bank and Capital Finance, in addition to Equititrust (which was already included in cl 2.1 of the original Facility Agreement).

73    That same day, Lewisham Estates, Mr Demian and other entities in the Demian Group entered into a Guarantee and Indemnity with Abacus. Under cl 4, Lewisham Estates, as one of the guarantors, guaranteed the obligations of the borrowers under the Riverlands Facility Agreement, and under cl 3, it agreed that its obligations under that guarantee were “Secured Moneys” for the purposes of the Abacus Facility.

74    On 29 July 2010, Lewisham Estates drew down $8,744,541.38 from the Abacus Facility for the purpose of discharging the amounts owing under the Capital Finance facility, being a total of $8,703,431.38. On 30 July 2010, the Capital mortgage was discharged. On 3 August 2010, a further $1,350,350 was drawn down on the Abacus Facility for the purpose of repaying the amounts owing under the facility secured by the NAB mortgage. On 26 July 2010, the NAB mortgage was discharged.

75    By a series of further amendments over the balance of 2010 to 2012, the facility limit of the Abacus Facility was progressively increased. By 17 July 2012, through the Ninth Deed of Amendment and Affirmation and Amendment to Call Option, the facility limit had been increased to $54,400,000, with provision made for a further $7,750,000 to be borrowed for specified purposes. The reason for the increase in the limit was not explained in the evidence, though it may be inferred that those amounts were used for a range of purposes relating to the activities of various entities in the Demian Group.

76    When the Lewisham Properties were sold in 2012, the collateralization clause was engaged and $23,375,723.55 was paid to Abacus to discharge debts of other entities in the Demian Group.

77    The applicants argued that the obligations of Lewisham Estates to Abacus as a result of the two drawdowns on the Abacus Facility on 29 July 2010 and 3 August 2010 were in “substitution” for its obligations to repay the loans from Capital Finance and National Australia Bank, within the meaning of that concept as explained in Thiess Toyota and Cadbury-Fry Pascall. It was submitted that the funds were advanced under those two drawdowns for the purpose of discharging the loans from Capital Finance and National Australia Bank, and those funds were used for that purpose. Consequently, so the argument went, the obligations of Lewisham Estates were also on revenue account for it. I disagree. The evidence did not substantiate that the Abacus Facility was a mere “substitution” for the loans to purchase the Lewisham Properties. Rather, the Abacus Facility was a key part of the capital profit earning structure of the whole group of Demian entities, which consolidated and restructured the former capital structure necessitated by the impact of the global financial crisis on the finance arrangements of the Demian entities, including Lewisham Estates’ borrowings. Even if the original borrowings were on revenue account, the refinancing in 2010 was plainly undertaken to augment the capital of the Demian group and accordingly was on capital account.

78    Moreover, the excess amount paid by Lewisham Estates to Abacus when it sold the Lewisham Properties was an amount paid in discharge of an obligation in the nature of a guarantee. $23,375,723.55 was applied, not in the discharge of Lewisham Estates’ indebtedness, but in discharge of debts owed by other entities in the Demian Group or in discharge of other obligations owed to Abacus. The payment was wholly separate from the acquisition of the Lewisham Properties and cannot be characterised as part of the costs of the purchase of the trading stock. Nor was the repayment an integral part of the process by which Lewisham Estates acquired that trading stock. Accordingly, no part of the excess amount bears the character of a revenue outgoing.

79    Finally, if I am wrong and the excess amount is deductible to the extent that it is referrable to the drawdowns of $8,703,431.38 and $1,350,350, an apportionment issue arises. The applicants contended that 53.3% of the excess amount should be treated as revenue in nature because that is the percentage expression of the proportion of the amounts drawn down from the Abacus Facility to repay the amounts secured by the NAB mortgage and the Capital mortgage bear to the total principal drawdowns.

80    In their joint judgment in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; 78 CLR 47, Latham CJ, Rich, Dixon, McTiernan and Webb JJ at 59 stated that there are at least two kinds of outgoings which require apportionment for the purposes of s 51(1) of the Income Tax Assessment Act 1936-1944 (Cth):

One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently.

As their Honours also stated at 59, the appropriate apportionment of such items of expenditure is essentially a question of fact, requiring some fair and reasonable assessment of the extent of the relation of the outlay to assessable income.

81    Critically, for an indivisible outgoing to be apportionable, there must be a relevant connection between the outgoing and the business activities directed to the gaining or production of assessable income. Here, the excess amount related to the repayment of the debts of other entities in the Demian Group. How that amount related to assessable income was not explained by the applicants and, more particularly, it is not apparent how the basis of apportionment contended by the applicants achieves a fair result in yielding the portion of the excess amount having an income nature and the portion of the excess amount having non-income nature. Accordingly, this leads to the conclusion that no deduction is available for any part of the excess amount.

Other amounts

82    The applicants claim three other amounts as deductible outgoings for the 2013 income year:

(a)    a $1.5 million “risk fee” or “monitoring fee” paid to Abacus under the Facility Agreement (as amended);

(b)    a $1 million call option fee paid to Callmask in connection with the exercise of the option to purchase 78-90 Old Canterbury Road; and

(c)    $657,273 paid to Demian Constructions Pty Ltd for construction work at 78-90 Old Canterbury Road, Lewisham.

83    The Commissioner accepted that expenses in (b) and (c) are proper deductions from the net income of the Lewisham Estates Trust for the 2013 income year. However, the Commissioner submitted that the amount in (a) was not a proper deduction.

84    The Abacus Facility, as amended (relevantly) by a Deed of Amendment on 17 May 2010, provided for the payment to Abacus of an annual “risk fee” payable on each anniversary of the Facility Agreement. This fee was initially set at $500,000 per annum and, by a Deed of Amendment dated 27 October 2010, was increased to $750,000. By a Deed of Amendment dated 3 May 2011, the parties to the Facility Agreement agreed there would be a drawdown of $4.8 million under the Facility Agreement, $1.5 million of which would be used to pay two annual instalments of the $750,000 annual “risk fee”. By a Deed of Rectification and Amendment dated 8 August 2011, the parties to the Facility Agreement rectified the 3 May 2011 Deed of Amendment so that instead of the $1.5 million payment being described as a payment of two annual instalments of the risk fee, that amount was instead described as the single payment of a “Monitoring Fee” as follows:

a Monitoring Fee of $1,500,000 in consideration for the extraordinary amount of management time of the Lender involved in dealing with the Demian Parties in relation to their various arrangements and projects during the financial year to 30 June 2011,

The applicants argued that from a commercial and business point of view, the $1.5 million “Monitoring Fee” was still to maintain the availability of the Abacus Facility during a specific period of time – that is, the financial year ended 30 June 2011 – and that as it was a fee for the maintenance of the facility during that particular period of time, rather than simply for the facility as a whole, it was deductible. I disagree. The Abacus Facility was a key part of the capital structure of the whole Demian Group and the monitoring fee was a one-off cost for the maintenance of that aspect of the capital structure of the group: Sharpcan at 1154–5 [18]. It was not an outgoing incurred in the course of Lewisham Estates’ income earning activities and did not have a revenue character.

Second set of issues: which entity is assessable on the net income of the Lewisham Estates Trust?

85    The second group of issues concerns which entities are assessable on the net income of the Lewisham Estates Trust for the income year ended 30 June 2013 if, contrary to the applicants’ contention, it is greater than nil. The second set of issues involves three sub-issues:

(a)    In what capacity did Advanced Holdings hold units in the Lewisham Estates Trust? This issue raises two further issues for determination: (1) whether Advanced Holdings was a trustee of the Demian Trust; and (2) if so, whether Advanced Holdings owned its units in the Lewisham Estates Trust in its capacity as trustee of the Demian Trust;

(b)    If found that Advanced Holdings held the units in the Lewisham Estates Trust in its capacity as trustee of the Demian Trust, there is a dispute as to which entities were presently entitled to the trust law income of the Demian Trust; and

(c)    Depending on the outcome of the prior issue, there is a legal issue as to whether the trustee of the Demian Trust is subject either to trustee beneficiary non-disclosure tax under Div 6D of the ITAA 1936 or income tax under s 99A of the ITAA 1936.

