Time to Try a “Nutha Way” The Voice of Indigenous Young People

first defendant to the deceased as his attorney: Spina v Permanent

Custodians Limited [2008] NSWSC 561; (2008) 13 BPR 25,463 at [113][121] and [153]; Ward v Ward (No. 2) [2011] NSWSC 1292 at [3]; Cohen v

Cohen [2016] NSWSC 336 at [62][67]. 2. It was qualified by an obligation to exercise the power of attorney bona fide and not for an improper, foreign purpose (that is, an obligation not to commit a “fraud on the power”): GE

Dal Pont, Powers of Attorney (Lexis

Nexis Butterworths, Australia, 2nd ed, 2015), paragraphs [6.64]-[6.65];

PW Young, C Croft and ML Smith,

On Equity (Law Book Co, Sydney, 2009), paragraphs [8.880]-[8.950]; G

Thomas, Thomas on Powers (Oxford

University Press, 2nd ed, 2012), Ch 9, especially paragraphs [9.01]-[9.05] and [9.90]-[9.91]; Vatcher v Paull [1915] AC 372 at 378.

6. Case Examples

( a ) Problems that can arise when acting on instructions from an enduring attorney

Some of the problems that can arise when acting on instructions from an enduring attorney are illustrated in the case known as McFee v Reilly7 that was heard by Lindsay J at first instance.8 On appeal the case was heard by Leeming JA (with whom McColl JA agreed); and Payne JA (who also agreed with Leeming JA but who wrote a separate judgment). Frank Riley and his wife, Peg, conducted a farming partnership on two properties near Forbes in central New South Wales called “Malaya” and “Boronga”. Frank and Peg had four daughters: Margaret, Carmel, Genevieve, Patricia (known as Tish), and a son Joseph, all of whom were adults. In 2000 Frank had given an Enduring Power of Attorney exercisable jointly and severally by Peg and Joseph. In 2003 Frank engaged a solicitor (Mr Buckley) to prepare a Will. The Will gave all of his real and personal property, save for “Boronga” to his four daughters as joint tenants. A separate clause purported to devise “Boronga”, but failed to nominate a devisee. In about 2008 and certainly from 2009 onwards, Frank became mentally incapable of managing his own affairs. In 2009 acting pursuant to the power of attorney Peg caused “Boronga” to be transferred to the four daughters as joint tenants for a consideration of $1, though its value at the time was assessed at $815,000. The daughters obtained title by registration. Peg took this course with the involvement of a solicitor, Mr McCallum, who was engaged to represent the interests of Peg and her daughters. His retainer extended to estate planning and prior to effecting the transfer of “Boronga” he requested and read Frank’s 2003 will. Frank died in December 2012. In 2014, Joseph lodged caveats affecting “Boronga” and commenced proceedings against his mother, his sisters and Mr McCallum. Lindsay J made orders rectifying Frank’s will to make Joseph the devisee of “Boronga”, upholding Joseph’s claim that “Boronga” was held on trust for Frank’s estate. This required his sisters to transfer title to him and reserved for future determination the quantum of damages at common law that Joseph might be entitled for his successful claim in negligence against Mr McCallum. The sisters appealed, Joseph and Mr McCallum both cross-appealed. Peg entered a submitting appearance to the appeal.

Court of Appeal Findings:

