Kafatarisv The Deputy Commissioner of Taxation [2008] FCA 1454 (19 September 2008)
Last Updated: 25 September 2008
FEDERAL COURT OF AUSTRALIA
Kafatarisv The Deputy Commissioner of Taxation [2008] FCA 1454
TAXATION – capital gains tax – a married couple who owned real estate jointly settle it upon themselves as trustees for the husband as to a one half interest – whether CGT event E1 or CGT event E2 occurred – ss104-55 and 104-60 of Income TaxAssessment Act 1997(Cth) – whether exclusion in subs(5) of each section applied – whether each spouse was "sole beneficiary" of the trust establishing his or her superannuation fund – whether each spouse was "absolutely entitled" to the fund as against themselves as trustees.
Held in each case (1) spouse was not the sole beneficiary of the trust; (2) the spouse was not absolutely entitled to the asset as against the trustees.
Income Tax Assessment Act 1997(Cth) ss104-55, 104-60, 106-50
Australian Securities & Investments Commission v Carey (No6) (2006) 58 ACSR 141 cited
CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 referred to
Gartside v Inland Revenue Commissioners (1968) AC 553 cited
Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 referred to
In re Gulbenkian’s Settlements [1970] AC 408 cited
Kent v "Maria Luisa" (No 2) (2003) 130 FCR 12 cited
McPhail v Doulton [1971] AC 424 cited
Public Curator of Queensland v Union Trustee Company of Australia Ltd (1922) 31 CLR 66 referred to
R & I Bank of Western Australia Ltd v Anchorage Investments Pty Ltd (1992) 10 WAR 59 cited
Re Denley’s Trust Deed; Holman v HH Martyn & Co Ltd [1968] 3 All ER 65 cited
Sacks v Gridiger (1990) 22 NSWLR 502 cited
Saunders v Vautier (1841) 4 Beav 115 discussed
Stephenson (HM Inspector of Taxes) v Barclays Bank Trust Co Limited [1975] 1 All ER 625 referred to
Tomlinson (Inspector of Taxes) v Glyns Executor & Trustees Co [1969] 1 All ER 700 referred to
Tomlinson (Inspector of Taxes) v Glyns Executor & Trustees Co [1970] 1 All ER 381 referred to
HELEN KAFATARISv THE DEPUTY COIMMISSSIONER OF TAXATION
NSD 2509 OF 2007
PETER KAFATARISv THE DEPUTY COIMMISSSIONER OF TAXATION
NSD 2510 OF 2007
LINDGREN J
19 SEPTEMBER 2008
SYDNEY
NEW SOUTH WALES DISTRICT REGISTRY / NSD 2509 OF 2007
BETWEEN: / HELEN KAFATARIS
Applicant
AND: / THE DEPUTY COIMMISSSIONER OF TAXATION
Respondent
JUDGE: / LINDGREN J
DATE OF ORDER: / 19 SEPTEMBER 2008
WHERE MADE: / SYDNEY
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The applicant pay the respondent’s costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal CourtRules.
NEW SOUTH WALES DISTRICT REGISTRY / NSD 2510 OF 2007
BETWEEN: / PETER KAFATARIS
Applicant
AND: / THE DEPUTY COIMMISSSIONER OF TAXATION
Respondent
JUDGE: / LINDGREN J
DATE OF ORDER: / 19 SEPTEMBER 2008
WHERE MADE: / SYDNEY
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The applicant pay the respondent’s costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
NEW SOUTH WALES DISTRICT REGISTRY /
NSD 2509 OF 2007
BETWEEN: / HELEN KAFATARIS
Applicant
AND: / THE DEPUTY COIMMISSSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY / NSD 2510 OF 2007
BETWEEN: / PETER KAFATARIS
Applicant
AND: / THE DEPUTY COIMMISSSIONER OF TAXATION
Respondent
JUDGE: / LINDGREN J
DATE: / 19 SEPTEMBER 2008
PLACE: / SYDNEY
REASONS FOR JUDGMENT
INTRODUCTION
1 The applicants in these two proceedings are husband and wife. Not intending any discourtesy, I will refer to them as "Helen" and "Peter" when it is necessary to distinguish between them. Each appeals to the Court against an appealable objection decision of the respondent (Commissioner) to disallow an objection to an assessment of income tax for the year of income ended 30June 2002.