The capacity in which Advanced Holdings held units in the Lewisham Estates Trust

86    It was common ground that Advanced Holdings was the sole unit holder of the Lewisham Estates Trust at all material times. It was also common ground that Advanced Holdings was presently entitled to the net income of the Lewisham Estates Trust in the 2013 income year. In dispute between the parties was whether Advanced Holdings held the units in the Lewisham Estates Trust in its capacity as trustee of the Demian Trust (as contended by the applicants) or, as the Commissioner contended, Advanced Holdings was never validly appointed trustee of the Demian Trust or, if it was, the units in the Lewisham Estates Trust never formed part of the corpus of the Demian Trust. In the result, the Commissioner argued, Advanced Holdings was beneficially entitled to the net income of the Lewisham Estates Trust and was itself assessable on that income.

87    The determination of this issue involves both legal and evidentiary questions.

Was there a valid appointment of Advanced Holdings as trustee of the Demian Trust under cl 22 of the Demian Trust Deed in 2003?

88    Clause 22 of the Demian Trust Deed is titled “Power of Appointment of New Trustee”. It provides, relevantly:

The Principal may at any time by notice in writing to the Trustee remove from office any or all of the Trustees or Trustee for the time being of this Deed and may by Deed appoint a new Trustee in its or their place to be the Trustee hereof…

89    The “Principal” at the relevant time was Mr Demian. On 2 April 2003, Mr Demian signed a document entitled “Deed of Appointment of a Trustee” addressed to “the Trustee and Beneficiaries” of the Demian Trust. The document stated:

Pursuant to clause 22 of the trust deed dated 20th March 1998 governing the said Trust, I appoint Advanced Holdings Pty Limited as trustee of the Demian Trust.

90    Mr Demian’s evidence was that he understood that the effect of this deed was to appoint Advanced Holdings as a co-trustee of the Demian Trust, with Demian Holdings remaining as a trustee of the Demian Trust.

91    The parties were in dispute on the proper construction of cl 22. In issue is whether the power to appoint a new trustee under cl 22 could be exercised without an anterior removal of a trustee from the office.

92    The Commissioner argued that cl 22 of the Demian Trust Deed is a power of the Principal in two parts. First, it is a power of removal of a trustee in office. Second, epexegetically to the first power, it is a power to appoint a new trustee in substitution of the removed trustee. It was submitted that cl 22 is not a power to appoint an additional trustee or trustees. As at 2 April 2003, Demian Holdings was the trustee of the Demian Trust and no notice in writing removing it was signed by Mr Demian as Principal. As a consequence, it was argued, the power to appoint a replacement trustee in cl 22 of the Demian Trust never arose, with the result that the appointment of Advanced Holdings as trustee on 2 April 2003 was ineffective.

93    The applicants argued that the proper construction of cl 22 is that it permitted the appointment of multiple persons as co-trustees. Reference was made to cl 1(a), which defines “Trustee” as meaning “the Company, person or persons named as such in the Schedule or any other Trustee or Trustees for the time being of the Trust Fund”. It was submitted that unless cl 22 permitted the appointment of two or more persons as co-trustees, there could never be “other […] Trustees for the time being”.

94    The clause should be construed on its terms. The clause can sensibly be given the construction urged by the Commissioner, allowing for two or more trustees to be appointed by one instrument. The deed clearly contemplates that there can be two or more trustees at any point in time: see definition of “Trustee” (cl 1(a)); cls 1(j) and 23. However, that does not gainsay the express words that condition the power in cl 22 on replacement, not of addition. The clause, properly construed, requires one or more trustees to be removed (including by retirement: cl 15) and, that having happened, permits one or more trustees to be appointed in their place. Removal is the pre-condition of the power of appointment. Accordingly, I find that Advanced Holdings was not validly appointed as trustee of the Demian Trust in 2003.

Was there a valid appointment of Advanced Holdings as trustee of the Demian Trust under cl 22 of the Demian Trust Deed in 2006?

95    The applicants alternatively argued that if the appointment was not effective in 2003, Advanced Holdings was validly appointed as trustee of the Demian Trust in November 2006. Mr Demian’s evidence was that by 2006 he had formed the view that Demian Holdings should not continue to act as trustee of the Demian Trust and he decided to retire Demian Holdings as trustee and to appoint Advanced Holdings as the sole trustee of that trust. He deposed that on 13 November 2006 he caused the following to happen:

(a)    Demian Holdings resolved to retire as trustee of the Demian Trust;

(b)    on behalf of the Demian Trust he accepted the resignation of Demian Holdings as a trustee of the Demian Trust and appointed Advanced Holdings to continue as trustee and become sole trustee of the Demian Trust; and

(c)    Advanced Holdings resolved to consent to being appointed as the sole trustee of the Demian Trust.

96    In evidence were the following documents (collectively the November 2006 documents):

(a)    a document entitled “Minutes of a meeting of the directors of Demian Holdings Pty Limited” signed by Mr Demian as chairman and dated 13 November 2006, which recorded:

Documents tabled:

1.    The Trust Deed dated 20th March, 1998. (The “The Demian Trust”)

   2.    Deed of Retirement of Trustee.

IT WAS RESOLVED;

1.    That the Company has retired from its capacity as trustee of The Demian Trust, and that the Company executes a Deed of Retirement and Appointment.

2.    That the Resignation Notice Tabled at the meeting be executed by the Company.

3.    That the Company is not and cannot become a beneficiary under the Trust Deed, this clause 3 is irrevocable.

(b)    a document headed “Notice of Removal of Trustee”, addressed to “The Trustee and Beneficiaries” of the Demian Trust, executed as a deed by Mr Demian and dated 13 November 2006, which recorded:

Notice of Removal of Trustee

I [Mr Demian] refer to the vacancy caused by the resignation of Demian Holdings Pty Limited from the office as trustee of The Demian Trust.

1.     I accept the resignation of Demian Holdings Pty Limited from the office as trustee of The Demian Trust effective immediately.

2.     Pursuant to clause 22 of the Trust Deed dated 20th March, 1998 governing the said trust, I appoint Advanced Holdings Pty Limited to continue its role as trustee and further more to become the sole trustee for The Demian trust

(c)    a document entitled “Minutes of a Meeting of the directors of Advanced Holdings Pty Limited” signed by Mr Demian as chairman and dated 13 November 2006, which recorded:

Documents tabled: The Chairman tabled the following documents:-

1.    The Trust Deed dated 20th March, 1998. (The “The Demian Trust”)

   2.    Deed of Retirement and Appointment of Trustee

IT WAS RESOLVED;

1.    That the Company consents to being appointed Sole Trustee of The Demian Trust.

2.    That the Company executes a Deed of Appointment of Sole Trustee in the form of the document tabled at the meeting.

3.    That the Company is not and cannot become a beneficiary under the Trust Deed, this clause 3 is irrevocable.

97    I do not accept on the strength of these documents that Demian Holdings in fact retired or resigned as represented, or was removed as trustee of the Demian Trust so as to satisfy the condition to enliven the power in cl 22 of the Demian Trust Deed for the Principal to appoint a new trustee.

98    First, there was no evidence of a resignation notice executed by Demian Holdings, let alone the resignation notice purportedly tabled at the meeting of the directors of Demian Holdings on 13 November 2006.

99    Secondly, and correlatively, there was no evidence that Demian Holdings gave written notice of its intention to resign as trustee of the Demian Trust as required by cl 15(a) of the Demian Trust Deed. Clause 15(a) provides:

Retirement of Trustee

The Trustee may at any time resign from the office of Trustee by giving not less than two (2) months’ notice in writing (which may be withdrawn by the Trustee) addressed to the person or persons in whom the power of appointing a new Trustee or new Trustees of the settlement is then vested.

Moreover, it may reasonably be inferred that such notice was not given, as the document headed “Notice of Removal of Trustee” provided that the resignation would be “effective immediately”.

100    Thirdly, whilst in cross-examination Mr Demian identified the document headed “Notice of Removal of Trustee” as the Deed of Retirement of Trustee referred to in the minutes of meeting of the directors of Demian Holdings, the “Notice of Removal of Trustee” was executed by Mr Demian in his personal capacity and not by him on behalf of the Demian Holdings. It was not “the resignation” by Demian Holdings as trustee.

101    Fourthly, although entitled “Notice of Removal of Trustee” the document did not purport to be an exercise of power by Mr Demian as Principal under cl 22 to remove Demian Holdings as trustee. Rather, the notice assumed a prior effective resignation by Demian Holdings as trustee.