1. The Court of Appeal allowed the appeal in part and dismissed the cross-appeal. The Court of Appeal upheld the decision of Lindsay J in regard to: ( ii ) The rectification of Frank’s Will. The failure to nominate a devisee for “Boronga” was an obvious clerical error, and the facts amply supported the inference that Frank meant to leave “Boronga” to Joseph. ( iii ) There was no agreement between Frank and Peg that “Boronga” would be transferred to their daughters when Frank could no longer farm that land. ( iv ) Peg’s transfer of “Boronga” to her daughters was in breach of her fiduciary duty to Frank. Mr McCallum who acted for both Peg and her daughters on the transfer, had knowledge of Peg’s breach of duty, which knowledge was to be imputed to the daughters. 2. The Court of Appeal held that the primary judge erred in holding, in the absence of a finding of “actual fraud, moral turpitude”, the daughters’ indefeasible title was held on trust for Frank’s estate. However, the daughters were liable to account to Frank’s estate for the value of the property (“Boronga”) obtained in breach of fiduciary duty to their knowledge. 3. Mr McCallum, a solicitor, owed a common law duty to Joseph to take reasonable care to see that Frank’s testamentary wishes, as expressed in his 2003 will, were not frustrated by his attorney’s breach of fiduciary duty. Mr McCallum breached his duty of care owed to Joseph by failing to critically examine Frank’s testamentary intentions and their consistency with Peg’s instructions.

This breach was causative of

Joseph’s loss, being the transfer to his sisters of “Boronga”, which he otherwise would have received under

Frank’s will.

( i ) In finding that the solicitor owed Joseph a duty of care, Payne JA stated that this case did not sit comfortably within the principles applicable to the imposition of a duty of care explained by the plurality (French CJ, Kiefel and Keane JJ) in Badenach9: [18] It must be conceded, as the appellants point out in the present proceedings, that the approaches taken by members of the majority to the question whether a duty existed differed in some respects. Nevertheless, it may be seen from most of the judgements that the duty found to be owed by the solicitors to Mrs Van Earp as the intended beneficiary had its source in the solicitor’s obligations arising from the retainer between the solicitor and her client. The solicitor was obliged to exercise care and skill in giving effect to her client’s testamentary intentions. The interest of the testatrix and the intended beneficiary in those intentions being carried into effect were relevantly the same. Recognising a duty to the intended beneficiary would not involve any conflict with the duties owed by the solicitor to her client, the testatrix.

[19] … The scope of the solicitor's duties will be set by the terms of the retainer with the client. The solicitor would be entitled to invoke that contract in defence of, or to limit, any claim by a disappointed beneficiary.” (Footnotes omitted) ( ii ) Payne JA stated that the judgment of Gageler J in

Badenach also poses a challenge to the imposition of a duty of care here:

[59] … Confined to taking reasonable care to benefit the intended beneficiary in the manner and to the extent identified in the testator’s instructions, the solicitor’s tortious duties to that beneficiary is coherent with the solicitor's contractual and tortious duties to the client, thereby allowing the two to co-exist. The duty is coherent because it admits no possibility of conflict: the interests of the client and the interest of the beneficiary necessarily coincide completely. (Footnotes omitted) ( iii ) Payne JA stated at [195]-[196]: The solicitor here was not the solicitor who drew Frank’s will, although he was aware of its terms. As Leeming JA explains, however the solicitor must have understood that Frank’s will left “Boronga” to somebody other than Peg’s daughters. So much is clear by the bequest of the residue to the daughters in the succeeding paragraph of the will. Not without hesitation, I have ultimately come to the conclusion, for the reasons given by Leeming JA that the remarks of the High Court in Badenach are not to be understood as applying to a case where the grantor of an enduring power of attorney has become incapable. In reaching this conclusion I am influenced by the close analogy between the duty owed to Mrs Van Erp and the duty owed to the incapable grantor of the power of attorney, Frank. I am also influenced by the fact that the imposition of a duty of care of the kind found here will be rare indeed. The duty is confined to a solicitor engaged to advise the holder of an enduring power of attorney about estate planning issues where the grantor of the power has become incapable. In advising the grantee of the power as part of the estate planning retainer about an inter vivos transfer of property, the solicitor is obliged to exercise care and skill in giving that advice, taking into account any separate testamentary intentions of his or her client, the incapable grantor. In this limited way the duties owed to Frank and to the beneficiaries under Frank’s will coincide completely.

The other members of the family regarded the giving of the power of attorney similar to “giving the crooks the keys to the bank.”

