The decision of the Tribunal in Dalby’s case
The Tribunal in Dalby’s case noted that the discretion to permit the trustee to amend the grounds of objection “must be exercised by reference to considerations of justice on which such decisions are regularly made in litigation”. The Tribunal further noted that, based on the decision in Lewski v FCT [2017] FCAFC 145 (‘Lewski’s case’) and Aon Risk Services Australia Limited v Australian National University [2009] HCA 27, a just resolution of proceedings remains paramount, but speed and efficiency, in the sense of minimum delay and expense, are essential to a just resolution. Although, this “does not mean that an application for amendment of pleadings must be refused because it involves some delay and waste of costs, as it inevitably will”. It is the extent of the delay and costs, together with the prejudice which might reasonably be assumed to follow, which are to be weighed against the grant of permission to a party to alter its case.
Briefly, in relation to these factors, the Tribunal noted that the importance of the trust resolution to the trustee weighed in favour of allowing this issue to be introduced as a ground of objection. That is, the Tribunal took into account the substantial financial impact that could arise for the trustee if the trust resolution issue were not allowed to be heard (i.e., because the trustee would be assessed on any net (taxable) income, rather than trust beneficiaries, who would be on a lower marginal tax rate). However, this factor was required to be weighed against the following factors:
- The considerable delay between the time when the grounds of objection were required to be stated (upon lodgment of the objection on 28 June 2018, where the trust resolution was not mentioned), and the time when the ground of objection was stated (via email on 27 September 2019), being some 15 months later. The trustee had multiple opportunities over an extended period to bring the existence of the resolution to the attention of the ATO but, despite prompting, failed to do so. The Tribunal noted that there was no real explanation offered for this delay.
- The prejudice to the ATO that would arise if the Tribunal permitted the trust resolution issue to be heard. Specifically, if the trust resolution ground were able to be raised, and it was established that the trust beneficiaries should pay tax on net (taxable) income pursuant to the trust resolution (rather than the trustee), most of the net (taxable) income would go completely untaxed because the (four-year) time limit for assessing the beneficiaries had already expired.
The Tribunal noted that this would allow Mr Dalby’s family to enjoy a substantial financial benefit at the expense of the general body of taxpayers, as a direct consequence of the trustee’s own delay, and with no identified lack of diligence on the ATO’s part.
The Tribunal considered the factors above and concluded that, on balance, it was not in the interests of justice for leave to be granted to allow the trustee to amend his grounds of objection to include the trust resolution.
Notably, a factor that was not relevant to the Tribunal in deciding whether to allow the trustee to introduce the trust resolution as a ground of objection was whether or not the trust resolution was effective for trust law purposes. However, as an aside, be aware that, whilst the validity of the trust resolution for trust law purposes did not assist in having the resolution introduced as a ground of objection for tax purposes, if the trust resolution is effective in distributing trust income under the deed for trust purposes, the beneficiaries of the trust are entitled to the trust income so distributed. This means, for example, that the trustee could not choose to accumulate the trust income for the 2013 income year on the basis that the trust resolutions were not effective for tax purposes.