102    Fifthly, the Deed of Retirement and Appointment of Trustee referred to in the Minutes of Demian Holdings and recorded as tabled at the meeting of the directors of Advance Holdings was not produced in evidence.

103    Accordingly I find that Advanced Holdings was not validly appointed trustee of the Demian Trust in 2006.

Authenticity of the November 2006 documents

104    The Commissioner also put into issue the date of creation of the November 2006 documents and whether those documents evidenced meetings that actually occurred on that date. It was submitted that, if those documents were to be treated as evidencing an effective resignation and removal of Demian Holdings as trustee of the Demian Trust and the appointment of Advanced Holdings as trustee of the Demian Trust, the Court “needed to be affirmatively satisfied”: (i) that the documents were created on the date that they bear; and (ii) that they evidenced meetings that actually occurred on that date. The following submissions were made:

In considering whether the Court obtains that state of affirmative satisfaction, the following matters should be borne in mind: (i) the shifting, varied and inconsistent positions and explanations given to the Commissioner as to the identity of the trustee of the Demian Trust over time …; (ii) the absence of any explanation in the evidence for those inconsistent, varied positions… ; (iii) the fact that the first time the 13 November 2006 documents emerge in the evidence is in the course of the deceptive scheme of Mr Incollingo and Mr Amorello in or about March 2015 when a decision is taken not to provide them to the Commissioner… ; (iv) the fact that when the documents were first provided to the Commissioner in May 2017 they were provided without explanation and without any attempt to reconcile them to the previous positions adopted by the Demian Group… ; (v) the defects and deficiencies of the 13 November 2006 documents themselves, including that they refer to a number of other documents which have never been provided to the Commissioner and about which there is no evidence to prove that they exist …

(emphasis in original)

105    The factual context for those submissions was as follows.

106    In June 2014, the Demian Trust lodged its return for the 2013 income year. The tax return recorded Demian Holdings as the trustee of the Demian Trust and was signed by Mr Demian in his capacity as a director of Demian Holdings.

107    In August 2014, the Commissioner commenced an audit of the trustee of the Lewisham Estates Trust for the income years 2010–13. In January 2015, the Commissioner issued a notice under s 264 of the ITAA 1936 (then in force) which sought information and documentation relating to the determination of the unitholders in the Lewisham Estates Trust in the 2013 income year (s 264 notice).

108    On 10 March 2015, Gerardo Incollingo (Mr Incollingo) from LCI Partners Pty Ltd (LCI Partners), the accountant and tax agent for the Demian Group, provided the following documents to the Commissioner in response to that notice:

(a)    a copy of the unit trust deed for the Lewisham Estates Trust;

(b)    a document purporting to be a “Unit Certificate” of the Lewisham Estates Trust certifying that Demian Holdings as trustee for the Demian Trust was the holder of the 100 units in the Lewisham Estates Trust and dated “15th May”;

(c)    a document purporting to be a transfer of 100 units in the Lewisham Estates Trust from Advanced Holdings to Demian Holdings dated 15 May 2003;

(d)    a copy of the Demian Trust Deed; and

(e)    a deed of appointment dated 5 May 1998 replacing Tramdell as trustee of the Demian Trust with Demian Holdings.

109    In the proceeding, the applicants conceded that the documents referred to in (b) and (c) were actually created in 2015 and backdated to 15 May 2003. The Court issued Mr Incollingo a certificate under s 128 of the Evidence Act 1995 (Cth) in respect of evidence he gave under cross-examination and re-examination in relation to the issue of backdated documents and the provision of backdated documents to the Australian Tax Office.

110    The Commissioner argued that it was significant that the response did not include the November 2006 documents and why those documents were not supplied to the Commissioner in response to the s 264 notice was left unexplained in the applicants’ evidence. It was argued that the inference was open that it was because they conflicted with the picture which the applicants presented by the forged documents to the effect that Demian Holdings was the trustee of the Demian Trust and holder of the units in the Lewisham Estates Trust. I agree that inference is open to be drawn.

111    First, there is no doubt on the evidence that the intended purpose of the backdated documents was to present the picture to the Commissioner that Demian Holdings was trustee of the Demian Trust in the 2013 income year and held the units in the Lewisham Estates Trust in that capacity. That was the evidence given by Mr Incollingo.

112    In short, Mr Incollingo’s evidence was to the effect that he had Steven Amorello (Mr Amorello), an employee of LCI Partners, go through the Demian Group’s records at Mr Demian’s office to find any documents responsive to the s 264 notice. The only documents that Mr Amorello was able to locate were the trust deed for the Lewisham Estates Trust, which showed Advanced Holdings was the holder of the units in the Lewisham Estates Trust, and the “original minutes” replacing Tramdell as trustee of the Demian Trust with Demian Holdings. Mr Incollingo’s evidence was that he understood at the time that the Demian Trust was, and had been “from day one”, the holder of the units in the Lewisham Estates Trust. Mr Incollingo gave evidence that, upon reviewing the Lewisham Trust Deed and discovering for the first time that Advanced Holdings was a trustee of the Demian Trust, he assumed that both Advanced Holdings and Demian Holdings were acting as trustees of the Demian Trust, or that Advanced Holdings had acted as the trustee of the Demian Trust at one stage and that the trustee had “changed along the way” to Demian Holdings. As Mr Amorello had not located any documentation for this apparent replacement of trustee, Mr Incollingo instructed Mr Amorello to prepare a unit certificate showing Demian Holdings as trustee of the Demian Trust as the holder of the units in the Lewisham Estates Trust and a transfer of units from Advanced Holdings to Demian Holdings.

113    Mr Demian denied that he was aware that LCI Partners had created backdated documents to provide to the Commissioner but I find it implausible he did not know. After all, he had signed the 2013 tax return for the Demian Trust as a director of Demian Holdings on the basis that Demian Holdings was the trustee of the Demian Trust, and the backdated documents were consistent with the return as lodged. He also signed versions of documents described at [108(b)] and [108(c)] above in his capacity as director of Demian Holdings, albeit the versions he signed were not the versions ultimately produced to the Commissioner. Mr Demian’s evidence was that he signed those documents in about April 2015 but it is clear on the evidence that LCI Partners obtained his signatures to those documents in February or early March 2015, prior to the response to the Commissioner on 10 March 2015. The versions that Mr Demian signed were not correct in many details, and the evidence was that Mr Amorello prepared revised documents. A comparison of the documents supplied to the Commissioner and the versions signed by Mr Demian suggests that the documents supplied to the Commissioner were doctored from the actual documents which Mr Demian had signed. Whether that is so or not need not be decided, as what is salient is that Mr Demian signed a unit certificate and a transfer of unit document in circumstances that have no apparent explanation, other than for the purpose of providing such documents to the Commissioner in response to the s 264 notice. It is telling that, other than saying he signed the documents as part of a bundle, Mr Demian’s evidence left wholly unexplained why he signed any such documents at all in 2015. Absent such evidence, the reasonable inference is that Mr Demian knew of the intended purpose of the documents he signed.

114    Secondly, at the time of the response to the Commissioner, Mr Incollingo had the November 2006 documents in his possession. The evidence showed that Mr Demian emailed the minutes of meeting of the directors of Demian Holdings and the minutes of meeting of the directors of Advanced Holdings to LCI Partners on 14 November 2014. Further, those documents, along with the notice of removal, were attached to an email that Mr Amorello sent to Mr Incollingo on 27 February 2015 with the query as to whether the meeting minutes should be included in the documentation to be furnished to the Commissioner. The response to that query was not in evidence but it was not in doubt that the November 2006 documents were not included in the response to the Commissioner. Mr Incollingo’s remarkable explanation in cross-examination was that he did not even look at the documents at the time because the request for information related to the Lewisham Estates Trust. I do not accept that as a truthful explanation. As Mr Incollingo well knew at the time, the s 264 notice sought information and documentation relating to the determination of the unitholders in the Lewisham Estates Trust in the 2013 income year. At the same time as he received the 27 February 2015 email from Mr Amorello, he was liaising with Mr Amorello about the creation of backdated documents showing Demian Holdings as trustee of the Demian Trust and, in that capacity, the holder of the units in Lewisham Estates Trust. It beggars belief that Mr Incollingo did not consider the sets of minutes relevant. They were directly relevant because they showed that Demian Holdings had purportedly resigned/retired as trustee of the Demian Trust in 2006 and that Advanced Holdings had been appointed as sole trustee, giving rise to the inference that it held the units of the Lewisham Estates Trust in that capacity. Moreover, the existence of the two sets of minutes was plainly within the knowledge of Mr Demian because he supplied them to Mr Incollingo. In the circumstances, the inference may reasonably be drawn that a deliberate decision was made not to include those sets of minutes or the notice of removal because they were inconsistent with the 2013 income tax return for the Demian Trust.