( b ) ( c ) Liability of executors and administrators where misuse of a power of attorney has occurred

In Bird v Bird [2013] NSWCA 262, McFarlane JA (with whom Beasley P and Ward JA agreed) decided an appeal in a case where there had been misuse of enduring powers of attorney10 which not only resulted in liability for the executors but also for the solicitor who drafted the power of attorney.

In his 1991 will, Mr Percy Bird gave his wife Mona a legacy of $300,000 and two properties owned by him with the residue divided equally between his children Warwick,

Rodney and Deborah. Also, in 1991

Percy executed a Power of Attorney in favour of Mona, Warwick and

Rodney that was drafted by his solicitor, Mr Cannington who also prepared his will and a codicil in 1994. In the codicil Percy stated that if two of his properties had been sold by the date of his death Mona was to have a legacy of $700,000 that was reduced to $500,000 if she had “acquired another home”.

Mr Cannington also prepared a second power of attorney in 1994 in the same terms as the first. In 1991 Percy became ill and up until that time Mona received a weekly allowance from him and possessed only a bank account in her own name and a property that she had inherited from her parents. In 1993 Percy was admitted to hospital and thereafter to convalescent and nursing homes where he remained until his death.

At about the time of his admission into hospital the bank accounts operated by Percy were transferred to accounts in the joint names of himself and Mona. In 1993 and 1994 with the assistance of Warwick and Rodney and acting under the

Powers of Attorney, Mona sold four properties belonging to Percy and deposited the funds into an account in her own name. In late 1994 Mona purchased a property upon which she built a home for herself to live in.

The total expenditure on this property was $228,328.05. After Percy’s death on 2 September 1996, probate of his will was granted to Warwick, Rodney and Mr Cannington. Partial payments of Mona’s legacy of $500,000 commenced on 28 November 1996.

In total she was paid $445,586.07 of the legacy. In 2005 Deborah commenced proceedings to which

Mona was later joined but no claim for relief was made against her.

Deborah claimed that Warwick and

Rodney received from Mona part of the sale proceeds with knowledge that they were obtained by her without Percy’s authority and that they were liable under the first limb of the principles in Barnes v Addy (1874) LR 9 Ch App 244, to indemnify the estate in respect of Percy’s loss of that part of the proceeds. Deborah claimed that the executors breached their duties by not attempting to recoup the sale proceeds from Mona (that is, they allowed the estate to ‘waste’) and seeking orders that they committed a devastavit11 and that they indemnify Percy’s estate for the loss it suffered.

At first instance Rein J rejected the Barnes v Addy claim on the basis that Warwick and Rodney were not proved to have known that their receipts were of funds Mona obtained by acting without Percy’s authority and the devastavit claim was rejected on grounds that Deborah had suffered no loss and the claim was in any event statute barred.

Court of Appeal Findings:

1. Deborah’s appeal in relation to her

Barnes v Addy claim was rejected. 2. Deborah succeeded in relation to her devastavit claim. The Court of Appeal held that the executors’ cause of action against Mona only became statute barred in 1999 after the expiration of six years from Mona’s first misappropriation. Deborah’s proceedings were commenced within time because they were commenced within six years of the relevant date in 1999.

3. In the course of implementing its decision the Court of Appeal reduced by 50 per cent Deborah’s entitlement against Warwick and Rodney to her costs of the appeal to reflect her lack of success on her severable, Barnes v Addy claim against them. She was given the whole of her appeal costs from Mr Cannington as she was successful on her only claim against him. The respondents were ordered to pay the whole of Deborah’s costs at first instance as failure at first instance on one of multiple claims does not ordinarily result in a plaintiff being deprived of his or her costs.

( c ) Breach of power of attorney

Grant v Grant12 is a case where there was a misuse of a power of attorney and the attorney acted outside the authority conferred by the power of attorney.

