Case: Federal Commissioner of Taxation v Peabody [1994] HCA 43 ; (1994) 181 CLR 359
Outcome: cited
In determining whether either appellant has obtained a tax benefit in connection with the scheme the Commissioner was required under s 177C(1)(a) to consider whether an amount not included by the taxpayer in his or her assessable income as returned would have been included had the scheme not been implemented. That consideration contemplates the most likely prediction of future events absent the sequence of distributions and gifts interposed after or from the distribution by OPSL as trustee of the PGUT. A reference to obtaining a tax benefit is also to be read as reference to an amount that 'might reasonably be expected to have been included'. That phrase seems to contemplate a lower threshold of prediction although in Federal Commissioner of Taxation v Peabody [1994] HCA 43 ; (1994) 181 CLR 359 at p 385, the Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) concluded that a 'reasonable expectation' involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'. The Court in FCT v Spotless Services Ltd [1996] HCA 34 ; (1996) 186 CLR 404 at p 424 (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ), observed that in establishing, for the purposes of s 177C(1)(a), a tax benefit by reason of the non-inclusion of assessable income in a taxpayer's assessable income, 'it is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out'. 44 At [147], the Tribunal addressed the second limb of the prediction test in s 177C(1)(a) as interpreted in Federal Commissioner of Taxation v Peabody (supra) to determine whether the Commissioner's hypothesis as to the distributions from the P &amp; A Trust to Mr and Mrs McCutcheon equally was 'sufficiently reliable for it to be regarded as reasonable'. In considering that matter, the Tribunal concluded: In cross-examination, the respondent was able to show and the Tribunal finds, that Mr McCutcheon was motivated by the desire to receive the sale proceeds stemming from the sale of two businesses in as tax effective a manner as was possible and to reinvest those proceeds. In and of itself, this is not indicative of a purpose to gain a tax benefit within section 177D but it is a fact which is relevant to consider and give appropriate weight to. [147] 45 The Tribunal also concluded that it was a matter for the Commissioner to demonstrate to the Tribunal that a basis for sufficiently reliable prediction subsisted once the appellants put the determination and assessments in issue. There is no doubt that the onus and burden of proof falls upon the appellants to demonstrate that the assessment issued to each taxpayer is excessive. That necessarily involves each taxpayer adducing evidence which would discharge the onus of demonstrating that the Commissioner's prediction or hypothesis was not sufficiently reliable for it to be regarded as reasonable. The appellants sought to do that by reliance upon the history of distributions. 46 The Commissioner, although not bearing the onus, sought to support the hypothesis on the following basis. The appellants ultimately owned and controlled each of the P &amp; A Trust, the PGUT, the NCT, the NCIT and the AM Trust. The appellants were the economic owners of the income derived from the sale of the businesses leading to the adoption of the scheme. The appellants led no evidence as to what distributions would have been made by the P &amp; A Trust, if any, had the scheme not been entered into. A consideration of previous distributions showed that PGUT and another beneficiary, Pennant Fuels Pty Ltd received substantial distributions in earlier years. Distributions were made to PGUT in the income years ending 30 June 1991 and 1995. In those years, the P &amp; A Trust held all of the units in PGUT. In those years, the PGUT had tax losses available to offset income receipts. In the 1998 year, the trust vested. The Commissioner contended that a distribution to PGUT of the proceeds of sale of the Townsville businesses would have served no purpose given that but for the scheme, the P &amp; A Trust was the sole unit holder in the PGUT. The Commissioner contended before the Tribunal that distributions appear to have been made for tax effective purposes. The appellants' accountants of 14 November 1997 in a letter to Cleary &amp; Hoare described the PGUT and Pennant Fuels as a loss trust and loss company in relation to distributions. Pennant Fuels carried on business from 1984 to 1990 and appeared to serve no purpose after that time other than to receive distributions in the income years ending 30 June 1995, 1996 and 1997 as it had carried forward losses. Upon voluntary liquidation on 27 May 1998, Pennant Fuels distributed all of its income and capital to the appellants. It was deregistered on 7 December 1998. The Commissioner contended before the Tribunal that it was improbable that the sum of $3,232,813.00 would have been distributed to that entity but for the scheme as it only had tax losses in the income year ending 30 June 1998 of $15,449.00. The Commissioner contended that the children of the appellants received nominal distributions in the income years ending 1996 and 1997 and it was therefore improbable that they would have received the income stream or a significant component of it as minors are taxed at the top marginal rate.