2 The facts of each case are, mutatis mutandis, identical. There is a statement of agreed facts. The appeals were heard together, the evidence in each being evidence in the other.
3 The appeals turn on the exception to the happening of CGT event E1 and the exception to CGT event E2 found, respectively, in s104-55(5)(a) and s104-60(5)(a) of the Income Tax Assessment Act1997 (Cth) (the Act). The terms of those exceptions are, relevantly, identical. The relevant difference between ss104-55 and 104-60 is in the primary provisions of those sections. Subsections 104-55(1) and (2) provide:
(1) CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.
(2) The time of the event is when the trust over the asset is created.
Subsections 104-60(1) and (2) on the other hand, provide:
(1) CGT event E2 happens if you transfer a CGT asset to an existing trust.
(2) The time of the event is when the asset is transferred.
4 Importantly, in each section, subs(5) provides:
CGT event E1 [in s104-60(5), the reference is to ‘CGT event E2’] does not happen if: (a) you are the sole beneficiary of the trust and;
(i) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); ...
Subsection (5) is in the nature of an exclusion, in common form, from the primary provisions of each section.
5 In each appeal the question is whether the applicant was:
(1) the sole beneficiary of the trust concerned; and
(2) absolutely entitled to the asset in question as against the trustee.
As will appear, I have reached the conclusion in each case that the applicant was neither.
FACTS
6 Sometimes, for convenience, I will refer to the facts relating to one of the applicants (Helen), but the facts relating to the other (Peter) are identical.
7 In May 1987 the applicants as joint tenants purchased a property at 22Darlinghurst Road, Kings Cross NSW (folio identifier 13967/129) (the Property) for $612,000. For convenience, I will refer to the interest of each applicant in the Property as a half interest, although this is an oversimplified way of describing the interest of one of two joint tenants.
8 On 28 June 2002 the applicants executed two trust deeds in identical form (Deeds). Each was a deed poll executed by the applicants as a single party. In each Deed the applicants were called the "Trustees". Each Deed recited that the Trustees had decided to establish an indefinitely continuing superannuation fund (Fund) and to declare that one of the half interests in the Property would form trust property to be held on the terms of the Deed and Rules attached to the Deed (Trust) which were to have effect as if set out in the body of the Deed. The term "Deed" was stated to include a reference to the Rules. I will also use the term "Deed" as including a reference to the Rules.
9 The Deed relating to Helen’s half interest established "the Helen KafatarisSuperannuation Fund" and the Deed relating to Peter’s half interest established "the Peter KafatarisSuperannuation Fund". For brevity, I will call the respective Funds "Helen’s Fund" and "Peter’s Fund" without implying anything as to the questions I have to answer.
10 I will discuss the terms of the form of the Deed in detail below. It is not disputed that each Deed was effective to subject the half interest in the Property to the terms of the Deed relating to it.
11 On 4 July 2002, the applicants sold the Property to Marriott Restaurants Pty Ltd (Marriott) for $4,000,000. By that time each half interest had been held by the Trustees subject to the terms of the Deed relating to it for six days.
12 There is no evidence of the circumstances relating to receipt of the purchase money. For example, there is no evidence that one-half went into a bank account maintained in respect of one Trust, and the other half in respect of the other Trust. The evidence does not include evidence of the accounts, if any, maintained by the Trustees in respect of each Trust. In particular, there is no evidence within the records of each Trust of the crediting by the Trustees of half of the proceeds to an account for Helen or Peter, as the case may be.
INTRODUCTION TO LEGISLATION AND ISSUES
13 Section 108-5(1) of the Act defines a "CGT asset" as, relevantly, "any kind of property", and subs(2) of s108-5 provides that to avoid doubt, relevantly, "part of, or an interest in, an asset referred to in subsection (1)" is a CGT asset. The respective half interests of Helen and Peter in the Property were CGT assets.
14 Although it does not matter for the purposes of the exception in subs(5), it seems clear that it is s104-55 rather than s104-60 that applies in the circumstances of the case. Section 104-60 did not apply because there was no "existing trust" and no "transfer" to an existing trust. There could only be "an existing trust" if, prior to the transfer to which s104-60(1) refers, there was already other property subject to the particular trust. But it is not disputed that the first property (and so far as the evidence reveals the only property) that was subjected to each Trust was the half interest in the Property of Helen or Peter, as the case may be.
