Kingston and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2011/0615-17; 2011/0612-14)
Judgment date: 19 December 2012
Date published: 13 February 2013

Summary of decision:
Outlines the ATO response to this case concerning whether Part IVA of the Income Tax Assessment Act 1936 applies to the assessable income of the taxpayers as beneficiaries of a trading trust.

Overview of facts:
Prior to the income tax years ended 30 June 2002, 30 June 2003 and 30 June 2004 ('the relevant years') the taxpayers, Mr and Mrs Kingston as beneficiaries of the Kingston Family Trust, received income from the trust. The Kingston Family Trust was a trading trust that carried on a farming business. | Clause 4.2 of the Trust Deed stated that "if the Trustee shall not by or at the end of any accounting period have exercised its discretion to pay apply set aside or accumulate the whole or any part of such Net Income in the manner aforesaid then the Trustee shall hold the Net Income not so paid applied set aside or accumulated for that accounting period in trust for such of the Primary Beneficiaries as are then living or in existence and if more than one (1) absolutely as tenants in common in equal shares. | "Primary Beneficiaries" was defined in the Trust Deed to mean Trevor Kingston. | On 29 June 2002 the Bethel Trust was created with four unit holders, namely Mr and Mrs Kingston, the trustee of the Bethel Trust and the Eleventh Hour Unit Trust (EHUT). | In each of the income years ended 30 June 2002 to 30 June 2004 the Kingston Family Trust lodged tax returns purporting to distribute significant amounts of the net income of the Kingston Family Trust to the Bethel Trust. The Bethel Trust then purported to distribute the income received to the EHUT. The distributions were notional with only 15% of the notional distribution paid to the EHUT as a promoter's fee for setting up the profit washing scheme. The balance remained available for the benefit of Mr and Mrs Kingston. | The Commissioner made a determination that there was avoidance of tax by Mr and Mrs Kingston for the 2002, 2003 and 2004 years of income, due to fraud or evasion and subsequently made determinations under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) that the amounts purportedly distributed to the Bethel Trust be deemed to be included by virtue of section 97 of the ITAA 1936 in the assessable income of Trevor Kingston and Jeannie Kingston on a 50/50 basis. The Commissioner also imposed an administrative penalty at 50% of the shortfall amount. | Issues decided by the tribunal | 1. Whether Mr and Mrs Kingston should be assessed to the income purportedly distributed to the Bethel Trust; | 2. Whether there was an avoidance of tax due to fraud or evasion under the former section 170(2) of the ITAA 1936 such that the Commissioner could make amended assessments after the expiration of 4 years; | 3. Whether the administrative penalty imposed should be remitted.

Issues decided:
1. Whether Mr and Mrs Kingston should be assessed to the income purportedly distributed to the Bethel Trust; 2. Whether there was an avoidance of tax due to fraud or evasion under the former section 170(2) of the ITAA 1936 such that the Commissioner could make amended assessments after the expiration of 4 years; 3. Whether the administrative penalty imposed should be remitted.

ATO view of decision:
During the course of the litigation/hearing, the taxpayers conceded that the purported distribution to the Bethel Trust was a sham and that the Bethel trust should be disregarded. They contended that the tax liability should fall on the trustee of the Kingston Family Trust. | The Commissioner contended that the tax liability should fall on Mr and Mrs Kingston on the basis of evidence before the AAT of the Trustee exercising the discretion to make payments or apply income of the Trust in favour of the relevant benefiaries in reliance on section 101 ITAA 1936. In the alternative, the Commissioner contended clause 4.2 of the Trust Deed applied such that the purported trust distributions to the Bethel Trust should be assessed to Mr Kingston as the primary beneficiary. | The decision of the AAT in applying clause 4.2 of the Kingston Family Trust Deed to make the entirety of the distribution assessable to Trevor Kingston is consistent with the alternative submission made by the Commissioner. | In terms of fraud and evasion, the AAT found that in light of the taxpayers' concession of sham that the facts presented as a clear case of evasion and the Commissioner's power to amend under the former s170(2)(a) was enlivened. In addition, the administrative penalty imposed by the Commissioner at 50% of the shortfall amount was confirmed. | The Commissioner considers the AAT's decision to be broadly consistent with TA 2005/1 and TD 2005/34.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | Nil | Implications for Law Administration Practice Statements | Nil

Legislative references: Income Tax Assessment Act 1936 170(2)(a) Taxation Administration Act 1953 Schedule 1, Div 284 Schedule 1, 298-20(1)
Case references: Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 Dixon (as trustee) v Commissioner of Taxation [2008] FCAFC 54 (2008) 167 FCR 287 2008 ATC 20-015 (2008) 69 ATR 627 Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 (1991) 22 ATR 726 91 ATC 5000 [1991] HCA 51 Re Lack and Federal Commissioner of Taxation [2012] AATA 823
Subject references: tax avoidance scheme trusts distribution of income amendment to original assessments discretion to remit penalties in whole or in part