115    Thirdly, the charade continued when a Deed of Amendment for the Demian Trust dated 16 April 2007 (2007 Deed of Amendment) was withheld from the Commissioner in response to a notice under s 353-10 of sch 1 to the TAA 1953 (s 353-10 notice) which the Commissioner issued to Mr Demian on 14 October 2015. Mr Incollingo responded to that notice by letter dated 6 November 2015 stating that there were “no amendments to date that we are aware of”. That response was plainly incorrect in view of the 2007 Deed of Amendment. Why that document was not supplied to the Commissioner in response to the s 353-10 notice was not satisfactorily explained in the applicants’ evidence. Mr Incollingo deposed that in preparing the response to the s 353-10 notice he searched the server for the Demian entities, to which he was given access by Mr Demian, but could not find any documents reflecting any amendments to the Demian Trust. He also deposed that he had two conversations with Mr Demian about this before sending the response to the Commissioner, during the second of which Mr Demian said that he was unable to find any documents reflecting any amendment to the Demian Trust. Mr Demian, for his part, deposed that he had not seen the s 353-10 notice prior to preparing his affidavit in these proceedings and did not recall being asked by Mr Incollingo to provide any instructions as to how to respond to the notice. Tellingly, the evidence left wholly unexplained how the 2007 Deed of Amendment came to be found in 2017, which was when it was first provided to the Commissioner, but was not found in 2015. An explanation was called for and the inference is again open, which I make, that a deliberate decision was made not to provide the 2007 Deed of Amendment in response to the s 353-10 notice.

116    Fourthly, it was not just the 2013 tax return for the Demian Trust which identified Demian Holdings as trustee for the Demian Trust. In evidence were the 2013, 2014, 2015 and 2016 trust distribution resolutions for the Demian Trust, all made by Demian Holdings as trustee for the Demian Trust and signed by Mr Demian on behalf of Demian Holdings. Mr Demian’s evidence in cross-examination was that he acted “by mistake” on the basis that Demian Holdings was the trustee at the time – “just simple oversight, not remembering”. When put to him in cross-examination that he had repeatedly acted on the basis that Demian Holdings was the trustee of the Demian Trust and made declarations to that effect to the Australian Taxation Office, Mr Demian agreed but said it was “only in error”. I do not accept as truthful Mr Demian’s evidence that it was, as he put it, “a mistake”, “an error”, “just simple oversight”. Tellingly, there was a consistent course of conduct that persisted over a number of years.

117    On 30 March 2017, the Commissioner issued a position paper addressed to the “Trustee of the Demian Trust” relating to the period 1 July 2012 to 30 June 2014 (Commissioner’s position paper). On 2 May 2017, Jason Green of Gibson Howlin Lawyers sent a letter by email to the Commissioner attaching a number of documents which appear, based on the file titles indicated on the version of the email that was in evidence, to include the November 2006 documents. The attachments to that email were not in evidence, but the Commissioner submitted, and I accept, that they also included the 2007 Deed of Amendment. No explanation was provided in the covering email as to why those documents had not been provided previously to the Commissioner. Nor was an explanation made for the inconsistent response of Mr Incollingo to the s 353-10 notice that there had been no amendments to the Demian Trust, nor as to how the November 2006 documents reconciled with the position previously represented to the Commissioner that Demian Holdings was the trustee of the Demian Trust and the holder of the units in the Lewisham Estates Trust.

118    On 3 August 2017, Deloitte Private Pty Ltd (Deloitte) provided a response to the Commissioner’s position paper on behalf of the Demian Group (Demian position paper). At [10]–[11] of Appendix B of the Demian position paper, the question regarding which persons were entitled to the net income of the Lewisham Estates Trust in the 2013 income year was addressed as follows:

… the register of unit holders for Lewisham identifies the sole unit holder of the Trust as Advanced Holdings Pty Limited as Trustee for the Demian Trust (we have attached the Register as Appendix F to this document).

Therefore pursuant to clause 45 of the Lewisham Deed, any additional Trust income identified by the Commissioner… is distributable to the Demian Trust.

119    This response was yet a further departure from the position as it had been presented to the Commissioner in March 2015. Yet again, no explanation was provided for the departure from, or the discrepancy with, the position previously taken, including the position conveyed by the 2013 tax return for the Demian Trust lodged with the Commissioner, which identified Demian Holdings as the trustee of the Demian Trust.

120    On 19 September 2017, in response to an information request made by the Commissioner in relation to another trust within the Demian Group, the Riverlands Estate Trust, LCI Partners “confirmed” that Demian Holdings, as trustee for the Demian Trust, was the sole owner of the units issued in the Riverlands Estate Trust. This response appeared to be a reversion to the position presented in March 2015 to the effect that Demian Holdings was trustee of the Demian Trust and a departure from the Demian position paper.

121    In an attempt to clarify the matter, the Commissioner issued a further notice under s 353-10 of sch 1 to the TAA 1953 on 8 March 2018 which sought “details of all changes of trustee for the Demian Trust from the trust’s settlement in 1998 to 30 June 2013”. Deloitte responded on 16 March 2018, stating, relevantly:

In the period from settlement in 1998 to 2013, the only other trustee of the Demian Trust was Tramdell Pty Ltd (for the period from settlement to 5 May 1998, at which time Tramdell Pty Ltd was removed as trustee and Demian Holdings Pty Ltd was appointed and thereafter removed from 13 November 2006 and replaced with Advanced Holdings Pty Ltd). There was no period of joint trustees.

…

LCI Partners’ response to the ATO’s queries were potentially not entirely clear. The narration should have read: “Advanced Holdings Pty Ltd and Demian Holdings Pty Ltd acted as trustees at separate times, and that there has been no change of ownership of units held in the Riverlands Estate Trust”. At all times, there has only been a sole trustee of the Demian Trust.

(emphasis in original)

122    That explanation also conflicted with the November 2006 documents, the language of which was that Advanced Holdings was appointed “to continue its role as trustee” for the Demian Trust. Once again, the discrepancy was left unexplained.

123    The explanation for the inconsistent statements regarding the trustee of the Demian Trust, if one exists, is plainly within the knowledge of Mr Demian and his advisors and the discrepancies and inconsistencies called for an explanation, yet no evidence was led by the applicants at all to explain the conflicting statements and documents provided to the Commissioner, let alone why the November 2006 documents were not provided in response to the s 264 notice. If, as the applicants now contend, Advanced Holdings became sole trustee of the Demian Trust in 2006, the failure of Mr Demian to explain why Demian Holdings still continued to act as trustee in subsequent years gives rise to an inference that his evidence on that matter would not have assisted his case: Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418–9 per Handley JA. However, I do not think that it follows that the Court should not be satisfied that the November 2006 documents were not genuine. Rather the evidence amply supports the conclusion that those documents were deliberately withheld from the Commissioner. But aside from the two 2003 documents admitted to be fabrications, the evidence otherwise did not suggest that the November 2006 documents were also falsely created.

Did Advanced Holdings hold the units on a resulting or constructive trust for Demian Holdings?

124    The applicants put the further submission that the plain intention evinced by the documents accompanying the Lewisham Trust Deed was that Advanced Holdings was to hold the Lewisham Estates Trust units it received in its capacity as trustee of the Demian Trust, not for itself, so that if the appointment of Advanced Holdings as trustee of the Demian Trust in 2003 failed because the deed of appointment was not legally effective, it held the units on resulting trust for Demian Holdings in its capacity as trustee of the Demian Trust. That submission has no merit.

125    The relevant principles for a resulting trust to arise were helpfully set out in Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc [2018] VSC 413 by McMillan J where her Honour said at [390]–[391]:

A resulting trust, which is sometimes referred to as an implied trust, is a trust that arises in favour of the settlor or those taking through the settlor. There are two broad categories of resulting trusts. The first category of resulting trust are referred to as automatic resulting trusts. Such a trust arises when the settlor has transferred the legal interest in property but has not disposed of the whole of the beneficial interest in that property. This may occur, for example, where a transferor transfers property to a trustee on trust without specifying the relevant beneficiary. Another example is where an express trust fails because of uncertainty. This first category of resulting trusts is not relevant to the current facts.