Nerez held a power of attorney from her father, Dr Grant and depleted his estate of over $4 million between 2011 and 2017. In 2017 Nerez caused the transfer of Dr Grant’s last remaining property to her daughter for nominal consideration. The estate contends that this transfer was for $900,000 and that Nerez and her daughter never intended to pay that amount. The property has been leased to Nerez for life. In October 2017 Nerez transferred $160,000 from Dr Grant’s accounts using the power of attorney and applied the funds for her and her daughter’s benefit. In accordance with the orders of Kunc J the granddaughter repaid $60,000. As a result, $100,000 remains unaccounted for and outstanding. The estate contends that the power of attorney did not confer on Nerez power to make gifts to herself or other family members and that Nerez’s actions were a breach of the power of attorney. The estate seeks to have the transfer of property set aside and to recover the funds transferred from Dr Grant’s accounts.

NSW Supreme Court Findings:

1. Slattery J ordered that the second defendant transfer the property to the plaintiff for no consideration.

The Court concluded that Nerez did not take the trouble to read the

Power of Attorney at the time or to seek advice about it before going ahead with the transfer of the Killcare property to Kashaya. Because of the substantial nature of this transaction, relative to Dr Grant’s assets at the time and because she was gaining a substantial benefit as a result, an honest person in her position would have checked the powers conferred on her under the Power of Attorney and obtained advice as to whether she was authorised to use the Power of Attorney in these circumstances. The Court found that the transfer of the property was not in accordance with Dr Grant’s wishes and instructions as contended by the defendants and that a letter tendered by the defendants as evidence of Dr

Grant’s wishes and instructions was fabricated.

2. Slattery J ordered that the first defendant pay compensation to

Dr Grant’s estate for the money transfers of $100,000 and $34,700 that she authorised. The defendants contended that the cash withdrawals made from Dr Grant’s bank accounts were consistent with his wishes. The

Court found that the large number of withdrawals made over the period were well beyond anything that could possibly be related to Dr Grant’s care and is so great that it depleted his estate to the point of placing him in penury. The Court found that the total nursing home fees paid by Dr Grant during this period were only $119,823.47, being less than 3% of the $4 million withdrawn from the accounts and Dr Grant was left with a total of $20,769 in his two accounts. He was unable to pay his ongoing nursing home fees from his remaining resources and had no prospect of paying a deposit at the nursing home. The Court found that the power of attorney did not empower Nerez to make gifts to herself or to others by use of the instrument. The estate is entitled to interest on these sums to be assessed in accordance with the principles applicable to dishonest breaches of fiduciary duty: Hagen v Waterhouse (No. 2) (1992) 34 NSWLR 400.

7. Forms of Relief

( a ) Devastavit

A devastavit is an old tort remedy available where loss is suffered by an estate.

Definition13: He (or she) has wasted. The personal representative of a deceased estate is under a duty to properly preserve, protect and administer estate assets. Breach of the duty renders the personal representative personally liable for any loss to the estate: Re Tankard; Tankard v Midland Bank Executor and Trustee Co Ltd [1942] Ch 69; 72; [1941] 3 All ER 458; Dalrymple v Melville (1932) 32 SR (NSW) 596; 49 WN (NSW) 206; Re Diplock; Diplock v Wintle [1948] Ch 465; [1948] 2 All ER 318.

A devastavit occurs where loss is suffered by an estate due to a breach of duty by the personal representative of a deceased estate to properly preserve, protect and administer estate assets. The personal representative is liable for losses to the estate arising from the breach.

( b ) Advantages and Disadvantages (or when not to use)

( iii ) Advantages:

The advantages of bringing a devastavit claim is that it can be brought alongside other administrative actions against a personal representative of a deceased estate. For example, bringing a devastavit claim together with a claim under the first limb of Barnes v Addy14 similar to the appellant in Bird v Bird. 15 A devastavit claim can be made where an estate has suffered loss due to the personal representative of the estate misappropriating the assets of the estate, but also where the estate suffers loss due to the negligence of the personal representative or the misadministration of estate assets by the personal representative. In both these situations the personal representative of the estate is liable for any loss that is suffered by the estate. In Bird v Bird16 the appellant brought a devastavit claim against the executors of the estate on the basis that they should have known that the power of attorney had misappropriated the proceeds from the sale of estate assets. The executors had breached their duty to call in and collect the assets of the estate.17