15 Prior to execution of the Deeds, Helen and Peter owned their respective half interests in the Property beneficially. Although no document was executed by Helen or Peter as beneficial owner of a half interest, her or his execution as one of the Trustees of the Deed relating to her or his half interest was effective to subject that half interest to the relevant Trust, to sever the joint tenancy, and to attach trust obligations under the Deed to the half interest. Consistently with this analysis, there was not a "transfer" by Helen or Peter to an existing trust.
16 I need not characterise what happened as a "declaration" on the one hand or as a "settlement" on the other.
17 The expression "beneficiary" is not defined for the purposes of subs(5) of s104-55 and of s104-60. Nor is there a definition of the notion of absolute entitlement to an asset as against a trustee. However, s106-50, which, like ss 104-55 and 104-60, is within Pt 3-1 of the Act, is relevant to this concept. It provides:
If you are absolutely entitled to a CGT asset as against the trustee of a trust or (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.
18 This is a "see through" provision, and raises a fundamental question in relation to the applicants’ appeals.
19 The applicants propound two inconsistent positions. First, they contend that the interposition of the Trusts had the effect that the sale to Marriott for $4,000,000 was not a sale by them as joint tenants and as beneficial owners of the entire interest in the Property as they had been prior to the establishment of the Trusts. They also contend that the sale was not two sales by them separately of their respective half interests. Rather, they contend that the sale was by the Trustees of the two half interests that were the subject of the respective Trusts. The CGT event that resulted from the sale of the Property to Marriott was treated as having arisen in respect of each Fund, not the applicants personally, in their assessable incomes for the 2002-2003 year.
20 On the other hand, in order to bring themselves within subs(5) of s104-55 or of s104-60, they must contend that they are each absolutely entitled as against the Trustees to the half interest in the Property the subject of the relevant Trust. But if this last contention is upheld, s106-50 has the effect that Pts3-1 and 3-3 of the Act apply to the Trustees’ sales of the respective half interests to Marriott as if Helen and Peter respectively had sold them to Marriott – the very result that Helen and Peter have sought to avoid.
21 In sum, if, as the applicant’s contend, the exception allowed by subs (5) of s104-55 or of s104-60 applies, s106-50 also operates, and the applicants are taken to have sold their respective half interests in the Property to Marriott in the 2002-2003 year. If that subsection, and therefore s106-50, does not apply, the applicants are caught by the primary provision of s104-55 or s104-60 in the 2001-2002 year.
THE TERMS OF EACH DEED
22 It is clear that the object of each Deed was to ensure that each Fund was a "complying superannuation fund" within the meaning of s42 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), with the consequence that it would be eligible for concessional tax treatment under PtIX of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act).
23 Clause 3 of each Deed provides:
The assets of the Fund, including the initial real estate shall be vested in the Trustees upon trust to apply the same in the manner set forth in the Rules.
I referred earlier to the recital in each Deed which made it clear that "the initial real estate" was a reference to the half interest in the Property of Helen in the one case and Peter in the other.
24 Clause4 of each Deed provided that the Fund was to be managed and administered in all respects according to the Rules.
25 Clause 6.3 of the Deed provided that the Fund was to consist of all the cash, investments and other property for the time being held by or on account of the Trustees in accordance with the terms of the Deed and was to include, inter alia, "Contributions" by "Members" and contributions in respect of "Employer Supported Members" by "Employers" of those Members. As well, the Fund was to include moneys, investments, policies of insurance or assurance and other property transferred to the Fund from any other superannuation fund or arrangement.
26 Clause6.4 provided that the purpose of the Fund was to provide superannuation benefits for Members and their "Dependants" after the retirement of a Member.
27 Clause 7.2 dealt with the appointment of trustees. As noted below, a question has arisen as to whether it can be said that Helen and Peter, the initial Trustees, were "appointed". Clause 7.2(b) provided that any person or combination of persons might be appointed or removed as trustees of the Fund only so long as:
... (iv) Where the Trustees are individuals: (i) There shall be at least two Trustees;
(ii) The Trustees shall comprise the persons required to be so appointed under the Act; and
(iii) The Trustees shall be appointed by the Members by deed or other written instrument and the persons so appointed shall be the persons required to be appointed under the Act; ...