The second category of a resulting trust, which is advanced by the plaintiffs in the Trust proceeding, is referred to as a presumed resulting trust. It is also labelled a purchase money resulting trust because the catalyst for its creation is the acquisition of property. The circumstances in which the presumption of such a trust will arise was summarised last year by the Victorian Court of Appeal [citing Vlahos Pty Ltd v Vlahos [2017] VSCA 166 per Kyrou JA, with Tate and McLeish JJA agreeing]:

Where A purchases property in the name of B, or in the name of A and B, and B does not financially contribute to the purchase price, there is a presumption that A is beneficially entitled to the interest in the property held by B.

Where two or more parties make equal financial contributions to the purchase price, but the property is conveyed into the name of one party only, there is a presumption that the parties take a beneficial interest in the property as tenants in common in equal shares.

Where two or more parties make unequal financial contributions to the purchase price, but the property is conveyed into the name of only one of them, or in all their names, there is a presumption that the parties take a beneficial interest in the property as tenants in common in shares that are proportionate to their respective financial contributions to the purchase price.

(footnotes omitted)

Neither species of resulting trust are applicable in the present case. More particularly, if a resulting trust did arise, the resulting trust would be in favour of Lewisham Estates, not the Demian Trust or the beneficiaries of the Demian Trust. Accordingly I reject the resulting trust argument.

126    A further alternative argument put by the applicants was that the doctrine of trustee de son tort applied. As explained in Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 AC 366 at 403 [138] per Lord Millett, a trustee de son tort is “a person who, though not appointed to be a trustee, nevertheless takes it upon himself to act as such and to discharge the duties of a trustee on behalf of others”. In an earlier case of Mara v Browne [1896] 1 Ch 199, Smith LJ said at 209:

… what constitutes a trustee de son tort? It appears to me if one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may thereby make himself what is called in law a trustee of his own wrong – i.e., a trustee de son tort, or, as it is also termed, a constructive trustee.

In Nolan v Nolan [2004] VSCA 109, Ormiston JA observed at [27] that this passage picks up and explains in brief but comprehensive terms what Lord Selborne LC adverted to in Barnes v Addy (1874) LR 9 Ch App 244 at 251 where his Lordship said that “responsibility [akin to that of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee…”. His Honour also noted that the High Court in Consul Development Pty Limited v DPC Estates Pty Limited [1975] HCA 8; 132 CLR 373 cited Lord Selborne LC with approval at 396 (Gibbs J) and 408 (Stephen J, with whom Barwick CJ agreed) in referring to the characteristics of a trustee de son tort.

127    Thus the application of the principle requires the identification of acts of Advanced Holdings by which it undertook to discharge the office of the trustee. The applicants relied on the following three documents as evidence that Advanced Holdings acted as trustee:

(a)    an application for units in the Lewisham Estates Trust by Advanced Holdings “as trustee for the Demian Trust” signed “by its authorized representative, Charbel Demian” and bearing the date 1 May 2003;

(b)    the document entitled “Minutes of a meeting with the directors of Advanced Holdings Pty Limited”, dated 13 November 2006, recording the resolutions that Advanced Holdings consented to being appointed sole trustee of the Demian Trust and that it execute a deed of appointment of sole trustee; and

(c)    the 2007 Deed of Amendment executed by Advanced Holdings as trustee of the Demian Trust.

128    The difficulty for the applicants is that the evidence showed that the trust was actually administered on the basis that Demian Holdings was the trustee, not Advanced Holdings. Tellingly, there was a complete absence of any evidence of acts undertaken by Advanced Holdings characteristic of the office of trustee, other than the execution of the 2007 Deed of Amendment. But even if the execution of the 2007 Deed of Amendment was sufficient in itself for the doctrine of trustee de son tort to apply, which I do not accept, given that subsequently the trust continued to be administered on the basis that Demian Holdings was the trustee of the Demian Trust, the applicants did not explain how by that act it could be said that the units in the Lewisham Estates Trust, which Advanced Holdings had held in its own right since 2003, thereby became part of the corpus of the Demian Trust. Accordingly, I reject the contention that the doctrine of trustee de son tort applies on the facts of this case.

Were the units in the Lewisham Estates Trust part of the corpus of the Demian Trust?

129    It follows from the finding that Advanced Holdings was not validly appointed as trustee of the Demian Trust on 2 April 2003 that the units in the Lewisham Estates Trust issued to Advanced Holdings in its own right in 2003. Moreover, even if Advanced Holdings was validly appointed as trustee of the Demian Trust in November 2006, the applicants did not explain how by that act it could be said that the units thereby became part of the corpus of the Demian Trust and there was no evidence that they did. Accordingly, I find that Advanced Holdings held the units in its own right in the 2013 income year, not as trustee for the Demian Trust. It follows that Advanced Holdings was assessable in its own right on the net income of the Lewisham Estates Trust for the 2013 income year.

Which entity is presently entitled to the income of the Demian Trust?

130    In view of my conclusion that Advanced Holdings held the units of the Lewisham Estates Trust in its own right in the 2013 income year, not as trustee for the Demian Trust, the next issue does not arise for consideration. Nevertheless I should deal with this issue in case I am wrong in so finding.

131    The issues that arise for determination under this heading proceed on the assumption, contrary to the finding made, that Advanced Holdings held the units in the Lewisham Estates Trust in its capacity as trustee of the Demian Trust. On that assumption, there are three possible alternative groups of beneficiaries that were, as between them, presently entitled to the trust law income of the Demian Trust for the income year ended 30 June 2013. The first group consisted of those entities identified as default beneficiaries in cl 27.5(d)(i) of the 2007 Deed of Amendment. For this to be so, the 2007 Deed of Amendment must have been legally effective but the 11 June 2013 resolution must have been legally ineffective. This was the applicants’ case. The second group consisted of the four companies identified in the 11 June 2013 resolution. For this to be so, that resolution must have been legally effective. The third group consisted of the “residuary beneficiaries” identified in the schedule to the Demian Trust Deed. For this to be so, both the 2007 Deed of Amendment and the 11 June 2013 resolution must have been legally ineffective.

132    Neither party contended that the 11 June 2013 resolution, which was a resolution of Demian Holdings as trustee for the Demian Trust, was effective. Even accepting that Demian Holdings was the trustee of the Demian Trust (contrary to the applicants’ case), the resolution was ineffective because the four companies to which it purported to distribute the income of the Demian Trust were not beneficiaries of the Demian Trust under the Demian Trust Deed. Accordingly, that resolution can be ignored for present purposes. On the finding that I have made that Advanced Holdings was never validly appointed trustee of the Demian Trust, the 2007 Deed of Amendment was also not effective because it was executed by Advanced Holdings as trustee. On this basis, the “residuary beneficiaries” identified in the schedule to the Demian Trust Deed were the persons presently entitled to a share of the income of the Demian Trust for the 2013 income year and assessable on their respective shares of the net income of the Demian Trust: cl 3(c) of the Demian Trust Deed.

Effectiveness of the 2007 Deed of Amendment

133    Clause 27.5 of the 2007 Deed of Amendment amended cl 3(c) of the Demian Trust Deed to provide for any trust law income of the Demian Trust not distributed to be held on trust for named default beneficiaries. Clause 27.5 of the 2007 Deed of Amendment relevantly provided as follows:

Distribution Procedure

Subject to any provision of this deed which limits or restricts distributions of capital, the trustee must:

(a)    …

(b)    …

(c)    …; and

(d)    hold the remainder of the trust fund on trust for the following default beneficiaries:

(i)    such of Summer Hill Business Estate Pty Limited as Trustee for “Camellia Estate Trust”, Demian Holdings Pty Limited as Trustee for “The Riverlands Trust”, Riverlands Estate Pty Limited as Trustee for “Riverlands Estate Trust” and Lewisham Estate Pty Limited as Trustee for “Lewisham Estate Trust” as are in existence on the expressed date.