( iv ) Disadvantages:

The disadvantages of bringing a devastavit claim are that any payments received by the claimant from the estate will offset the amount of the claim. In Bird v Bird18 the claimant’s entitlement from the estate was reduced by an amount to reflect the payments they had received from the estate. If it can be proved that the claimant acquiesced to the devastavit then the claim will be rejected. In

Holder v Holder19 the plaintiff was found to have acquiesced to the sale of two farms that formed part of the deceased estate to his brother when the plaintiff accepted his share of the sale proceeds. The plaintiff objected to the sale of the property to his brother because his brother was a personal representative of the estate and should be disentitled from purchasing the property.20

Where a devastavit claim is brought, a court may relieve a personal representative, either wholly or partly, from personal liability arising from a breach of duty where they have acted honestly and reasonably and ought fairly to be excused for the breach and for failing to obtain the directions of the court in the matter in which the breach was committed.21

( c ) Seeking approval from the State Administrative Tribunal

A personal representative is able to seek the approval of the State Administrative Tribunal for a transaction where they are concerned that giving effect to the transaction would result in them breaching their duty to preserve, protect and administer the assets of the estate.22 In Reilly v Reilly23 a power of attorney transferred a farm to her four daughters for nominal consideration and Justice Lindsay held that she could have sought the authorisation of the State Administrative Tribunal for the transaction before effecting the transaction to avoid breaching her obligations. Section 109(2) (a) Guardianship and Administration Act 1990 (WA) allows the attorney to apply to the State Administrative Tribunal to seek an order to revoke or vary the terms of an enduring power of attorney. Section 109(2)(b) Guardianship and Administration Act 1990 (WA) allows an attorney to seek directions from the state administrative tribunal in relation to matters connected with the exercise of the power of attorney or the interpretation of the terms of a power of attorney.

( d ) Other Forms of Relief

A beneficiary is able to bring a claim under the first or second limb of Barnes v Addy. 24 Justice Lindsay in Reilly v Reilly25 explained the two limbs as follows and held that the first limb does apply to fiduciaries in general:

The rule in Barnes v Addy is conventionally treated as involving two forms of liability, respectively described as the “first limb” (involving a “knowing receipt” of trust property) and the “second limb” (involving

“knowing assistance” in a dishonest and fraudulent design on the part of a trustee).

Although the High Court of Australia, in Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230

CLR 89 at 141 [113], left open the question whether the first limb of

Barnes v Addy applies generally to persons dealing with some type of fiduciary other than a trustee, the

Court of Appeal has accepted that it applies to fiduciaries (Simmons v

NSW Trustee and Guardian [2014]

NSWCA 405 at [86]-[92]) and, that being so, I am bound in these proceedings to do likewise.

Conclusions

This article has highlighted some of the problems that can arise from the misuse of Powers of Attorney and in particular, Enduring Powers of Attorney. Regrettably, abuse of Powers of Attorney is becoming more frequent. This trend is likely to increase with an ageing population. The WA Parliamentary Select Committee has made practical suggestions for the reform of Powers of Attorney and to the Guardianship and Administration Act 1990. These suggestions could be considered with the statutory review of the Guardianship Act. The result may be a need for a Powers of Attorney Act in Western Australia similar to that in other Australian States and Territories. The ALRC recommendations are based on an Australia wide view. The problem has been recognised nationally in Australia. The need to reform Powers of Attorney is now widely recognised. Efforts have been made to attempt to co-ordinate the laws of the States and Territories as attaining uniformity is extremely difficult. The States will have to update and clarify their laws on Powers of Attorney. The recent Report by the South Australian Law Reform Institute26 will be a valuable guide along the course ahead. In the interim, it is hoped that this article gives practitioners some guidance in navigating the increasingly turbulent waters of Powers of Attorney.

