Richardson v Commissioner of Taxation [2001] FCA 68

FEDERAL COURT OF AUSTRALIA

Richardson v Commissioner of Taxation [2001] FCA 68

INCOME TAX – trusts – trust income – business of trading in land – whether proceeds of sale are capital in nature – effect of accounting for land as "non-current asset" – power of trustee to treat income as capital – whether power exercised by accounting treatment of asset WORDS AND PHRASES – "non-current asset" Income Tax Assessment Act 1936 (Cth) s 97(1)(a)(i)

Commissioner of Taxation v Whiting (1943) 68 CLR 199 referred to Union Fidelity Trust Co of Australia Ltd & Mayfield v Federal Commissioner of Taxation (1969) 119 CLR 177 referred to Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444 referred to Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 referred to Ammonia Soda Co v Chamberlain [1918] 1 Ch 266 discussed IAN RICHARDSON v COMMISSIONER OF TAXATION V 247 of 1999 FINKELSTEIN J MELBOURNE 19 FEBRUARY 2001

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 247 of 1999

On appeal from the Taxation Division of the Administrative Appeals Tribunal

BETWEEN: IAN RICHARDSON

Applicant

AND: COMMISSIONER OF TAXATION

Respondent

JUDGE: FINKELSTEIN J

DATE: 19 FEBRUARY 2001

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 The applicant, Mr Richardson, was assessed to income tax under the Income Tax Assessment Act 1936 (Cth) in respect of income derived by him in the year ended 30 June 1988. The assessment was made under s 97 on the basis that the applicant was a beneficiary of a trust estate (the Richardson Family Trust, of which Ian R Richardson Pty Ltd was the trustee) and was presently entitled to a share ($707,122.00) of the income of the trust estate in that period. The amount of $707,122.00 was part of the gain made by the trustee on the sale of two properties which the respondent, the Commissioner, said were acquired and sold by the trustee in the course of its business of building and project management. 2 An objection to the assessment was disallowed by a deputy commissioner and the case went to the Administrative Appeals Tribunal for the review of that decision. In the first hearing before the tribunal, the applicant argued that the acquisition of the two properties by the trustee was for the purpose of deriving income (rent) and that the gain on sale was not income. The applicant also argued that even if the gain was revenue, he was not "presently entitled", within the meaning of s 97, to any part of that income. 3 To understand these arguments it is necessary to make some reference to the facts, most of which have not been in dispute. In 1981 the trustee identified a particular organisation that wished to establish its head office in Melbourne. The trustee located a suitable site in Box Hill, a Melbourne suburb, subject to the land being rezoned and planning approval being obtained. However, an adjoining neighbour warned the trustee that she would oppose the development. To be rid of a potential objector, the trustee agreed to purchase the neighbour's property (20 Prospect Street) on condition that the development proceed. This is one of the two properties which, when sold, produced the gain, a portion of which was included in the assessable income of the applicant. 4 When the trustee was in a position to proceed with the development it entered into a contract to purchase the site, which comprised a number of allotments. The contract was made in late 1981. It contained a provision permitting the trustee to nominate a person who would take a transfer of the land on completion of the contract. In due course a financier agreed to purchase the site, fund the development and lease the site to the organisation for its new head office. In 1982 the financier took an assignment of the land, save for one allotment which was not required for the development. That allotment (14 Prospect Street) was transferred to the trustee. 5 In 1984 the trustee "exchanged" 14 Prospect Street for another allotment, 18 Prospect Street, in the neighbourhood. The "exchange" was effected by two contracts of sale, one by which the trustee purchased 18 Prospect Street, and the other by which it sold 14 Prospect Street, wherein the purchase price was the same. The property which the trustee acquired in this "exchange" is the second of the two properties which, when sold, produced the gain of $707,122.00. 6 The argument that the gain derived on the sale of the two properties was not income was straightforward. The applicant said that the two properties were not acquired by the trustee with the intention of a resale at a profit. He said that when it acquired them, the trustee intended to "hold on" to the properties but said they were sold when the trustee received "an offer… which was too good to refuse". 7 Section 97(1)(a) relevantly provides that "[w]here a beneficiary of a trust estate…is presently entitled to a share of the income of the trust estate, the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident;…". To apply s 97 to the facts of a particular case in a relevant year, it is necessary to follow a number of steps. The first is to determine whether a beneficiary is entitled to a share of the income of the trust. That enquiry has two aspects, viz (a) whether the trustee has derived any income, and (b) whether the beneficiary has any entitlement to a share of that income. Leaving to one side the question of entitlement, an enquiry into whether the trust has derived income is to be distinguished from the question whether the trust has derived any "assessable income" within the meaning of the Income Tax Assessment Act. That which is to be determined is the income of the trust according to law. This distributable income will be found by reference to the applicable principles of the general law and the provisions of the trust instrument. 8 If the trust has derived income in a relevant year, it is then necessary to determine whether any beneficiary of the trust has a "present entitlement" to any part of that income. A beneficiary will be "presently entitled" to a share of income of the trust if the beneficiary can demand payment of the income from the trustee; that is, if the beneficiary has an indefeasible or vested interest in possession in the trust income: Commissioner of Taxation v Whiting (1943) 68 CLR 199; Union Fidelity Trust Co of Australia Ltd & Mayfield v Federal Commissioner of Taxation (1969) 119 CLR 177; Taylor v Federal Commissioner of Taxation (1970) 119 CLR 444. 9 Once it is established that a beneficiary has a present entitlement to a share of the income of a trust estate, it becomes necessary to determine "that share of the net income" of the trust estate. It is "that share" that is included in the beneficiary's assessable income. The "net income" of the trust estate is the total assessable income of the trust less all allowable deductions: s 95(1). According to the present state of the authorities, "that share of the net income of the trust estate" means the proportionate share rather than the quantum of the income to which the beneficiary is entitled: see Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70. 10 Having regard to the way the case was argued, the tribunal did not approach the application of s 97 in the manner just described. First it considered whether the applicant had any entitlement to any income of the trust that the trustee derived in the relevant year. This required the tribunal to determine what effect, if any, should be given to a resolution of the directors of the trustee recorded in signed minutes dated 24 June 1988, and what appeared to be a contradictory resolution recorded in unsigned minutes dated 22 August 1988. The 24 June minutes record the following resolution: "It was resolved that the net income of the Trust be distributed in the following manner: The Second Richardson Family Trust$47,000 and the remainder to Ian Richardson."