134    The power to amend is contained in cl 19 of the Demian Trust Deed. That clause provides as follows:

The Trustee may with the consent of the person who has the power to appoint a new Trustee hereof in accordance with Clause 22 at any time and from time to time in its absolute discretion by Deed or Memorandum in writing or oral declaration recorded in the Minutes of the Trustee:

(i)     Vary all or any of the powers or provisions herein declared concerning the Trust Fund with the exception of the Vesting Day.

(ii)     Add any persons, corporations, Trustees of trusts or classes of persons as Beneficiaries.

(iii)     Exclude any persons, corporations, Trustees of trusts or classes of persons as Beneficiaries but so that this power shall not be capable of being exercised so as to derogate from any interest to which any Beneficiary has previously become indefeasibly entitled whether in possession or in reversion or otherwise.

135    Assuming for present purposes that Advanced Holdings was the trustee of the Demian Trust and had the power to amend the Demian Trust Deed, in issue is the proper construction of cl 19.

136    On the applicants’ construction, the power under cl 19(i) had two requirements for its exercise. The first requirement was that it be exercised “by Deed or Memorandum in writing or oral declaration recorded in the Minutes of the Trustee”. It was submitted that Advanced Holdings complied with that requirement by entering into a deed to effect the amendment. The second requirement was said to be that the power could only be exercised by the trustee “with the consent of the person who has the power to appoint a new Trustee hereof in accordance with Clause 22 at any time and from time to time” (ie the Principal). It was submitted that at all relevant times, that person was Mr Demian. He consented to the 2007 Deed of Amendment by signing it, not just on behalf of Advanced Holdings but also in his personal capacity. Consequently, it was submitted, the 2007 Deed of Amendment met the requirements of cl 19(i) and so was legally effective to amend the Demian Trust Deed.

137    The Commissioner argued that the better construction of cl 19 is that the consent of the Principal must be manifested in a deed, memorandum or a record of an oral declaration in the minutes of the trustee.

138    There is ambiguity in the clause but, in my view, the preferable construction is a variation on the construction urged by the applicants – that is to say, the clause should be read as if there is a comma after the word “may” in the first line and a comma after the reference to “Clause 22” in the second line. Reading the clause in this way gives effect to the syntax and grammatical structure of the clause and it makes sense that it is the relevant variation or amendment that is required to be put in writing, as distinct from the consent of the Principal.

139    Next it was contended for the Commissioner that if his construction was not preferred, then nonetheless consent under cl 19 of the Demian Trust Deed cannot be manifested simply by a bare signature on a deed of amendment. It was submitted that there must be some manifestation of that consent as consent under cl 19. It was argued there was no manifestation of such consent in the 2007 Deed of Amendment and the “self-serving” evidence given by Mr Demian in these proceedings as to whether or not he consented did not assist the applicants, as the manifestation of consent must be contemporaneous to the amendment.

140    As the consent of the Principal is necessary to exercise the power, I agree that there must be some manifestation of that consent for the purposes of cl 19. However, in my view, that consent was manifested by Mr Demian’s signature on the 2007 Deed of Amendment. Mr Demian was the person under cl 19 of the Demian Trust Deed whose consent was required for the amendments effected by the 2007 Deed of Amendment and he signed the 2007 Deed of Amendment both as director of Advanced Holdings and separately in his own right. That Mr Demian gave such consent as Principal to the amendments is manifested by his signature on the deed in his personal capacity, which otherwise would not be required.

Circularity of present entitlements

141    Given the conclusion above that Advanced Holdings held the units in the Lewisham Estates Trust in its own right, and not as trustee for the Demian Trust, it is likewise not necessary to consider this issue. However, in case I am wrong in concluding that Advanced Holdings held the units in the Lewisham Estates Trust in its own right, I deal below with the parties’ arguments on this issue.

142    On the hypothesis that:

(1)    Advanced Holdings was, from November 2006, the sole trustee of the Demian Trust and held the units in the Lewisham Estates Trust in that capacity;

(2)    the net income of the Lewisham Estates Trust for the 2013 income year formed part of the net income of the Demian Trust for that year;

(3)    the 2007 Deed of Amendment was effective; and

(4)    the 11 June 2013 resolution was ineffective –

the distributable income of the Demian Trust, including the distributable income of the Lewisham Estates Trust, fell to be distributed in equal shares to each of the default beneficiaries listed in cl 27.5(d)(i) of the 2007 Deed of Amendment. On that hypothesis, each of those default beneficiaries had for the 2013 income year an interest in the distributable income of the Demian Trust which was vested in interest and vested in possession and were each “presently entitled” to one quarter of the distributable income of the Demian Trust and assessable on that amount pursuant to s 97 of the ITAA 1936: Harmer v Commissioner of Taxation [1991] HCA 51; 173 CLR 264 at 271; Commissioner of Taxation v Bamford [2010] HCA 10; 240 CLR 481 at 505 [37], 506 [39].

143    The applicants argued that there was a circularity of present entitlements in that:

(a)    the trustee of the Demian Trust was presently entitled to the trust law income of the Lewisham Estates Trust;

(b)    the trustees of each of the four default beneficiaries identified in cl 27.5(d)(i) of the 2007 Deed of Amendment were presently entitled, as between them, to the trust law income of the Demian Trust; and

(c)    the trustee of the Demian Trust was presently entitled to the trust law income of each of those four trusts.

144    It was argued that by reason of the circular trust entitlements between the trustee of the Demian Trust and the default beneficiaries, those trust entitlements were freed from tax altogether because the circular trust entitlements were not caught either by s 99A of the ITAA 1936 or the trustee beneficiary non-disclosure tax under s 102UK of the ITAA 1936. For the reasons that follow, that contention is not accepted.

Trustee beneficiary non-disclosure tax

145    If the distributable income of the Demian Trust, including the distributable income of the Lewisham Estates Trust, fell to be distributed in equal shares to each of the default beneficiaries listed in cl 27.5(d)(i) of the 2007 Deed of Amendment, the question arises as to whether the trustee of the Demian Trust is liable to trustee beneficiary non-disclosure tax under s 102UK of the ITAA 1936. The applicants conceded that, if the net income of the Demian Trust was greater than nil, the trustee of the Demian Trust would be liable to that tax, unless the Demian Trust was not a “closely held trust” for the purposes of s 102UK.

146    Section 102UK of the ITAA 1936, as it was for the 2013 income year, relevantly provided:

(1)     Subject to subsection (2A), this section applies if:

(a)     a share of the net income of a closely held trust for a year of income is included in the assessable income of a trustee beneficiary of the trust under section 97; and

(b)     the share comprises or includes an untaxed part; and

(c)     the trustee of the closely held trust is not covered by a determination under subsection (1A) for the year of income; and

(d)     during the TB statement period in relation to the year of income, the trustee of the closely held trust does not make and give to the Commissioner a correct TB statement about the share.

…

(2)    If this section applies:

(a)     either:

(i)     if the trustee of the closely held trust is the only person in the trustee group (see subsection (3))—the trustee is liable to pay tax; or

(ii)     if the trustee of the closely held trust is not the only person in the trustee group—the persons in the trustee group are jointly and severally liable to pay tax;

as imposed by the Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 1) 2007, on the untaxed part; and

(b)     except for the purposes of sections 99, 99A and 99B and this Division, the untaxed part is not included in the assessable income of the trustee beneficiary under section 97.

(notes omitted)

147    The applicants contended that the Demian Trust was not a “closely held trust” because it was an “excluded trust”: s 102UC(1). At the relevant time, s 102UC(4) defined “excluded trust” to mean, relevantly, a “family trust”.

148    The term “family trust” was not defined but it was common ground that the term has the meaning given to it by sub-div 272-D of sch 2F to the ITAA 1936. Section 272-75 of sch 2F provides that a trust is a “family trust” at any time when a family trust election in respect of the trust is in force.

149    Section 272-80 provides for the making of a family trust election. That section relevantly provides:

Nature of election

(1)     Subject to this section, the trustee of the trust may make an election (the family trust election) in accordance with this section that the trust is a family trust for the purposes of this Schedule at all times after the beginning of a specified income year.

How election made

 (2)     The election must be in writing and in the approved form.

Election to specify individual and certain information

 (3)     The election must also specify an individual as the individual whose family group is to be taken into account in relation to the election, and must contain such other information as the Commissioner requires.

Trust must pass family control test

 (4)     If the trust does not pass the family control test (see section 272-87) at the end of the specified income year, the trustee must not make the election.