Endnotes

1 Rebecca Turner, ‘How enduring power of attorney documents enable children to rip off the elderly’, ABC News (Web Page, 16 December 2018) <https://www. abc.net.au/news/2018-12-16/unrestricted-enduringpower-of-attorney-ripping-off-elderly/10621388>. 2 Cited in “Dodging the Hazards of Enduring Powers of Attorney, With a particular focus on conflict transactions.” In a presentation by Ines Kallweit, Principal Solicitor, KHQ Lawyers, Level 15, 440 Collins Street, Melbourne, Victoria 3000 in 2020. 3 Royal Commission into Aged Care Quality and Safety (Interim Report, October 2019) vol 1. 4 Select Committee into Elder Abuse, Parliament of Western Australia, ‘I Never Thought It Would Happen to Me’: When Trust Is Broken, (Final Report, September 2018). 5 Australian Law Reform Commission, Elder Abuse- A National Legal Response (Final Report No 131, May 2017). 6 Royal Commission into Aged Care Quality and Safety (Interim Report, October 2019) vol 1. 7 McFee v Reilly [2008] NSWCA 322. 8 The case at first instance was reported as: Reilly v Reilly [2017] NSWSC 1419. 9 Badenach v Calvert (2016) 257 CLR 440; (2016) HCA 18. 10 The powers of attorney were made under the Conveyancing Act 1919 (NSW), in which a line was drawn through a clause in the following terms: “In the exercise of the authority conferred on him/them by Section 163B of the Conveyancing Act 1919, my attorney/ies is/are authorised to execute an assurance or other document or do any other act whereby a benefit is conferred on him/them.” In both powers of attorney, the word “NIL” appeared under a heading “Conditions and Limitations”. 11 The personal representative of a deceased estate is under a duty to properly preserve, protect and administer the estate assets. Breach of the duty renders the personal representative personally liable for any loss to the estate. A devastavit is “…a mismanagement of the estate and effects of the deceased, in squandering and misapplying the assets contrary to the duties duty imposed on them, for which executors or administrators must answer out of their own pockets, as far as they had, or might have had, assets of the deceased”. (Bac. Abr., I, 1. Re Stevens [1898] 1 Ch. 162 at 177; and see: Re Tankard; Tankard v Midland Bank Executor and Trustee Co Ltd [1942] 1 Ch 69, 72; Dalrymple v Melville (1932) 32 SR (NSW) 596; 49 WN (NSW) 206; Re Diplock; Diplock v Wintle [1948] Ch 465). 12 Grant v Grant (No. 2) [2020] NSWSC 1288. 13 LexisNexis Concise Australian Legal Dictionary, Fifth edition, 2015 at 185. 14 Barnes v Addy (1874) LR 9 Ch App 244. 15 Bird v Bird [2013] NSWCA 262. 16 Ibid. 17 Ibid. 18 Ibid. 19 Holder v Holder [1968] 1 Ch 353. 20 Ibid. 21 Trustees Act 1962 (WA), s 75. 22 Section 109 of the State Administration Act (WA); see: Reilly v Reilly [2017] NSWSC 1419, [112]. 23 Reilly v Reilly [2017] NSWSC 1419, [112]. 24 Barnes v Addy (1874) LR 9 Ch App 244. 25 Reilly v Reilly [2017] NSWSC 1419, [143]-[144].

Developing the limits of section 100A:

when is a distribution to a discretionary beneficiary not a distribution?

By John W Fickling, John

Toohey Chambers Perth and Ground Floor Wentworth Chambers Sydney

Introduction

Discretionary trusts are a common structure, often recommended and implemented by accountants and lawyers and adopted by families for business and investment interests.

