Lewski v Commissioner of Taxation, [2017] FCAFC 145

On June 30, 1999, a trust of which the taxpayer was a beneficiary had a 40% (later reduced to 2%) interest in a syndicate (that entered into an agreement to purchase an aged care facility in consideration for a “Settlement Amount” of $1.74 million to be paid on the settlement date (being the date of completion of a contemporaneous purchase of the business at the facility, slated to be October 31, 1999), with provision being made for further post-settlement amounts totalling $14.5 million. S. 8-1 of the Income Tax Assessment Act 1997 (Cth) provided:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The Court referred inter alia to the statement in Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 (at 101) that:

Once … it is appreciated that an outgoing may be deductible notwithstanding that it may be defeasible, there can be no logical reason why an outgoing pursuant to a contract may not be deductible notwithstanding that the ultimate price payable upon delivery of the goods the subject of a contract may be varied upwards or downwards to reflect the increased cost of the goods.

In finding that the trust’s share of the Settlement Amount was incurred by it on June 30, 1999, the Court stated (at paras. 103, 110):

[T]he Tribunal [below] relied on the fact that, under the Contract of Sale, the Glendale Property Syndicate was entitled to terminate the contract if an insolvency event occurred in relation to [the purchaser] as a basis for concluding that “it was not known whether the Contract of Sale would proceed” …. However, the cases discussed above do not suggest that, without more, this type of contingency is enough to conclude that an outgoing is not incurred upon execution of a contract. …

Neither approval [by the Department of Health and Aged Care] of the Purchaser as an Approved Provider nor approval of the transfer of the Approved Places from Prime Life Corporation to the Purchaser was a condition for payment of the balance of the purchase price. The obligation to pay the balance of the purchase price was not expressed to be conditional upon these matters.

On June 30, 2006, the trustee of a trust resolved that 100% of all of its income for the year then ending would be paid, applied and set aside to or for the benefit of the taxpayer, but with it being further resolved in a “variation of income” resolution that (as interpreted by the Court at para. 118) should the Commissioner of Taxation disallow any amount as a deduction to the trust, that amount was to be deemed to have been distributed on the same (On June 30, 2006) date to an alternate beneficiary. Subsequently, the Commissioner denied a loss-carryforward that had been claimed by the trust, and the taxpayer claimed that the variation of income resolution precluded the inclusion of (what was now, a much bigger amount of) income in her hands.

S. 97(1) of the Income Tax Assessment Act 1936 (Cth) relevantly provided that “where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate” the assessable income of the beneficiary includes “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”. After referencing the statement in Harmer v Commissioner of Taxation (Cth) (1991) 173 CLR 264 at 271, that:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

the Court stated (at para. 121):

[I]f the two resolutions are read together, the distribution to the applicant was contingent: it depended on the occurrence of an event that may or may not take place (namely, the Commissioner disallowing a deduction…). It follows that, assuming that each ‘variation of income’ resolution was authorised by the relevant trust deed, the applicant was not “presently entitled” to a share of the net income of the trust estate … for [that] year… .

The Commissioner of Taxation denied a claimed loss carryforward of a trust which had declared a distribution of all its income for a particular year, as a result of which there was a substantial increase in the amount of the of income to be included in her hands. Over seven years later, she executed a purported disclaimer of her right to that distribution.

After finding that the resolution had not resulted in a current income inclusion to the taxpayer on other grounds, but in going on to find that the disclaimer was invalid, the Court first stated (at para. 141) that “In the present case, the particular legal issue concerns the acceptance of a trust distribution,” and “the question whether a donee is to be taken to have accepted a gift, or an object of a discretionary trust is taken to have accepted a distribution, is broadly similar,” and then stated (at para. 142):

Here, the applicant had handed over all of her financial affairs to [her husband] Mr Lewski. It was within the scope of Mr Lewski’s authority to receive knowledge of the relevant trust distributions. We consider that Mr Lewski was under a duty to inform the applicant of the distributions as they were material transactions that affected her financial position (including her potential liability to tax). There is no question that Mr Lewski was aware of the distributions, as he either made or participated in the making of the relevant resolutions. … Neither the applicant, nor Mr Lewski on her behalf, took any step to disclaim the distribution before 15 December 2015. In these circumstances … we consider the conclusion that the applicant was taken to have had knowledge of, and to have accepted, the gifts before 15 December 2015 to be consistent with the cases and principles discussed above.

On June 30, 2006, the trustee of an Australian trust declared a distribution to the taxpayer of all its income for the year then ended and at the same time made a further resolution that in the event the Australian taxation authority denied a deduction to the trust, the trust income for that year was instead to be deemed to have been distributed on the same 2006 date to an alternate beneficiary. This contingency in fact materialized, i.e., the ATO denied a loss carryforward by the trust, so that all the income of the trust for that year was now a material amount.

The Court accepted that the further resolution made the distribution declaration contingent, so that it did not cause the (now material) income amount to be included in the taxpayer’s hands as an amount to which she was “presently entitled” on that (June 30, 2006) date.

The taxpayer had delegated the handling of all her affairs to her husband, and did not find out about a purported income distribution by a trust to her until over seven years later, at which point she promptly executed a disclaimer of any interest in the distribution. The Court found that she should be imputed with the knowledge of her agent (her husband), so that she had not promptly disclaimed - so that if (contrary to the finding above) the income distribution to her had otherwise been valid, her purported disclaimer thereof would have been ineffective. In this regard, the Court stated (at para. 139):

In the current edition of Bowstead, namely Watts P and Reynolds FMB, Bowstead & Reynolds on Agency (20th ed, 2014), the relevant ‘rules’ are set out in Arts 94 and 95. We note that the rule corresponding to the second rule set out above is expressed in less absolute terms [than in the previous edition]: “The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority” (art 95(1)). This revised formulation accommodates the flexibility that is required, given the different legal contexts in which the principles of attribution may operate.