Earlier year may be the specified year

 (4A)     The specified income year may be a year before the one in which the election is made if:

(a)     at all times in the period from the beginning of the specified income year until 30 June in the income year before the one during which the election is made, the trust passes the family control test (see section 272-87); and

(b)     either:

(i)     any conferrals of present entitlement to income or capital of the trust made by the trustee during that period have been made on; or

(ii)     any distributions of income or capital of the trust made by the trustee during that period have been made to;

the individual specified in the election or members of that individual’s family group.

…

150    The question as to whether the Demian Trust is a “family trust” and thereby an “excluded trust” for the purposes of s 102UC turns upon the validity of a family trust election that was lodged by Advanced Holdings in February 2018. The family trust election was stated to apply retrospectively to the 2007 income year. Thus, in order for the family trust election to have that effect, the applicants must establish that the trustee of the Demian Trust satisfied the requirements set out in s 272-80(4A) of sch 2F.

151    The Commissioner accepted that the Demian Trust passed the “family control test” at all times during the period from 1 July 2006 to 30 June 2017 and thereby satisfied s 272-80(4A)(a). However, the Commissioner did not accept that the Demian Trust satisfied the second element of the test in s 272-80(4A)(b). Applying s 272-80(4A)(b) to the facts of this case required the applicants to demonstrate either that:

(1)    any conferrals of present entitlement to income or capital of the Demian Trust made by the trustee of the Demian Trust during the period 1 July 2006 to 30 June 2017 were made on Mr Demian or members of Mr Demian’s “family group”; or

(2)    that any distributions of income or capital of the Demian Trust made by the trustee of the Demian Trust during that period were made to Mr Demian or members of Mr Demian’s “family group”.

152    In issue is whether the evidence established that all conferrals of present entitlement to the income or capital of the Demian Trust and any distributions of income or capital in the period 1 July 2006 to 30 June 2017 were made to individuals or entities in Mr Demian’s “family group”.

153    The applicants contended that resolutions dated 11 June 2013, 30 June 2014 and 30 June 2016 were the only resolutions purportedly made by the trustee of the Demian Trust in relation to the trust law income of the Demian Trust and there had been no resolutions to confer entitlements to, or distribute capital of, the Demian Trust. In support of that proposition, the applicants relied upon [5] and [6] of Mr Demian’s third affidavit, in which he gave evidence that:

(a)    he did not recall having any conversation with Mr Incollingo or with any other person “as to how profits or income of the Demian Trust should be distributed or otherwise dealt with for the income year ended 30 June 2015 and the income years ended 30 June 2017 and onwards”;

(b)    he did not recall having any conversation with his previous accountants or with any other person “as to how any profits or income of the Demian Trust for income years ended 30 June 2007 to 2012 should be distributed or otherwise dealt with”;

(c)    he did not recall having any conversation with his previous or current accountants or with any other person “about making distributions of capital from or otherwise dealing with the capital of the Demian Trust”;

(d)    he had searched his records and been unable to locate any resolutions or “similar documents” by Advanced Holdings, Demian Holdings or “anyone else” that “attempt to deal with the profits or income of the Demian Trust for income years other than those ended 30 June 2013, 2014 and 2016 or that attempt to deal with the capital of the Demian Trust for any income years”; and

(e)    he did not recall signing any resolutions or documents of such a nature.

154    The Commissioner submitted that the Court should approach that evidence “with a very high degree of caution” and urged the Court to hold that it could not be satisfied that s 272-80(4A)(b) was satisfied. In particular, it was argued that the Court could not have confidence that the 2013, 2014 and 2016 resolutions were the only resolutions made by the trustee of the Demian Trust for the period 1 July 2007 to 30 June 2017. There is considerable force in those submissions. First of all, Mr Demian omitted to refer the resolution for the 2015 income year, which the Commissioner put into evidence and secondly, it is abundantly evident that the Demian Group’s record keeping practices are abysmal. However, as a premise for the determination of this issue is that Advanced Holdings was the trustee of the Demian Trust during the period 2007 to 2017, it must follow that the purported trust distribution resolutions for the Demian Trust for the 2013, 2014, 2015 and 2016 income years in evidence were all ineffective, as all of them were made by Demian Holdings purporting to be the trustee of the Demian Trust, not Advanced Holdings. If that be the case, on the assumption that the 2007 Deed of Amendment was effective, it thus follows that, pursuant to cl 27.4(a) of the Demian Trust Deed (as amended), the default beneficiaries named in cl 27.5(d)(i) would have been presently entitled to the trust law income of the Demian Trust for those income years. As it was not disputed by the Commissioner that each of the default beneficiaries were entities in Mr Demian’s “family group”, it follows that s 272-80(4A)(b) would be satisfied at least in relation to those years. Furthermore, there is nothing in the evidence which suggests that Advanced Holdings undertook any acts in its capacity as trustee of the Demian Trust in the income years 2007 to 2017, other than to execute the 2007 Deed of Amendment. In particular, there is nothing in the evidence to suggest trust distribution resolutions for the Demian Trust were made by Advanced Holdings in any of the income years in question.

155    On that basis, and on the basis of the hypothesis set out above at [142], I would have found that the requirements in s 272-80 were made out and the family trust election in February 2018 was effective as from the 2007 income year. Accordingly, the Demian Trust would have been at all relevant times a “family trust” and thus an “excluded trust” under s 102UC(4). It follows that the trustee beneficiary non-disclosure tax under s 102UK would not apply.

Section 99A of the ITAA 1936

156    If the trustee of the Demian Trust, under the hypothesis set out at [142] above, was not liable to trustee beneficiary non-disclosure tax under s 102UK of the ITAA 1936, there remains the issue as to whether the trustee of the Demian Trust would nonetheless have been assessable on the net income of the Demian Trust in the 2013 income year, including the net income of the Lewisham Estates Trust, on the basis of s 99A of the ITAA 1936.

157    The Demian Trust and each of the default beneficiary trust estates named in cl 27.5(d)(i) of the Demian Trust Deed (as amended by the 2007 Deed of Amendment) are resident trust estates. Sub-sections 99A(4) and (4A) of the ITAA 1936 relevantly provide:

(4)     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.

…

(4A)     Where there is a part of the net income of a resident trust estate:

(a)     that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97;

(b)     in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and

(c)     that does not represent 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 that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

(notes omitted)

158    Thus, for the trustee of the Demian Trust to be assessed under s 99A, either the whole of, or some part of, the net income of that trust must not have been included in the assessable income of the beneficiary or beneficiaries of that trust estate pursuant to s 97. The applicants submitted that the whole of the net income of the Demian Trust would, however, have been included in the default beneficiaries’ assessable incomes pursuant to s 97 and, so, s 99A would have no application. The applicants advanced three constructional arguments in support.

159    First, it was submitted that the reference in s 99A to “part or all of the net income of a trust estate… included in the assessable income of a beneficiary of that trust estate in pursuance of s 97” includes where that beneficiary acts in the capacity as trustee of another trust estate.

160    Secondly, it was submitted that there are several other provisions in the ITAA 1936 that depend upon, or assume that, the reference in s 99A to “part or all of the net income of a trust estate … included in the assessable income of a beneficiary of that trust estate in pursuance of s 97” can include where that beneficiary is acting in the capacity of trustee of another trust estate.

161    Thirdly, it was submitted that s 102UK(2)(b) of the ITAA 1936 would be otiose unless sub-ss 99A(4) and (4A) were construed as the applicants contend. Section 102UK(2) sets out the consequences of s 102UK applying. It provides:

(2)    If this section applies:

(a)     either:

(i)     if the trustee of the closely held trust is the only person in the trustee group (see subsection (3))—the trustee is liable to pay tax; or

(ii)     if the trustee of the closely held trust is not the only person in the trustee group—the persons in the trustee group are jointly and severally liable to pay tax;

as imposed by the Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 1) 2007, on the untaxed part; and

(b)     except for the purposes of sections 99, 99A and 99B and this Division, the untaxed part is not included in the assessable income of the trustee beneficiary under section 97.

