25 January 2015

Tax Tales (The AAT has fun with Dick and Dora)

Noting [1] through [7] and [9] of WT86/1506, WT86/1507 and Commissioner of Taxation [1988] AATA 396; (1988) 19 ATR 3270; 88 ATC 355 as a quirky example of legal writing -
1. Once upon a time, there were two little children called Dick and Dora. They had a Mummy, a Daddy and a Family Trust. The Family Trust was very fond of Dick and Dora and, in 1979, it gave each of them $1000. That is called a "distribution". Their Mummy and Daddy also loved Dick and Dora very much. That is why Mummy and Daddy lent each of them $19,000. This involved a great sacrifice, for no matter how hard Mummy and Daddy searched through the house, they couldn't find the cash, so they had to borrow it, and that is a bad thing. So, with cap in hand, Mummy and Daddy went to the Family Trust and pleaded: "Please Mr Trust, can we borrow some money for our little children?" And the Trust, which was a good-natured trust, replied: "Sure buddy, that's OK". So they borrowed the money, onlent it to their children, who lent it back to the trust and they all lived happily ever after. The End
2. But even in fairy tales, there is usually a fly in the ointment. The "fly" in this tale is the fact that the trust didn't have the money either. Now that WAS a blow. But, as Milton once observed, when the devil is desperate, he'll eat flies, whether in the ointment or out. Now it so happened that Daddy, who owned a Finance Company, was a wizard with books of account. All he needed was a book, a pen and a few mirrors. If you watch carefully, you'll see how it is done.
3 It all began on June 2 1977, when the family trust credited Daddy's and Mummy's loan accounts with a lot of money, money that the trustee didn't have. That caused the trust account to be what grown-ups call "in the red" or "overdrawn". Now trustees who allow their trust account to be overdrawn are known as "naughty" trustees. This trustee knew that he was naughty, so he made himself a hot lemon drink, added an aspirin, stirred mightily and drank the magic potion down to the last drop. This is a well-known cure for overdrawn trust accounts and, hey presto, the account was in credit again. The whole process only took a few seconds and can be done by anyone who has a lemon, an aspirin, a clever trustee and an obliging bank manager. Watch how the trick was done in slow motion.
4. Mummy and Daddy each wrote out a cheque for $19,000 and gave one cheque to Dick and the other one to Dora. Then Dick, who was nearly four, and Dora who was not yet two, took these cheques and toddled off to the Bentley branch of the Australia and New Zealand Savings Bank Limited, looking to the left, looking to the right and left again to get to 1136 Albany Highway where they each opened a savings account. They signed the application forms and deposit slips and then put all that money in the hank in the cutest little handwriting you have ever seen. Young toddlers opening bank accounts, it seems, so counsel for the applicant assured me, is not at all unusual: "Banks encourage that sort of thing". Dick, who was a bright little lad, and streetwise beyond his years, asked the bank manager what rate of interest he and his sister could expect on their money. The rate was disappointing and, doing a quick calculation on his cute little fingers, he concluded that he and Dora could make a much more profitable investment with the family trust. "Let's lend the money back to the trust" he whispered to his sister, hoping the manager could not hear him. After all, they had just opened two accounts and it WAS a bit embarrassing to close them down again so soon. But Dora, less worldlywise than her brother, and saving up for her second birthday party, was not convinced. It all seemed rather, well, disloyal. To cut a long story short, after some highpowered financial discussion between brother and sister, they agreed on a compromise - they would lend the family trust $18,995, and each leave $5 with the bank for lollies and other necessaries. As luck would have it, and by sheer coincidence, the family trust also had its bank account with the same bank and at the same branch so that the money didn't have far to travel. All of it - save the $5 left in the accounts - had time to play "Here We Go Round The Mulberry Bush" and "Round Robin Hood" and other children's games and still be home in time for dinner. It was all a lot of fun. So much fun in fact, that everyone played the same games the next year (1979), and the next year and the So that on June 15 1979, to be exact, each child was "paid" an amount of $23,743.75, which was, it seems, made up of the loan monies lent to the trust together with interest (not quantified) and something extra (presumably another "loan"). Each child then waddled off to the bank again to pay in the money, draw out $23,740, play Round Robin and go home. 5. No one was called to depose to these events, I have been asked to assume them because the various amounts referred to appeared as credits and debits in Dick's and Dora's accounts. The only variation from the 1978 year was that this time the withdrawal was credited, not to the family trust, but to Daddy's Finance Company, which duly recorded the loans for each child in its books and resolved to repay them on demand with interest at 11.95% in advance. Dick's savings bankbook, which was made an exhibit, shows - however fleetingly - a credit of $26,575 for 18 April 1980, which accurately reflects a "repayment" of the loan, together with interest at 11.95%. Meanwhile, back at the bank, the lolly money ($5) attracted interest, and each child's account was credited with 18 cents on 7 June 1979.
6. The events recorded above disclose that in the relevant year, each child received as income
(i) 18 cents bank interest
(ii) $1000 from the family trust
(iii) interest on money lent.
7. It is tempting to treat these events as a fairy tale and to dismiss it good-humouredly as an interesting variation on a fiscal theme in A minor; alternatively, one could equally conclude that the various acts done and entries made had no other purpose than to give the appearance of creating between the parties legal rights and obligations which the parties had no intention of creating and - in the case of Dick and Dora - had no legal capacity to create. However, this was not argued by the Crown, presumably because such a finding would result in revealing a tax liability against a party from whom the tax is no longer recoverable. In the result, the case was fought pragmatically, as a salvage operation, on the basis that the interest received by Dick and Dora constituted the net income from a trust estate, so that, when taken in conjunction with the distribution from the family trust, sec. 7A of the Income Tax (Rates) Act 1976 would apply in respect of the multiple trusts. ...
9. If one ignores all the hanky panky involved in these transactions in the year now under review (1979) and starts from first principles, we find two parents "lending" some $38,000 to two toddlers barely able to walk. These funds are then onlent to the father's finance company. I have not been informed about the mechanics by which these transactions were achieved other than being assured that it was all done by the infants themselves. So be it. Nevertheless, whilst I am prepared to assume that Dick and Dora are bright little children and well advanced for their age, I am taking notice of what must surely be notorious, viz that children of such tender years are incapable of engaging in such transactions unaided. I am therefore satisfied that there was at all times a person or persons unknown who manipulated these funds on behalf of these infants. I can think of no better description for such person(s) than "trustee".