As is reasonably well known, prior to or on 30 June of every year, the trustee of a discretionary trust (or in the case of a corporate trustee, the directors of the corporate trustee) must make a resolution to distribute the net income of the trust to beneficiaries. Broadly stated, when not all of the net income of the trust is distributed, the amount not distributed is assessable to the trustee, generally at the highest marginal income tax rate, presently 45% prior to the application of the Medicare Levy of 2%. Accordingly, there is, broadly stated, an incentive to distribute all income to beneficiaries of the discretionary trust. As is reasonably well known, resident individuals may have marginal tax rates which range between 0% and 45% before the application of the Medicare Levy. Corporations, broadly stated may have a tax rate of 27.5% or 30%.

However, s. 100A of the Income Tax Assessment Act 1936 (Cth) (ITAA36)1 may operate to cause a distribution to a beneficiary to be disregarded, so that the particular trust income distributed to the beneficiary will instead be assessed to the trustee. As mentioned, when income is assessed to the trustee as a result of it not being distributed to beneficiaries, this is likely to result in that income being taxed at the highest marginal tax rate. Section 100A broadly provides that where a beneficiary is made presently entitled who is party to a reimbursement agreement such that he, she or it does not obtain full benefit from that distribution, s. 100A may apply. This article explores the potential scope of s. 100A and some of the key issues likely to arise. Section 100A, inserted into the tax law in the late 1970s has been the subject of precious few cases. The leading decision is that of the Full Court in Commissioner of Taxation v Prestige Motors (1998) 82 FCR 195 (Prestige Motors) as decided by Beaumont, Hill and Sackville JJ in New South Wales, over 20 years ago and Idlecroft v FCT [2005] FCAFC 1412 (Idlecroft), over 15 years ago, as decided by Ryan, Tamberlin and Kiefel JJ (as the Chief Justice of the Commonwealth then was). In more recent times there was a single interlocutory hearing which touched on the section in Nelson v Commissioner of Taxation [2017] FCA 8193 (Nelson), over three years ago, before the late Gilmour J in Western Australia, in which the author appeared as counsel. There was another matter filed in the Western Australian registry which was later discontinued which involved s. 100A.

Additionally, in tax practice where practitioners advising clients are highly reliant on the Commissioner’s formal public advice, which may provide a safe harbour when followed, there has for several years been foreshadowed the release of a s. 100A ruling from the Commissioner of Taxation (the Commissioner). Current Australian Taxation Office (ATO) website material posted in November 2019 indicates there is a draft s. 100A ruling on the scope of the ordinary family and commercial dealing exceptions to s. 100A undergoing private consultation before public consultation is due to occur in April 2021.4 However, elsewhere on the ATO website, there is notification that such a ruling was being worked on as early as October 2018, but that the earlier version covered whether the requisite purpose was met.5 At present, on the basis of the aforementioned, there seems little likelihood of a formal ruling being finalised prior to the end of the 30 June 2021 financial year. That leaves, in the case of the Commissioner who administers the law through audits and assurance activity, the Commissioner’s guidance on his website as indicative of his practice, last modified on 12 May 2016.6 That said, despite the case law, and despite the foreshadowed guidance, the general understanding amongst tax advisors is that the Commissioner’s auditors in the field are regularly considering the application of s. 100A.

Section 100A

A broad explanation of s. 100A, from the perspective of the ATO is provided on the ATO’s website in his guidance provided therein;7 in this respect, a reimbursement agreement, at its simplest, is described as follows:

“A reimbursement agreement generally involves making someone presently entitled to trust income in circumstances where both:

• someone other than the presently entitled beneficiary actually benefits from that income, and • at least one party enters into the agreement for purposes that include getting a tax benefit.” Turning to the legislation, as a summarised version of the legislation of s. 100A, it can be broadly said the following four elements are required before s. 100 may be enlivened: 1. There must be a reimbursement agreement as generally explained by subsection (7) of s. 100A that involves the “payment of money or the transfer of property, or the provision of services or other benefits” to someone other than the beneficiary; this, inter-alia, as sub-section (12) expands to mean, includes the forgiveness of debt; agreement is given its