The “untaxed part” is defined in s 102UE to mean, in effect, so much of the share of the net income of the closely held trust in respect of which the trustee, or the trustee of another trust estate, is not otherwise liable to pay tax under certain other provisions. A “trustee beneficiary” is defined in s 102UD and relevantly is a person who is a beneficiary of the trust in the capacity of trustee of another trust. It was argued that the exception in sub-s (2)(b) is so that the exception from liability under sub-ss 99A(4)or (4A) can apply and the trustee of the trust estate is not made subject to tax on the same amount as has been taxed to a beneficiary of that trust estate (in its capacity as trustee of another trust estate) under s 102UK. The applicants also referred to sub-s 102UK(1)(a) which, it was submitted, made it clear that this construction is correct. That sub-section provides:

Subject to subsection (2A), this section applies if:

(a)    a share of the net income of a closely held trust for a year of income is included in the assessable income of a trustee beneficiary of the trust under section 97; and

…

162    Further, support was said to be provided by the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Bill 2007 (Cth), which introduced the trustee beneficiary non-disclosure tax. Paragraph 4.36 of the Explanatory Memorandum to that Bill stated:

The purpose of section 102UM is to discourage the use of a chain of trusts to channel income through a circular chain of trusts to disguise the identity of the final beneficiary in receipt of the income. In such a round robin arrangement, amounts are included in the assessable income of a trustee beneficiary of a closely held trust under section 97 and the amount (or part of it) ‘comes back’ to the trustee of a closely held trust.

163    It was submitted that s 102UM is a specific policy response to a recognised circumstance of circular trust arrangements but was intentionally limited to apply only to a closely held trust. Further, it was submitted that as the definition of “excluded trust” stood at the relevant time in the 2013 income year, excluded trusts that could engage in such arrangements were family trusts (s 102UC(4)(c)), interposed trusts subject to s 272-85 of sch 2F (s 102UC(4)(d)) and trusts “owned” by the family group under s 279-90(5) of sch 2F (s 102UC(4)(e)). It was submitted there was thus a clear policy choice of Parliament that circular trust arrangements did not apply to family trusts, interposed trusts and trusts “owned” by the family group. That has since changed for the years of income starting on or after 1 July 2019: sch 4 to the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019 (Cth), entitled “Extending anti-avoidance rules for circular trust distributions”. As observed in the Explanatory Memorandum to the Bill at [4.1], [4.7] and [4.8]:

Schedule 4 to the Bill amends the ITAA 1936 to extend to family trusts the anti-avoidance rule that applies to other closely held trusts that undertake circular trust distributions. This allows income tax to be imposed on circular trust distributions at a rate of tax equal to the top marginal tax rate plus the rate of Medicare levy.

…

Prior to the amendments an ‘excluded trust’ included a family trust and as a result trustee beneficiary non-disclosure tax did not apply to circular trust arrangements involving family trusts.

Accordingly, as trustee beneficiary non-disclosure tax did not apply to family trusts prior to the amendments, it created the potential for circular trust distributions to occur involving family trusts that could result in the original trustee avoiding liability for tax on such distributions.

164    The Commissioner did not put any contrary construction. Rather, the Commissioner’s argument rested on the proposition that the circular trust entitlements have a compounding effect which create additional amounts of net income not included in the assessable income of a beneficiary of the trust estate pursuant to s 97. The Commissioner put the following by way of example to illustrate the “true operation” of ss 97 and 99A of the ITAA 1936:

Assume the net income of the [Lewisham Estates Trust] for the 2013 income year was $100. That amount entered into the net income of the Demian Trust. At this point the net income of the Demian Trust for the 2013 income year is $100. Each of the Default Beneficiaries is presently entitled to a share of one-fourth of that $100 ($25). The assessable income of each of those Default Beneficiaries under s 97 of the 1936 Act thus includes that $25. The net income of each of the trusts of which the Default Beneficiaries was trustee also includes that $25. By reason of the operation of cl 48 of the relevant trust deed or equivalent… the trustee of the Demiant [sic] Trust became presently entitled to that $25 in each case. Those amounts then entered into the net income of the Demian Trust. At this point, the Demian Trust’s net income will not be $100 but $200; that is, the original $100 from the net income of the [Lewisham Estates Trust] and a further $100 generated by the present entitlements created by the operation of the trusts of which the Default Beneficiaries were trustees.

What then happens to this additional $100 of net income of the Demian Trust? It has not been distributed by the trustee of the Demian Trust to any beneficiary. It cannot be picked by up cl 27.4 of the 2007 Deed of Amendment... That is because the premise of that clause is that the trustee has failed to effectively distribute the whole of the “income of the financial year as provided in cl 27.1 or effectively accumulate the income as provided in cl 27.2 …”. Clause 27.1 applies to “income of a financial year which is available for distribution …” and cl 27.2 applies to income available for accumulation. However, the additional $100 was never available for distribution or accumulation under cl 27.1 or cl 27.2 of the 2007 Deed of Amendment. This is because it was the result of the operation of cl 27.4 in relation to the first $100 and the subsequent present entitlements created by the trusts of which the Default Beneficiaries were trustees. Therefore, it only arose after cll 27.1, 27.3 and 27.4 of the 2007 Deed of Amendment had operated in a year of income and were thus spent.

The result of this is that no present entitlement has been created in the second $100 of net income of the Demian Trust. It has not been included in the assessable income of any beneficiary under s 97 of the 1936 Act. The trustee of the Demian Trust is not assessable on it under s 98 of the 1936 Act. It is not attributable to a period when any beneficiary was not a resident and was also attributable to sources outside of Australia. Thus, the trustee of the Demian Trust was liable to be assessed and to pay tax on the second $100 under s 99A(4) of the 1936 Act.

On the hypothesis on which the issue of the application of s 99A(4) of the 1936 Act in this matter proceeds, the second $100 in the above example can be taken to reflect the whole of the net income of the Demian Trust for the 2013 year (including the net income of the [Lewisham Estates Trust]).

165    Clause 27.1 of the 2007 Deed of Amendment provided:

The Trustee holds the income of a financial year which is available for distribution upon trust to pay, apply or set aside the income, or any part of the income, to or for the benefit of the beneficiaries, other than a default beneficiary who is not otherwise a beneficiary, or any one or more of them exclusive of the other or others who are living or which are in existence at the time the distribution of the income is made in such shares or proportions and from such category of income as the Trustee may in its discretion determine.

166    Clause 27.2 of the 2007 Deed of Amendment provided:

(a)    The Trustee may before the end of a financial year resolve to accumulate the whole or a part of the income of that financial year whereupon the accumulation will subject to clause 27.2(c), form part of capital.

(b)    A resolution to accumulate may be in respect of the whole or a part of one or more categories of income.

(c)    The Trustee may pay tax in respect of an accumulation out of the accumulation or out of capital.

167    Clause 27.4 of the 2007 Deed of Amendment provided:

If the Trustee fails to effectively distribute the whole of the income of a financial year as provided in clause 27.1 or to effectively resolve to accumulate the income as provided in clause 27.2, the Trustee must set aside the income which has not been distributed or so accumulated on trust absolutely:

 (a)     for the default beneficiaries named or described in clause 27.5(d)(i); and

(b)    if there are no such persons, for the default beneficiaries described in clause 27.5(d)(ii), and the provisions of clause 27.3 will apply to any distribution under this clause 27.4.

168    I accept the Commissioner’s submissions that the circular trust entitlements did not operate on a static amount of trust income. The consequence of the circular present entitlement would have been that an amount arose in the net income of the Demian Trust additional to the existing net income of the Demian Trust and s 99A(4A) would have made the trustee of the Demian Trust liable to be assessed on that additional amount of the net income because it was not included in the assessable income of a beneficiary under s 97. The additional amount of the net income of the Demian Trust would not reflect any amount which the trustee had failed effectively to distribute or accumulate under cls 27.1 or 27.2 of the 2007 Deed of Amendment. The additional amount of that net income would arise after the operation of those clauses, that is, once s 97 had applied to the default beneficiaries as beneficiaries. Neither the introduction of the trustee beneficiary non-disclosure tax nor the amendments to that legislation applying from the 2019 income year onwards direct any different outcome.

Third set of issues: penalties

169    The applicants’ challenges to the penalties imposed were brought by way of merits review in the AAT in proceedings heard concurrently with the FCA proceedings. The issue of penalties is the subject of the decision in the corresponding AAT decision.

Orders

170    The parties are directed to provide a draft form of order giving effect to this judgment in respect of each of the related FCA proceedings within 14 days.

Associate:

Dated:    15 October 2020

APPENDIX A