The expression "Act" was defined very broadly to include a wide range of Acts of the Parliament and regulations. I give the definition of "Act" below at [67].
28 Clause 7.11 provided that the Fund was to be vested in the Trustees upon the terms and conditions and subject to the trusts, powers and authorities contained in the Deed, and was to be managed, administered and applied by the Trustees in accordance with the provisions of the Deed.
29 Clause 14 was headed "Membership of Fund". Sub-clauses 14.1 and 14.2 were as follows:
14.1 Eligibility
Any person who is engaged in Gainful Employment or is appointed a Trustee or a director of a corporate Trustee and any Relative of a Member or a deceased Member may become a Member of the Fund.
14.2 Admission of Members
Upon:
(a) A contribution being made by or on behalf of a person to the Fund;
(b) A person being appointed a Trustee or a director of a corporate Trustee;
(c) The receipt by the Trustees from a Relative of a Member or a Deceased Member of a written application to join the Fund in the form of the Second Schedule to this Deed or in any other form as the Trustees may require; or
(d) Any amount being credited to an account in the Fund in the name of a Relative of a member
Then that person and / or relative shall become a Member of the Fund on the date in which the event occurred.
It was not in contest that Helen made a contribution (of her half interest) to Helen’s Fund, and that Peter made a contribution (of his half interest) to Peter’s Fund.
30 The expressions "Dependant", "Member", "Relative", "Eligible Person" and "Gainful Employment" were defined in cl4 of the Deed as follows:
"Dependant" in relation to a Member or former Member means:
(i) the Spouse of a former Member or the widow or widower of a deceased Member; or
(ii) any child of a Member including any person who, in the opinion of the Trustee, is or was actually maintained by the Member as the child of the Member; or
(iii) any other person who, in the opinion of the Trustee, was substantially dependent on the Member at the relevant time;
"Member" means an Eligible Person that has been accepted as a Member of the Fund pursuant to sub-clause 14.2 of this Deed and who has not ceased to be a Member pursuant to sub-clause 14.11 and ‘Membership’ shall mean Membership of the Fund. "Relative" in relation to a member has the meaning given by the Income Tax Act. "Eligible Person" means any person who is engaged in Part-Time Gainful Employment or Full-Time Gainful Employment. "Gainful Employment" in relation to a Member means engagement in any business, trade, profession, vocation, calling, occupation or employment for gain to the extent required by the Relevant Requirements.
I need not give the Deed’s definitions of "Part-Time Gainful Employment" and "Full-Time Gainful Employment". I give the Deed’s definition of "Income Tax Act" and "Relevant Requirements" below at [67].
31 According to the statement of agreed facts, as at 28June 2002, the date of execution of each Deed, at least the following persons fell within the definition of "Dependant" in cl4:
(a) in the case of Helen’s Fund, Peter,
(b) in the case of Peter’s Fund, Helen; and
(c) in the case of each Fund, the five children of Helen and Peter, whose first names are Con, George, Faye, Sandra and Christina.
Further, according to the statement of agreed facts, as at 28June 2002 the 15 grandchildren of Helen and Peter, not being Dependants as defined, nonetheless fell within the definition of "Relative" in cl4.
32 Clause16 required the Trustees to keep a complete record of all matters essential to the administration of the Fund. The clause provided that this might include an "Unallocated Contributions Account", a "Member’s Non-Vested Accounts", "Member’s Accounts [sic]" and a "Reserve Account". Clause 16.3, dealing with Members’ Accounts described such accounts as follows:
A Member’s Account for each Member in which is to be recorded and credited or debited as the case requires: (a) ... (b) ...
(c) Contributions to the Fund by the Member or by another person with written direction that the Contributions be allocated to the Member; ...
To take the case of Helen, she contributed her half interest to Helen’s Fund, but in the absence of any evidence of the accounts maintained by the Trustees, it cannot be said that they credited that contribution to a Member’s Account maintained for her.
33 Clause 17 regulated the making of contributions to the Fund. Clause 17.1 provided that each Member might contribute to the Fund in respect of that Member or the spouse of that Member, the amount the Member determines. Such contributions were to be credited to the "Member’s account" (cl17.6(a)) and might be in the form of cash or other property (cl17.14).