“widest definition” in subsection (13) (Prestige Motors; Idlecroft) to include broadly any arrangement; and as noted by the late Hill J in

East Finchley v FCoT (1989) 90

ALR 457, cited with approval in

Idlecroft, “the question who are parties or necessary parties to an arrangement must depend upon the circumstances of each particular case and the legislative context under consideration”; 2. There must be purpose as generally explained by sub-section (8) of s. 100A, where the purpose of the reimbursement agreement must be to secure an exemption or a lowering of income tax; s. 100 subsection (9) provides, that purpose may be the purpose of any party; as Prestige Motors noted, unlike

Part IVA, any question of subjective purpose is not excluded;

... there is, broadly stated, an incentive to distribute all income to beneficiaries of the discretionary trust.

3. The arrangement must not pertain to an “ordinary family or commercial dealing” as generally set out by sub-section (13) of s. 100A; and 4. Where the particular beneficiary is already a beneficiary of a trust (for example, has been receiving distributions from the trust in previous years), then only that amount which is capable of being identified as exceeding the amount which “would have been, or could reasonable expected to have been” distributed, as generally provided for by sub-section (5). As was recorded in Idlecroft and broadly accepted, “The commissioner submit[ted] that the determination of this question requires each appellant to prove that the identified beneficiaries would probably have received, or could reasonably be expected to have received, the trust income in the event that there was no reimbursement agreement”; that ss. (5) is a ““but for” test”. This sub-section may be particularly relevant, say in the case of family trusts where the Commissioner asserts a particular beneficiary has been distributed more than he or she would have otherwise received in any given year (for example, an adult child of the controller). In some cases, the position (where supported by evidence) may be that the beneficiary was going to get that amount regardless, so there would be no “additional amount”.

Although it is not part of the legislation, in terms of understanding the potential application of the legislation, at the time it was introduced, it noted that there has been significant reference in the case law to the 11 June 1978 Treasurer’s statement, that of Treasurer Howard, as he then was explaining what s. 100A was proposed to address:

“A feature of several of the schemes is a very wide power given to the trustee under the terms of the trust instrument as to the distribution or application of trust income. …

In some cases, the nominal beneficiary selected is a taxexempt body, such as a charitable institution or sporting association.

In other cases, it is a company, set up for the purpose by the promoters of the scheme, that by one means or another escapes payment of tax on the income. …

The essential element common to the schemes is that, while the income concerned is effectively freed from tax in the hands of the nominal beneficiary, the terms of the underlying arrangement ensure that the beneficiary does not enjoy anything like the full use or benefit of the income. …”

Much of the mischief capable in the late 1970s has now been closed out by other provisions – for example non-resident beneficiaries no longer enjoy a tax-free threshold – but s. 100A remains; and as Prestige Motors noted, “the examples given [in extrinsic materials] were intended to be illustrative, and not an exhaustive statement of the transactions that were to be subject to the legislation”.

Two extremes – a clear cut case example and a literal reading of the Commissioner’s website guidance

Clear cut case example

As a clear-cut example, I outline the following situation: 1. Beatrice controls the Beatrice Family

Trust.

2. The Beatrice Family Trust has derived $300,000 of income during the current income year (30 June 2021) which must be distributed on or prior to 30 June 2021 so as to ensure the trustee is not subjected to income tax at the top marginal rate.

3. Beatrice and her partner have two children at Hightown Private School.

The annual fees amount to $60,000 and are now due and payable on 30

June 2021. That is, Beatrice owes

Hightown Private School $60,000. 4. Beatrice is an acquaintance of the

Hightown Private School bursar,

Ms Quiñones. They agree that

Beatrice will not need to pay the fees if $60,000 is distributed to the

Hightown Private School on 30 June 2021.

5. The trust distribution is made as foreshadowed, and Beatrice receives an updated account statement from Hightown Private

School showing she no longer owes the fees.

6. Hightown Private School, being an educational institution, pays no income tax.